<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
October 3, 1997
-------------------
Date of Report (Date of Earliest Event Reported)
WESTERN BANCORP
---------------
(Exact Name of Registrant As Specified In Its Charter)
CALIFORNIA
----------
(State or Other Jurisdiction of Incorporation)
0-13551 95-3863296
------- ----------
(Commission File Number) (IRS Employer Identification No.)
4100 Newport Place, 9th Floor
Newport Beach, California 92660
-------------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
(714) 863-2300
--------------
(Registrant's Telephone Number, including Area Code)
------------------------------------------------------------
(Former Name or Former Address, If Changed Since Last Report)
1
<PAGE>
Item 5. Other Events.
On July 30, 1997, Western Bancorp ("Western") entered into an Agreement and
Plan of Merger, by and among Western, Western Bank and Santa Monica Bank
("SMB"), pursuant to which SMB will merge with a subsidiary of Western.
In connection therewith, Western hereby files (i) SMB's Annual Report on
Form F-2 for the fiscal year ended December 31, 1996; (ii) SMB's Current Reports
on Form F-3, dated April 17, 1997 and August 8, 1997; (iii) SMB's Quarterly
Reports on Form F-4, dated April 19, 1997 and August 6, 1997; (iv) SMB's Annual
Report to security holders for fiscal year ended December 31, 1996; and (v)
SMB's Proxy Statement to security holders for fiscal year ended December 31,
1996.
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington. D.C. 20429
FORM F-2
ANNUAL REPORT
UNDER SECTION 13 of the Securities
Exchange Act of l934
for the fiscal year ended Decemher 31, 1996
FDIC CERTIFICATE NO. 00114-7
S A N T A M O N I C A B A N K
Incorporated in the State of California on Feb/3/1928
IRS Employer Identification No. 95-1191910
1251 Fourth Street
Santa Monica, California 90401
Telephone No. (310) 394-9611
Securities registered under section 12 (g) of the Act: Capital Stock
7,077,332 outstanding shares. Traded in the American Stock Exchange
under the symbol of SMO.
Delinquent filers pursuant to item 10 is not contained herein, and will not be
contained, to the best of Santa Monica Bank's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this form F-2 or
any amendment of this form F-2
Santa Monica Bank (1) has filed all reports required to be filed by Section 13
of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
<PAGE>
SANTA MONICA BANK
Securities Registered:
The Stock registered pursuant to Section 12 (g) of the Securities
Exchange Act of 1934 is Capital Stock, par value $3 per share. As of December
31, l996, 7,077,332 shares were outstanding of 10,000,000 shares authorized.
The number of holders of record of the Capital Stock of the Bank was 1,297 at
December 31, 1996. The Capital Stock of the Bank is traded in the American
Stock Exchange. The Transfer Agent and Registrar of the Capital Stock is
Chemical Mellon Shareholder Services, L.L.C., P.O. Box 3315, South
Hackensack, NY 07606, (800) 356-2017.
Documents Incorporated by Reference
The Annual Report to security holders for fiscal year ended December 31,
1996 is herein incorporated by reference in lieu of Part II of Form F-2.
The Proxy Statement to security holders for fiscal year ended December 31,
1996 is herein incorporated by reference in lieu of Part III of Form F-2.
PART I
Item 1. Business
The Bank was organized in 1928 and at December 31, 1996 amounted to
$631,561,490 in total resources. The Bank's main office and its executive
offices are located in Santa Monica. The Bank has offices in Pacific Palisades,
West Los Angeles, Malibu and Marina Del Rey and four in Santa Monica. At
year-end the Bank had a total staff of 281 employees.
The Bank provides a wide variety of banking services to its customers.
Services include those traditionally offered by commercial banks, such as
checking and savings accounts, commercial, industrial, real estate and
installment loans, and safe deposit facilities. The Bank also has a trust
department with total assets market value under administration of $604,505,000
at December 31, 1996.
The Bank concentrates its marketing among small and medium-sized
businesses, persons and firms in the medical, dental, legal and accounting
professions, and developers of commercial and residential real estate projects.
The Bank also serves consumers and, to a lesser extent, larger corporations.
Santa Monica Bank has kept pace with the growth of the banking industry.
The Bank ranks as the 38th largest among all banks in California and 530th
largest in the nation. In terms of the region we serve, Santa Monica Bank has
over 15% market share, placing it third in a field that includes some of the
state's largest banks. Our size and resources give us the flexibility to meet
the needs of all types of customers.
For additional information, refer to the l996 Annual Report, pages 2 thru
11, incorporated herein by reference.
<PAGE>
SANTA MONICA BANK
Item 2. Properties
All properties are leased by the Bank, with the exception of the land and
building at 1251 Fourth Street, Santa Monica; the building at 2221 Santa Monica
Boulevard, Santa Monica; the land and building at 1324 Fifth Street, Santa
Monica; the land and building at 1235 Fourth Street, Santa Monica, and the land
and building at 4700 Lincoln Boulevard, Marina del Rey, which are owned by the
bank.
MAIN OFFICE
1251 Fourth Street
Santa Monica. California 90401 OWNED
BRANCH OFFICES
15245 Sunset Boulevard, Pacific Palisades, California 90272 /
Lease expires l2/31/2003
3302 Pico Boulevard, Santa Monica, California 90405 /
Lease expires 9/30/2001
12100 Wilshire Boulevard, West Los Angeles, California 90025 /
Lease expires 12/31/2003
4700 Lincoln Boulevard, Marina del Rey, California 90292 OWNED
23705 West Malibu Road, Malibu, California 90265 /
Lease expires 02/28/2001
152 Santa Monica Place, Santa Monica, California 90401 /
Lease expires 12/31/2004
AUDITING DEPARTMENT
1324 Fifth Street
Santa Monica, California 90401 OWNED
SERVICE CENTER
1324 Fifth Street
Santa Monica, California 90401 OWNED
CASHIER'S DEPARTMENT
1237 Fourth Street
Santa Monica, California 90401 Lease expires 3/31/2000
LOAN DEPARTMENT
1235 Fourth Street
Santa Monica, California 90401 OWNED
Types of properties carried as Other Real Estate Owned (OREO) as of December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
Number Amount Number Amount
------------------------------------------------------
<S> <C> <C> <C> <C>
Construction and land development # $ 1 $ 2,640
l-4 family residential properties 3 345 10 3,998
Multifamily (5 or more) res. properties 5 5,239 11 9,247
Nonfarm nonresidential properties 4 3,022 5 2,673
------------------------------------------------------
TOTAL # 12 $8,606 # 27 $18,558
</TABLE>
For additional information regarding OREO refer to 1996 Annual Report, page 25,
incorporated herein by reference.
<PAGE>
SANTA MONICA BANK
Item 3. Legal Proceedings
The Bank is continually faced with legal proceedings in the ordinary
conduct of its business, which in the opinion of the counsel and the judgement
of management will not materially affect its financial position.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the shares of Capital Stock owned
beneficially, by the principal holders of securities.
<TABLE>
<CAPTION>
Percent of
Shares of
Total Capital
Beneficial Stock
Name Address Ownership Outstanding
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Doris J. Carver 1324 5th Street 981,690 (1) 13.87%
Santa Monica, CA 90401
849,942 (2) 12.01%
W. Paul Carver 1235 4th Street
Santa Monica, CA 90401
------------- -------------
Total beneficial ownership of W. Paul Carver and Doris J. Carver 1,831,632 25.88%
</TABLE>
- -----------------
(1) Consists of 930,872 shares held as Trustee under Aubrey E. Austin, Jr. and
Doris J. Austin 1987 Trust, of which 818,260 shares are held as trustee
with a life estate interest under a Marital Trust, and 112,612 shares are
held as Trustee and Beneficiary under a Survivor's Trust. In addition
33,401 shares are held as Trustee of an irrevocable trust for her two
daughters who are associates, 16,322 shares are held as Trustee under the
Herman Klabunde Trust, and 1,095 shares are held by Doris J. Carver as an
individual.
(2) Consists of 812,995 shares which are held as Trustee with a life estate
interest under the W. Paul Carver Trust, and 4,282 shares which are held by
Wendell Paul Carver as Trustee of the Wendell Paul Carver 1990 Trust. In
addition 32,665 shares are also held as Trustee for his one stepdaughter
who is an associate.
For information on directors' individual holdings as a group, please refer to
Exhibit B, Proxy Statement pages 2 thru 4, incorporated herein by reference.
Part II
Item 5. Market for the Bank's Common Stock and Related Security Holder Matters.
(a) Market for the Bank's Common Stock
Refer to 1996 Annual Report, page 12, incorporated herein by reference.
(b) Approximate Number of Equity Security Holders:
Title of Class Number of Record Holders
- --------------------------------------------------------------------------------
Common stock $3.00 par value 1297
7,077,332 shares outstanding
of 10,000,000 shares authorized
<PAGE>
SANTA MONICA BANK
Item 6. Selected Financial Data.
1. Financial Statements refer to 1996 Annual Report, page 12,
Incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
1. Refer to 1996 Annual Report, page 13 thru 19, incorporated herein
by reference.
2. For tabular statistical information, refer to 1996 Annual
Report, page 14 thru 19.
Item 8. Financial Statements and Supplementary Data.
1. Financial Statements refer to 1996 Annual Report, page
20 thru 36, incorporated herein by reference.
Part III
Item 9. Directors and Principal Officers of the Bank.
1. Directors see exhibit B, Proxy Statement, page 3 thru 4,
incorporated herein by reference.
The Principal Officers of the Bank as of December 31, 1996 are listed below. The
Officers were elected to their respective positions by the Board of Directors in
January 1996. There is no arrangement or understanding with any officer pursuant
to selections as an officer. No principal officer has any other occupation
except being a Principal Officer of the Bank.
