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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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<C> <S>
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 2-76555
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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 incorporation (I.R.S. Employer Identification No.)
or organization
24012 CALLE DE LA PLATA, SUITE 340,
LAGUNA HILLS, CA 92653
(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. / /
There were 14,391,227 shares of Common Stock outstanding at March 30, 2000.
The aggregate market value of Common Stock held by non-affiliates at March 30,
2000 was approximately $37,777,000 upon the last known trade of $7.50 per share
on March 30, 2000.
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 May 16, 2000.
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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.................................................. 28
Item 3. Legal Proceedings........................................... 28
Item 4. Submission of Matters to a Vote of Security Holders......... 29
Item 4A. Executive Officers.......................................... 30
PART II
Market for Issuer's Common Stock and Related Stockholder
Item 5. Matters..................................................... 31
Item 6. Selected Financial Data..................................... 33
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations................................... 35
Quantitative and Qualitative Disclosures About Market
Item 7A. Risk........................................................ 49
Item 8. Financial Statements........................................ 52
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure.................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 52
Item 11. Executive Compensation...................................... 52
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 52
Item 13. Certain Relationships and Related Transactions.............. 52
PART IV
Item 14. Exhibits and Reports on 8-K................................. 53
Signatures.......................................................................... 55
</TABLE>
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. SEE "BUSINESS--RISK FACTORS."
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
OVERVIEW
Eldorado Bancshares, Inc. (the "Company"), 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 24 full service offices located primarily in Southern California and the
Sacramento area of Northern California. See "-- Market." The products offered by
the banks include commercial, consumer and real estate loans, a broad range of
deposit products and other non-deposit banking services. In addition, the Banks
augment their traditional banking products and services with specialized
products primarily consisting of Small Business Administration ("SBA") loans,
and loans to finance the acquisition of new and used automobiles that are
originated through 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."
STRATEGIC PLAN
The key elements of the Company's strategic plan have been and continue to
be the establishment and enhancement of an attractive community banking
franchise through the improvement of core profitability, the opportunistic
acquisition of community banks primarily, but not exclusively, in and around our
Southern California base and the maintenance of a strong balance sheet. Since
1995, the Company has acquired four community banks with combined assets of
approximately $1 billion. See "--Prior Acquisitions."
3
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IMPROVING CORE PROFITABILITY. The Company's 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,
(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.
BUILDING AND ENHANCING AN ATTRACTIVE COMMUNITY BANKING FRANCHISE. We
continue to identify and evaluate potential acquisitions of community banks in
California. The Company focuses 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, the Company
seeks 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 disciplines. From time to time in the ordinary course of the Company's
strategic planning it reviews acquisition opportunities, which if consummated,
may constitute a material acquisition for Eldorado.
MAINTAINING A STRONG BALANCE SHEET. The Company seeks 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 its strategic plan. The Company
seeks to improve the asset quality of the banks it acquires 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 the
Company's existing businesses and to permit the Company to continue to expand
through acquisitions, the Company's objective is to meet the "well capitalized"
regulatory standards. See "Supervision and Regulation-- Capital Adequacy
Requirements."
RECENT DEVELOPMENTS
In October 1999, the Company's management adopted a plan to discontinue
operations of the Mortgage Wholesale Division. The Company ceased production of
new mortgage loans as of March 20, 2000 and intends to fund its existing
commitments and sell all loans held for sale by the end of the second quarter of
2000. The adoption of this plan is part of the Company's overall strategic
initiative to focus on the growth of its core banking units.
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 Robert P. Keller, the Company's President and Executive
Officer. Following that recapitalization, Mr. Keller assumed control of the
Company, installed new management and began implementing policies to improve
asset quality and operating performance.
Since September 1995, the Company has acquired four banks in California with
combined assets of approximately $1 billion. The following table summarizes
certain data regarding those acquisitions,
4
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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
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(IN MILLIONS)
<S> <C> <C> <C>
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 Valley Bank 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.
Effective June 30, 1997, the Company consolidated into Eldorado Bank the
respective operations of Commerce Securtiy Bank ("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
The Company operates primarily in Southern California. Our executive office
is located in Laguna Hills, a residential community in southern Orange County,
approximately 50 miles south of Los Angeles. The Banks currently operate a total
of 23 full-service banking offices in Southern California, covering a geographic
market ranging from the north coastal area of San Diego County in the south, to
Kern County and the northern border of Los Angeles County in the north, and to
San Bernardino and Riverside Counties in the east. The counties of Orange, Los
Angeles, San Bernardino and Riverside are located in the Los
Angeles-Riverside-Orange County Metropolitan Statistical Area ("MSA"), which is
the second most populous MSA in the United States, with a population of 15.5
million in 1996, according to the most currently available estimate published by
the U.S. Bureau of the Census.
In Northern California, Eldorado Bank operates one full-service banking
office, located in Sacramento. 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 Bank also
operates one SBA loan production office in Orinda, California, which is located
east of San Francisco.
PRODUCTS AND SERVICES
The Company markets its products and services primarily through two
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), equipment leases to business
customers and a broad range of deposit products and other non-deposit
banking services.
- AUTOMOBILE LENDING DIVISION--purchasing loans to finance the purchase of
new and used automobiles originated by automobile dealers located in
Southern California.
5
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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. 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, 1999, management estimates that approximately 75% 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, 1999, commercial
real estate loans constituted 31.3% 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, 1999 of the
Company's SBA loans, other commercial real estate loans and commercial loans not
secured by real estate based upon the Standard Industry Classification, or SIC
codes, provided by the Company's borrowers:
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<CAPTION>
DECEMBER 31, 1999
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COMMERCIAL REAL ESTATE
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NON-SBA SBA COMMERCIAL TOTAL
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INDUSTRY AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
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(DOLLARS IN THOUSANDS)
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Services........................... $ 41,367 32.84% $36,023 40.75% $ 55,623 36.71% $133,013 36.35%
Wholesale and retail trade......... 18,338 14.56% 28,282 31.99% 26,469 17.47% 73,089 19.97%
Finance, insurance and real
estate........................... 36,602 29.05% 2,097 2.37% 19,695 13.00% 58,394 15.96%
Manufacturing...................... 13,656 10.84% 14,801 16.74% 33,373 22.02% 61,830 16.90%
Mining and construction............ 8,063 6.40% 5,563 6.29% 8,029 5.30% 21,655 5.92%
Other and unclassified............. 7,957 6.32% 1,638 1.85% 8,347 5.51% 17,942 4.90%
-------- ------ ------- ------ -------- ------ -------- ------
$125,983 100.0% $88,404 100.0% $151,536 100.0% $365,923 100.0%
======== ====== ======= ====== ======== ====== ======== ======
</TABLE>
The origination and servicing of SBA loans are important elements of the
Community Banking Division's business. For the year ended December 31, 1999, the
Company originated $59.7 million of SBA loans. Revenue attributable to the
Company's SBA lending activities was $13.0 million for the year ended
December 31, 1999, 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 the lowest in the first quarter of the year and the
highest 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
6
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the estimated life of the loan. The Company had a total of $88.4 million of SBA
loans in its portfolio at December 31, 1999, comprised of $66.7 million of the
unguaranteed portions of the SBA 7(a) loans being serviced by the Company and
$21.7 million of SBA 504 loans. The total SBA 7(a) loan portfolio serviced by
the Company at December 31, 1999 was $232.0 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, 1999, the
Company originated $15.9 million, or approximately 47.5% 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 9th greatest dollar volume
of SBA loans in that district by all SBA lenders and the 6th largest dollar
volume of SBA 7(a) loans produced in that district by SBA originating banks. 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.
The Company has historically acquired or originated leases of equipment to
small businesses with an average lease size of less than $50,000. From September
1996 and continuing through 1998, the production of leases was derived primarily
from the wholesale sector through a network of brokers located primarily in the
mid-western and western states. Beginning in mid-1999, the Company chose to
discontinue purchasing leases from wholesale brokers. Currently, the production
of new leases is derived primarily from the retail sector located in Southern
California. The Company makes no consumer leases. The Company seeks to limit the
residual risk with respect to the collateral it leases by entering into leases
that permit the lessee to acquire the equipment for a nominal purchase price at
the end of the lease term. The Banks' largest concentration of leases to a
single borrower (and related interests) at December 31, 1999 amounted to
$342,000. Historically, the Company has generally retained for investment the
majority of leases that it purchased, although in 1997, the Company sold $24.8
million of leases to other banks while retaining the right to service those
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, 1999, the Company held $80.5 million of leases for
investment. The following table sets forth the collateral concentrations of the
Company's leases at December 31, 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
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<S> <C>
Electronic data processing.................................. 24.20%
Transportation.............................................. 13.30
Materials handling.......................................... 5.60
Machine tools............................................... 7.40
Garment cleaning............................................ 3.90
Manufacturing............................................... 4.50
Agriculture................................................. 2.60
Printing.................................................... 3.50
Restaurant.................................................. 4.20
Automotive Equipment........................................ 3.29
Other(1).................................................... 27.51
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Total..................................................... 100.00%
======
</TABLE>
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(1) No category of collateral concentration included in Other is in excess of
2.5%.
7
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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, 1999, Title and Escrow Deposits averaged $148.4 million,
representing 13.9% 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, 1999 totaled $163.5 million,
constituting 15.4% of the Company's total deposits at that date. One company
controlled Title and Escrow Deposits that represented 11.2% of the Company's
total average deposits for the year ended December 31, 1999 and 14.1% of the
Company's total deposits at December 31, 1999.
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 including
mortgage loans held for sale that the Company originated before March 20, 2000.
To reduce its concentration of Title and Escrow Deposits, 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 Company's Sacramento branch.
The Company is actively seeking, however, to cross-sell those services to
customers of its Southern California branches.
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 in 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, 1999, with the largest single relationship accounting
for approximately 21.6% of such loans.
8
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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 new 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, 1999,
the Company held $96.6 million of dealer loans, constituting 14.14% of the
Company's 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, 1999.
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1999 1999 1999 1999 1998
------------- -------------- --------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans funded:
Amount funded...................... $14,906 $12,928 $11,030 $11,932 $13,699
Number
Used............................. 216 403 223 357 534
New.............................. 690 283 341 438 359
------- ------- ------- ------- -------
Total.......................... 906 686 564 794 893
Total amount outstanding............. $96,575 $93,227 $91,731 $91,530 $97,146
Total delinquencies.................. 1,108 1,179 878 1,024 1,408
Net charge-offs...................... 250 209 88 258 192
Delinquencies to total amount
outstanding........................ 1.15% 1.26% 0.96% 1.12% 1.45%
Net charge-offs (annualized) to total
amount outstanding................. 1.04% 0.90% 0.38% 1.13% 0.79%
</TABLE>
9
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UNDERWRITING AND CREDIT ADMINISTRATION
UNDERWRITING. 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 $26.6 million at December 31, 1999). 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, 1999, 20
borrowers had total obligations (including loans to related interests) to
Eldorado Bank in excess of $3.0 million, representing $65.9 million or 12.2% of
Eldorado Bank's total portfolio loans and leases at that date. At December 31,
1999, the Company's largest concentration of loans to a single borrower (and
related interests) totaled $7.2 million. At December 31, 1999, all outstanding
loans in excess of $3.0 million were performing and were 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
$7.4 million at December 31, 1999). 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 $200,000 individually and jointly up to
$400,000. Loans must be approved by the Antelope Board of Directors. As of
December 31, 1999, Antelope's 10 largest borrowing relationships had total
obligations (including loans to related interests) to Antelope representing
$13.8 million or 9.8% of Antelope's total loans and leases at that date. At
December 31, 1999, Antelope's largest concentration of loans to a single
borrower (and related interests) totaled $2.3 million. At December 31, 1999, all
outstanding loans to Antelope's 10 largest borrowers are performing and are
secured primarily by real estate located in Southern California.
The Company's commercial loans are generally underwritten in the Company's
primary market area on the basis of the borrower's ability to service such debt
from income. As a general practice, the Company takes as collateral a lien on
any available real estate, equipment or other assets and obtains a personal
guaranty. Working capital loans are primarily collateralized by short-term
assets and term loans are primarily collateralized by long-term assets.
In addition to commercial loans secured by real estate, the Company makes
commercial mortgage loans to finance the purchase of owner-occupied real
property, which generally consists of real estate on which structures have
already been completed. The Company's commercial mortgage loans are secured by
first liens on real estate, typically have variable interest rates and
generallly amortize over a 20-year period with balloon payments due at the end
of five years. In underwriting commercial mortgage loans, consideration is given
to the property's operating history, future operating projections, current and
projected occupancy, location and physical condition. The underwriting analysis
also includes credit checks, appraisals and a review of the financial condition
of the borrower.
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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.
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 function, which administers and
collects the leases that the Company 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 months 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
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<PAGE>
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, 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. 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,
developments in technology and mass marketing have permitted larger institutions
to market loans more aggressively to small business borrowers. Additionally,
occupation-based credit unions may serve unrelated companies, as long as such
companies have fewer than 3,000 employees, and therefore 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 to consumers and small to medium-sized
business customers. 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 23 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 410 full-time equivalent employees as of
December 31, 1999, of whom 67 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--The Company is
dependent on the contributions of its key management personnel." None of the
Company's employees is represented by a union or covered under a collective
bargaining agreement.
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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.
The BHC Act also generally 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 bankholding company, or from
engaging directly in activities other than those of banking, managing or
controlling banks or providing services for its subsidiaries, unless the
activity, by statute or by Federal Reserve regulation or order, has been
identified as an activity closely related to the business of banking or of
managing or controlling banks. In determining whether an activity is closely
related to the business of banking or managing or controlling banks, 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 are expected to
outweigh the possible adverse effects of the activity, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
The principal exception to these prohibitions arises as a result of the
November 1999 enactment of the Graham-Leach-Bliley Act (Financial Services
Modernization Act--s.900), which amended the BHC Act by adding a new Section
4(k). Under Section 4(k) of the BHC Act, a bank holding company that qualifies
and elects to be treated as a "financial holding company" ("FHC") may engage in
any activity that is financial
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in nature or incidental or complementary to such a financial activity, provided
that prior approval of the Federal Reserve is required for activities that are
complementary to a financial activity. FHC's, therefore, may engage in insurance
underwriting and sales; securities underwriting, dealing and distribution; and
merchant banking, as well as in all activities previously permitted for bank
holding companies. In order to qualify for FHC status, the bank holding
company's bank subsidiaries must satisfy capital and management standards and
have a "Satisfactory" or better rating under CRA. Once a bank holding company
becomes an FHC, it may be subject to sanctions if its bank subsidiaries fail to
continue to satisfy the capital and management standards or the required CRA
rating. Sanctions may include divestiture of the bank subsidiaries if capital
and management standards are not met and preclusion from engaging de novo or by
acquisition in financial activities if its CRA ratings decline. As of the date
of this Annual Report, the Company has no plans to become a FHC.
Furthermore, the BHC Act, prohibits subsidiaries of bank holding companies
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 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
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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 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 Company's 1997 acquisition of Eldorado Bancorp, Eldorado
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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 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-
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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.
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.
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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.
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.
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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>
- - ------------------------
(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, 2000, each of the Banks 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, 1999 was $356,000, and
Antelope's insurance assessment paid during the year ended December 31, 1999 was
$21,000.
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 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
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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.
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.
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 1999 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
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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.
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.
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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."
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.
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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 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
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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
RISKS RELATED TO GROWTH STRATEGY--FAILURE TO INTEGRATE ACQUISITIONS SUCCESSFULLY
COULD HAVE A NEGATIVE EFFECT ON THE COMPANY
Since September 1995, the Company has experienced rapid growth through
acquisitions. An element of our business strategy continues to involve efforts
to acquire or combine with additional financial institutions that would
complement our existing businesses. There can be no assurance, however, that the
Company will be able to identify additional suitable acquisition targets or
complete any acquisitions.
If the Company is able to identify and complete future acquisitions, its
ability to successfully integrate into its operations any acquired businesses,
depends on the Company's ability to
- monitor operations,
- control costs,
- maintain positive customer relations,
- maintain regulatory compliance, and
- attract, assimilate and retain additional qualified personnel.
If the Company fails to achieve any of those objectives in an efficient and
timely manner, the Company may experience interruptions and dislocations in the
Company's business. Any of these problems could harm the Company's existing
operations, including its 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 the Company's
federal or state banking regulators to require the Company to delay or forgo any
proposed acquisition until those problems have been addressed to their
satisfaction.
Another risk associated with the Company's 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 the Company's
business.
The Company's failure to manage its acquisition strategy effectively could
have a negative effect on its business.
