Acquisition to Create Largest Bank Firm in Orange County

Acquisition-minded Citizens Holdings has reached a tentative agreement to buy Eldorado Bancorp in Laguna Hills for $34 million in cash, a deal that would create Orange County’s largest banking company, the two firms said Tuesday.

Newport Beach-based Citizens will pay $15 a share to pick up the nine-branch operation of Eldorado’s subsidiary, 16-year-old Eldorado Bank in Tustin, according to the letter of intent, which was signed late Monday. Eldorado will retain its name and operate as a subsidiary.

The purchase would put the county’s three oldest banks under one roof. Citizens already owns 16-year-old Citizens Bank of Costa Mesa and 18-year-old El Camino Bank in Anaheim.

Largest Banking Company

The acquisition would make Citizens Holdings the county’s largest banking company with $490 million in assets, surpassing Centennial Beneficial in Orange. And the firm would grow to almost $600 million once its pending purchase of Rancho Santa Fe National Bank in northern San Diego County is completed.

Definitive agreements for both Eldorado and Rancho Santa Fe should be signed within two months and the deals closed by the end of the year, said Paige V. Simpson, president of Citizens Bank and spokesman for its parent.

The acquisitions, if completed, would mean that Australian industrialist Richard Pratt will have spent $75 million acquiring four Southern California banks, starting with the 1986 purchase of Citizens Bank for $12 million. A trust for Pratt’s three children is the ultimate owner of Citizens Holdings.

The deal for Eldorado, one of the largest and healthiest banks in the county, continues Citizens Holdings’ strategy of growing to a $1-billion banking company by acquiring sound banks from Long Beach to San Diego and letting them continue operations separately.

As with El Camino Bank, acquired for $17.5 million in March, Citizens Holdings will allow Eldorado Bank to continue operating with its same board of directors and top management. The same will apply to Rancho Santa Fe National, which has agreed tentatively to a $12-million buyout.

“Frankly, I think we will have to stop and rest awhile to digest this one,” Simpson said. “We don’t expect to be talking seriously with anyone until next year--after these (acquisitions) are done.”

Simpson said the purchase price is slightly higher than the company wanted to pay. Eldorado’s chairman, J.B. Crowell, said Eldorado directors thought the price was fair and liked the “unique” idea of remaining autonomous.

“Normally, when a cash acquisition is in place, you become a senior officer and your bank is not allowed to operate as a separate entity,” said Crowell, who is Eldorado’s largest single shareholder with 7% of the stock.

“Citizens is leaving the same bonus plan and incentives in place, so the carrot will still be there for us to perform,” he said. One incentive missing, he conceded, would be stock options.

The tentative deal, which took barely two weeks to negotiate, surprised Wall Street investment bankers, who have high regard for Eldorado and have never heard of the privately held Citizens Holdings.

Eldorado, on the other hand, is the county’s only banking firm on the American Stock Exchange. News of the acquisition pushed its stock to $13 a share at Tuesday’s close, up $3.625 a share from Monday’s close.

With nine branches in Orange, Riverside and San Bernardino counties, Eldorado would give Citizens Holdings 16 banking offices, and Rancho Santa Fe would add three more branches in San Diego County. Citizens Bank is in the process of selling its Brea branch, leaving it with two in Costa Mesa.

Throughout the branch network, the only overlap is in Tustin where Eldorado and El Camino have offices.

Besides expanding Citizens’ reach, Eldorado could provide its sister banks with at least two services they don’t already enjoy--a credit card operation and clublike activities for customers, Simpson said.

More aggressive than Citizens Bank, Eldorado started its own Visa and MasterCard charge cards, rather than offering cards that are really from other banks. Eldorado has been able to monitor its costs more closely and offer rates as low as 12% on its top-of-the-line card. It also created two clubs for customers, an “Our Gang” discount travel and entertainment club for senior customers and an “Eldorado” club that offers discounts on bank services.

Simpson and Crowell have headed their banks--and have been friends--since the banks opened months apart in 1972.

Simpson said that when he and other Citizens Bank shareholders agreed to sell to Pratt in 1986, many county banking leaders believed that he would soon be out and Pratt would soon change the operations.

“Some customers still come in and say, ‘You were going to sell your bank. What happened?’ And I have to tell them we did sell,” Simpson said.

In a strategy session early last year in Australia, Simpson, Pratt and Pratt associates worked out an aggressive plan to acquire other banks but let them operate on their own. The idea was that banks with up to $300 million in assets are the most efficient and give the highest returns to investors. The rate of return falls as banks get bigger than $1 billion, Simpson said.

By allowing a newly acquired bank to operate on its own, the plan avoids ego problems--such as who would be chairman and who would be president--that have broken up many previous tentative deals, said Simpson and Crowell.

When Simpson returned from Australia, he outlined his plan to owners of about a dozen banks that he thought Citizens might want to acquire. Response was slow at first, Simpson said, but picked up when some bankers saw that Pratt wasn’t firing executives and changing the bank’s course.

Eldorado wasn’t one of those banks, though. Gerry Findley, a Brea banking consultant who advises Crowell and Eldorado directors and has worked for Simpson, said he told Simpson that Citizens Holdings “better do its homework” on Eldorado and “take its best shot” because Eldorado wasn’t standing still.

Indeed, Eldorado Bancorp completed its own acquisition in March of another Orange County bank, American Merchant Bank in Newport Beach.

Eldorado barely heard anything from Citizens, Findley said, until about two weeks ago when Gene Schutt, Citizens Holdings president, and Robert Katz, its chairman, took their “best shot” with the $15-a-share offer to join the holding company as a separate subsidiary.

Eldorado’s seven directors--five of whom have been on the board more than 12 years--agreed to the buyout Monday, Crowell said.

BUILDING A BANKING EMPIRE

Proposed acquisitions by Citizens Holdings would create Orange County’s largest bank holding company. Citizens has tentatively agreed to acquire Eldorado Bancorp, and Citizens’ purchase of Rancho Santa Fe National Bank is pending. The following are banks that would be controlled by Citizens Holdings upon completion of the acquisitions.

(Dollar amounts in thousands) 1st Quarter Assets Deposits Loans Net Income Citizens Bank of Costa Mesa $127,000 $114,204 $81,782 $473 El Camino, Anaheim 114,892 103,626 62,673 337 Rancho Santa Fe National 103,000 94,560 76,637 246 Eldorado, Tustin 244,570 218,811 161,484 644 Totals 589,462 531,201 382,576 1,700

(Dollar amounts in thousands) Branches Citizens Bank of Costa Mesa 3 El Camino, Anaheim 4 Rancho Santa Fe National 3 Eldorado, Tustin 9 Totals 19