Present Principal Occupation
and Principal Occupation
Name Age During the Past Five Years
- --------------------------------------------------------------------------------
Aubrey L. Austin 49 President of Santa Monica Bank
and Chief Executive Officer.
Director of Santa Monica Bank
since 1985. He joined the Bank
in 1977.
Dan T. Atkins 59 Executive Vice President/Sr. Credit
Administrator. He joined the Bank
in May, 1993.
Ron D. Makela 53 Sr. Vice President/Operations
Administrator since 1988. He joined
the Bank in February, 1977.
Linda L. Mazarella 47 Sr. Vice President/Human Resources
Director. She joined the Bank in
March, 1978.
Dario O. Quiroga 55 Sr. Vice President/Cashier and
Chief Financial Officer since 1988.
He joined the Bank in October 1963.
Richard Ratkovic 60 Sr. Vice President/Trust Manager
since 1983. He joined the Bank in
April, 1977.
<PAGE>
SANTA MONICA BANK
Item 10. Management Renumeration and Transactions.
See Exhihit B, Proxy Statement, pages 6 thru 8, incorporated herein by
reference.
Item 11. Exhibits, Financial Statements Schedules.
Exhibits:
Exhibit A. The Annual Report to security holders for fiscal year
ended December 31, 1996 is herein attached.
Exhibit B. The Proxy Statement dated March 7, 1997 to security
holders is herein attached.
Schedules:
Schedule I. Securities: Refer to 1996 Annual Report, page 27,
incorporated herein by reference.
Schedule II. Loans to officers, directors, principal security
holders and any associates of the foregoing persons:
<TABLE>
<CAPTION>
Balance at Interest Amounts Additions Balance at
beginning Rate Collected end of period
of period 12/31/95
01/01/95
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aubrey L. Austin
Real Estate Loan due 10/01/01 761,668.49 8.00% 8,493.49 753,175.00
Cardinal Liberty Inc.
Joe Crail, President/CEO
Real Estate Loan due 02/25/98 844,081.56 9.00% 35,843.17 808,238.39
Joe Crail
Unsecured Loan due 11/10/97 255,208.29 10.00% 87,500.04 167,708.25
Donald E. Dickerson
Unsecured Loan due l2/01/96 167,600.00 10.00% 46,900.00 120,700.00
William B. Fritzsche
Unsecured Loan due 10/15/96 58,566.03 10.50% 58,566.03
Pioneer French Baking Co. Inc.
John W. Garacochea, President
Real Estate Loan due 01/19/96 3,531,322.90 11.00% 166,142.39 3,365,180.51
Real Estate Loan due 01/19/96 320,547.16 l2.50% 16,791.05 285,756.11
Real Estate Loan due 04/01/97 1,723,944.76 10.00% 74,724.83 1,649,219.93
Real Estate Loan due 04/01/97 972,728.28 10.00% 972,728.28
Other Officers or retired
officers and directors 253,790.00 3,627.65 250,162.35
Cummings Properties Inc.
Willard L. Cummings, Jr.
President 9.00% 560,699.12 560,699.12
Real Estate Loan due 06/05/98
Willard L. Cummings Jr. 9.00% 249,061.05 249,061.05
Real Estate Loan due 08/01/97
---------------------------------------------------------------------------
8,889,457.47 1,471,316.93 809,760.17 8,227,900.71
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
<PAGE>
SANTA MONICA BANK
<TABLE>
<CAPTION>
Balance at Interest Amounts Additions Balance at
beginning Rate Collected end of period
of period 12/31/96
01/01/96
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aubrey L. Austin
Real Estate Loan due 10/01/01 753,175.00 8.00% 9,198.41 743,976.59
Cardinal Liberty Inc.
Joe Crail, President/CEO
Real Estate Loan due 02/25/98 808,238.39 9.00% 39,164.94 769,073.45
Joe Crail
Unsecured Loan due 11/10/97 167,708.25 10.00% 167,708.25
Donald E. Dickerson
Unsecured Loan due 01/01/97 120,700.00 9.75% 20,700.00 100,000.00
William B. Fritzsche
Unsecured Loan due 10/15/96 56,819.33 10.25% 34,259.75 22,559.58
Pioneer French Baking Co. Inc.
John W. Garacochea, President
Real Estate Loan due 01/19/96 3,365,180.51 11.00% 3,365,180.51
Real Estate Loan due 01/19/96 285,756.11 12.50% 285,756.11
Real Estate Loan due 04/01/97 1,649,219.93 10.00% 1,649,219.93
Other officers or retired
officers and directors 250,162.35 73,838.37 176,323.98
Cummings Properties Inc.
Willard L. Cummings, Jr.
President 560,699.12 9.00% 72,488.02 488,211.10
Real Estate Loan due 06/05/98
Willard L. Cummings Jr. 249,061.05 7.875% 47,328.51 201,732.54
Real Estate Loan due 04/01/03
---------------------------------------------------------------------------
8,266,720.04 5,764,842.80 2,501,877.24
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
Schedule III. Loans
1. refer to 1996 Annual Report, page 28 and 29,
incorporated herein by reference.
Schedule IV. Bank Premises and Equipment
1. Refer to 1996 Annual Report, pages 29 and 30,
incorporated herein by reference.
Schedule V. Investments in, Income From Dividends, and Equity in
Earnings or Losses of Subsidiaries and Associated Companies.
1. Not Applicable
Schedule VI. Allowance for Possible Loan Losses
1. Refer to 1996 Annual Report, page 28, incorporated
herein by reference.
<PAGE>
SANTA MONICA BANK
SIGNATURES
Pursuant to the requirements of section 13 of the Securities Exchange Act of
l934, the bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SANTA MONICA BANK
by /s/ Pablo M. Ercilla by /s/ Dario O. Quiroga
--------------------------- ---------------------------
Pablo M. Ercilla Dario O. Quiroga
Vice President / Controller Senior Vice President / Cashier /
Chief Financial Officer /
Secretary of the Bank
by /s/ Aubrey L. Austin
---------------------------
Aubrey L. Austin
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons behalf of the registrant and in
the capacities and on the dates indicated.
Director /s/ W. B. Fritzsche
---------------------------
Director /s/ W. L. Cummings, Jr.
---------------------------
Director /s/ Donald E. Dickerson
---------------------------
Director /s/ J. W. Garacochea
---------------------------
Director /s/ Dorothy F. Menzies
---------------------------
Director /s/ Doris J. Carver
---------------------------
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM F-3
CURRENT REPORT
Pursuant to Section 13 of Securities
Exchange Act of 1934
For the Month of April 1997
SANTA MONICA BANK
Incorporated in the State of California on Feb/3/1928
IRS Employer Identification No. 95-1191910
1251 Fourth Street
Santa Monica, California 90401
Telephone No. 213/394-9611
<PAGE>
SANTA MONICA BANK
Item 9. Submission of Matter to a Vote of Security Holders:
(a) Date of Annual Meeting: April 17, 1997
(b) Directors Elected at the Meeting:
1. Election of Class III Directors to hold office for three years;
Aubrey L. Austin, Doris J. Carver, W. Paul Carver to serve as Class III
Directors until the Annual Meeting of Shareholders in 2000, or until a successor
is duly elected. No other nominations for the Board of Directors were made at
the Annual Meeting.
---------------------------------------------------------------------------
Shares issued and outstanding 7,077,332
---------------------------------------------------------------------------
Shares represented by proxy 5,849,152
---------------------------------------------------------------------------
Shares represented in person 147,931
---------------------------------------------------------------------------
Total shares voting 5,997,083
---------------------------------------------------------------------------
Results: Unanimous vote of the stockholders for the election of the directors
as nominated
(c) Matters Voted upon:
2. To approve the 1997 Incentive Stock Option Plan adopted by the
Board of Directors of the Santa Monica Bank on January 22, 1997, subject to the
approval of the stockholders.
---------------------------------------------------------------------------
Shares represented by proxy 5,692,613
---------------------------------------------------------------------------
Shares represented in person 147,931
---------------------------------------------------------------------------
Total shares voting 5,840,544
---------------------------------------------------------------------------
Results: Unanimous vote of the stockholders to approve the 1997 Incentive Stock
Option Plan as set forth in the 1997 Proxy Statement.
3. To approve the amendment to the Articles of Incorporation of the
Bank to increase the authorized number of shares of capital stock from
10,000,000 shares to 50,000,000 shares.
---------------------------------------------------------------------------
Shares represented by proxy 4,996,945
---------------------------------------------------------------------------
Shares represented in person 147,931
---------------------------------------------------------------------------
Total shares voting 5,144,876
---------------------------------------------------------------------------
Result: Unanimous vote of the stockholders to amend the Articles of
Incorporation of the Bank as set forth in the 1997 Proxy Statement.
4. Ratification of the appointment of the accounting firm of Arthur
Andersen LLP as auditors and as independent public accountants for the year
1996.
---------------------------------------------------------------------------
Shares represented by proxy 5,712,808
---------------------------------------------------------------------------
Shares represented by person 147,931
---------------------------------------------------------------------------
Total shares voting 5,860,973
---------------------------------------------------------------------------
Result: Unanimous vote of the stockholders to ratify the appointment of the
accounting firm of Arthur Andersen LLP as auditors and as independent public
accountants for the year 1996.
<PAGE>
SANTA MONICA BANK
SIGNATURE
Pursuant to the requirements of section 13 of the Securities Exchange Act
of 1934, the bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SANTA MONICA BANK
by /s/ Pablo M. Ercilla by /s/ Dario O. Quiroga
-------------------------- --------------------------
Dario O. Quiroga
Pablo M. Ercilla Sr. Vice President/Cashier
Vice President/Controller Secretary of The Bank
by /s/ Aubrey L. Austin
--------------------------
Aubrey L. Austin
President
Chief Executive Officer
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM F-3
CURRENT REPORT
Pursuant to Section 13 of Securities
Exchange Act of 1934
For the month of July 1997
S A N T A M 0 N I C A B A N K
Incorporated in the State of California on February 3, 1928
IRS Employer Identification No. 95-1191910
1251 Fourth Street
Santa Monica, California 90401
Telephone No. 310/394-9611
<PAGE>
SANTA MONICA BANK
ITEM I - CHANGES IN CONTROL OF THE BANK.