THE COMPANY IS DEPENDENT UPON THE CONTRIBUTIONS OF ITS KEY MANAGEMENT PERSONNEL
The Company's future success depends, in large part, upon the continuing
contributions of its key management personnel. One of the Company's executive
officers has been with it for less than a month. The loss of services of one or
more key employees could have a material adverse effect on the Company.
The Company's future success is also dependent upon its 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.
Mr. Keller, Eldorado's President and Chief Executive Officer, has an
employment agreement which expires on September 30, 2001. 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.
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CONCENTRATION OF BUSINESS IN CALIFORNIA--A DOWNTURN IN THE CALIFORNIA ECONOMY OR
A SIGNIFICANT NATURAL DISASTER IN CALIFORNIA MAY ADVERSELY AFFECT THE COMPANY'S
BUSINESS
Substantially all of the Company's business is located in California, with a
particular concentration in Southern California. As a result, the Company's
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, the Company remains
subject to changes in economic conditions in that region.
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. 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.
CONCENTRATION IN SBA LENDING--CHANGES IN SBA REGULATIONS COULD REDUCE SBA LOAN
ORIGINATIONS AND REVENUES, WHICH ARE SIGNIFICANT
The Company makes a significant percentage of its loans and derives a
significant percentage of its revenue under the loan programs of the U.S. Small
Business Administration (the "SBA"). The Company's revenue from SBA loan
programs constituted approximately 12.4% of its total interest and noninterest
income for the year ended December 31, 1999.
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, the Company's SBA loan
originations and its 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
The Company funds loans and leases primarily through the deposits of its
customers and various lines of credit. Among these deposits are deposits
provided by title or escrow companies. The Company considers 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 the Company's customers control
such deposits. As a result, the decision by any one depositor to withdraw its
funds could have a significant immediate effect on the Company's total deposits
at any given time.
As a consequence of their potential volatility, the Company utilizes 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. The Company believes that it has 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 the Company's title and escrow
deposits. The Company can provide no assurance, however, that any alternative
funding sources will be available at a reasonable cost if and when needed. If
the Company cannot obtain any
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necessary replacement funding on reasonable terms, its 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 THE COMPANY'S BUSINESS
The Company's profitability is significantly dependent on its net interest
income. Net interest income is the difference between the Company's interest
income on interest-earning assets, such as loans and leases, and its 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
the Company's net interest income. The Company's 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 the
Company's assets and liabilities. As a result, changes in interest rates can
affect the Company's net interest income in either a positive or a negative way.
THE COMPANY OPERATES IN A HIGHLY COMPETITIVE MARKET
There is intense competition in California and elsewhere in the United
States for banking customers. The Company experiences 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. The Company competes for loans and leases primarily with other
commercial banks, commercial finance companies and savings institutions. In
addition, the Company's 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 the Company's competitors have greater
financial strength, marketing capability and name recognition than the Company
does, 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 the Company's small business customers. Such
advantages may give the Company's competitors opportunities to realize greater
efficiencies and economies of scale than the Company can.
THE VALUE OF THE GOODWILL RECOGNIZED IN ACQUISITIONS MAY NOT BE REALIZED
As of December 31, 1999, the Company had total assets of approximately $1.4
billion, of which $58.8 million, or 4.3% of total assets and 50.0% of
shareholders' equity, was goodwill. The goodwill was recognized in three
acquisitions that were accounted for using the purchase method of accounting.
The Company's ratio of tangible equity to assets, 4.3% as of December 31, 1999,
is substantially below the average ratio for commercial banks in its peer group.
During the quarter ended December 31, 1999, the Company wrote off $4.0
million of goodwill when it discontinued the Mortgage Wholesale Division. The
Company can provide no assurance that the value of its remaining goodwill will
ever be realized. The Company monitors 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.
SUPERVISION AND REGULATION--THE BANKS OPERATE IN A HIGHLY REGULATED ENVIRONMENT
The Company 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, the Company 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
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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.
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. The Company and the Banks also undergo periodic
examinations by one or more regulatory agencies. Following such examinations,
the Company may be required, among other things, to change its asset valuations
or the amounts of required loss allowances or to restrict its operations. Such
actions would result from the regulators' judgments based on information
available to them at the time of their examination. Federal and state regulators
also have the power to impose substantial fines and other civil and criminal
penalties under a variety of circumstances. 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 the Company 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 the Company. See
"Supervision and Regulation."
Neither the Company nor either of the Banks is subject to any memorandum of
understanding or other extraordinary supervisory agreement with any regulatory
authority. The Company did make certain commitments to the Federal Reserve in
connection with the acquisition of Eldorado Bancorp, however. Among other
things, those commitments provide that it will not incur any debt or pay any
dividend on the common stock without the prior approval of the Federal Reserve.
See "Supervision and Regulation."
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's aggregate rental
expense under such leases was $2.7 million for the year ended December 31, 1999.
For additional information regarding the Company's lease obligations, see Note
18 to the Consolidated Financial Statements. At December 31, 1999, the net book
value of the property and leasehold improvements of the offices of the Company
amounted to $11.3 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 1998, 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
28
<PAGE>
on the judgment at the statutory rate of 10% and as of December 31, 1999 the
judgment, including interest, was equal to $2.7 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
None.
29
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS
The following table sets forth the executive officers of the Company and the
Banks.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---- -------- ------------------------------------------
<S> <C> <C>
THE COMPANY:
Robert P. Keller.......................... 62 President, Chief Executive Officer and
Director
Romolo C. Santarosa....................... 43 Senior Vice President, Treasurer and Chief
Financial Officer
THE BANKS:
Catherine C. Jooyan....................... 38 Executive Vice President--SBA Lending
Gary A. Green............................. 41 Executive Vice President--Commercial
Lending
Richard Korsgaard......................... 58 Executive Vice President--Construction
Loan Division and CRA Officer
Henry T. McCaffrey........................ 47 Executive Vice President and Chief Credit
Officer
Paul F. Rodeno............................ 44 Executive Vice President--Operations
Jack D. Seefus............................ 64 President and Chief Operating Officer,
Antelope Valley Bank
George E. Nagy............................ 54 Executive Vice President and Chief Credit
Officer, Antelope Valley Bank
</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 similar 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 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 board
of directors of Pennichuck Corporation. 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.
ROMOLO C. SANTAROSA has served, since March 13, 2000, as Senior Vice
President, Chief Financial Officer and Treasurer of the Company and Executive
Vice President and Chief Financial Officer of the Banks. From 1997 to 2000,
Mr. Santarosa served as Executive Vice President and Chief Financial Officer of
Southern Pacific Bank, a $2.0 billion industrial loan company located in Los
Angeles, California. From 1995 to 1997, Mr. Santarosa served as Vice President
and Controller of Sanwa Bank California, an $8.0 billion regional bank also
located in Los Angeles, California. During 1991 to 1994, Mr. Santarosa served as
Senior Vice President and Controller of Shawmut National Corporation, a $36.0
billion regional bank
30
<PAGE>
located in Hartford, Connecticut. From 1986 to 1994, Mr. Santarosa served as
Senior Audit Manager of Price Waterhouse, an international accounting and
consulting firm, in their Hartford, Connecticut office. Mr. Santarosa has also
served as the Treasurer of the DCG General Partner since March 13, 2000.
CATHERINE C. JOOYAN is the Executive Vice President of Eldorado Bank
responsible for its SBA lending programs. Ms. Clampitt has been responsible for
the Company's SBA lending since March 1997, when the Company's predecessor
acquired Liberty National Bank ("Liberty"). For four years prior to that
acquisition, Ms. Clampitt was responsible for Liberty's SBA lending programs.
Ms. Clampitt is a member of the 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 commercial lending function. Mr. Green joined Eldorado Bank in 1989 as a
commercial loan officer. From 1994 to 1997, Mr. Green served as Regional Vice
President, and in 1998, was named head of Eldorado Bank's 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.
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 the DCG general partner acquired a substantial interest in
San Dieguito's parent company. Prior to joining San Dieguito, Mr. Rodeno was a
commercial loan officer for First Interstate Bank.
JACK D. SEEFUS has served as President and Chief Operating Officer of
Antelope Valley Bank since 1980. From 1957 to 1980, Mr. Seefus served as Vice
President, Branch Manager and Regional Manager of Crocker National Bank.
GEORGE E. NAGY has served as Executive Vice President and Chief Credit
Officer of Antelope Valley Bank since 1980. From 1970 to 1980, Mr. Nagy served
as Senior Examiner with the Federal Deposit Insurance Corporation.
PART II
ITEM 5. MARKET FOR ISSUER'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET FOR ISSUER'S COMMON STOCK
The Company has been quoted on the Nasdaq National Market since February 1,
1999 under the symbol "ELBI." The trading market for the common stock was
extremely limited and could not be characterized as an established public
trading market until April 6, 1999, when the Company completed a
31
<PAGE>
public offering of common stock. The high and low sales prices of common stock
during each quarter since that date are as follows:
<TABLE>
<CAPTION>
1999
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
Second quarter (from April 6, 1999)......................... $12.13 $9.75
Third quarter............................................... $10.75 $8.13
Fourth quarter.............................................. $12.13 $9.00
</TABLE>
DIVIDEND POLICY
The Company 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 "Supervision and Regulation--Regulatory Restrictions on
Distribution to Shareholders."
The Company is a legal entity separate and distinct from the Banks.
Substantially all of the Company's revenues and cash flow, including funds
available for the payments of dividends and other operating expenses, will be
paid by dividends to the Company from the Banks. There are statutory and
regulatory limitations on the amount of dividends that may be paid to the
Company by the Banks. See "Risk Factors--No present intention to pay dividends;
Restrictions on payment of dividends by the Banks to the Company; Prohibition on
dividends by Eldorado Bank to the Company 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, 2000, there were approximately 500 holders of record of
Common Stock.
32
<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, 1999 are derived
from the Company's Consolidated Financial Statements which have been audited by
independent accountants.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ---------
(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........................................ $ 54,785 $ 52,361 $ 41,530 $ 19,220 $ 10,969
Provision for possible loan and lease loss.............. 5,872 5,552 2,549 1,215 1,335
---------- ---------- ---------- --------- ---------
Net interest income after provision for loan and lease
loss.................................................. 48,913 46,809 38,981 18,005 9,634
Noninterest income...................................... 14,588 13,663 12,252 7,631 4,805
Noninterest expenses
Amortization of goodwill and intangibles.............. 4,096 3,996 2,881 268 --
Carrying costs and losses on OREO..................... 111 219 395 293 --
Other noninterest expense............................. 46,122 47,878 36,452 20,415 13,142
---------- ---------- ---------- --------- ---------
Total noninterest expense........................... 50,329 52,093 39,728 20,976 13,142
---------- ---------- ---------- --------- ---------
Income before income taxes, extraordinary item, and
discontinued operations............................... 13,172 8,379 11,505 4,660 1,297
Income tax provision (benefit).......................... 6,837 4,736 5,110 (115) 277
---------- ---------- ---------- --------- ---------
Income before extraordinary item and discontinued
operations............................................ 6,335 3,643 6,395 4,775 1,020
Extraordinary item(1)................................... -- -- -- -- 625
Discontinued operations(2).............................. (9,695) 1,771 (1,485) (356) --
---------- ---------- ---------- --------- ---------
Net (loss) income....................................... (3,360) 5,414 4,910 4,419 1,645
Preferred dividends..................................... 706 1,282 731 -- --
---------- ---------- ---------- --------- ---------
Net (loss) income available to common shareholders...... $ (4,066) $ 4,132 $ 4,179 $ 4,419 $ 1,645
========== ========== ========== ========= =========
Comprehensive (loss) income............................. $ (10,976) $ 5,896 $ 4,954 $ 4,169 $ 2,129
========== ========== ========== ========= =========
PER SHARE DATA(3):
Weighted average shares outstanding
Basic................................................. 13,711,473 11,955,313 10,188,177 5,432,001 2,915,714
Diluted............................................... 13,954,140 12,433,770 11,416,266 5,432,001 2,915,714
Basic:
Income before extraordinary item and discontinued
operations............................................ $ 0.41 $ 0.20 $ 0.56 $ 0.88 $ 0.35
Extraordinary item...................................... -- -- -- -- $ 0.21
Discontinued operations................................. $ (0.71) $ 0.15 $ (0.15) $ (0.07) --
---------- ---------- ---------- --------- ---------
Net (loss) income per share............................. $ (0.30) $ 0.35 $ 0.41 $ 0.81 $ 0.56
========== ========== ========== ========= =========
Income before extraordinary item and discontinued
operations, excluding goodwill amortization(4)........ $ 0.71 $ 0.53 $ 0.84 $ 0.93 $ 0.35
========== ========== ========== ========= =========
Diluted:
Net income before extraordinary item discontinued
operations............................................ $ 0.40 $ 0.19 $ 0.50 $ 0.88 $ 0.35
Extraordinary item...................................... -- -- -- -- $ 0.21
Discontinued operations................................. $ (0.69) $ 0.14 $ (0.13) $ (0.07) --
---------- ---------- ---------- --------- ---------
Net (loss) income per share............................. $ (0.29) $ 0.33 $ 0.37 $ 0.81 $ .056
========== ========== ========== ========= =========
Income before extraordinary item and discontinued
operations, excluding goodwill amortization(4)........ $ 0.70 $ 0.51 $ 0.75 $ 0.93 $ 0.35
========== ========== ========== ========= =========
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF CONSOLIDATED FINANCIAL POSITION
Total assets............................................ $1,366,240 $1,394,621 $1,088,936 $ 582,270 $ 187,065
Loans and leases, net................................... 662,764 630,249 607,396 403,855 123,724
Goodwill and other intangibles.......................... 58,830 67,378 70,903 10,736 --
Net assets of discontinued operations(2)................ 140,719 253,117 116,472 86,127 --
Deposits................................................ 1,058,456 1,221,487 933,070 510,661 165,138
Long-term debt.......................................... 27,657 27,657 27,657 537 537
Common shareholders' equity............................. 117,618 107,874 102,757 58,495 19,440
Shareholders' equity.................................... 117,618 119,533 114,416 58,495 19,440
Average assets.......................................... 1,305,909 1,206,489 886,605 381,042 187,900
Average earning assets.................................. 1,127,353 1,005,460 726,622 320,639 165,731
Average common equity................................... 123,026 106,050 83,890 37,582 14,615
PER SHARE DATA(3):
Common shares outstanding............................... 14,391,227 11,955,313 11,955,313 7,630,330 3,229,349
Diluted common shares outstanding....................... 14,633,894 12,433,770 12,433,853 7,630,330 3,229,349
Book value per share.................................... $ 8.17 $ 9.02 $ 8.60 $ 7.67 $ 6.02
Diluted book value per share............................ 8.04 8.68 8.26 7.67 6.02
Tangible book value per share........................... 4.08 3.39 2.66 6.26 6.02
Diluted tangible book value per share................... 4.02 3.26 2.56 6.26 6.02
SELECTED PERFORMANCE RATIOS FROM CONTINUING OPERATIONS
Return on average assets................................ 0.49% 0.30% 0.72% 1.25% 0.88%
Return on average assets, excluding goodwill
amortization(4)....................................... 0.80 0.63 1.05 1.32 0.88
Return on average common equity......................... 5.15 3.44 7.62 12.71 11.26
Return on average common equity, excluding goodwill
amortization(4)....................................... 8.48 7.20 11.06 13.42 11.26
Net interest margin..................................... 4.86 5.21 5.71 5.99 6.62
Efficiency ratio (5).................................... 66.48 72.52 67.78 76.02 83.31
Net yield on average assets............................. 4.20 4.34 4.68 5.04 5.84
SELECTED ASSET QUALITY RATIOS(6)
Nonperforming assets to total portfolio loans and leases
and OREO.............................................. 1.72% 1.90% 3.40% 4.38% 4.45%
Nonperforming assets to total assets.................... 0.85 0.89 2.03 2.77 3.19
Allowance for loan and lease losses to portfolio loans
and leases............................................ 1.63 1.40 1.69 1.79 1.57
Allowance for loan and lease losses to nonperforming
loans and leases...................................... 95.15 84.18 56.37 60.01 82.32
Net charge-offs to average portfolio loans and leases... 0.72 1.15 0.39 0.48 0.89
SELECTED CAPITAL RATIOS
Tier 1 Leverage Ratio................................... 7.10% 6.37% 6.91% 8.30% 10.35%
Tier 1 Risk-Weighted Ratio.............................. 10.96 8.76 9.30 10.97 14.11
Total Risk-Weighted Ratio............................... 12.16 9.78 10.60 12.35 15.91
Average common equity to average assets................. 9.42 8.79 9.46 9.86 7.78
</TABLE>
- - ------------------------------
(1) Forgiveness of indebtedness net of $443,000 income tax benefit.
(2) The Consolidated Statements of Financial Operations and Position have been
retroactively restated to reflect the discontinued operations of the
Mortgage Wholesale Division.
(3) Share and per share amounts have been retroactively restated to reflect
(i) a one-for-two reverse split of the Company's common stock effective
September 4, 1999 and (ii) changes in the presentation of earnings per
share.
(4) Excludes discontinued operations, extraordinary items, and the amortization
of goodwill and other intangibles. Although such presentation is not defined
by generally accepted accounting principles, management believes it to be
beneficial to gaining an understanding of the Company's financial
performance in comparison to its peer group.
(5) As used in this report, the term efficiency ratio means noninterest
expense--excluding amortization of goodwill and other intangibles, and
carrying costs and losses of OREO--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.
(6) 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. For information
relating to the Company's regulatory capital requirements, see Item 1.
Business--Supervision and Regulation.
34
<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, 1997, 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 assets 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.
Effective June 30, 1998, the Company merged San Dieguito, Liberty, CSB and
Eldorado Bank into a single bank, which is known as Eldorado Bank. 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 notes thereto.
On January 22, 1999, the Company completed the acquisition of Antelope
Valley Bank. In connection with the acquisition, the Company issued to the
shareholders of Antelope Valley Bank approximately 2.8 million shares of common
stock. The acquisition was treated for accounting purposes as a pooling of
interests. Accordingly, the financial information for prior periods contained
herein has been restated to reflect the combined entities.
In April 1999, in an underwriting managed by Keefe, Bruyette & Woods, Inc.,
the Company completed a public offering of an aggregate of 2,286,400 shares of
Common Stock. The net proceeds to the Company were $21.9 million. The Company
used a portion of these proceeds to redeem all of its outstanding 11% Series B
Preferred Stock which had an aggregate liquidation value of $12.1 million,
including a redemption premium of $351,000. In addition, the Company repaid
indebtedness in the amount of $338,000 to one of its principal shareholders,
DCG. The remaining net proceeds of the offering are being used for general
purposes, including investment in the Banks.
In October 1999, the Company's Management adopted a plan to discontinue
operations of the Mortgage Wholesale Division. The Company ceased production of
new mortgage loans as of March 20, 2000 and intends to fund its existing
commitments and sell all loans held for sale by the end of the second quarter of
2000. With the decision to exit the wholesale mortgage business, the Company
recognized one-time extraordinary expenses of approximately $4.0 million in
goodwill and $3.5 million, after tax, in other disposal costs during the fourth
quarter of 1999. Accordingly, the operating results and net assets of the
Mortgage Wholesale Division have been segregated retroactively from continuing
operations and reported separately on the Consolidated Statements of Financial
Operations and Position.
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, but management believes it to be beneficial to gaining an
understanding of the Company's financial performance in comparison to its peer
group.
35
<PAGE>
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, 1999, 1998 AND 1997
The Company generated net income from continuing operations of $6.3 million
for the year ended December 31, 1999. This represents an increase of $2.7
million, or 73.90%, compared to net income from continuing operations of $3.6
million for the year ended December 31, 1998. The increase in net income was
primarily the result of an increase in net interest income and non-interest
income of $2.4 million and $925,000, respectively. Additionally, non-interest
expense decreased by $1.5 million. The increase in pre-tax earnings was
partially offset by an increase in income taxes of $2.1 million. Basic net
income per share from continuing operations was $0.41 for the year ended
December 31, 1999, compared to $0.20 per share for the year ended December 31,
1998. Diluted net income per share from continuing operations was $0.40 for the
year ended December 31, 1999, compared to $0.19 per share for the year ended
December 31, 1998. Excluding the amortization of goodwill and intangibles, basic
and diluted earnings per share from continuing operations for the year ended
December 31, 1999 were $0.71 and $0.70 respectively, as compared to $0.53 and
$0.51 for the year ended December 31, 1998. The Company's return on average
assets from continuing operations was 0.49% and its return on average common
equity from continuing operations was 5.15% for the year ended December 31,
1999, as compared to 0.30% and 3.44%, respectively, for the year ended
December 31, 1998. Excluding the amortization of goodwill and other intangibles,
return on average assets from continuing operations was 0.80% and return on
average common equity from continuing operations was 8.48% for the year ended
December 31, 1999, as compared to 0.63% and 7.20%, respectively, for the year
ended December 31, 1998.
The Company had net income from continuing operations of $3.6 million for
the year ended December 31, 1998, a decrease of $2.8 million, or 43.04%,
compared to net income of $6.4 million for the year ended December 31, 1997. The
decrease in net income is due to an increase in the provision for credit losses
and non-interest expense of $3.0 million and $10.5 million, respectively,
partially offset by an increase in net interest income of $10.8 million. Basic
net income per share from continuing operations in 1998 was $0.20 compared to
$0.56 in 1997, while diluted net income per share from continuing operations in
1998 was $0.19 per share compared to $0.50 in 1997. Excluding the amortization
of goodwill and other intangibles, basic and diluted earnings per share from
continuing operations for the year ended December 31, 1998 were $0.53 and $0.51,
respectively, as compared to $0.84 and $0.75 for the year ended December 31,
1997. The Company's return on average assets from continuing operations was
0.30% and its return on average common equity from continuing operations was
3.44% for the year ended December 31, 1998, as compared to 0.72% and 7.62%,
respectively, for the year ended December 31, 1997. Excluding the amortization
of goodwill and other intangibles, return on average assets from continuing
operations was 0.63% and return on average common equity from continuing
operations was 7.20% for the year ended December 31, 1998, as compared to 1.05%
and 11.06%, respectively, for the year ended December 31, 1997.
RESULTS OF CONTINUING 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 $54.8 million for 1999. This represented an increase of
$2.4
36
<PAGE>
million, 4.63%, over net interest income of $52.4 million for 1998. The increase
was due to an increase of $3.4 million in interest income partially offset by an
increase of $1.0 million in interest expense.
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 1999 was partially offset by a decrease in
the net interest margin. The net interest margin decreased to 4.86% for 1999,
compared to 5.21% for 1998. The decrease in the net interest margin for 1999 was
the result of a lower yield on average earning assets partially offset by a
lower cost of average interest bearing liabilities. The yield on average earning
assets declined to 8.02% for 1999, compared to 8.66% for 1998. The lower average
yield on earning assets was attributable to a decrease in the yield on loans and
leases to 9.64% for the year ending December 31, 1999, compared to a yield of
10.37% for the year ending December 31, 1998. The cost of average interest
bearing liabilities decreased to 4.04% for 1999, compared to 4.44% for 1998. The
decrease in the cost of average interest bearing liabilities was the result of a
decreased reliance on time deposits combined with a lower average cost for those
deposits.
The Company's net interest income totaled $52.4 million for 1998. This
represented an increase of $10.8 million, or 26.08%, over net interest income of
$41.5 million for 1997. The increase for 1998 was the result of a $21.4 million
increase in total interest income, partially offset by a $10.6 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. The net interest margin decreased to
5.21% for 1998, compared to 5.71% for 1997. The decrease in the net interest
margin was primarily the result of a decrease in the yield on earning assets to
8.66% for 1998, from a yield of 9.02% for 1997.
Loan fee income totaled $3.4 million for 1999. This represented a decrease
of $900,000, or 20.93%, over loan fee income of $4.3 million for 1998. Loan fee
income increased $1.4, or 48.28%, for 1998, from a total of $2.9 million for
1997. The fluctuations for both 1999 and 1998 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.
37
<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, 1999 DECEMBER 31, 1998
---------------------------------- ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR
BALANCE EXPENSE COST BALANCE EXPENSE COST
---------- ---------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases(1).................. $ 655,728 $63,235 9.64% $ 617,568 $64,029 10.37%
Investment securities(2)............. 294,133 18,120 6.16 132,881 7,790 5.86
Federal funds sold................... 31,358 1,555 4.96 66,943 3,318 5.11
Funds allocated to discontinued
operations......................... 146,134 7,521 5.15 188,068 11,802 6.28
---------- ------- ---------- -------
Total interest-earning assets...... 1,127,353 90,431 8.02% 1,005,460 87,039 8.66%
Other assets:
Cash and demand deposits with
banks.............................. 68,198 88,513
Other assets......................... 110,358 112,516
---------- ----------
Total assets..................... 1,305,909 1,206,489
---------- ----------
Interest-bearing liabilities:
Deposits
Interest-bearing demand............ $ 148,128 $ 1,531 1.03% $ 134,979 $ 1,964 1.46
Money market....................... 130,323 4,249 3.26 116,283 4,001 3.44
Savings............................ 249,937 13,898 5.56 202,971 11,169 5.50
Time............................... 260,853 9,022 3.46 286,147 13,428 4.69
---------- ------- ---------- -------
Total interest- bearing
deposits....................... 789,241 28,700 3.64 740,380 30,562 4.13
Short-term borrowing................. 65,169 3,652 5.60 13,80 8 806 5.84
Long-term debt....................... 27,657 3,294 11.91 27,657 3,310 11.97
---------- ------- ---------- -------
Total interest- bearing
liabilities 882,067 35,646 4.04% 781,845 34,678 4.44%
Noninterest-bearing liabilities:
Demand deposits.................... 280,687 288,377
Other liabilities.................. 17,254 18,558
---------- ----------
Total liabilities 1,180,008 1,088,780
Shareholders' equity................. 125,901 117,709
---------- ----------
Total liabilities and shareholders'
equity............................. $1,305,909 $1,206,489
========== ------- ========== -------
Net interest income.................. $54,785 $52,361
======= =======
Net yield on interest- earning
assets............................. 4.86% 5.21%
<CAPTION>
YEAR ENDED
----------------------------------
DECEMBER 31, 1997
----------------------------------
INTEREST AVERAGE
AVERAGE INCOME OR YIELD OR
BALANCE EXPENSE COST
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans and leases(1).................. $ 489,919 $51,055 10.42%
Investment securities(2)............. 119,971 7,330 6.11
Federal funds sold................... 35,228 1,891 5.37
Funds allocated to discontinued
operations......................... 82,504 5,349 6.48
---------- -------
Total interest-earning assets...... 727,622 65,625 9.02%
Other assets:
Cash and demand deposits with
banks.............................. 77,691
Other assets......................... 81,292
----------
Total assets..................... 886,605
----------
Interest-bearing liabilities:
Deposits
Interest-bearing demand............ $ 98,188 $ 1,612 1.64
Money market....................... 90,600 2,839 3.13
Savings............................ 126,356 5,496 4.35
Time............................... 214,087 11,677 5.45
---------- -------
Total interest- bearing
deposits....................... 529,231 21,624 4.09
Short-term borrowing................. 12,478 563 4.51
Long-term debt....................... 15,982 1,908 11.94
---------- -------
Total interest- bearing
liabilities 557,691 24,095 4.32%
Noninterest-bearing liabilities:
Demand deposits.................... 227,629
Other liabilities.................. 10,815
----------
Total liabilities 796,135
Shareholders' equity................. 90,470
----------
Total liabilities and shareholders'
equity............................. $ 886,605
========== -------
Net interest income.................. $41,530
=======
Net yield on interest- earning
assets............................. 5.71%
</TABLE>
- - ------------------------------
(1) Loan fees of $3.4 million, $4.3 million, and $2.9 million are included in
the computations for 1999, 1998 and 1997, respectively.
(2) Yields are calculated on historical cost and exclude the impact of the
unrealized gain (loss) available for sale securities.
38
<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,
-------------------------------------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
----------------------------------------- -----------------------------------------
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............. $ (794) $(4,474) $ 3,956 $(276) $12,974 $ (260) $13,301 $ (67)
Investment securities........ 10,330 396 9,453 481 460 (297) 789 (32)
Federal funds sold........... (1,863) (98) (1,817) 52 1,527 (92) 1,702 (83)
Funds allocated to
discontinued operations.... (4,281) (2,123) (2,631) 473 6,453 (172) 6,845 (220)
------- ------- ------- ----- ------- ------- ------- -------
Total interest income...... 3,392 (6,299) 8,961 730 21,414 (821) 22,637 (402)
Interest Expense
Interest-bearing demand...... (433) (569) 191 (55) 352 (183) 604 (69)
Money market................. 248 (210) 483 (25) 1,162 278 805 79
Savings...................... 2,729 117 2,585 27 5,673 1,457 3,332 884
Time......................... (4,406) (3,531) (1,187) 312 1,751 (1,631) 3,930 (548)
Short-term borrowing......... 2,846 (32) 2,998 (120) 243 165 60 18
Long-term debt............... (16) (16) -- -- 1,402 5 1,394 3
------- ------- ------- ----- ------- ------- ------- -------
Total interest expense..... 968 (4,241) 5,070 139 10,583 91 10,125 367
------- ------- ------- ----- ------- ------- ------- -------
Net interest income............ $ 2,424 $(2,058) $ 3,891 $ 591 $10,831 $ (912) $12,512 $ (769)
======= ======= ======= ===== ======= ======= ======= =======
</TABLE>
NONINTEREST INCOME
Noninterest income totaled $14.6 million for 1999. This represented an
increase of $925,000, or 6.77%, over noninterest income of $13.7 million for
1998. The increase in noninterest income was primarily the result of increased
merchant income associated with the credit card portfolio, and gains recognized
from the sale of investment securities and other real estate owned.
Noninterest income totaled $13.7 million for 1998. This represented an
increase of $1.4 million, or 11.52%, over noninterest income of $12.3 million
for 1997. The increase in noninterest income for 1998 compared to 1997 was the
result of 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,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts.............. $ 6,399 $ 6,456 $ 5,562
SBA loan servicing............................... 2,181 2,539 2,353
Other income..................................... 6,008 4,668 4,337
------- ------- -------
Total noninterest income....................... $14,588 $13,663 $12,252
======= ======= =======
</TABLE>
39
<PAGE>
NONINTEREST EXPENSES
Noninterest expense totaled $50.3 million for 1999. This represented a
decrease of $1.8 million, or 3.39%, over total noninterest expense of $52.1
million for 1998. The decrease in noninterest expense for 1999 was primarily the
result of decreases in professional services and item processing expenses.
Salaries and related expenses totaled $21.7 million for 1999. This represented
an increase of $676,000, or 3.22%, over total salaries and related expenses of
$21.0 million for 1998. Occupancy and equipment expense totaled $6.7 million for
1999 and 1998. The amortization of goodwill and intangibles totaled $4.1 million
for 1999. This represented an increase of $100,000, or 2.5%, over the
amortization expense of $4.0 million for 1998.
Noninterest expense totaled $52.1 million for 1998. This represented an
increase of $12.4 million, or 31.12%, over noninterest expense of $39.7 million
for 1997. The increase in noninterest expense for 1998 compared to 1997 was the
result of increases in most expense categories resulting from the Eldorado
Acquisition. Salaries and related expenses totaled $21.0 million for 1998. This
represented an increase of $4.2 million, or 25.47%, over total salaries and
related expenses of $16.8 million for 1997. Occupancy and equipment expenses for
1998 increased $1.2 million, or 21.37%, compared to a total expense of $5.5
million for 1997. The amortization of goodwill and intangibles for 1998
increased $1.1 million, or 38.70%, from a total of $2.9 million for 1997.
The efficiency ratio measures the percentage of net revenue that is paid as
noninterest expenses. The Company's efficiency ratio decreased to 66.48% for
1999, from 72.52% for 1998 and 72.52% for 1997. The decrease in the efficiency
ratio indicates increased operating efficiency as a smaller 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, and losses and carrying costs of
OREO as a percentage of total revenue less interest expense. The Company's
definition of the efficiency ratio may not be comparable to that used by other
companies.
The following table presents for the periods indicated the major categories
of noninterest expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits........................... $21,698 $21,022 $16,754
Non-staff expenses
Occupancy and equipment................................ 6,731 6,730 5,545
Professional, regulatory and other services............ 1,186 1,650 1,406
Legal.................................................. 1,677 1,222 916
Insurance.............................................. 392 811 729
Losses and carrying costs of OREO...................... 111 219 395
Amortization of goodwill and other intangibles......... 4,096 3,996 2,881
Other.................................................. 14,438 16,443 11,102
------- ------- -------
Total non-staff expense.............................. 28,631 31,071 22,974
------- ------- -------
Total noninterest expense.......................... $50,329 $52,093 $39,728
======= ======= =======
</TABLE>
PROVISION FOR INCOME TAXES
The Company's income tax provision totaled $6.8 million for 1999. This
represents an increase of $2.1 million, or 44.36%, over an income tax provision
of $4.7 million for 1998. The increase in tax provision resulted from higher
pre-tax earnings for 1999 compared to 1998. The Company's effective tax rate for
1999 of 51.91% 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.