Santa Monica Bank ("Bank") entered into an Agreement and Plan of Merger
dated as of July 30, 1997 (the "Agreement") with Western Bancorp ("Buyer") and
its subsidiary Western Bank. Pursuant to the Agreement, Buyer will acquire the
outstanding common stock of the Bank (the "Acquisition") for the Cash
Consideration and, if applicable, the Stock Consideration (each as defined
below) and (ii) the Bank will merge with a wholly-owned subsidiary of Buyer.
Each outstanding share of the common stock, $3 par value per share ("Bank Common
Stock"), of the Bank will be converted into the right to receive either (i)
$28.00 in cash (the "Cash Consideration") or (ii) 0.875 shares of the common
stock, no par value per share ("Buyer Common Stock"), of Buyer (the "Stock
Consideration"). Each holder of Bank Common Stock may elect to, and may,
receive the Cash Consideration and, if the number of Bank stockholders electing
to receive the Cash Consideration is so great as to prevent a tax-free
reorganization, all the holders of Bank Common Stock shall receive the Cash
Consideration. If the number of Bank stockholders electing to receive the Cash
Consideration is such as to permit a tax-free reorganization, the remaining
holders of Bank Common Stock shall receive the Stock Consideration, subject to
adjustment and/or proration under certain circumstances. The Acquisition is
subject to regulatory and shareholder approvals.
1
<PAGE>
It is estimated that the Acquisition will be consummated by the end of January
1998, subject to satisfaction of closing conditions.
The Agreement provides that if the Bank, or its Board in the exercise of
the Board's fiduciary duties, take certain actions relative to accepting a
competing acquisition offer, the Bank shall pay to Buyer $10,000,000, together
with costs and expenses incurred by Buyer in connection with the Agreement up to
the maximum amount of $1,000,000. The Agreement also provides for a $3,000,000
payment, together with costs and expenses incurred by Buyer, by the Bank in the
event that Buyer terminates the Agreement as a result of a material breach by
the Bank of the Agreement which breach is not cured or curable within 30 days
after written notice is given. The Agreement provides as well that the Buyer
shall pay $5,000,000, together with costs and expenses incurred by the Bank in
connection with the Agreement up to a maximum of $1,000,000, in the event that
the Bank terminates the Agreement as a result of a material breach of the
Agreement by Buyer which breach is not cured or curable within 30 days after
written notice. In addition, certain directors of the Bank have entered into an
agreement with Western Bancorp and Western Bank pursuant to which, among other
things, each director agreed, in his or her capacity as a shareholder, to vote
his or her shares in favor of the Acquisition.
2
<PAGE>
The description of the Acquisition set forth above is subject in all
respects to the terms and conditions of the Agreement.
3
<PAGE>
Exhibits.
Listed below are the exhibits filed as a part of this report:
Exhibit
Number Description
10.1 Agreement and Plan of Merger, dated as of July 30,
1997, by and among Western Bancorp, Western Bank and Santa Monica
Bank.
10.2 Shareholders Agreement, dated as of July 30, 1997, by
and among Doris J. Carver and Western Bancorp and Western Bank.
10.3 Shareholders Agreement, dated as of July 30, 1997, by
and among W. Paul Carver and Western Bancorp and Western Bank.
10.4 Shareholders Agreement, dated as of July 30, 1997, by
and among Joe Crail and Western Bancorp and Western Bank.
10.5 Shareholders Agreement, dated as of July 30, 1997, by
and among Willard L. Cummings, Jr., and Western Bancorp and Western
Bank.
4
<PAGE>
10.6 Shareholders Agreement, dated as of July 30, 1997, by and among
Donald E. Dickerson and Western Bancorp and Western Bank.
10.7 Shareholders Agreement, dated as of July 30, 1997, by and among
William B. Fritzsche and Western Bancorp and Western Bank.
10.8 Shareholders Agreement, dated as of July 30, 1997, by and among
John W. Garacochea and Western Bancorp and Western Bank.
10.9 Shareholders Agreement, dated as of July 30, 1997, by and among
Dorothy F. Menzies and Western Bancorp and Western Bank.
10.10 Joint Press Release, dated as of July 31, 1997, by and between Western
Bancorp and Santa Monica Bank.
5
<PAGE>
SANTA MONICA BANK
SIGNATURE
Pursuant to the requirements of section 13 of the Securities Exchange
Act of 1934, the bank has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SANTA MONICA BANK
by /s/ Aubrey L. Austin by /s/ Dario 0. Quiroga
--------------------- ---------------------
Aubrey L. Austin Dario 0. Quiroga
President Sr. Vice President/Cashier/CFO
Chief Executive Officer Secretary of the Bank
6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
10.1 Agreement and Plan of Merger, dated as of July 30, 1997, by and among
Western Bancorp, Western Bank and Santa Monica Bank.
10.2 Shareholders Agreement, dated as of July 30, 1997, by and among
Doris J. Carver and Western Bancorp and Western Bank.
10.3 Shareholders Agreement, dated as of July 30, 1997, by and among
W. Paul Carver and Western Bancorp and Western Bank.
10.4 Shareholders Agreement, dated as of July 30, 1997, by and among Joe
Crail and Western Bancorp and Western Bank.
10.5 Shareholders Agreement, dated as of July 30, 1997, by and among
Willard L. Cummings, Jr., and Western Bancorp and Western Bank.
10.6 Shareholders Agreement, dated as of July 30, 1997, by and among
Donald E. Dickerson and Western Bancorp and Western Bank.
7
<PAGE>
10.7 Shareholders Agreement, dated as of July 30, 1997, by and among
William B. Fritzsche and Western Bancorp and Western Bank.
10.8 Shareholders Agreement, dated as of July 30, 1997, by and among
John W. Garacochea and Western Bancorp and Western Bank.
10.9 Shareholders Agreement, dated as of July 30, 1997, by and among
Dorothy F. Menzies and Western Bancorp and Western Bank.
10.10 Joint Press Release, dated as of July 31, 1997, by and between Western
Bancorp and Santa Monica Bank.
8
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON D.C. 20429
FORM F-4
QUARTERLY REPORT
UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1997
FDIC INSURANCE CERTIFICATE NUMBER 00114-7
SANTA MONICA BANK
Incorporated in the State of California on Feb. 3/1928
IRS Employer Identification No. 95-1191910
1251 Fourth Street
Santa Monica, California 90401
Telephone No. (213) 394-9611
Santa Monica Bank (1) has filed all reports required to be filed by
Section 13 of the Securities Exchange Act of 1934 during the preceding 12
months., and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
- ------ -------
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
ASSETS PERIOD ENDED
03/31/97 12/31/96
------------------------------
<S> <C> <C>
Cash and Due from Banks ............................... $ 55,140,529 57,535,025
------------------------------
Investment securities available for sale .............. 138,251,291 141,139,066
Federal funds sold..................................... 64,000,000 43,000,000
Loans ................................................. 373,243,224 374,993,789
Less: unearned income................................ 139,565 139,147
reserve for possible loan losses............... 8,455,228 8,955,096
------------------------------
Net loans...................................... 364,648,431 365,899,546
Bank premises end equipment, net....................... 10,436,570 10,340,943
Real estate owned...................................... 6,336,150 8,606,042
Accrued interest receivable............................ 3,960,463 3,496,127
Net deferred tax asset ................................ 796,447
Other assets .......................................... 933,111 748,294
------------------------------
Total assets ........................................ $643,706,345 631,561,490
------------------------------
------------------------------
LIABILITIES
Noninterest bearing deposits........................... $171,210,565 172,161,860
Interest bearing deposits.............................. 392,875,101 381,821,146
------------------------------
Total Deposits.................................... 564,085,666 553,983,006
Mortgage indebtedness................................. 1,976,891 1,981,863
Other liabilities...................................... 2,850,126 2,621,314
------------------------------
Total liabilities ................................ $568,912,683 558,586,183
Stockholders' Equity
Capital Stock (authorized, 10,000,000 shares of
$3 par value, issued and outstanding, 7,077,332
shares for 1997 and 1996.) 21,231,996 21,231,996
Surplus................................................ 2,982,631 2,982,631
Undivided Profits...................................... 50,258,474 48,211,600
Unrealized holding gains on securities, net of
income taxes of $222,762 and $349,329 for 1997
and 1996 respectively. 320,561 549,080
------------------------------
Total Stockholders' equity $74,793,662 72,975,307
------------------------------
Total liabilities and stockholders' equity........ $643,706,345 631,561,490
------------------------------
------------------------------
</TABLE>
Standby letters of credit total $2,058,796 at March 31, 1997, and $1,345,993
at March 31, 1996.
Page 1 of 7
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME Fiscal year to date
Santa Monica Bank Three months ending March 31, Three months ending March 31,
1997 1996 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans......................... $ 8,828,435 8,785,780 8,828,435 8,785,780
Interest on Investment securities:
Taxable....................................... 1,711,304 1,448,941 1,711,304 1,448,941
Tax-exempt..................................... 241,232 288,063 241,232 288,063
Other.............................................. 867,005 598,658 867,005 598,658
---------------------------------------------------------------------
Total interest income......................... 11,647,976 11,121,442 11,647,976 11,121,442
---------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits .............................. 3,321,667 3,422,560 3,321,667 3,422,560
Interest on other liabilities ..................... 48,268 49,294 48,268 49,294
---------------------------------------------------------------------
Total interest expense ....................... 3,369,935 3,471,854 3,369,935 3,471,854
---------------------------------------------------------------------
Net interest income................................ 8,278,041 7,649,588 8,278,041 7,649,588
Provision for loan losses .........................