40
<PAGE>
The Company recorded a tax provision on continuing operations totaling $4.7
million in 1998 compared to $5.1 million 1997. The decrease in tax provision
resulted from lower pre-tax earnings for 1998 compared to 1997.
FINANCIAL CONDITION
The Company reported total assets of $1.4 billion at December 31, 1999. This
represented a decrease of $28.4 million, or 2.04%, from total assets of $1.4
billion at December 31, 1998. The decrease in total assets for 1999 was
primarily due to a decrease in the net assets associated with discontinued
operations partially offset by increases in the investment securities and loan
portfolios. The overall decrease in assets is a direct result of limiting funds
provided by high priced time deposits and volatile title and escrow demand
deposits.
LOANS AND LEASES
Net loans and leases of the Company at December 31, 1999 were $662.8
million. This represented an increase above net loans and leases of $630.3
million at December 31, 1998. The increase in portfolio loans and leases was
primarily attributable to growth in the commercial, real estate construction,
and installment loan portfolios of $14.8 million, $16.1 million, and $23.0
million, respectively. The increase in those lending categories was partially
offset by decreases in the real estate construction and lease financing
portfolios of $13.6 million and $8.4 million, respectively.
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. The Company has no foreign loans or energy-related loans as of the dates
indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial................................ $151,536 $136,783 $151,839 $ 79,505 $ 48,361
Real estate-commercial.................... 214,387 227,945 263,855 194,394 26,248
Real estate-construction.................. 62,822 46,717 36,332 19,638 2,435
Installment loans to individuals.......... 174,129 151,127 136,587 78,874 53,666
Lease financing........................... 80,472 88,875 40,819 46,498 --
-------- -------- -------- -------- --------
Subtotal................................ 683,346 651,447 629,432 418,909 130,710
Less: Allowance for loan and lease
losses.................................. 10,285 9,160 10,923 6,526 2,049
Unearned Discount....................... 6,832 8,531 8,206 6,152 4,943
Deferred loan fees...................... 3,465 3,507 2,907 2,376 (6)
-------- -------- -------- -------- --------
Net loans and leases...................... $662,764 $630,249 $607,396 $403,855 $123,724
======== ======== ======== ======== ========
</TABLE>
41
<PAGE>
The following table shows the amounts of certain categories of loans
outstanding as of December 31, 1999, which, based on remaining scheduled
repayments of principal, were due in one year or less, more than one year
through five years, and more than five years. Demand or other loans having no
stated maturity and no stated schedule of repayments are reported as due in one
year or less. Residential mortgage loans held for sale are recorded as due after
five years.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------
COMMERCIAL REAL ESTATE
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Aggregate maturities of loans and leases which are due:
Within one year............................................. $ 74,919 $ 60,899
After one year but within five years:
Interest rates are floating or adjustable................. 40,922 46,633
Interest rates are fixed or predetermined................. 16,731 39,790
After five years:
Interest rates are floating or adjustable................. 13,074 93,689
Interest rates are fixed or predetermined................. 5,890 36,198
-------- --------
Total................................................... $151,536 $277,209
======== ========
</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 and
those that have been restructured. For the twelve months ended December 31,
1999, additional gross interest income of $1.3 million would have been recorded
on impaired loans, and during 1998 additional gross interest income of $1.1
million would have been recorded on impaired loans, in each case had the loans
been current. No accrued but unpaid interest income on such loans was in fact
included in the Company's net income as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases, not restructured........... $ 7,984 $ 6,271 $11,395 $ 6,628 $ 2,292
Accruing loans and leases past due 90 day or more....... 50 883 4,991 1,588 71
Restructured loans and leases........................... 3,513 3,728 2,990 2,659 126
------- ------- ------- ------- -------
Total nonperforming loans and leases ("NPLs")......... 11,547 10,882 19,376 10,875 2,489
Other real estate owned ("OREO")........................ 563 1,583 2,760 5,336 3,481
------- ------- ------- ------- -------
Total nonperforming assets ("NPAs")................... $12,110 $12,465 $22,136 $16,211 $ 5,970
======= ======= ======= ======= =======
Selected ratios:
NPLs to total loans and leases........................ 1.71% 1.67% 3.08% 2.60% 1.90%
NPAs to total loans and leases and OREO(1)............ 1.72 1.90 3.40 4.38 4.45
NPAs to total assets.................................. 0.85 0.89 2.03 2.77 3.19
</TABLE>
Loans aggregating $11.5 million at December 31, 1999 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 minimum of $1.5 million should be included in the allowance at
December 31, 1999 because of the risk to the loan and lease
42
<PAGE>
portfolio represented by impaired loans. At December 31, 1998, loans aggregating
$9.8 million were designated as impaired and management determined that a
minimum of $1.3 should be included in the allowance because of the risk to the
loan and lease portfolio represented by such impaired loans.
At December 31, 1999, the Company had OREO properties with an aggregate
carrying value of $563,000. During 1999, properties with a total carrying value
of $610,000 were added to OREO, properties with a total carrying value of $1.6
million were sold and OREO properties were written down by approximately
$34,000. At December 31, 1998, the Company had OREO properties with an aggregate
carrying value of $1.6 million. During 1998, properties with a total carrying
value of $881,000 were added to OREO, properties with a total carrying value of
$1.7 million were sold and properties were written down by approximately
$353,000.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses was $10.3 million at December 31,
1999. This represents an increase of $1.1 million, or 12.28%, from the allowance
for loan and lease losses of $9.2 million at December 31, 1998. As a percent of
portfolio loans and leases, the allowance for loan and lease losses increased to
1.63% at December 31, 1999, compared to a ratio of 1.40% at December 31, 1998.
The increase in the allowance for credit losses at December 31, 1999 reflects an
increase in nonperforming loans at December 31, 1999 compared to December 31,
1998.
Nonperforming loans totaled $11.5 million at December 31, 1999. This
represents an increase of $665,000, or 6.11%, from nonperforming loans of $10.9
million at December 31, 1998. The increase in nonperforming loans and leases for
1999 was primarily the result of the lease financing portfolio. Charged off
loans and leases, net of recoveries totaled $4.7 million for 1999. This
represented a decrease of $2.6 million, or 35.62%, over net loans and leases
charged to the reserves of $7.3 million for 1998. The provision for loan and
lease losses totaled $5.9 million for 1999. This represented an increase of
$320,000, or 5.76%, over the provision for loan and lease losses of $5.6 million
for 1998.
The allowance for loan and lease losses totaled $9.2 million at
December 31, 1998. This represented a decrease of $1.7 million, or 15.60%, over
the allowance for loan and lease losses of $10.9 million at December 31, 1997.
As a percent of portfolio loans and leases, the allowance for loan and lease
losses decreased to 1.4% at December 31, 1998, compared to 1.7% of portfolio
loans at December 31, 1997. Net loans and leases charged to the allowance
totaled of $7.3 million for 1998, and represented an increase of $5.1 million,
or 228.3%, over net loans charged to the allowance of $2.2 million for 1997. The
provision for loan losses totaled $5.6 million for 1998, representing an
increase of $3.1 million, or 124.0%, over the provision for loan and lease
losses of $2.5 million for 1997.
43
<PAGE>
The table below summarizes average loans outstanding, gross loans and
leases, 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,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding............... $665,728 $617,568 $489,919 $236,276 $130,086
Gross portfolio loans and leases................... 683,346 651,447 629,432 418,909 130,710
Nonperforming loans and leases..................... 11,547 10,882 19,376 10,875 2,489
Allowance for loan and lease losses:
Balance at beginning of period................. 9,160 10,923 6,526 2,049 1,859
Balance acquired during period................. -- -- 4,076 4,382 --
Loans charged off during period
Commercial................................... 317 4,201 960 1,441 619
Leases....................................... 4,191 2,282 1,092 -- --
Real estate.................................. 977 1,312 739 145 204
Installment.................................. 2,335 1,871 1,377 334 1,089
-------- -------- -------- -------- --------
Total...................................... 7,820 9,666 4,168 1,920 1,912
Recoveries during period:
Commercial................................... 674 1,226 438 129 152
Leases....................................... 470 41 33 -- --
Real estate.................................. 737 194 517 61 5
Installment.................................. 1,192 890 952 610 610
-------- -------- -------- -------- --------
Total...................................... 3,073 2,351 1,940 800 767
Net loans charged off during period.......... 4,747 7,315 2,228 1,120 1,145
Provision for loan and lease losses.......... 5,872 5,552 2,549 1,215 1,335
-------- -------- -------- -------- --------
Balance at end of period................... $ 10,285 $ 9,160 $ 10,923 $ 6,526 $ 2,049
======== ======== ======== ======== ========
Selected ratios:
Net charge-offs to average loans and leases
(annualized)................................... 0.72% 1.18% 0.45% 0.47% 0.88%
Provision for loan and lease losses to average
loans.......................................... 0.90% 0.90% 0.52% 0.51% 1.03%
Allowance at end of period to gross loans and
leases outstanding at end of period............ 1.51% 1.41% 1.74% 1.56% 1.57%
Allowance as percentage of nonperforming loans
and leases..................................... 89.07% 84.18% 56.37% 60.01% 82.32%
</TABLE>
The following table indicates management's allocation of the allowance for
each of the following years:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allocated amount:
Commercial, financial and agricultural.............. $ 6,960 67.7% $4,323 47.2% $ 799 7.3%
Real estate and construction........................ 1,611 15.7% 1,992 21.7% 1,864 17.1%
Consumer............................................ 941 9.1% 2,836 31.0% 2,130 19.5%
Unallocated......................................... 773 7.5% 9 0.1% 6,130 56.1%
------- ----- ------ ----- ------- -----
Total............................................. $10,285 100.0% $9,160 100.0% $10,923 100.0%
======= ===== ====== ===== ======= =====
</TABLE>
44
<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, 1999 were $325.1 million.
This represents an increase of $74.61 million, or 29.79%, over total investments
of $250.5 million at December 31, 1998. The increase in investment securities
primarily reflects the reallocation of assets previously allocated to
discontinued operations. 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, 1999, 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, 1999
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------- MARKET
COST GAIN LOSS VALUE
--------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury........................................... $ 14,497 $ -- ($ 30) $ 14,467
U.S. Government agencies................................ 113,088 37 (4,096) 109,029
State and municipal securities.......................... 37,378 75 (1,948) 35,505
Mortgage-backed securities.............................. 157,538 -- (5,625) 151,913
Corporate bonds and equities............................ 14,609 2 (459) 14,152
-------- ---- -------- --------
Total................................................. $337,110 $114 ($12,158) $325,066
======== ==== ======== ========
</TABLE>
The following tables show the maturities of investment securities at
December 31, 1999, 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........... $14,467 5.38% $ -- -- $ -- -- $ -- --
U.S. Government
agencies................ 2,782 5.54% 90,781 5.59% 15,466 5.93% -- --
State and municipal
bonds................... 460 8.16% 2,678 5.31% 10,338 4.32% 22,029 4.75%
Mortgage-backed
securities.............. -- -- 2,414 6.44% 3,407 6.66% 146,092 6.88%
Corporate debt and
other................... -- -- -- -- -- -- 14,152 8.23%
------- ------- ------- --------
Total................... $17,709 5.48% $95,873 5.60% $29,211 5.45% $182,273 6.73%
======= ======= ======= ========
</TABLE>
Additional information concerning investment securities is provided in the
notes to the accompanying financial statements.
45
<PAGE>
DEPOSITS
Total deposits were $1.1 billion at December 31, 1999. This represents a
decrease of $163.0 million, or 13.35%, from total deposits of $1.2 billion at
December 31, 1998. The decrease in deposits was primarily attributable to
decreased title and escrow demand deposits and time deposits. Title and escrow
demand deposits totaled $14.1 million at December 31, 1999. This represents a
decrease of $46.1 million, or 76.6%, from title and escrow demand deposits of
$60.2 million at December 31, 1998. Total time deposits were $237.9 million at
December 31, 1999. This represents a decrease of $77.7 million, or 24.62%, from
time deposits of $315.6 million at December 31, 1998. The decrease in these
deposit portfolios was a direct result of limiting funds provided by high priced
time deposits and volatile title and escrow demand deposits. 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>
1999 1998 1997
--------------------- --------------------- -------------------
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.......... $ 280,687 0.00% $ 288,377 0.00% $227,629 0.00%
Interest-bearing demand............. 148,128 1.03 134,979 1.46 98,188 1.64
Money market........................ 130,323 3.26 116,283 3.44 90,600 3.13
Savings............................. 249,937 5.56 202,971 5.50 126,356 4.35
Time................................ 260,853 3.46 286,147 4.69 214,087 5.45
---------- ---------- --------
Total............................. $1,069,928 2.68% $1,028,757 2.97% $756,860 2.86%
========== ========== ========
</TABLE>
The following table shows the maturities of time certificates of deposits of
$100,000, or more at December 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------
(IN THOUSANDS)
<S> <C>
Due in three months or less................................. $36,273
Due in over three months through six months................. 32,139
Due in over six months through twelve months................ 17,823
Due in over twelve months................................... 4,324
-------
Total..................................................... $90,559
=======
</TABLE>
BORROWINGS
Other borrowed funds totaled $177.3 million at December 31, 1999. This
represents an increase of $143.4 million, or 423.01%, from borrowed funds of
$33.9 million at December 31, 1998. The increase in borrowed funds represents
the replacement of funds provided by high priced time deposits and volatile
title and escrow demand deposits.
46
<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 its subsidiary banks were well capitalized at December 31,
1999 for federal regulatory purposes. As of December 31, 1999, the Company and
its subsidiary banks had a leverage ratio, Tier 1 risk-weighted capital ratio,
and total risk-weighted capital ratio as follows:
<TABLE>
<CAPTION>
COMPANY ELDORADO ANTELOPE VALLEY
-------- -------- ---------------
<S> <C> <C> <C>
Leverage ratio....................................... 7.10% 6.19% 9.18%
Tier 1 risk weighted ratio........................... 10.96% 9.75% 12.77%
Total risk weighted ratio............................ 12.16% 10.97% 13.93%
</TABLE>
LIQUIDITY
The Company relies on deposits as its principal source of funds and,
therefore, must be in a position to service depositors' needs as they arise.
Management attempts not to exceed a loan-to-deposit ratio of approximately 80%
and attempts not to fall below 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 61.29% for
1999, 60.30% for 1998 and 64.73% for 1997. The average liquidity ratio was
36.80% for 1999, 28.03% for 1998 and 30.51% for 1997. At December 31, 1999, the
Company's loan-to-deposit ratio was 63.59% and the liquidity ratio was 52.35%.
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, 1999 the Company had approximately $100.0 million
of unused borrowing capacity under FHLB advances. In order to borrow from the
Federal Reserve, the Company would be required to physically deliver to the
Federal Reserve collateral consisting of marketable Government securities. At
December 31, 1999, the Company has no such collateral at the Federal Reserve.
YEAR 2000 PREPAREDNESS
The Year 2000 issue is a computer programming concern that may affect many
electronic processing systems. Until relatively recently, in order to minimize
the length of data fields, most computer programs eliminated the first two
digits of the year. This problem could affect computers leaving them unable to
distinguish dates in the twentieth and twenty-first centuries. For example,
date-sensitive calculations that treat "00" as the year 1900, rather than 2000.
Secondly, years that end in "00" are not leap years, except for
47
<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.
As of the date of this report, the Year 2000 issue has had no effect on the
Company's information technology systems, such as its item and data processing
applications, microprocessors, security systems and telecommunication equipment.
However, Year 2000 problems may turn out to exist in portions of computer
programs not now suspected, and we can provide no assurance that the Company
will not be adversely affected by issues we have yet to identify.
The Company's noninterest expense for 1999 included $500,000 in direct costs
associated with the Year 2000 issue.
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, lease financing, 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.
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.
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. 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
48
<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 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.
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, 1999, 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, 1999. The table also
sets forth the time periods during which interest-earning assets and
interest-bearing liabilities will mature or may reprice in accordance with their
contractual terms. The interest rate relationships between the repriceable
assets and repriceable liabilities are not necessarily constant and may be
affected by many factors, including the behavior of customers in response to
changes in interest rates. This table should, therefore, be used only as a guide
as to the possible effect changes in interest rates might have on the net
interest margins of the Company.