---------------------------------------------------------------------
Net interest income after provision for loan losses. 8,278,041 7,649,588 8,278,041 7,649,588
---------------------------------------------------------------------
OTHER OPERATING INCOME
Trust department income ........................... 775,016 733,431 775,016 733,431
Service charges on deposits accounts .............. 769,608 808,632 769,608 808,632
Other service charges, commissions and fees........ 123,477 119,469 123,477 119,469
Other income ...................................... 57,432 55,582 57,432 55,582
---------------------------------------------------------------------
Total other operating income ................. 1,725,533 1,717,114 1,725,533 1,717,114
---------------------------------------------------------------------
OTHER OPERATING EXPENSE
Salaries .......................................... 2,755,857 2,704,751 2,755,857 2,704,751
Profit sharing and other employee benefits ........ 783,646 778,662 783,646 778,662
Net occupancy expense of bank premises ............ 629,313 624,165 629,313 624,165
Furniture and equipment expense ................... 406,970 390,381 406,970 390,381
FDIC assessment ................................... 56,094 240,000 56,094 240,000
Legal fees ........................................ 316,002 360,732 316,002 360,732
Loss (gain) on sale of OREO........................ (3,155) 132,796 (3,155) 132,796
OREO related expenses ............................. 55,217 520,785 55,217 520,785
Other operating Expenses .......................... 1,038,226 1,124,690 1,038,226 1,124,690
---------------------------------------------------------------------
Total other operating expense ................ 6,038,170 6,876,962 6,038,170 6,876,962
---------------------------------------------------------------------
Income before taxes................................ 3,965,404 2,489,740 3,965,404 2,489,740
Applicable income taxes ........................... 1,352,344 519,252 1,352,344 519,252
---------------------------------------------------------------------
NET INCOME ....................................... $ 2,613,060 1,970,488 2,613,060 1,970,488
---------------------------------------------------------------------
---------------------------------------------------------------------
NET INCOME PER SHARE............................... $ .37 .28 .37 .28
</TABLE>
See notes to Consolidated Financial Statements.
Page 2 of 7
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Holding
Undivided Gains on Securities
Capital Stock Capital Surplus Profits Net of Income Taxes Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995..................... 21,231,996 2,982,631 39,656,939 594,838 64,466,404
Net Income .................................... 1,970,488 1,970,488
Unrealized holding gains (losses) on investment
securities available for sale, net of 0 0
income taxes ............................ ( 92,143) ( 92,143)
------------------------------------------------------------------------------
Balance, March 31, 1996........................ 21,231,996 2,982,631 41,627,427 502,695 66,344,749
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Balance, December 31, 1996 .................... 21,231,996 2,982,631 48,211,600 549,080 72,975,307
Net Income..................................... 2,613,060 2,613,060
Cash dividends at $.08 per share............... ( 566,186) ( 566,186)
Unrealized holding gains (losses) on investment
securities available for sale, net of income
taxes...................................... ( 228,519) ( 228,519)
------------------------------------------------------------------------------
Balance, March 31, 1997........................ 21,231,996 2,982,631 50,258,474 320,561 74,793,662
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
See notes to Consolidated Financial Statements.
Page 3 of 7
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows Santa Monica Bank
- ---------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities
Net income $ 2,613,060 $ 1,970,488
Adjustments to reconcile net income to net cash provided
by operating activities:
Accretion of discount on investments ( 295,232) ( 511,513)
Provision for loan losses
Accretion of deferred loan fees and costs ( 281,504) ( 144, 143)
Depreciation and amortization 367,093 361,095
Change in accrued interest receivable ( 166,546) ( 564,716)
Change in accrued interest payable ( 498,407) ( 183,593)
Change in accrued taxes on income
(excluding deferred activity) 624,094 590,062
Change in accounts payable and other liabilities 228,812 465,791
----------------------------------------
Total Adjustments ( 21,690) 12,983
----------------------------------------
Net cash provided by operating activities $ 2,591,370 $ 1,983,471
----------------------------------------
----------------------------------------
Cash flows from investing activities:
Proceeds from sale of investment securities $ 87,450,000 $ 96,500,202
Purchase of investment securities ( 84,357,086) ( 78,108,758)
Net increase in loans ( 1,251,115) ( 10,684,477)
Loan origination fees received 235,941 122,793
Proceeds from sale of other real estate owned 3,349,284 3,706,884
Purchase of Bank premises and equipment ( 482,475) ( 891,673)
Other assets 1,533,111 1,157,111
----------------------------------------
Net Cash provided by investing activities $ 6,477,660 $ 11,802,082
Cash flows from financing activities:
Net (decrease) increase in demand deposits,
Now accounts and savings accounts $ 7,396,493 $ ( 2,989,332)
Net (decrease) increase in certificates of deposit 2,706,167 ( 10,291,209)
Cash dividends ( 566,186)
----------------------------------------
Net cash used in financing activities $ 9,536,474 $ ( 13,280,541)
Net increase in cash and cash equivalents 18,605,504 505,012
Cash and cash equivalents, beginning of year 100,535,025 99,386,586
----------------------------------------
Cash and cash equivalents, end of period $ 119,140,529 $ 99,891,598
----------------------------------------
----------------------------------------
</TABLE>
Page 4 of 7
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS
Note 1: In the opinion of management, the accompanying unaudited financial
statement of Santa Monica Bank, includes all adjustments necessary to present
fairly its financial position as of March 31, 1997, its results of operations
and its cash flows for the quarter then ended.
Note 2: Income taxes for period ended 3-31-97, 3-31-96 and 3-31-95.
Total tax expense amounted to $1,352,344 in 1997, $519,252 in 1996 and $ 236,944
in 1995 (effective rates of 34.1%,20.8% and 27.6% respectively)a total less than
the amount of $1,387,891 in 1997, $ 846,512 in 1996 and $ 292,435 in 1995,
computed by applying the U.S.Federal Income tax rate of 35% in 1997,34% in 1996
and 34% in 1995 to income before tax. The reasons for this difference are as
follows.
<TABLE>
<CAPTION>
1997 1996 1995
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate ................. $ 1,387,891 35% 846,512 34% 292,435 34%
Increase (reduction) in taxes resulting
from:
Tax exempt interest............................ ( 68,392) ( 1.7) ( 84,258) (3.4) ( 136,052) (15.8)
State franchise taxes, net of
federal income tax benefits................. 289,059 7.3 181,690 (7.3) 80,561 9.4
Reduction in valuation allowance............... ( 256,214) ( 6.5) ( 424,692) (17.1)
--------------------------------------------------------------------
Total ......................................... 1,352,344 34.1 519,252 20.8 236,944 27.6
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
Note 3: In March of 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No.128 Earnings Per Share
(EPS) which changes among other things the method of computing earnings per
share as follows:
Replacement of primary EPS with basic EPS. Basic EPS is computed by dividing
reported earnings available to common stockholders by weighted average shares
outstanding. Use of the average share price for the period when applying the
treasury stock method in computing diluted EPS.
Statement 128 is effective for financial statements ending after December
15, 1997. Early adoption is prohibited. Because of the limited number of
options outstanding management does not believe the adoption of SFAS No. 128
will have a material effect on the financial position or results of
operations of the Bank.
Note 4: Cash dividends declared
On January 22, 1997, the Board of Directors of Santa Monica Bank declared
a cash dividend of $.08 per share, to be paid on February 28, 1997 to
stockholders of record as of February 14, 1997.
Note 5: Letters of Credit
Standby letters of credit total $2,057,349 at March 31, 1997, $1,345,993 at
March 31, 1996, $1,376,740 at March 31, 1995.
Note 6: Legal Proceedings
The Bank is continually faced with legal proceedings in the ordinary conduct of
its business, which in the opinion of the counsel and the judgement of
management will not materially affect its financial position.
<PAGE>
SANTA MONICA BANK
MANAGEMENT'S ANALYSIS OF QUARTERLY INCOME STATEMENTS
Net income for the first quarter of 1997 was $2,613,060 or $.37 per share, an
increase of 33%, compared with $1,970,488 or $.28 per share recorded in the
first quarter of 1996 and 319% increase as compared with $623,158 or $.09 per
share recorded in the first quarter of 1995. Income before income taxes was
$3,965,404 for the first quarter of 1997, a gain of 59% as compared with
$2,489,740 recorded in the first quarter of 1996 and 361% increase as compared
with $860,102 recorded in the first quarter of 1995.
The steep decline continued in real estate owned, which fell 57% to $6.3 million
as compared to $14.9 million a year ago. Delinquent loans were also reduced
substantially from last year, with non-accruals down 67% to $3.3 million as
compared to $10.0 million. Credits past due 30-89 days decreased 44% to $3.2
million as compared to $5.7 million in 1996, while accruing loans past due 90
days or more stood at zero as compared to $687,091 for the same period in 1996.
As of March 31, our capital position remained excellent with ratios in excess of
all regulatory requirements for a well capitalized bank. Equity capital to
assets totaled 11.82%, while equity capital (Tier 1) to risk-weighted assets and
total capital (Tier 1 and Tier 2) to risk-weighted assets were 19.24% and
20.50%, respectively. Given the Bank's high capital ratios, our performance
ratios were all the more commendable, with return on average stockholders'
equity rising to 14.41% and return on average assets to 1.68%. Our consistently
solid results enabled us to pay a first quarter cash dividend of $.08 per share
on February 28, 1997 to stockholders of record as of February 14, 1997, an
increase of 60% over the prior quarter.
Our ongoing emphasis on marketing and sales training helped the Bank to achieve
quality growth in assets of 6% over a year ago. During the first quarter, we
began signing up customers for RON, our new Remote On-line Network, which will
allow both individuals and businesses to enjoy convenient access and expanded
options through the Internet and other forms of electronic communication. As we
continue providing our premium brand of community bank service, RON will open
up a world of additional opportunity to reach out to customers throughout the
greater Santa Monica Bay region.
Net interest income for the first quarter of 1997 amounted to $ 8,278,041 or an
8% increase over the first quarter of 1996 and a 7% increase over the first
quarter of 1995. Net interest income after provision for loan losses amounted to
$8,278,041 in the first quarter of this year, an increase of 8% compared to
$7,649,588 in the first quarter of 1996 and an increase of 16% from $7,145,134
in the first quarter of 1995.
Total interest income during the first quarter of the year increased 5% to
$11,647,976 from $11,121,442 in 1996. Total interest expense for the first
quarter of 1997 amounted to $3,369,935 a decrease of 3% from the first quarter
of 1996.
Total other operating income, which is derived from trust, escrow and service
charges amounted to $1,725,533 for the first quarter of 1997 as compared with
$1,717,114 for the first quarter of 1996. Total other operating expense, which
includes staff, occupancy, FDIC assessment, Legal fees, OREO related expenses
and other expenses, for the first quarter of 1997 was $6,038,170, or a 12%
decrease over the same period in 1996.
Total assets amounted to $643,706,345 at March 31, 1997, an increase of
$36,333,143 or 6% , as compared to total assets at March 31, 1996. Net loans
increased 1% to $364,648,431 at March 31, 1997, from $359,782,309 at March 31,
1996. Deposits amounted to $564,085,666 at March 31, 1997, an increase of 5%
from the previous year.
Shareholders' equity at March 31, 1997, amounted to $74,793,662 as compared to
$66,344,749 as of March 31, 1996. Based on 7,077,332 shares outstanding the per
share equity value of the stock increased to $10.57 at March 31, 1997, from
$9.37 at March 31, 1996.
Three Three
Months Ended Months Ended
Profitability Ratios: 3/31/1997 3/31/1996
------------ ------------
Return on average stockholders' equity 14.41% 12.21%
Return on average assets 1.68 1.30
Capital Ratios: 03/31/97 12/31/96 03/31/96
---------- -------- ---------
Tier 1 capital to adjusted 11.82% 11.41% 10.74%
assets
Tier 1 capital to risk-weighted 19.24% 18.58% 16.96%
assets
Total capital to risk-weighted 20.50% 19.84% 18.23%
assets
<PAGE>
SANTA MONICA BANK
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the bank has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
SANTA MONICA BANK
/s/ Pablo M. Ercilla /s/ Dario O. Quiroga
- ------------------------------- ---------------------------
Pablo M. Ercilla Dario 0. Quiroga
Vice President/Controller Sr. Vice President, Cashier
Chief Financial Officer
/s/ Aubrey L. Austin
---------------------------
Date: April 24, 1997 Aubrey L. Austin
President
Chief Executive Officer
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D. C. 20429
FORM F-4
QUARTERLY REPORT
UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1997
AS AMENDED AUGUST 6, 1997
FDIC INSURANCE CERTIFICATE NUMBER 00114-7
SANTA MONICA BANK
Incorporated in the State of California on Feb. 3/1928
IRS Employer Identification No. 95-1191910
1251 Fourth Street
Santa Monica, California 90401
Telephone No. (310) 394-9611
Santa Monica Bank (1) has filed all reports required to be filed by Section 13
of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
- ------ ------
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
ASSETS PERIOD ENDED
JUNE 30,
1997 1996
-------------- --------------
<S> <C> <C>
Cash and Due from Banks...................................... $ 50,009,899 $ 58,581,888
-------------- -------------
Investment securities available for sale..................... 141,238,821 120,882,551
Federal funds sold........................................... 76,000,000 38,000,000
Loans 390,376,037 373,381,715
Less:unearned income...................................... 133,073 97,517
allowance for possible loan losses...................... 7,991,762 9,964,156
-------------- -------------
Net loans.............................................. 382,251,202 363,320,042
Bank premises and equipment, net............................. 10,357,806 10,798,142
Other real estate owned...................................... 5,686,649 12,964,666
Accrued interest receivable.................................. 3,820,702 3,643,110
Net deferred tax asset....................................... 570,256
Other assets................................................. 3,208,835 1,640,930
-------------- -------------
Total assets............................................... $ 672,573,914 $610,401,585
-------------- -------------
-------------- -------------
LIABILITIES
Noninterest bearing deposits.................................. $ 178,906,630 $ 166,530,194
Interest bearing deposits..................................... 411,878,042 372,243,739
-------------- -------------
Total Deposits.............................................. 590,784,672 538,773,933
Mortgage indebtedness.......................................... 1,971,991 1,991,452
Other liabilities.............................................. 2,554,254 1,652,182
-------------- -------------
Total liabilities............................................ $ 595,310,917 542,417,567
Stockholders' Equity
Capital Stock (authorized 50,000,000 and 10,000,000 shares of
$3 par value for 1997 and 1996, respectively, issued and
outstanding, 7,077,332 shares for 1997 and 1996.)............. 21,231,996 21,231,996
Surplus......................................................... 2,982,631 2,982,631
Undivided Profits............................................... 52,601,312 43,409,359
Unrealized holding gains on securities, net of income taxes
of $310,667 and $250,192 for 1997 and 1996 respectively. 447,058 360,032
-------------- -------------
Total Stockholders' equity $ 77,262,997 $ 67,984,018
-------------- -------------
Total liabilities and stockholders' equity $ 672,573,914 $ 610,401,585
-------------- -------------
-------------- -------------
</TABLE>
Standby letters of credit total $1,904,299 at June 30, 1997 and $1,106,793 at
June 30, 1996.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME Fiscal year to date
Santa Monica Bank Three months ending June 30, Six months ending June 30,
1997 1996 1997 1996
----------------------------- --------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans..................... $ 9,277,913 8,771,166 18,106,348 17,556,946
Interest on investment securities:
Taxable..................................... 1,869,215 1,445,148 3,580,519 2,894,089
Tax-exempt.................................. 208,045 269,374 449,277 557,437
Other.......................................... 812,891 495,938 1,679,896 1,094,596
----------------------------- --------------------------------
Total interest income....................... 12,168,064 10,981,626 23,816,040 22,103,068
----------------------------- --------------------------------
INTEREST EXPENSE
Interest on deposits............................ 3,576,307 3,203,865 6,897,974 6,626,425
Interest on other liabilities................... 49,332 48,617 97,600 97,911
----------------------------- --------------------------------
Total interest expense....................... 3,625,639 3,252,482 6,995,574 6,724,336
----------------------------- --------------------------------
Net interest income 8,542,425 7,729,144 16,820,466 15,378,732
----------------------------- --------------------------------
Provision for loan losses.......................
Net interest income after provision for loan losses 8,542,425 7,729,144 16,820,466 15,378,732
----------------------------- --------------------------------
OTHER OPERATING INCOME
Trust department income......................... 836,540 710,529 1,611,556 1,443,960
Service charges on deposits accounts............ 800,333 797,570 1,569,941 1,606,202
Other service charges, commission and fees...... 110,402 132,448 233,879 251,917
Other income.................................... 61,005 59,851 118,437 115,433
----------------------------- --------------------------------
Total other operating income 1,808,280 1,700,398 3,533,813 3,417,512
----------------------------- --------------------------------
OTHER OPERATING EXPENSE
Salaries........................................ 2,835,615 2,761,382 5,591,472 5,466,133
Profit sharing and other employee benefits...... 688,926 702,160 1,472,572 1,480,822
Net occupancy expense of bank premises.......... 621,215 620,650 1,250,528 1,244,815
Furniture and equipment expense................. 410,882 395,226 817,852 765,607
FDIC assessment................................. 17,100 18,471 73,194 258,471
Legal fees...................................... 441,062 364,197 757,064 724,929
(Gain) loss on sale or OREO..................... (521,758) (55,907) (524,913) 76,889
OREO related expenses........................... (48,116) 602,291 7,101 1,123,076
Other operating expenses........................ 1,203,078 1,190,858 2,241,304 2,315,548
---------------------------- --------------------------------
Total other operating expense................ 5,648,004 6,599,328 11,686,174 13,476,290
----------------------------- --------------------------------
Income before income taxes...................... 4,702,701 2,830,214 8,668,105 5,319,954
Applicable income taxes......................... 1,652,130 694,416 3,004,474 1,213,668
----------------------------- --------------------------------
Net income...................................... $ 3,050,571 2,135,798 5,663,631 4,106,286
----------------------------- --------------------------------
Net income per share............................ $ 0.43 0.30 0.80 0.58
----------------------------- --------------------------------
----------------------------- --------------------------------
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SANTA MONICA BANK
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL UNDIVIDED UNREALIZED HOLDING
STOCK SURPLUS PROFITS GAINS ON SECURITIES TOTAL
NET OF INCOME TAXES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995................................. $21,231,996 2,982,631 39,656,939 594,838 64,466,404
Net Income................................................. 4,106,286 4,106,286
Cash dividends at $.05 per share........................... (353,866) (353,866)
Net change in unrealized holding gains (losses) on investment
securities available for sale, net of income taxes......... (234,806) (234,806)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996..................................... 21,231,996 2,982,631 43,409,359 360,032 67,984,018
----------------------------------------------------------------------
----------------------------------------------------------------------
Balance, December 31, 1996................................. 21,231,996 2,982,631 48,211,600 549,080 72,975,307
Net income................................................. 5,663,631 5,663,631
Cash dividends at $.18 per share........................... (1,273,919) (1,273,919)
Net chance in unrealized holding gains (losses) on investment
securities available for sale, net of income taxes.......... (102,022) (102,022)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $21,231,996 2,982,631 52,601,312 $ 447,058 77,262,997
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
See notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
SANTA MONICA BANK
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities
Net income.................................................................. $ 5,663,631 $ 4,106,286
Adjustments to reconcile net income to net cash provided
by operating activities:
Accretion of discount on investments...................................... (653,917) (637,112)
Provision for loan losses.................................................