49
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------------------------------
AMOUNTS MATURING OR REPRICING IN
---------------------------------------------------
3 MONTHS OVER 3 MONTHS OVER 1 YEAR OVER
OR LESS TO 12 MONTHS TO 5 YEARS 5 YEARS NON-SENSITIVE(1) TOTAL
--------- -------------- ----------- -------- ---------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks................. -- -- -- -- $122,839 $ 122,839
Federal funds sold...................... -- -- -- -- -- --
Investment securities................... -- 17,711 92,730 214,587 38 325,066
Loans and leases........................ 302,867 58,863 235,275 76,044 -- 673,049
Net assets of discontinued operations... -- -- -- -- 140,719 140,719
Other assets(2)......................... -- -- -- -- 104,567 104,567
--------- --------- --------- -------- -------- ----------
Total assets.......................... $302,867 $ 76,574 $ 328,005 $290,631 $368,163 $1,366,240
========= ========= ========= ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits.... -- -- -- -- $261,121 $ 261,121
Interest-bearing demand, money market
and savings........................... 559,437 -- -- -- -- 559,437
Time certificates of deposit............ 92,458 138,645 6,706 89 -- 237,898
Short term debt......................... 149,640 -- -- -- -- 149,640
Long term debt.......................... -- -- -- -- 27,657 27,657
Other liabilities....................... -- -- -- -- 12,869 12,869
Shareholders' equity.................... -- -- -- -- 117,618 117,618
--------- --------- --------- -------- -------- ----------
Total liabilities & shareholders'
equity.............................. $801,535 $ 138,645 $ 6,706 $ 89 $419,265 $1,366,240
========= ========= ========= ======== ======== ==========
Period Gap.............................. (498,668) (62,071) 321,299 290,542 (51,102)
Cumulative interest earning assets...... 302,867 379,441 707,446 998,077
Cumulative interest earning
liabilities........................... 801,535 940,180 946,886 946,975
Cumulative Gap.......................... (498,668) (560,739) (239,440) 51,102
Cumulative assets to liabilities........ 0.38 0.40 0.75 1.05
Cumulative gap as a percent of:
Total assets.......................... (36.50)% (41.04)% (17.53)% 3.74%
Interest earning assets............... (49.96)% (56.18)% (23.99)% 5.12%
</TABLE>
- - ------------------------------
(1) Assets or liabilities which are not interest rate-sensitive.
(2) Allowance for possible loan losses of $10.3 million as of December 31, 1999
is included in other assets.
At December 31, 1999, the Company had $379.5 million in assets and
$940.2 million in liabilities repricing within one year. This means that
$560.7 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, 1999 is 0.40. Management tries to maintain this ratio as
close to 1.00 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,
1999. 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 1.50% with
a 200 basis point instantaneous increase to interest rates and increase
approximately 1.30% with a 200 basis
50
<PAGE>
point instantaneous decrease in rates. Management has a target of minimizing the
decline in net interest income to no more than 4.00% given a 200 basis point
instantaneous decrease in rates.
The preceding sensitivity analysis does not represent a forecast and should
not be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including: the nature
and timing of interest rate levels including the yield curve shape, prepayments
on loans and securities, changes in deposit levels, pricing decisions on loans
and deposits, reinvestment/ replacement of asset and liability cashflows and
others. While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the predictive
nature of these assumptions including how customer preferences or competitor
influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate loans, depositor early withdrawals and product
preference changes, and other internal/external variables. Furthermore, the
sensitivity analysis does not reflect actions that management might take in
responding to or anticipating changes in interest rates.
Management has taken several steps to reduce the positive gap of the Company
by lengthening the maturities in its investment portfolio and originating more
fixed rate assets that mature or reprice in balance with its interest bearing
liabilities. Management will continue to maintain a balance between its interest
earning assets and interest bearing liabilities in order to minimize the impact
on net interest income due to changes in market rates.
The following table sets forth the distribution of the expected maturities
of the Company's interest-earning assets and interest-bearing liabilities as
well as the fair value of these instruments. Expected maturities are based on
contractual payments without effect being given for the estimated effect of
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, 1999
-----------------------------------------------------------------------------------------
EXPECTED MATURITY
-----------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
-------- -------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities........ $ 17,711 $ 27,044 $ 9,618 $ 35,663 $20,443 $214,587 $325,066 $325,066
Weighted average rate
(%)...................... 5.29 5.54 5.37 5.37 5.56 6.07 5.71
Fixed Rate Loans............. $ 75,615 $ 55,591 $63,466 $ 72,117 $39,100 $ 63,399 $369,288 $364,531
Weighted average rate
(%)...................... 10.09 10.81 10.62 10.28 9.31 8.87 10.04
Variable Rate Loans.......... $102,466 $ 23,491 $24,577 $ 20,824 $20,737 $111,686 $303,761 $306,540
Weighted average rate
(%)...................... 8.95 9.17 9.36 9.04 8.86 9.46 9.19
-------- -------- ------- -------- ------- -------- -------- --------
Total interest earning
assets..................... $195,772 $106,126 $97,661 $128,604 $80,281 $389,672 $998,115 $996,137
======== ======== ======= ======== ======= ======== ======== ========
Interest bearing demand,
money market and savings... $559,437 -- -- -- -- -- $559,437 $554,648
Weighted average rate
(%)...................... 3.78 3.78
Time deposits................ $231,103 $ 5,549 $ 696 $ 148 $ 312 $ 89 $237,898 $238,105
Weighted average rate
(%)...................... 5.07 5.09 5.54 5.20 5.38 5.08
Subordinated debentures...... -- -- -- -- -- $ 27,657 $ 27,657 $ 27,657
Weighted average rate
(%)...................... 11.75 11.75
Federal funds purchased...... $149,640 -- -- -- -- -- $149,640 $149,640
Weighted average rate
(%)...................... 5.60 5.60
-------- -------- ------- -------- ------- -------- -------- --------
Total interest-bearing
liabilities................ $940,180 $ 5,549 $ 696 $ 148 $ 312 $ 27,657 $974,632 $970,051
======== ======== ======= ======== ======= ======== ======== ========
</TABLE>
51
<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, 1999
and 1998.................................................. F-2
Consolidated Statement of Income for the Years ended
December 31, 1999, 1998 and 1997.......................... F-3
Consolidated Statement of Shareholders' Equity for the Years
ended December 31, 1999, 1998 and 1997.................... F-4
Consolidated Statement of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997.......................... F-5
Notes to Consolidated Financial Statements December 31,
1999, 1998 and 1997....................................... F-7
</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, 1999 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, 1999 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, 1999 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, 1999 and such information is
incorporated herein by reference.
52
<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, 1997 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, 1997 and
incorporated by reference herein)
2.2 Stock Option Agreement dated December 24, 1997 between the
Company and Eldorado (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated December 24, 1997 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, 1997 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, 1997 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, 1998 (incorporated by reference to the
Company's Current Report on Form 8-K filed with the
Commission on August 7, 1998)
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, 1997)
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))
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))
</TABLE>
53
<PAGE>
<TABLE>
<C> <S>
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.
54
<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>
ELDORADO BANCSHARES, INC.
Date: March 30, 2000 By: /s/ ROBERT P. KELLER
----------------------------------------------
Robert P. Keller
PRESIDENT, CHIEF EXECUTIVE OFFICER, AND
DIRECTOR
Date: March 30, 2000 By: /s/ ROMOLO C. SANTAROSA
----------------------------------------------
Romolo C. Santarosa
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
Date: By:
----------------------------------------------
Ernest J. Boch
DIRECTOR
Date: By:
----------------------------------------------
James A. Conroy
DIRECTOR
Date: March 30, 2000 By: /s/ EDWARD A. FOX
----------------------------------------------
Edward A. Fox
CHAIRMAN OF THE BOARD AND DIRECTOR
Date: By:
----------------------------------------------
Charles E. Hugel
DIRECTOR
Date: By:
----------------------------------------------
Mitchell A. Johnson
DIRECTOR
Date: March 30, 2000 By: /s/ K. THOMAS KEMP
----------------------------------------------
K. Thomas Kemp
DIRECTOR
Date: March 30, 2000 By: /s/ JEFFERSON W. KIRBY
----------------------------------------------
Jefferson W. Kirby
DIRECTOR
Date: March 30, 2000 By: /s/ JOHN B. PETTWAY
----------------------------------------------
John B. Pettway
DIRECTOR
Date: By:
----------------------------------------------
Henry T. Wilson
DIRECTOR
Date: March 30, 2000 By: /s/ PAUL R. WOOD
----------------------------------------------
Paul R. Wood
DIRECTOR
</TABLE>
55
<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. and its subsidiaries (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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
February 18, 2000
F-1
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 122,839,000 $ 124,403,000
Federal funds sold.......................................... -- 19,300,000
Available-for-sale investment securities.................... 325,066,000 250,463,000
Loans and leases, net....................................... 662,764,000 630,249,000
Premises and equipment, net................................. 10,423,000 11,500,000
Real estate acquired through foreclosure, net............... 563,000 1,583,000
Intangibles arising from acquisitions, net.................. 58,830,000 67,378,000
Net assets of discontinued operations (Note 2).............. 140,719,000 253,117,000
Accrued interest receivable and other assets................ 45,036,000 36,628,000
-------------- --------------
Total assets.............................................. $1,366,240,000 $1,394,621,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand:
Non-interest bearing.................................... $ 261,121,000 $ 313,891,000
Interest bearing........................................ 145,441,000 154,948,000
Savings:
Regular................................................. 297,624,000 317,285,000
Money market............................................ 116,372,000 119,836,000
Time:
Under $100,000.......................................... 147,339,000 198,362,000
$100,000 or more........................................ 90,559,000 117,165,000
-------------- --------------
Total deposits........................................ 1,058,456,000 1,221,487,000
Federal funds purchased..................................... 149,640,000 5,900,000
Due to related parties...................................... -- 338,000
Subordinated debentures..................................... 27,657,000 27,657,000
Accrued expenses and other liabilities...................... 12,869,000 19,706,000
-------------- --------------
Total liabilities..................................... 1,248,622,000 1,275,088,000
Shareholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized, none issued and outstanding at December 31,
1999 and 116,593 at December 31, 1998................... -- 11,659,000
Special common stock, $.01 par value, 9,651,600 shares
authorized, none issued and outstanding at December 31,
1999 and 2,412,859 at December 31, 1998................. -- 24,000
Common stock, $.01 par value, 35,000,000 shares
authorized; 14,391,277 issued and outstanding at
December 31, 1999 and 9,542,454 at December 31, 1998.... 144,000 96,000
Additional paid-in capital................................ 109,299,000 87,543,000
Retained earnings......................................... 16,525,000 20,591,000
Unearned compensation..................................... (1,360,000) (1,006,000)
Accumulated other comprehensive income.................... (6,990,000) 626,000
-------------- --------------
Total shareholders' equity............................ 117,618,000 119,533,000
-------------- --------------
Total liabilities and shareholders' equity............ $1,366,240,000 $1,394,621,000
============== ==============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans................................ $54,318,000 $57,368,000 $46,928,000
Income from lease finance receivables..................... 8,917,000 6,661,000 4,127,000
Interest and dividends on securities...................... 18,120,000 7,790,000 7,330,000
Interest on Federal funds sold............................ 1,555,000 3,418,000 1,891,000
Interest on funds allocated to discontinued operations
(Note 2)................................................ 7,521,000 11,802,000 5,349,000
----------- ----------- -----------
Total interest income................................... 90,431,000 87,039,000 65,625,000
Interest expense:
Interest bearing demand................................... 1,531,000 1,964,000 1,612,000
Money market.............................................. 4,249,000 4,001,000 2,839,000
Savings................................................... 13,898,000 11,169,000 5,496,000
Time...................................................... 9,022,000 13,428,000 11,677,000
Debentures................................................ 3,294,000 3,310,000 1,908,000
Federal funds purchased................................... 3,652,000 806,000 563,000
----------- ----------- -----------
Total interest expense.................................. 35,646,000 34,678,000 24,095,000
----------- ----------- -----------
Net interest income..................................... 54,785,000 52,361,000 41,530,000
Provision for loan and lease losses......................... 5,872,000 5,552,000 2,549,000
----------- ----------- -----------
Net interest income after provision for loan and lease
losses.................................................. 48,913,000 46,809,000 38,981,000
Non-interest income:
Service charges on deposit accounts....................... 6,399,000 6,456,000 5,562,000
SBA loan servicing........................................ 2,181,000 2,539,000 2,353,000
Other income.............................................. 6,008,000 4,668,000 4,337,000
----------- ----------- -----------
Total non-interest income............................... 14,588,000 13,663,000 12,252,000
Non-interest expense:
Salaries and employee benefits............................ 21,698,000 21,022,000 16,754,000
Occupancy and equipment................................... 6,731,000 6,730,000 5,545,000
Professional, regulatory and other services............... 1,186,000 1,650,000 1,406,000
Legal..................................................... 1,677,000 1,222,000 916,000
Insurance................................................. 392,000 811,000 729,000
Losses and carrying cost of OREO.......................... 111,000 219,000 395,000
Amortization of goodwill and other intangibles............ 4,096,000 3,996,000 2,881,000
Other..................................................... 14,438,000 16,443,000 11,102,000
----------- ----------- -----------
Total non-interest expense.............................. 50,329,000 52,093,000 39,728,000
----------- ----------- -----------
Income from continuing operations, before taxes............. 13,172,000 8,379,000 11,505,000
Income tax provision........................................ 6,837,000 4,736,000 5,110,000
----------- ----------- -----------
Income from continuing operations........................... $ 6,335,000 $ 3,643,000 $ 6,395,000
----------- ----------- -----------
(Loss) income from discontinued operations, net of tax (Note
2)........................................................ (9,695,000) 1,771,000 (1,485,000)
----------- ----------- -----------
Net (Loss) income........................................... $(3,360,000) $ 5,414,000 $ 4,910,000
=========== =========== ===========
Income from continuing operations........................... $ 6,335,000 $ 3,643,000 $ 6,395,000
Less: preferred stock dividend.............................. $ (706,000) $(1,282,000) $ (731,000)
=========== =========== ===========
Income from continuing operations available to common
shareholders.............................................. $ 5,629,000 $ 2,361,000 $ 5,664,000
(Loss) income from discontinued operations (Note 2)......... $(9,695,000) $ 1,771,000 $(1,485,000)
----------- ----------- -----------
Net (Loss) income available to common shareholders.......... $(4,066,000) $ 4,132,000 $ 4,179,000
=========== =========== ===========
Basic:
Income per share from continuing operations................. $ 0.41 $ 0.20 $ 0.56
Discontinued operations..................................... $ (0.71) $ 0.15 $ (0.15)
----------- ----------- -----------
(Loss) income per share..................................... $ (0.30) $ 0.35 $ 0.41
=========== =========== ===========
Diluted:
Income per share from continuing operations................. $ 0.40 $ 0.19 $ 0.50
Discontinued operations..................................... $ (0.69) $ 0.14 $ (0.13)
----------- ----------- -----------
(Loss) income per share..................................... $ (0.29) $ 0.33 $ 0.37
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK SPECIAL COMMON STOCK COMMON STOCK
----------------------- ------------------------------------ ----------
NUMBER ADDITIONAL
OF PREFERRED NUMBER OF COMMON PAID-IN NUMBER OF
SHARES STOCK SHARES STOCK CAPITAL SHARES
-------- ------------ ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.......... -- -- -- -- -- 15,260,660
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
Issuance of restricted stock.......... -- -- -- -- -- 427,556
Compensation expense.................. -- -- -- -- -- --
Cancellation of shares--Paulsen....... -- -- -- -- -- (424,182)
Comprehensive income:
Unrealized gain on securities
available for sale, net of tax...... -- -- -- -- -- --
Net income............................ -- -- -- -- -- --
Total comprehensive income............ -- -- -- -- -- --
Preferred dividends................... -- -- -- -- -- --
======== ============ ========== ======== ============ ==========
Balance at December 31, 1997.......... 116,593 $ 11,659,000 4,825,718 $48,000 $ 23,164,000 19,084,909
Stock split (1 for 2)................. -- -- (2,412,859) (24,000) 24,000 (9,542,455)
Compensation expense -- -- -- -- -- --
Comprehensive income:
Unrealized gain on securities
available for sale, net of tax...... -- -- -- -- -- --
Net income............................ -- -- -- -- -- --
Total comprehensive income............ -- -- -- -- -- --
Preferred dividends................... -- -- -- -- -- --
======== ============ ========== ======== ============ ==========
Balance at December 31, 1998.......... 116,593 $ 11,659,000 2,412,859 $24,000 $ 23,188,000 9,542,454
Issuance of Common Stock.............. -- -- (2,412,859) ($24,000) ($23,188,000) 4,699,259
Dissenting shares -- Antelope......... -- -- -- -- -- (4,952)
Redemption of preferred stock......... (116,593) $(11,659,000) -- -- -- --
Issuance of restricted stock.......... -- -- -- -- -- 154,466
Compensation expense.................. -- -- -- -- -- --
Unrealized gain on securities
available for sale, net of tax...... -- -- -- -- -- --
Net (loss) income..................... -- -- -- -- -- --
Total comprehensive income............ -- -- -- -- -- --
Preferred dividends................... -- -- -- -- -- --
-------- ------------ ---------- -------- ------------ ----------
Balance at December 31, 1999.......... -- -- -- -- -- 14,391,227
======== ============ ========== ======== ============ ==========
<CAPTION>
COMMON STOCK
----------------------- ACCUMULATED
ADDITIONAL RETAINED OTHER
COMMON PAID-IN EARNINGS UNEARNED COMPREHENSIVE
STOCK CAPITAL (DEFICIT) COMPENSATION INCOME TOTAL
-------- ------------ ----------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.......... $153,000 $ 45,963,000 $12,279,000 -- $ 100,000 58,495,000
Issuance of preferred
stock--Eldorado..................... -- -- -- -- -- 11,659,000
Issuance of common stock--Eldorado.... 38,000 17,966,000 -- -- -- 41,216,000
Issuance of restricted stock.......... 4,000 2,008,000 -- (2,012,000) -- --
Compensation expense.................. -- -- -- 503,000 -- 503,000
Cancellation of shares--Paulsen....... (4,000) (1,677,000) -- -- -- (1,681,000)
Comprehensive income:
Unrealized gain on securities
available for sale, net of tax...... -- -- -- -- 44,000 44,000
Net income............................ -- -- 4,910,000 -- -- 4,910,000
-----------
Total comprehensive income............ -- -- -- -- -- 4,954,000
Preferred dividends................... -- -- (730,000) -- -- (730,000)
======== ============ =========== =========== =========== ============
Balance at December 31, 1997.......... $191,000 $ 64,260,000 $16,459,000 $(1,509,000) $ 144,000 $114,416,000
Stock split (1 for 2)................. (95,000) 95,000 -- -- -- --
Compensation expense -- -- -- 503,000 -- 503,000
Comprehensive income:
Unrealized gain on securities
available for sale, net of tax...... -- -- -- -- 482,000 482,000
Net income............................ -- -- 5,414,000 -- -- 5,414,000
-----------
Total comprehensive income............ -- -- -- -- -- 5,896,000
Preferred dividends................... -- -- (1,282,000) -- -- (1,282,000)
======== ============ =========== =========== =========== ============
Balance at December 31, 1998.......... $96,000 $ 64,355,000 $20,591,000 $(1,006,000) $ 626,000 $119,533,000
Issuance of Common Stock.............. 47,000 43,558,000 -- -- -- 20,393,000
Dissenting shares -- Antelope......... -- (49,000) -- -- -- (49,000)
Redemption of preferred stock......... -- -- -- -- -- (11,659,000)
Issuance of restricted stock.......... 1,000 1,435,000 -- (1,436,000) -- --
Compensation expense.................. -- -- -- 1,082,000 -- 1,082,000
Unrealized gain on securities
available for sale, net of tax...... -- -- -- -- (7,616,000) (7,616,000)
Net (loss) income..................... -- -- (3,360,000) -- -- (3,360,000)
-----------
Total comprehensive income............ -- -- -- -- -- (10,976,000)
Preferred dividends................... -- -- (706,000) -- -- (706,000)
-------- ------------ ----------- ----------- ----------- ------------
Balance at December 31, 1999.......... $144,000 $109,299,000 $16,525,000 ($1,360,000) $(6,990,000) $117,618,000
======== ============ =========== =========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Operating Activities:
Net (loss) income.............................. $ (3,360,000) $ 5,414,000 $ 4,910,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Provision for loan and lease losses.......... 5,872,000 5,552,000 2,549,000
Provision for loss on real estate acquired
through foreclosure........................ 34,000 -- 176,000
(Gain) loss on sale of premises and
equipment.................................. (29,000) (30,000) 11,000
(Gain) loss on sale of real estate owned..... (295,000) 339,000 42,000
Net gain on sale of securities............... (589,000) (472,000) (205,000)
Depreciation and amortization................ 2,453,000 2,529,000 2,527,000
Amortization of goodwill and other
intangibles................................ 4,096,000 3,996,000 2,881,000
Accretion/amortization related to securities,
net........................................ 2,776,000 (302,000) 1,086,000
(Decrease) increase in unearned discount..... (1,699,000) 326,000 2,054,000
Amortization of deferred compensation........ 1,171,000 503,000 503,000
Amortization of deferred loan fees and
costs...................................... (1,741,000) (601,000) (1,178,000)
Provision (benefit) of deferred taxes........ 1,814,000 1,469,000 1,998,000
Decrease (increase) in net assets of
discontinued operations.................... 112,398,000 (136,645,000) (30,345,000)
Other, net................................... (1,919,000) (3,132,000) 3,211,000
------------- ------------- -------------
Net cash provided by (used in) operating
activities............................... 120,982,000 (121,054,000) (9,780,000)
Investing Activities:
Decrease in interest bearing deposits with
other financial institutions............... -- 99,000 1,127,000
Purchases of investment securities........... (296,788,000) (285,716,000) (77,401,000)
Proceeds from sales/maturities of investment
securities................................. 192,556,000 140,624,000 130,450,000
Loans/leases originated for portfolio, net of
principal repayment........................ (24,697,000) (27,351,000) (54,875,000)
Purchases of premises and equipment.......... (1,519,000) (2,378,000) (2,279,000)
Proceeds from sale of premises and
equipment.................................. 176,000 1,255,000 98,000
Proceeds from sale of real estate acquired
through foreclosure........................ 1,890,000 1,719,000 5,779,000
Capital expenditures for other real estate
owned...................................... -- -- (26,000)
Purchase of Eldorado Bank, net of cash
received................................... -- -- (61,299,000)
------------- ------------- -------------
Net cash used in investing activities...... (128,382,000) (171,748,000) (58,426,000)
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Financing Activities:
Net (decrease) increase in deposits............ (163,031,000) 288,416,000 79,473,000
Issuance of subordinated debentures............ -- -- 27,657,000
(Redemption) issuance of preferred stock....... (11,659,000) -- 11,659,000
Issuance of common stock....................... 20,393,000 -- 18,004,000
Issuance of special common stock............... -- -- 23,212,000
Payment of preferred dividends................. (706,000) (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 --
Net increase (decrease) in other borrowings.... 143,402,000 3,850,000 (10,986,000)
------------- ------------- -------------
Net cash (used in) provided by financing
activities................................. (11,601,000) 290,785,000 148,289,000
------------- ------------- -------------
Net (decrease) increase in cash and cash
equivalents.................................... (19,001,000) (2,017,000) 80,083,000
Cash and cash equivalents at beginning of
period......................................... 141,840,000 143,857,000 63,774,000
------------- ------------- -------------
Cash and cash equivalents at end of period....... $ 122,839,000 $ 141,840,000 $ 143,857,000
============= ============= =============
Supplemental disclosures of cash flow
information:
Cash paid for interest......................... $ 35,646,000 $ 36,182,000 $ 24,549,000
Cash paid for income taxes..................... 3,825,000 4,054,000 2,230,000
Supplemental disclosures of non-cash investing
activities:
Loans transferred to foreclosed real estate.... 610,000 763,000 3,677,000
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................... 1,435,000 -- 2,012,000
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
Eldorado Bancshares, Inc. (formerly Commerce Security Bancorp, Inc.), a
Delaware corporation and bank holding company, and its wholly-owned subsidiaries
Eldorado Bank, Antelope Valley Bank and CSBI Capital Trust I are included in the
accompanying consolidated financial statements and are collectively referred to
as the "Company." Significant intercompany transactions and accounts have been
eliminated.
Prior to June 1997 and the acquisition of Eldorado Bank, the Company had
three subsidiaries, Commerce Security Bank (CSB), Liberty National Bank (LNB),
and San Dieguito National Bank (SDNB). On June 30, 1997, the Company merged the
then existing three subsidiaries into the newly acquired Eldorado Bank. On
January 22, 1999, the Company completed the acquisition of Antelope Valley Bank.
Following those transactions, the organizational structure consists of the
Company, its two wholly owned banking subsidiaries, Eldorado Bank and Antelope
Valley Bank (sometimes referred to collectively as the "Banks") and CSBI Capital
Trust.
The Company has accounted for the Antelope Valley Bank acquisition using the
pooling of interest method of accounting for business combinations. The
Consolidated Financial Statements have been prepared as if the Company had
acquired Antelope Valley Bank at the beginning of the earliest period presented.
BUSINESS
The Banks offer a broad range of commercial banking services primarily in
Southern California, catering especially to small and medium-sized businesses.
The Banks offer commercial, real estate, consumer and Small Business
Administration-guaranteed loans, as well as checking and savings deposits,
corporate cash management, international banking services, safe deposit boxes,
collection, traveler's checks, notary public and other customary non-deposit
banking services.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. Economic risk is comprised of three
components--interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature and reprice at different speeds, or on a different basis,
than its interest-bearing assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may affect, favorably or
unfavorably, the realizability of those assets and liabilities.
The Company is subject to the regulations of various governmental agencies.
These regulations can and do change significantly from period to period. The
Company is also subject to periodic examinations by the regulatory agencies,
which may subject it to changes in asset valuations, in amounts of required loss
allowances and in operating restrictions resulting from the regulators'
judgments based on information available to them at the time of their
examination.
F-7
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 the FASB issued SFAS 133, "Accounting for Derivative
instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or as liabilities in the statement of financial
position and measure those instruments at fair value. For the Company, this new
standard is effective in 2000 and is not to be applied retroactively to
financial statements of prior periods. The impact of this Statement, if any, is
yet to be determined.
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.
Gains and losses on investment securities are determined on the specific
identification method and are included in other income.
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
primarily from the retail sector of Southern California. The Company services
these leases and, during 1998, sold blocks of leases from time to time to other
institutions. Leases
F-8
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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. 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 affect the borrower's ability to pay, volume, growth and composition of the
loan portfolio, value of the collateral and other relevant factors.
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-9
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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, 1999 and 1998.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation on furniture, fixtures and equipment is computed
using the straight-line method over the estimated useful lives, which range from
two to fifteen years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the improvements or the
remaining lease term, whichever is shorter. Expenditures for betterments or
major repairs are capitalized and those for ordinary repairs and maintenance are
charged to operations as incurred.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired in settlement of loans is recorded at the lower of the
unpaid balance of the loan at settlement date or the fair value less estimated
costs to sell. A valuation allowance is established to reflect declines in value
subsequent to foreclosure, if any, below the new basis. Required developmental
costs associated with foreclosed property under construction are capitalized and
considered in determining the fair value of the property. Operating expenses of
such properties, net of related income, and gains and losses on their
disposition are included in other non-interest expenses.
INTANGIBLES ARISING FROM ACQUISITIONS
The Company has paid amounts in excess of fair value for three branches of
Wells Fargo Bank and for CSB's, LNB's, and Eldorado's core deposits and tangible
assets. Such amounts are being amortized by systematic charges to income
(primarily for periods from 10 to 25 years) over a period which is no greater
than the estimated remaining life of the assets acquired or not to exceed the
estimated average remaining 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
F-10
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
of assets and liabilities, and for the expected future tax benefit to be derived
from tax loss and tax credit carryforwards. SFAS 109 also requires the
establishment of a valuation allowance, if necessary, to reflect the likelihood
of the realization of deferred tax assets. The effect of tax rate changes will
be reflected in income in the period such changes are enacted.
Deferred income taxes are provided by applying the statutory tax rates in
effect at the balance sheet date to temporary differences between the book basis
and the tax basis of assets and liabilities. The resulting deferred tax assets
and liabilities are adjusted to reflect changes in tax laws or rates.
STOCK-BASED COMPENSATION
On January 1, 1997, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize, as expense over
the vesting period, the fair value of all stock-based awards on the date of
grant.
Alternatively, SFAS 123 also allows entities to continue to apply the
provisions of Accounting Principles Board (APB) Opinion 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants as if the fair-value-based method defined in SFAS 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion 25, which requires compensation expense be recorded on the date of grant
only if the current market price of the underlying stock exceeds the exercise
price, and provide the pro forma disclosure provisions of SFAS 123. See Note 13
of the Notes to Consolidated Statements for the pro forma net income and pro
forma earnings per share disclosures.
F-11
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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 components of the per share amounts are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NUMERATOR:
Income from continuing operations..................... $ 6,335,000 $ 3,643,000 $ 6,395,000
Less: preferred stock dividend........................ (706,000) (1,282,000) (731,000)
----------- ----------- -----------
Income from continuing operations applicable to common
shares.............................................. 5,629,000 2,361,000 5,664,000
(Loss) income from discontinued operations............ (9,695,000) 1,771,000 (1,485,000)
----------- ----------- -----------
Net (loss) income applicable to common shares......... $(4,066,000) $ 4,132,000 $ 4,179,000
=========== =========== ===========
DENOMINATOR:
Weighted average common shares outstanding (Basic).... 13,711,473 11,955,313 10,188,177
Dilutive options and warrants......................... 242,667 478,457 1,228,089
----------- ----------- -----------
Weighted average common stock outstanding
(Dilutive).......................................... 13,954,140 12,433,770 11,416,266
=========== =========== ===========
EARNINGS PER SHARE:
Basic:
Income from continuing operations................... $ 0.41 $ 0.20 $ 0.56
(Loss) income from discontinued operations.......... $ (0.71) $ 0.15 $ (0.15)
----------- ----------- -----------
Net (loss) income................................... $ (0.30) $ 0.35 $ 0.41
=========== =========== ===========
Dilutive:
Income from continuing operations................... $ 0.40 $ 0.19 $ 0.50
(Loss) income from discontinued operations.......... $ (0.69) $ 0.14 $ (0.13)
----------- ----------- -----------
Net (loss) income................................... $ (0.29) $ 0.33 $ 0.37
=========== =========== ===========
</TABLE>
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1999
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.
F-12
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 2--DISCONTINUED OPERATIONS:
In October 1999, the Company adopted a plan to discontinue operations of the
Mortgage Wholesale Division. The Company ceased production of new mortgage loans
and intends to fund its existing commitments and sell all loans held for sale by
the end of the second quarter of 2000. With the decision to exit the wholesale
mortgage business, the Company recorded an after-tax provision for disposal
costs and losses of $3.5 million and wrote $4.0 million of associated intangible
assets during the fourth quarter of 1999. Accordingly, the operating results and
net assets of the Mortgage Wholesale Division have been segregated retroactively
from continuing operations and reported separately in the Consolidated Financial
Statements. The loss from discontinued operations includes interest paid by the
Mortgage Wholesale Division to the continuing operations segment, under the
Company's cost allocation policy. Such amount is shown on the Consolidated
Statement of Income as "interest on funds allocated to discontinued operations."
The components of the loss from discontinued operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Discontinued operations:
Income (loss) from operations of discontinued
Mortgage Wholesale Division....................... $ (3,819,000) $ 3,053,000 $(2,561,000)
Applicable income tax............................. 1,604,000 (1,282,000) 1,076,000
Loss on disposal of discontinued Mortgage Wholesale
Division.......................................... (10,000,000) -- --
Applicable income tax............................. 2,520,000 -- --
------------ ----------- -----------
$ (9,695,000) $ 1,771,000 $(1,485,000)
============ =========== ===========
</TABLE>
NOTE 3--ACQUISITIONS AND REORGANIZATIONS:
From September 1995, the Company has completed four acquisitions, increasing
the Company's assets by approximately $1.0 billion, including the acquisition,
completed on January 22, 1999, of Antelope Valley Bank, in a transaction
accounted for as a pooling of interest. In connection with the acquisition, the
Company issued approximately 2,777,000 shares of common stock. As of
December 31, 1998, Antelope Valley Bank had total assets of $211.7 million.
On January 22, 1999, the Company completed the acquisition of Antelope
Valley Bank. 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. At December 31, 1998, Antelope had assets of
$211.7 million, deposits of $187.7 million and shareholders' equity of
$21.4 million. The Company issued 2,777,543 of Class B common stock to complete
the merger with Antelope. Merger related expenses totaling $651,000, net of tax,
were recorded during 1999 in conjunction with the Antelope acquisition.
On June 6, 1997, the Company acquired Eldorado Bancorp ("Eldorado") and its
bank subsidiary, Eldorado Bank, a community bank based in Tustin, California
with approximately $400 million in total assets (collectively with the financing
related thereto, the "Eldorado Acquisition"). Effective June 30, 1997, the
Company consolidated via mergers (collectively, the "Bank Mergers") into
Eldorado Bank the respective operations of its other subsidiaries--LNB, SDNB,
and CSB. Contemporaneously with the bank
F-13
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3--ACQUISITIONS AND REORGANIZATIONS: (CONTINUED)
mergers, the Company's predecessor, SDN Bancorp, Inc. ("SDN"), a then
wholly-owned subsidiary of the Company, merged into the Company.