Accretion of deferred loan fees and costs................................. (483,203) (356,960)
Depreciation and amortization............................................. 336,165 517,631
Change in accrued interest receivable..................................... (635,319) (240,412)
Change in accrued interest payable........................................ (9,554) (37,947)
Other assets.............................................................. 236,678 591,838
Provision for deferred taxes..............................................
Change in accrued taxes on income.........................................
(excluding deferred activity) 442,668 570,256
Change in accounts payable and other liabilities.......................... 272,716 466,145
-------------- ------------
Total Adjustments........................................................... (493,766) 873,439
Net cash provided by operating activities.............................. $ 5,169,865 $ 4,979,725
Cash flows from investing activities:
Proceeds from sale of investment securities.............................. $158,115,000 $129,974,494
Purchase of investment securities........................................ (158,868,672) (116,655,772)
Net increase in loans.................................................... (16,351,656) (5,125,920)
Loan origination fees received........................................... 560,209 410,460
Proceeds from sale of other real estate owned............................ 2,919,393 5,593,417
Purchase of Bank premises and equipment.................................. (1,597,011) (1,037,619)
-------------- ------------
Net Cash used in investing activities.................................... $(15,222,737) $ 13,159,060
Cash flows from financing activities:
Net (decrease) increase in demand deposits
Now accounts and savings accounts..................................... $ 29,345,303 $(12,462,005)
Net increase (decrease) in certificates of deposits...................... 7,456,362 957,750
Dividends paid........................................................... (1,273,919) (354,867)
-------------- ------------
Net cash provided by financing activities................................ $ 35,527,746 $(11,859,122)
Net increase in cash and cash equivalents.................................. 25,474,874 6,279,663
Cash and cash equivalents, beginning of year............................... 100,535,025 90,302,225
-------------- ------------
Cash and cash equivalents, end of year..................................... $ 126,009,899 $ 96,581,888
-------------- ------------
-------------- ------------
</TABLE>
<PAGE>
SANTA MONICA BANK
Note 1: In the opinion of management, the accompanying unaudited financial
statement of Santa Monica Bank, includes all adjustments necessary to present
fairly its financial position as of June 30, 1997, its results of operations and
its cash flows for the quarter then ended.
Note 2: Income taxes for period ended 6-30-97, 6-30-96 and 6-30-95.
Total tax expense amounted to $3,004,474 in 1997, $1,213,668 in 1996 and
$938,647 in 1995 (effective rates of 34.6%,22.8% and 34.4% respectively) a
total less than the amount of $3,033,837 in 1997, $1,808,784 in 1996 and
$928,780 in 1995 computed by the U.S. Federal income tax rate of 35% in 1997,
34% in 1996 and 1995 to income before tax. The reasons for this difference
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate............... $3,033,837 35% 1,808,784 34% 928,780 34%
Increase (reduction) in taxes resulting
from:
Tax exempt interest......................... (140,238) (1.6) (165,764) (3.1) (195,305) (7.1)
State franchise taxes, net of
federal income taxes benefits.............. 630,875 7.3 190,131 3.6 204,459 7.5
Other net.................................... 517 713
Reduction in valuation allowance ............ (520,000) (6.1) (620,000) (11.7)
---------------------- -------------------- ---------------------
Total........................................ $3,004,474 34.6 % 1,213,668 22.8 % 938,647 34.4 %
---------------------- -------------------- ---------------------
</TABLE>
Note 3: In March of 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No.128 Earnings Per Share
(EPS) which changes among other things the method of computing earnings per
share as follows:
Replacement of primary EPS with basic EPS. Basic EPS is computed by dividing
reported earnings available to common stockholders by weighted average shares
outstanding. Use of the average share price for the period when applying the
treasury stock method in computing diluted EPS.
Statement 128 is effective for financial statements ending after December 15,
1997. Early adoption is prohibited. Because of the limited number of options
outstanding management does not believe the adoption of SFAS No.128 will have a
material effect on the financial position or results of operations of the Bank.
Note 2: Cash dividends declared:
On April 30, 1997, the Board of Directors declared a cash dividend of $.10 per
share, to be paid on May 30, 1997 to stockholders of record May 15, 1997.
Note 5: Letters of Credit
Standby letters of credit total $1,904,299 at June 30, 1997, $1,106,793 at June
30, 1996 and $1,368,740 at June 30, 1995.
Note 6: Legal Proceedings
The Bank is continually faced with legal proceedings in the ordinary conduct of
its business, which in the opinion of the counsel and the judgement of
management will not materially affect its financial position.
<PAGE>
SANTA MONICA BANK
MANAGEMENT'S ANALYSIS OF QUARTERLY INCOME STATEMENTS
For the second quarter of 1997, Santa Monica Bank posted excellent earnings
growth as income before taxes climbed 66% to $4,702,701, compared to $2,830,214
for the same period a year ago. Net income rose 43% to $3,050,571 or $.43 per
share, compared to $2,135,798 or $.30 per share in 1996.
Results for the first six months were similarly strong with income before
income taxes of $8,668,105, a gain of 63% over $5,319,954 last year. Net income
for the first half reached $5,663,631 or $.80 per share, an increase of 38% over
$4,106,286 or $.58 per share in 1996.
Our good progress continued in the reduction of real estate owned, which
declined by more than half to $5.7 million from $13.0 million a year ago. A gain
of $524,913 on the sale of 6 properties during the first half was an indication
of the improvement in our real estate market. A busy local economy also
supported the sharp downward trend in delinquent loans, with non-accruals
falling to $1.9 million, a decrease of 78% from $8.5 million a year ago, and
42% from $3.3 million last quarter. Credits past due 30-89 days were down to
$1.6 million, a decrease of 73% from $6.0 million a year ago, and
50% from $3.2 million last quarter. Accruing loans past due 90 days or more
remained at zero.
At midyear, our solid capital position was maintained with ratios in excess of
all regulatory requirements for a well capitalized bank. Equity capital to
assets rose to 11.90%. Equity capital (Tier 1) to risk-weighted assets was
18.72% and total capital (Tier 1 and Tier 2) to risk-weighted assets was 19.98%.
In light of the Bank's strong capital ratios, our performance ratios continued
to be all the more noteworthy, with return on average stockholders' equity
increasing to 15.35% and return on average assets to 1.79%.
Our record of profitability and our commitment to stockholders were reflected
in a second quarter cash dividend of $.10 per share, an increase of 25% over the
previous quarter, paid on May 30, 1997 to stockholders of record as of May 15,
1997.
During the first half of the year, we continued to reap the benefits of our
long-range planning efforts. As of June 30, the Bank's assets were up 10% over a
year ago. Our ongoing marketing programs contributed to an increase of 5% in
loans and 10% in deposits. At the same time that we worked to achieve quality
growth, we also retained our emphasis on cost efficiency, with other operating
expense down 13% from 1996 and 23% from 1995. Our sound financial position and
strong earnings gains, combined with new service capabilities like our Remote
On-Line Network, will enable us to participate more actively than ever in a
revitalized Westside community.
Net interest income after provision for loan losses for the first half of 1997
amounted to $16,820,466 or 9% increase over the first six months of 1996 and
17% increase over the first half of 1995.
Total interest income during the first six months of 1997 increased 8% to
$23,816,040 from $22,103,068 in 1996. Total interest expense increased 4% to
$6,995,574 from $6,724,336 in 1996.
Total other operating income, which is derived from trust, escrow and service
charges increase 3% to $3,533,813 for the first six months of 1997, as compared
with $3,417,512 for the same period in 1996. Total other operating expense,
which includes staff, occupancy and other expenses, for the first six months of
1997, was $11,686,174 or a 13% decrease over the same period in 1996.
Total assets reached $672,573,914 at June 30, 1997, or a 10% increase as
compared to $610,401,585 at June 30, 1996. Loans increased 5% to $382,251,202 at
June 30, 1997, from $363,320,042 at June 30, 1996. Deposits amounted to
$590,784,672 at June 30, 1997, an increase of 10% from June 30, 1996.
Stockholders' equity at June 30, 1997, amounted to $77,262,997 an increase of
14% over June 30, 1996. Based on 7,077,332 shares outstanding, the per share
equity value of the stock increased to $10.92 at June 30, 1997, from $9.61 at
June 30, 1996.