The Eldorado Acquisition was effected pursuant to an Agreement and Plan of
Merger entered into between the Company and Eldorado on December 24, 1996. The
Company acquired 100% of the outstanding stock of Eldorado for cash
consideration of $23.00 per share. Contemporaneously with the Eldorado
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.
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 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 in cash and a total of 1,771,845
shares of the Company's common stock. CSB had total assets of approximately $220
million at September 1, 1996.
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.
The Liberty, Commerce, and Eldorado Acquisitions 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-14
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3--ACQUISITIONS AND REORGANIZATIONS: (CONTINUED)
The following table presents income statement data reported prior to the
merger and on a combined basis. Net interest income has been restated to give
effect to the discontinued operations (Note 2).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net interest income:
Eldorado Bancshares, Inc................................. $41,362,000 $31,647,000
Antelope Valley Bank..................................... 10,999,000 9,883,000
----------- -----------
Combined................................................. $52,361,000 $41,530,000
=========== ===========
Net income:
Eldorado Bancshares, Inc................................. $ 3,952,000 $ 2,990,000
Antelope Valley Bank..................................... 1,462,000 1,920,000
----------- -----------
Combined................................................. $ 5,414,000 $ 4,910,000
=========== ===========
</TABLE>
NOTE 4--CASH AND DUE FROM BANKS:
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. Included in cash and due from banks in the consolidated statement
of financial condition are restricted amounts aggregating $1,788,000 and
$1,714,000 at December 31, 1999 and 1998, respectively.
F-15
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5--INVESTMENT SECURITIES:
At December 31, 1999 and 1998, the Company's investment portfolio is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------- MARKET
COST GAIN LOSS VALUE
--------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury........................................... $ 14,497 $ -- $ (30) $ 14,467
U.S. Government agencies................................ 113,088 37 (4,096) 109,029
State and municipal securities.......................... 37,378 75 (1,948) 35,505
Mortgage-backed securities.............................. 157,538 -- (5,625) 151,913
Corporate bonds and equities............................ 14,609 2 (459) 14,152
-------- ---- -------- --------
Total................................................. $337,110 $114 $(12,158) $325,066
======== ==== ======== ========
</TABLE>
<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................................. 109,136 53 (357) 108,832
State and municipal securities........................... 18,418 696 (50) 19,064
Mortgage-backed securities............................... 45,277 193 (108) 45,362
Corporate bonds and equities............................. 33,747 145 (113) 33,779
-------- ------ ----- --------
Total.................................................. $249,331 $1,760 $(628) $250,463
======== ====== ===== ========
</TABLE>
F-16
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5--INVESTMENT SECURITIES: (CONTINUED)
Amortized cost and estimated market value of debt securities at
December 31, 1999, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less.......................... $ 18,396,000 $ 17,709,000
Due after one year through five years............ 101,813,000 95,873,000
Due after five years through ten years........... 20,807,000 29,211,000
Due after ten years.............................. 196,094,000 182,273,000
------------ ------------
Subtotal....................................... $337,110,000 $352,066,000
============ ============
</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.
Investment securities with an amortized cost of $90,428,000 and $32,710,000
and an estimated market value of $87,225,000 and $20,081,000 at December 31,
1999 and 1998, 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 1999, 1998, and
1997 were $192,556,000, $140,624,000, and $130,450,000, respectively. Gross
gains of $589,000, $476,000, and $341,000 were realized on those transactions.
Gross losses on sales totaled $-0-, $4,000, and $136,000 for 1999, 1998, and
1997, respectively.
NOTE 6--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,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Commercial.................................................. $151,536,000 $136,783,000
Real estate -- commercial................................... 214,387,000 227,945,000
Real estate construction.................................... 62,822,000 46,717,000
Installment loans to individuals............................ 174,129,000 151,127,000
Direct financing leases..................................... 80,472,000 88,875,000
------------ ------------
683,346,000 651,447,000
Less:
Allowance for loan and lease losses....................... (10,285,000) (9,160,000)
Unearned discount......................................... (6,832,000) (8,531,000)
Deferred loan fees and costs.............................. (3,465,000) (3,507,000)
------------ ------------
Loans and leases, net....................................... $662,764,000 $630,249,000
============ ============
</TABLE>
F-17
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 6--LOANS AND LEASES: (CONTINUED)
The components of the Company's direct financing lease receivable are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Future minimum lease payments............................... $ 92,599,000 $104,604,000
Residuals................................................... 389,000 699,000
Initial direct costs........................................ 3,218,000 4,384,000
Unearned income............................................. (15,734,000) (20,812,000)
------------ ------------
Total..................................................... $ 80,472,000 $ 88,875,000
============ ============
</TABLE>
An analysis of the activity in the allowance for loan and lease losses is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year.......................... $ 9,160,000 $10,923,000 $ 6,526,000
Balance acquired...................................... -- -- 4,076,000
Provision for loan and lease losses................... 5,872,000 5,552,000 2,549,000
Loans charged off..................................... (7,820,000) (9,666,000) (4,168,000)
Loan recoveries....................................... 3,073,000 2,351,000 1,940,000
----------- ----------- -----------
Balance at end of year................................ $10,285,000 $ 9,160,000 $10,923,000
=========== =========== ===========
</TABLE>
At December 31, 1999, future minimum lease payments receivable are as
follows:
<TABLE>
<S> <C>
2000........................................................ $33,298,000
2001........................................................ 21,105,000
2002........................................................ 14,760,000
2003........................................................ 8,565,000
2004........................................................ 2,744,000
Thereafter.................................................. --
-----------
Total....................................................... $80,472,000
===========
</TABLE>
There are no contingent rental payments included in income for the year
ended December 31, 1999.
As of December 31, 1999 and 1998 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 either 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.
F-18
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 6--LOANS AND LEASES: (CONTINUED)
The following table represents information relating to nonperforming and
past due loans:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Nonaccrual, not restructured.......................... $ 7,984,000 $ 6,271,000 $11,395,000
90 days or more past due, not on nonaccrual........... 50,000 883,000 4,991,000
Restructured loans.................................... 3,513,000 3,728,000 2,990,000
----------- ----------- -----------
Total................................................. $11,547,000 $10,882,000 $19,376,000
=========== =========== ===========
</TABLE>
At December 31, 1999 and 1998, loans aggregating $11,500,000 and $9,800,000,
respectively, have been designated as impaired. The total allowance for loan
losses related to these loans was $1,500,000 and $1,300,000 at December 31, 1999
and 1998, respectively.
The average balance of impaired loans during 1999 and 1998 was $10,650,000
and $11,199,000, 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,
--------------------------------
1999 1998 1997
-------- -------- ----------
<S> <C> <C> <C>
Non-accrual loans:
Income recognized......................................... $114,000 $139,000 --
Income foregone........................................... 667,000 472,000 980,000
Restructured loans:
Income recognized......................................... 134,000 288,000 336,000
Income foregone........................................... 633,000 610,000 1,127,000
</TABLE>
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, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Balance at the beginning of year............................ $452,000 $452,000 $ 485,000
Provision charged to expense................................ -- -- 176,000
Balances related to properties sold......................... -- -- (209,000)
-------- -------- ---------
Balance at the end of year.................................. $452,000 $452,000 $ 452,000
======== ======== =========
</TABLE>
F-19
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 8--PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Land........................................................ $ 2,478,000 $ 2,547,000
Buildings................................................... 6,731,000 7,534,000
Furniture, fixtures and equipment........................... 12,603,000 14,918,000
Leasehold improvements...................................... 5,001,000 5,053,000
Leasehold interests......................................... 732,000 732,000
------------ ------------
27,545,000 30,784,000
Less: Accumulated depreciation and amortization............. (17,122,000) (18,401,000)
------------ ------------
Premises and equipment, net................................. $ 10,423,000 $ 12,383,000
============ ============
</TABLE>
Depreciation and amortization of premises and equipment included in
operating expense amounted to $2,453,000, $2,529,000, and $2,527,000 in 1999,
1998 and 1997, respectively.
NOTE 9--DEPOSITS:
A summary of deposits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Noninterest bearing:
Checking.................................................. $ 247,014,000 $ 253,671,000
Title and escrow.......................................... 14,107,000 60,220,000
-------------- --------------
261,121,000 313,891,000
Interest bearing:
Savings................................................... 297,624,000 317,285,000
NOW and Super NOW......................................... 145,441,000 154,948,000
Money market.............................................. 116,372,000 119,836,000
Certificates of deposit $100,000 or greater............... 90,559,000 117,165,000
Other certificates........................................ 147,339,000 198,362,000
-------------- --------------
797,335,000 907,596,000
-------------- --------------
Total deposits.............................................. $1,058,456,000 $1,221,487,000
============== ==============
</TABLE>
F-20
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 9--DEPOSITS: (CONTINUED)
A summary of certificates of deposit maturities at December 31, 1999:
<TABLE>
<S> <C>
2000........................................................ $231,103,000
2001........................................................ 5,549,000
2002........................................................ 696,000
2003........................................................ 148,000
2004........................................................ 312,000
Thereafter.................................................. 89,000
------------
$237,898,000
============
</TABLE>
Interest expense for certificates of deposit in amounts of $100,000 or more
was $4,029,000, $6,540,000, and $5,213,000 for the years ended December 31,
1999, 1998, and 1997, respectively.
NOTE 10--BORROWINGS:
MANDATORY CONVERTIBLE DEBENTURES
Effective June 30, 1997, the Company assumed certain obligations of SDN its
then wholly-owned subsidiary. Among these obligations were mandatory convertible
debentures that totaled approximately $537,000. 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 was paid off during 1999. The annual interest rate on
the note was 10.5%, with principal and interest payments payable in quarterly
installments.
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-21
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal............................................... $ 9,462,000 $2,834,000 $3,137,000
State................................................. 2,573,000 433,000 1,203,000
----------- ---------- ----------
Total current provision (benefit)..................... 12,418,000 3,267,000 4,340,000
Deferred:
Federal............................................... (4,002,000) 768,000 746,000
State................................................. (1,196,000) 701,000 24,000
----------- ---------- ----------
Total deferred provision (benefit).................... (5,198,000) 1,469,000 770,000
----------- ---------- ----------
Total income tax provision (benefit).................. $ 6,847,000 $4,736,000 $5,110,000
=========== ========== ==========
</TABLE>
F-22
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 11--INCOME TAXES: (CONTINUED)
The amount of deferred tax assets (liabilities) resulting from each type of
temporary difference are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Deferred tax liabilities:
FHLB stock dividends................................ $ 463,000 $ 363,000 $ 216,000
Depreciation........................................ 107,000 445,000 605,000
Bad debt reserve recapture.......................... 671,000 1,212,000 1,860,000
Deferred loan costs................................. 1,132,000 919,000 599,000
State taxes......................................... -- -- --
Deferred lease acquisition cost..................... 1,475,000 1,966,000 611,000
Core deposits....................................... 158,000 380,000 470,000
Other............................................... -- -- 45,000
------------ ----------- -----------
Total deferred tax liabilities...................... 4,006,000 5,285,000 4,406,000
------------ ----------- -----------
Deferred tax assets:
Provision for loan losses........................... (3,911,000) (3,168,000) (4,468,000)
Accrued expenses.................................... (266,000) (453,000) (181,000)
Other reserves...................................... (453,000) (156,000) (248,000)
Real estate acquired through foreclosure............ (28,000) (161,000) (143,000)
NOL carryforward.................................... (693,000) (938,000) (1,363,000)
General business credit............................. -- -- (77,000)
AMT credit.......................................... -- -- (104,000)
Salary continuation payable......................... (1,232,000) (1,220,000) (794,000)
Restricted stock.................................... (231,000) (451,000) (225,000)
Accrued Legal....................................... (1,146,000) (1,121,000) (1,134,000)
Refinance reserve................................... -- (190,000) (341,000)
State taxes......................................... (345,000) (252,000) (34,000)
Discontinued operation.............................. 2,750,000 -- --
Securities.......................................... (4,863,000) 285,000 92,000
Other............................................... (488,000) (412,000) --
------------ ----------- -----------
Total deferred tax assets........................... (16,406,000) (8,237,000) (9,020,000)
------------ ----------- -----------
Net deferred tax asset................................ $(12,400,000) $(2,952,000) $(4,614,000)
============ =========== ===========
</TABLE>
As of December 31, 1999 and 1998, 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.
F-23
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 11--INCOME TAXES: (CONTINUED)
The income tax provisions (benefits) varied from the federal statutory rate
of 35% for 1999, 1998 and 1997, for the following reasons:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory federal expected tax rate......................... 35.00% 35.00% 35.00%
Increase in income taxes resulting from:
State franchise tax (net of federal benefit).............. 8.60 7.90 7.90
Goodwill.................................................. 8.50 12.20 6.20
Tax exempt interest....................................... (4.20) (3.90) --
Other..................................................... 4.00 5.30 (4.60)
----- ----- -----
Effective tax rate.......................................... 51.90% 56.50% 44.50%
===== ===== =====
</TABLE>
At December 31, 1999 the Bank had federal net operating loss carryforwards
of approximately $1,958,000, which expire in the years 2008 through 2011 and
California net operating loss carryforwards of approximately $69,000 which will
expire in the years 2000 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:
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 4,848,715 shares of common stock outstanding immediately prior to
the closing of the Eldorado Acquisition were redesignated as "Class B Common
Stock," and the Company issued 2,124,215 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 506,122 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 1997 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 $8.80 per share, and interest on that $4.5 million was converted to
shares of Class B Common Stock upon the completion of the Eldorado Acquisition
at a
F-24
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 12--SHAREHOLDERS' EQUITY: (CONTINUED)
purchase price of $9.62 per share, which, after giving effect to the 1%
commitment fee credit to other investors, 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 2,412,859 shares of
Special Common Stock, $.01 par value per share (the "Special Common"), to DCG,
Madison Dearborn Capital Partners II, L.P., ("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 $9.62 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 would have been 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 was
less than $9.62.
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. During 1999 the Company redeemed all outstanding shares
of the Series B Preferred Stock.
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 $9.62 per share. An
aggregate of 2,000,000 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, 1998 and July 15, 1998,
respectively, entitle the holders thereof to purchase an aggregate of 241,216
shares of Class B Common Stock at an exercise price of $9.62 per share and
expire on June 6, 2002 and July 15, 2002, respectively. The aggregate purchase
price of the Shattan Warrants was $4,824.
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 Commerce Acquisition of CSB in September 1996. As part
of that settlement, the Company canceled 212,091 shares of Class B Common Stock,
which cancellation, 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-25
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 12--SHAREHOLDERS' EQUITY: (CONTINUED)
ISSUANCE OF COMMON STOCK AND RECAPITALIZATION
In April 1999, the Company completed a public offering of 2,286,333 shares
of common stock for net proceeds of $21,264,000. In conjunction with the
April 1999 public offering, the Company used $12,009,000 of the proceeds raised
in the offering to redeem all of the Series B Preferred Stock. Also in
conjunction with that offering, Class B Common Stock was redesignated as "common
stock," and each share of Special Common Stock was converted into one share of
common stock.
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 $500,000
for 1999 and $484,000 for 1998.
DEFINED BENEFIT PENSION PLAN
The Company has employment agreements with two executive officers that
provide for a defined benefit pension plan. Under the terms of the employment
agreements, a fixed monthly benefit is payable in 180 equal installments from
the death or retirement of the executive. The defined benefit pension plan
includes the following pension costs for the years ended December 31, 1999 and
1998:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Service cost of benefits earned during the year.......... $17,000 $ 32,000
Interest costs of projected benefit obligation........... 69,000 72,000
Recognized net actuarial loss............................ 7,000 14,000
Net amortization and deferral............................ -- 11,000
------- --------
$93,000 $129,000
======= ========
</TABLE>
An analysis of the activity in the projected benefit obligation is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Benefit obligation at the beginning of the year...... $1,195,000 $1,074,000
Service cost......................................... 17,000 31,000
Interest cost........................................ 69,000 72,000
Actuarial loss/(gain)................................ (132,000) 69,000
Benefits paid........................................ (94,000) (51,000)
---------- ----------
Benefit obligation at the end of the year............ $1,055,000 $1,195,000
========== ==========
</TABLE>
F-26
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
An analysis of the funded status of the plan is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Actuarial present value of vested benefit
obligation......................................... $1,055,000 $1,195,000
========== ==========
Accumulated and projected benefit obligation......... $1,055,000 $1,195,000
Plan assets at fair value............................ -- --
---------- ----------
Projected benefit obligation in excess of plan
assets............................................. 1,055,000 1,195,000
Unrecognized net (loss) gain......................... (31,000) (170,000)
Unrecognized prior service cost...................... -- --
---------- ----------
Accrued pension and retirement cost included in
accompanying consolidated financial statements..... 1,024,000 1,025,000
Additional minimum liability......................... 31,000 170,000
---------- ----------
Required minimum liability........................... $1,055,000 $1,195,000
========== ==========
</TABLE>
The projected benefit obligation was determined using a weighted-average
assumed discount rate of 7.75% for the year ended December 31, 1999 and 6.00%
for the year ended December 31, 1998. 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. Under this
plan 582,022 restricted shares have been issued with a market value of
$3,448,000 as of December 31, 1999. 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 $1,082,000, and $503,000 recorded for 1999 and 1998,
respectively.