1st Half 1997 1st Half 1996
---------------- ---------------
Profitability Ratios:
Return on average assets 1.79% 1.36%
Return on average stockholders' equity 15.35% 12.61%
Capital Ratios: June 30, 1997 June 30, 1996
---------------- ---------------
Tier 1 Capital to Adjusted 11.90% 11.14%
Assets
Tier 1 Capital to Risk-Weighted 18.72% 17.51%
Assets
Total Capital to Risk-Weighted 19.98% 18.78%
Assets
<PAGE>
SANTA MONICA BANK
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the bank has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
/s/ Thomas M. Whitesel /s/ Dario O. Quiroga
- ------------------------ -----------------------
Thomas M. Whitesel Dario O. Quiroga
Vice President / Finance & Investments Senior Vice President / Cashier
Chief Financial Officer
/s/ Aubrey L. Austin
-----------------------
Date: August 6, 1997 Aubrey L. Austin
President
Chief Executive Officer
<PAGE>
SANTA MONICA BANK
1996 ANNUAL REPORT
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR INCREASE
------------------------------ --------------------------
1996 1995 AMOUNT PERCENT
-------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
Income before income taxes.............................. $ 13,083,189 $ 8,308,686 $ 4,774,503 57%
Applicable income tax expense........................... 3,466,929 3,041,346 425,583 14
Net income.............................................. 9,616,260 5,267,340 4,348,920 83
PER SHARE
Net income.............................................. $ 1.36 $ .74 $ .62 84%
Year-end book value..................................... 10.31 9.11 1.20 13
AT-YEAR-END
Assets.................................................. $ 631,561,490 $ 618,863,418 $ 12,698,072 2%
Deposits................................................ 553,983,006 550,278,188 3,704,818 1
Net loans............................................... 365,899,546 358,194,122 7,705,424 2
Investment securities available for sale................ 141,139,066 134,599,247 6,539,819 5
Stockholders' equity.................................... 72,975,307 64,466,404 8,508,903 13
Shares of capital stock outstanding..................... # 7,077,332 # 7,077,332
Stockholders of record.................................. # 1,297 # 1,395
PROFITABILITY RATIOS
Return on average stockholders' equity................... 14.22% 8.68%
Return on average assets................................ 1.56 .84
YEAR-END CAPITAL RATIOS
Tier 1 capital to adjusted assets....................... 11.41% 10.27%
Tier 1 capital to risk-weighted assets.................. 18.58 16.27
Total capital to risk-weighted assets................... 19.84 17.54
</TABLE>
IN 1996, SANTA MONICA BANK CELEBRATED ITS SIXTY-EIGHTH ANNIVERSARY, A
STRETCH OF YEARS FILLED WITH EVENT AND CHALLENGE, AND ALSO WITH AN UNWAVERING
COMMITMENT TO OUR AREA, THE BEAUTIFUL GEOGRAPHIC REGION WHICH EXTENDS FROM THE
BEACHES AND HILLS OF MALIBU TO THE BOAT-FILLED HARBOR OF MARINA DEL REY. OVER
THE DECADES, THE BANK AND THE COMMUNITY IT SERVES HAVE BEEN THROUGH A LOT
TOGETHER. ECONOMIC DOWNTURNS HAVE COME AND GONE AND ALWAYS AFTERWARD THERE WAS A
SENSE OF NEWFOUND PURPOSE. THIS TIME AROUND HAS PROVEN NO EXCEPTION: YOU CAN
FEEL THE ENERGY COLLECTING IN OUR BUSINESS DISTRICTS AND SEE IT IN THE LOCAL
CONSTRUCTION, BOTH NEW AND RENOVATION. The EXPANSION OF MONTANA AVENUE, THE
REVAMP OF SANTA MONICA PIER, THE REFURBISHING OF THIRD STREET PROMENADE ARE
AMONG THE PROJECTS THAT HAVE UPGRADED THE AREA'S FACILITIES AND GIVEN THE PLACE
A FRESH, BRIGHT LOOK. ADD IN THE GROWING OPTIMISM AND CONFIDENCE OF THE PEOPLE
AND IT ALL SEEMS TO POINT TO ONE CONCLUSION. THE WESTSIDE IS BACK. AND SO IS
SANTA MONICA BANK.
1
<PAGE>
LETTER TO OUR STOCKHOLDERS
Year end 1996 marked another strong period of quarterly earnings gains for
Santa Monica Bank. In the fourth quarter, income before taxes rose 25% to
$4,085,585 as compared to $3,279,503 in 1995, and net income was up 42% to
$2,865,508 or $.41 per share as compared to $2,023,964 or $.29 per share. For
the twelve months ended December 31, 1996, income before taxes reached
$13,083,189, an increase of 57% over $8,308,686 a year ago, while net income
climbed to $9,616,260 or $1.36 per share, an increase of 83% over $5,267,340 or
$.74 per share. Return on average stockholders' equity rose to 14.22% and return
on average assets to 1.56%.
REACHING GOALS IN AN IMPROVED MARKET
Our excellent performance included a reduction in real estate owned by more
than half to $8.6 million, down 54% from $18.6 million at the end of 1995. Costs
related to real estate owned also fell substantially, contributing to a decrease
in other operating expense of 9% for the year. These favorable trends are
expected to remain in place as our local real estate market shows further signs
of vigor due to stability in prices and a growing demand for both commercial and
residential properties.
With the economy in our area moving toward full recovery, delinquency rates
stayed on a downward course in 1996 and we continued to pursue our objectives of
high quality and control in our loan portfolio. At December 31, accruing loans
past due 90 days or more stood at zero and credits past due 30-89 days were down
75% to $1.4 million as compared to $5.5 million in 1995. Non-accruals fell 46%
to $5.6 million as compared to $10.4 million.
REALIZING THE BENEFITS OF SOUND POLICIES
We maintained our solid capital position with ratios in excess of all
regulatory requirements for a well capitalized bank. Equity capital (Tier 1) to
adjusted assets totaled 11.41%. Equity capital (Tier 1 to risk-weighted assets
and total capital (Tier 1 and Tier 2) to risk-weighted assets were 18.58% and
19.84%, respectively. During 1996, the Bank's steadily rising profits and its
commitment to stockholders were reflected in the payment of a quarterly cash
dividend of $.05 per share beginning in the second quarter. For the first
quarter of 1997, the Board of Directors declared a 60% increase in the dividend
to $.08 per share, to be paid on February 28, 1997 to stockholders of record as
of February 14, 1997.
As in 1995, good results were achieved in total recoveries, which had
another year of close to $2 million, enabling us to provide adequate protection
and plan for loan growth without a contribution to the allowance for loan losses
in 1996. This positive outcome is attributable not only to the skill and
dedication of our loan professionals, but also to our willingness to work with
local customers in both up and down economic cycles--a philosophy of doing
business that has always been a hallmark of community banking and an important
element in our partnership with the people of the Westside.
LOOKING FORWARD TO CONTINUED PROGRESS
Over the past few years, the success of the Santa Monica Bank reorganization
process has put us ahead of schedule in meeting our projections. We stand now
poised to enjoy the results of our efforts as we turn our attention to the
future and to the quality growth phase of our strategic plan Beyond 2000. The
Bank's profitability and capital strength will allow us to accomplish a variety
of things in the months ahead and currently we are underway developing new
products and programs to meet the needs of a region whose health and activity
are on the rise. With a history that reaches back to 1928, we have the great
advantage of knowing our marketplace and the great privilege of being ideally
positioned to serve it as we enter the next century.
/s/ W. PAUL CARVER
--------------------------------------
W. Paul Carver
CHAIRMAN OF THE BOARD
/s/ AUBREY L. AUSTIN
--------------------------------------
Aubrey L. Austin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
PERSONAL BANKING SERVICES
Santa Monica Bank suits the Westside. From Malibu to Marina del Rey, we find
ourselves in step with the people who reside and work here because we're a
day-to-day part of the community, just as they are. We share the basic values
and appreciate the good things, just as they do--home and family, financial
security and well-being, and the opportunity to enjoy life and make a
contribution. Working or playing with enthusiasm, the people of the Westside are
very much like the area itself--full of vitality. They demand convenience and
efficiency, but they also know that nothing takes the place of genuine
top-drawer service.
MEETING EACH INDIVIDUAL'S LOAN AND DEPOSIT NEEDS
One of our primary goals over the years has been to use the powerful
combination of technology and staff training to provide ever-better levels of
personalized attention to individual customer needs. Recently, for example, we
have been implementing loan processing software that will help free officers and
staff to concentrate more fully on assisting customers with personalized loans
for home improvements, auto purchases and residential construction, as well as
lines of credit that can be accessed anytime to fit the particular situation.
Through the Bank's ongoing training programs, our professionals are everything
the term implies--expertly qualified to furnish information on an array of
valuable products, ranging from checking, savings and retirement accounts to our
popular VIP Money Market Account, which features competitive market yields plus
liquidity and handy checkwriting.
OFFERING OUR CUSTOMERS ADDITIONAL WAYS TO BANK
Technology and training also play a key role in the whole new world of
online banking. To make that world a simple-to-use reality for our customers,
we've established a department to oversee the development of RON-SM-, our Remote
Online Network-SM-. Along with state-of-the-art technical capabilities, the
department is staffed with knowledgeable personnel to answer questions and
provide the instruction that will enable our clients and our employees to tap
into the tremendous potential of the Internet and other forms of electronic
communication.
Without leaving the comfort of their homes, customers will be able to use
their PCs to review account information, make transfers, send e-mail requests to
Bank staff, obtain current rates, track expenses and do budgeting. In the months
ahead, we will be considering a variety of expanded functions, such as placing
stop payments and paying bills. And for those who don't have a computer set-up,
we are planning enhancements to our voice response system that will make many of
these options available by telephone. Together our online and phone networks
will allow us to reach out to customers and give them banking service at their
fingertips, 24 hours a day.
KEEPING AT THE FOREFRONT OF TRUST SERVICES
Trust services are one more area where the caliber and experience of staff,
and the use of up-to-date technology, work in unison to keep us at the forefront
of the industry. Continuing a tradition that goes back to 1968, our trust
department remains one of the most-respected and fastest-growing in the greater
Los Angeles region. In addition to providing a wide range of investment
strategies, our trust specialists make it a point to understand and coordinate
with each client's circumstances and preferences. Like all of our people, they
place a premium on forming lasting relationships where clients are treated with
all the care and respect they deserve as valued members of the Santa Monica Bank
family.
3
<PAGE>
BUSINESS BANKING SERVICES
Doing business in the Santa Monica Bay region is an idea that has definitely
taken hold as entrepreneurs and professionals set up shop here, and companies
and their employees move in from other parts of Los Angeles. Not surprisingly,
occupancy rates in the commercial and residential sectors have been reaching
record highs. With tourism strong, and visitors stopping by regularly from
neighboring areas, our hotels, restaurants and retailers are seeing brisk
demand. Everywhere you look the Westside has come to life and this makes for
some especially good synergy. As a newly revitalized bank, we are more able than
ever to participate in a revitalized economy. For business clients in
particular, the formation of our commercial banking department has increased our
capability to deliver the quality solutions that can truly help them grow and
prosper.