Until the Company's Tier 1 capital, for regulatory purposes, is greater than
$125.0 million, 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 at December 31, 1995, the Company had Tier 1 capital of
$93.4 million.
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
F-27
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
certain officers of the Company or any of its subsidiaries. There are currently
1,061,600 shares of common stock subject to the Option Plan. The Option Plan
provides only for the issuance of so-called "nonqualified" stock options (as
compared to incentive stock options). The options granted will vest over four
years, in half-year increments, with the first portion vesting on the 18-month
anniversary of the date of grant. The Option Plan provides that unless the
Committee otherwise determines, the options will have a six-year term, expiring
on the sixth anniversary of the date of grant.
A summary of transactions in the Option Plan for the two years ended
December 31, 1999 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
Options granted.......................... 23,200 309,800 11.52
Options cancelled........................ 42,500 (42,500) 12.89
--------- -------- ------
Balance at December 31, 1999............... 294,000 767,600 $11.84
========= ======== ======
</TABLE>
At December 31, 1999 158,000 shares were exercisable at prices ranging from
$9.64 to $13.00 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 $93.4 million at December 31, 1999.
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 1999 and 1998 would have been reduced to the pro forma amounts
indicated below. The per share weighted-average fair value of the stock options
granted during 1999 and 1998 was $2.72 and $3.36, respectively. The fair value
of each option grant is estimated on the date of grant using the Black- Scholes
F-28
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
option-pricing model with the following assumptions: expected dividend yield
0.00%, risk-free interest rate of 5.50%, an expected life of 6 years and
expected volatility of 20.00%.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net earnings:
As reported............................ $(3,360,000) $5,414,000 $4,910,000
Pro forma.............................. (3,815,000) 5,198,000 4,354,000
Basic earnings per share:
As reported............................ $ (0.30) $ 0.35 $ 0.21
Pro forma.............................. (0.33) 0.33 0.18
Diluted earnings per share:
As reported............................ $ (0.29) $ 0.33 $ 0.18
Pro forma.............................. (0.32) 0.31 0.16
</TABLE>
NOTE 14--CAPITAL ADEQUACY:
The Banks are 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 either
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, each 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. Each 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 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that each
Bank met 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 Eldorado Bank as adequately capitalized
and Antelope Valley Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as adequately 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 either Bank's category.
F-29
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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, 1999 DECEMBER 31, 1998
----------------------------------------- -----------------------------------------
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.................. 10.96% $ 93,435 4.0% $34,100 8.76% $79,185 4.0% $36,158
EB.................... 9.75 67,916 4.0 27,863 8.29 62,329 4.0 30,074
Antelope.............. 12.77 19,704 4.0 6,172 11.47 17,370 4.0 6,058
Leverage Capital:
ELBI.................. 7.10% $ 93,435 3.0% $34,100 6.37% $79,185 3.0% $37,293
EB.................... 6.19 67,916 3.0 27,863 6.01 62,329 3.0 31,113
Antelope.............. 9.18 19,704 3.0 6,172 8.49 17,370 3.0 6,138
Total Capital:
ELBI.................. 12.16% $103,720 8.0% $68,237 9.78% $88,345 8.0% $72,266
EB.................... 10.97 76,420 8.0 55,730 9.26 69,633 8.0 60,158
Antelope.............. 13.93 21,485 8.0 12,339 12.70 19,226 8.0 12,111
</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,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Commitments to extend credit................................ $250,483,000 $240,666,000
Standby letters of credit................................... $ 6,200,000 $ 3,047,000
</TABLE>
The Company is principally engaged in providing commercial loans and leases
with interest rates that fluctuate with the various market indices and
variable-rate real estate loans. These loans are primarily funded through
short-term demand deposits and certificates of deposit with fixed rates. The
contractual amounts of commitments to extend credit, standby and commercial
letters of credit represent the amount
F-30
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 15--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: (CONTINUED)
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, 1999 or 1998.
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.
NOTE 16--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
Fair values for each class of financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------- -------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Federal funds sold... $ 122,839,000 $ 122,839,000 $ 141,840,000 $ 141,840,000
Investment securities......... 325,066,000 325,066,000 252,326,000 252,326,000
Loans and leases receivable... 673,049,000 671,071,000 644,188,000 643,577,000
Financial Liabilities:
Deposits...................... 1,058,456,000 1,053,874,000 1,221,487,000 1,206,745,000
Federal funds purchased....... 149,640,000 149,640,000 5,900,000 5,900,000
Note payable to related
parties..................... -- -- 338,000 338,000
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.
F-31
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 16--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
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.
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.
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
resulting in these accounts having a lower fair value.
BORROWINGS
Federal funds purchased are over-night investments and the carrying value is
a reasonable estimate of fair value. For subordinated debentures, having been
recently priced at the issuance in 1997, the carrying value is a reasonable
estimate of fair value.
F-32
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 16--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
NOTE PAYABLE TO RELATED PARTIES
The note payable to related parties has a maturity of 15 months and is
stated at cost.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to Extend Credit and Standby Letters of Credit--The fair value
of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present credit worthiness of the counterparties. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date. The fair value of commitments to
extend credit and standby letters of credit is not material.
NOTE 17--COMMITMENTS AND CONTINGENCIES:
LITIGATION
As of December 31, 1999, 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, 1999 the judgment, including interest, was equal to $2.7 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.
OPERATING LEASE COMMITMENTS
A summary of noncancellable future operating lease commitments at
December 31, 1999 is as follows:
<TABLE>
<S> <C>
2000........................................................ $ 2,670,000
2001........................................................ 2,499,000
2002........................................................ 1,851,000
2003........................................................ 1,461,000
2004........................................................ 1,328,000
Thereafter.................................................. 3,613,000
-----------
$13,422,000
===========
</TABLE>
It is expected that in the normal course of business, expiring leases will
be renewed or replaced.
F-33
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 17--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Rent expense under all noncancellable operating lease obligations aggregated
$2,744,000, $2,636,000 and $2,389,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
DIVIDEND RESTRICTIONS
Federal Reserve policies declare that a bank holding company may not pay
cash dividends on its common stock unless its net income is sufficient to fund
fully such dividend, and its prospective rate of earnings retention after the
payment of such dividend appears consistent with its capital needs, asset
quality and overall financial condition. In connection with the Eldorado
Acquisition, the Company agreed that it will not pay dividends on common stock
without the prior approval of the Federal Reserve.
The Company is a legal entity separate and distinct from the 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
F-34
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 17--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
"undercapitalized" for regulatory purposes. Those regulations and restrictions
may limit the Company's 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:
Upon discontinuance of the Mortgage Wholesale Division, the Company's
business consists of one segment, Commercial Banking. The Company does not have
revenues derived from foreign operations and is not reliant on revenues from a
single major customer.
F-35
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 19--QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarterly financial data for the years ended December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------
FOURTH THIRD SECOND FIRST
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income......................................... $24,017 $23,319 $21,529 $21,565
Interest expense........................................ 10,125 8,871 7,937 8,713
------- ------- ------- -------
Net interest income..................................... 13,892 14,448 13,592 12,852
Provision for losses.................................... 2,690 1,300 1,102 780
Noninterest income...................................... 3,573 3,513 3,844 3,659
Noninterest expense..................................... 12,934 11,800 13,052 12,543
Income tax expense...................................... 1,029 2,395 1,683 1,731
------- ------- ------- -------
Income from continuing operations....................... $ 812 $ 2,466 $ 1,599 $ 1,457
Income (loss) from discontinued operations (a).......... (8,233) (1,335) (61) (65)
------- ------- ------- -------
Net income.............................................. $(7,421) $ 1,131 $ 1,538 $ 1,392
======= ======= ======= =======
Income per share from continuing operations:
Basic................................................. $ 0.06 $ 0.17 $ 0.09 $ 0.09
Diluted............................................... $ 0.06 $ 0.17 $ 0.08 $ 0.09
Net income per share:
Basic................................................. $ (0.52) $ 0.08 $ 0.08 $ 0.09
Diluted............................................... $ (0.51) $ 0.08 $ 0.08 $ 0.09
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------
FOURTH THIRD SECOND FIRST
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income......................................... $22,906 $22,335 $21,192 $20,607
Interest expense........................................ 9,729 9,287 8,385 7,277
------- ------- ------- -------
Net interest income..................................... 13,177 13,048 12,807 13,330
Provision for losses.................................... 2,120 970 1,270 1,192
Noninterest income...................................... 3,744 3,327 3,427 3,166
Noninterest expense..................................... 14,296 12,196 13,613 11,989
Income tax expense...................................... 728 1,524 862 1,623
------- ------- ------- -------
Income (loss) from continuing operations................ $ (223) $ 1,685 $ 489 $ 1,692
Income (loss) from discontinued operations (a).......... (1,129) 774 1,677 448
------- ------- ------- -------
Net income.............................................. $(1,352) $ 2,459 $ 2,166 $ 2,140
======= ======= ======= =======
Income per share from continuing operations:
Basic................................................. $ (0.05) $ 0.11 $ 0.01 $ 0.12
Diluted............................................... $ (0.04) $ 0.11 $ 0.01 $ 0.11
Net income per share:
Basic................................................. $ (0.14) $ 0.18 $ 0.15 $ 0.15
Diluted............................................... $ (0.13) $ 0.17 $ 0.15 $ 0.15
</TABLE>
(a) In the fourth quarter of 1999, the Company adopted a plan to discontinue the
operations of the Mortgage Wholesale Division and recorded a provision for
disposal costs and wrote off $4.0 million associated with intangible assets.
F-36
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 20--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,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Assets
Cash and due from banks.......................... $ 4,525,000 $ 122,000 $ 262,000
Investments...................................... 38,000 38,000 38,000
Investment in subsidiary......................... 95,684,000 100,897,000 99,569,000
Goodwill and other intangibles................... 44,631,000 47,662,000 49,756,000
Receivables and other assets..................... 1,498,000 178,000 176,000
------------ ------------ ------------
Total Assets....................................... $146,376,000 $148,897,000 $143,691,000
============ ============ ============
Liabilities and Shareholders' Equity
Guaranteed preferred beneficial interest in the
Company's junior subordinated debentures....... $ 28,513,000 $ 28,513,000 $ 28,513,000
Accrued expenses................................. 245,000 513,000 225,000
Mandatory convertible debentures................. -- -- 537,000
Notes payable to related parties................. -- 338,000 --
------------ ------------ ------------
Total liabilities.................................. 28,758,000 29,364,000 29,275,000
------------ ------------ ------------
Shareholders' equity
Preferred stock.................................. -- 11,659,000 11,659,000
Common stock..................................... 144,000 120,000 239,000
Additional paid-in-capital....................... 109,299,000 87,543,000 87,424,000
Retained earnings (deficit)...................... 16,525,000 20,591,000 16,459,000
Unearned compensation............................ (1,360,000) (1,006,000) (1,509,000)
Unrealized gain on investments, net of tax....... (6,990,000) 626,000 144,000
------------ ------------ ------------
Total shareholders' equity......................... 117,618,000 119,533,000 114,416,000
------------ ------------ ------------
Total liabilities and shareholders' equity......... $146,376,000 $148,897,000 $143,691,000
============ ============ ============
</TABLE>
F-37
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 20--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY: (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Income:
Dividend from Bank..................................... $ 1,000,000 $3,800,000 $1,700,000
Interest income........................................ 103,000 102,000 51,000
Non-interest income.................................... -- 49,000 866,000
----------- ---------- ----------
Total Income........................................... 1,103,000 3,951,000 2,617,000
Expenses:
Interest expense....................................... 3,405,000 3,450,000 1,959,000
Amortization of goodwill and intangibles............... 2,576,000 2,574,000 1,537,000
Non-interest expense................................... 1,896,000 1,481,000 1,453,000
----------- ---------- ----------
Total expense.......................................... 7,877,000 7,505,000 4,949,000
Loss before taxes and equity in undistributed earnings of
subsidiary............................................. (6,774,000) (3,554,000) (2,332,000)
Income tax benefit....................................... 2,184,000 2,010,000 1,161,000
----------- ---------- ----------
Loss before equity in undistributed earnings of
subsidiary............................................. (4,590,000) (1,544,000) (1,171,000)
Equity in undistributed earnings of subsidiary........... 1,230,000 6,958,000 6,081,000
----------- ---------- ----------
Net income............................................. $(3,360,000) $5,414,000 $4,910,000
=========== ========== ==========
</TABLE>
F-38
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 20--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY: (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Operating activities:
Net income.......................................... $(3,360,000) $ 5,414,000 $ 4,910,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in earnings of subsidiary.................. (2,230,000) (10,758,000) (7,781,000)
Accretion/amortization related to securities...... -- -- --
Dividends from subsidiary......................... 1,000,000 3,800,000 1,700,000
Loss on sale of securities, net................... -- -- 7,000
Amortization of goodwill and other intangibles.... 2,576,000 2,574,000 1,537,000
Amortization of compensation expense.............. 1,171,000 503,000 503,000
Income taxes...................................... -- 15,000 109,000
(Increase) decrease in other assets............... (2,176,000) (497,000) 163,000
Increase (decrease) in other liabilities.......... (268,000) 291,000 (443,000)
----------- ----------- ------------
Net cash (used in) provided by operating activities... (3,287,000) 1,342,000 705,000
----------- ----------- ------------
Investing activities:
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)
----------- ----------- ------------
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
Redemption of preferred stock.......................
Redemption of mandatory convertible debentures...... (11,659,000) (538,000) --
Net proceeds from issuance of notes payable......... -- 338,000 --
Repayment of notes payable.......................... (338,000) -- --
Issuance of special common stock.................... 20,393,000 -- 23,212,000
Payment of dividends................................ (706,000) (1,282,000) (730,000)
Other borrowings.................................... -- -- (4,500,000)
----------- ----------- ------------
Net cash provided by financing activities............. 7,690,000 (1,482,000) 75,302,000
----------- ----------- ------------
Net increase (decrease) in cash....................... 4,403,000 (140,000) (4,382,000)
Cash at beginning of year............................. 122,000 262,000 4,644,000
----------- ----------- ------------
Cash at end of year................................... $ 4,525,000 $ 122,000 $ 262,000
=========== =========== ============
</TABLE>
F-39
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-91125) of Eldorado Bancshares, Inc. of our
report dated February 18, 2000 relating to the financial statements, which
appears in this Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 122,839
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 325,066
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 673,049
<ALLOWANCE> (10,285)
<TOTAL-ASSETS> 1,366,240
<DEPOSITS> 1,058,456
<SHORT-TERM> 149,640
<LIABILITIES-OTHER> 12,869
<LONG-TERM> 27,657
0
0
<COMMON> 109,443
<OTHER-SE> 8,175
<TOTAL-LIABILITIES-AND-EQUITY> 1,366,240
<INTEREST-LOAN> 63,235
<INTEREST-INVEST> 18,120
<INTEREST-OTHER> 9,076
<INTEREST-TOTAL> 90,431
<INTEREST-DEPOSIT> 28,700
<INTEREST-EXPENSE> 35,646
<INTEREST-INCOME-NET> 54,785
<LOAN-LOSSES> 5,872
<SECURITIES-GAINS> 589
<EXPENSE-OTHER> 50,329
<INCOME-PRETAX> 13,172
<INCOME-PRE-EXTRAORDINARY> 6,335
<EXTRAORDINARY> (9,695)<F1>
<CHANGES> 0
<NET-INCOME> (3,360)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.29)
<YIELD-ACTUAL> 4.86
<LOANS-NON> 7,984
<LOANS-PAST> 50
<LOANS-TROUBLED> 3,513
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,160
<CHARGE-OFFS> 7,820
<RECOVERIES> 3,073
<ALLOWANCE-CLOSE> 10,285
<ALLOWANCE-DOMESTIC> 10,285
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 773
<FN>
<F1>LOSS FROM DISCONTINUED OPERATIONS
</FN>
</TABLE>