CATERING TO OUR MOSAIC OF LOCAL BUSINESSES
Perhaps never before has our region had a mosaic of businesses so varied and
exciting. Entertainment and high tech industries continue to thrive as the trend
of studio outsourcing creates opportunities in special effects, sound, animation
and other specialized fields. Law, accounting and communication firms, as well
as a broad range of medical businesses, flourish alongside import-export
companies and a host of enterprises related to our prime location on the coast.
Art galleries, museums, theaters, bookstores--all make their home here.
It isn't by chance that Santa Monica Bank service fits this kind of
environment to a tee. For nearly seventy years, we have been cultivating an
approach that emphasizes responsiveness, flexibility and tailored
problem-solving. Unlike the large financial institutions, we never have and
never will attempt to make one size do for everyone. Our talented bankers bring
to the task a wealth of industry-specific expertise and financial acumen. Most
importantly, they also bring a real willingness to learn about each business and
work directly with its people to develop the appropriate credit structures.
TAKING A LONG-RANGE VIEW OF SERVICE
Effective commercial banking has a lot to do with taking a long-range view
of service and regarding clients as colleagues and partners who have specific
goals and requirements that unfold over time. Our emphasis on forging durable
relationships makes for a hands-on approach which includes on-site banking, as
well as an open door policy at our branch offices. Whether meeting the larger or
smaller credit need, we make sure that clients receive consistent attention from
experienced loan professionals. The result is very much like having a personal
business banker, readily available to talk over ideas and provide one-on-one
financial guidance.
REAPING THE ADVANTAGES OF TECHNOLOGY
At the same time that we offer the finest in traditional community banking,
we are also expanding the array of electronic options that will allow businesses
to reap the advantages of technology. In addition to its home banking function,
RON-SM- our upcoming Remote Online Network-SM- will provide cash management
services designed to meet the needs of commercial clients in such areas as
reporting, account transactions, investments and payroll. Accessible directly
through the Bank or through our home page on the Internet, RON-SM- is part of an
updated, bankwide system that will be put in place to connect with customers and
to link our branches and staff members. It will be another important advance in
Santa Monica Bank's trademark ability to combine the best of both worlds:
old-fashioned service with modern-day convenience and efficiency.
4
<PAGE>
SANTA MONICA BANK
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (AMOUNTS, EXCEPT PER SHARE, IN THOUSANDS)
Total assets......................................... $ 631,561 $ 618,863 $ 667,519 $ 688,301 $ 802,697
Investment securities available for sale............. 141,139 134,599 167,033
Investment securities held to maturity............... 125,353 124,130
Net loans............................................ 365,899 358,194 349,841 398,169 524,769
Total deposits....................................... 553,983 550,278 605,280 624,873 729,774
Stockholders' equity:
Amount............................................. 72,975 64,466 59,010 59,391 69,029
Per share.......................................... 10.31 9.11 8.34 8.39 9.76
Capital shares outstanding........................... # 7,077 # 7,077 # 7,077 # 7,077 # 7,070
---------- ---------- ---------- ---------- ----------
EARNINGS AND DIVIDENDS
Total interest income................................ $ 45,314 $ 45,678 $ 41,819 $ 44,765 $ 60,973
Total interest expense............................... 13,498 14,205 12,421 13,865 22,196
---------- ---------- ---------- ---------- ----------
Net interest income.................................. 31,816 31,473 29,398 30,900 38,777
Provision for loan losses............................ 2,000 3,542 21,300 35,000
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses.............................................. 31,816 29,473 25,856 9,600 3,777
Total other operating income......................... 7,024 7,209 7,277 7,639 7,843
Total other operating expense........................ 25,757 28,373 32,231 36,771 29,345
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.................... 13,083 8,309 902 (19,532) (17,725)
Applicable income taxes expense (benefit)............ 3,467 3,042 381 (8,543) (8,327)
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 9,616 $ 5,267 $ 521 $ (10,989) $ (9,398)
---------- ---------- ---------- ---------- ----------
Net income (loss) per share.......................... $ 1.36 $ .74 $ .07 $ (1.56) $ (1.33)
---------- ---------- ---------- ---------- ----------
Total cash dividends declared on capital stock....... $ 1,062 $ 3,181
Cash dividends declared per capital share............ $ .15 $ .45
---------- ---------- ---------- ---------- ----------
</TABLE>
Amounts have been adjusted to reflect all stock dividends paid.
MARKET PRICE STATISTICS OF SANTA MONICA BANK COMMON STOCK
The following table shows the market bid range for the years 1996 and 1995.
<TABLE>
<CAPTION>
1996 BY 1995 BY
QUARTER QUARTER
MARKET PRICE MARKET PRICE
RANGE RANGE
---------------- -----------------
HIGH LOW HIGH LOW
------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
1st............................... $14 1/8 $12 1st............................... $ 9 1/8 $ 7 5/8
2nd............................... 13 1/8 12 2nd............................... 9 1/16 8 1/4
3rd............................... 15 11 1/2 3rd............................... 14 1/8 11 1/8
4th............................... 17 1/2 14 1/4 4th............................... 13 7/8 12 1/8
</TABLE>
The common stock of Santa Monica Bank is traded on the American Stock
Exchange.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following sections contain management's discussion and analysis, which
provide additional insight into the results of operations and the financial
condition of Santa Monica Bank. The discussion and analysis should be read in
conjunction with the audited financial statements and notes included in this
report.
ANALYSIS OF THE RESULTS OF OPERATIONS
During 1996, Santa Monica Bank's profits continued their upward trend with
excellent results for the quarter and for the year as a whole. Showing a gain of
25%, income before taxes in the fourth quarter was $4,085,585 as compared to
$3,279,503 for the same period in 1995, while net income increased 42% to
$2,865,508 or $.41 per share as compared to $2,023,964 or $.29 per share. For
the year ended December 31, 1996, income before taxes was up 57% to $13,083,189
as compared to $8,308,686 a year ago. Net income rose 83% to $9,616,260 or $1.36
per share as compared to $5,267,340 or $.74 per share. Augmented by a second
year of close to $2 million in recoveries, the ample level of reserves during
the year enabled us to maintain our policy of providing adequate protection and
planning for loan growth without an addition to the allowance for loan losses in
1996.
Other operating income remained strong as service charges on deposit
accounts totaled $3.2 million and our Trust Department continued to reach new
highs with fee income of $3.2 million for the year. Other operating expenses
experienced a further decline, falling 9% to $25.8 million as compared to $28.4
million in 1995 and $32.2 million in 1994. Contributing factors were the
substantial reduction in costs associated with real estate owned and the lower
assessment by the FDIC in 1996.
As shown in the chart below, return on average equity rose to 14.22% and
return on average total assets to 1.56%, an achievement all the more noteworthy
given the Bank's high capital to assets ratio.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Return on average assets.............................................. 1.56% 0.84% 0.07%
Return on average equity.............................................. 14.22 8.68 0.80
Dividend payout ratio................................................. 11.03 -- --
Tier 1 capital to adjusted assets..................................... 11.41 10.27 8.68
</TABLE>
NET INTEREST INCOME AND NET INTEREST MARGIN
Table 1 illustrates the average balances of assets, liabilities and
stockholders' equity for the years 1996, 1995 and 1994. Interest income and
interest expense are included along with the corresponding yields and costs for
applicable interest-earning assets and interest-bearing liabilities.
Net interest income, which is the difference between the interest the Bank
receives on interest-earning assets and the interest it pays for
interest-bearing liabilities, was up 1% to $31.8 million from $31.5 million in
1995, with total interest income remaining about the same and interest expense
slightly lower than a year ago. The net yield on average earning assets, which
is net interest income as a percentage of average earning assets, held steady at
6% on a fully taxable basis in 1996.
Table 2 shows the changes in interest income and interest expense resulting
from changes in the volume of interest-earning assets and interest-bearing
liabilities, and the changes resulting from changes in interest rates for 1996,
1995 and 1994. Growth of 2% in loans and the sizable reduction in non-accruals
in our loan portfolio contributed to an increase in the volume of earning assets
during the year.
6
<PAGE>
TABLE 1--DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY: INTEREST
RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------- ------------------------------------- -----------
AVERAGE AVERAGE AVERAGE
BALANCE(4) INTEREST YIELD/RATE BALANCE(4) INTEREST YIELD/RATE BALANCE(4)
----------- ----------- ---------- ------------ ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans:(1)(2)
Commercial and industrial loans..... $ 110,720 $ 11,331 10.2% $ 112,769 $ 12,185 10.8% $ 131,075
Consumer loans...................... 45,429 5,160 11.4 48,327 5,519 11.4 55,465
Real estate and construction
loans............................. 204,496 18,888 9.2 191,040 17,118 9.0 179,012
----------- ----------- --- ----------- ----------- --- -----------
Total loans....................... 360,645 35,379 9.8 352,136 34,822 9.9 365,552
----------- ----------- --- ----------- ----------- --- -----------
----------- ----------- --- ----------- ----------- --- -----------
Investment securities:
Taxable............................. 109,868 6,205 5.6 108,649 6,433 5.9 121,233
Non-taxable(3)...................... 15,311 1,639 10.7 18,325 1,979 10.8 22,109
----------- ----------- --- ----------- ----------- --- -----------
Total securities.................. 125,179 7,844 6.3 126,974 8,412 6.6 143,342
Federal funds sold.................... 50,250 2,649 5.3 53,581 3,117 5.8 51,288
----------- ----------- --- ----------- ----------- --- -----------
Total earning assets.............. $ 536,074 $ 45,872 8.6% $ 532,691 $ 46,351 8.7% $ 560,182
----------- ----------- --- ----------- ----------- --- -----------
----------- ----------- --- ----------- ----------- --- -----------
Cash and due from banks............... 49,420 49,478 58,674
Premises and equipment................ 10,780 11,286 11,976
Real estate owned..................... 13,540 22,495 35,805
Other non-earning assets.............. 6,746 8,485 13,622
----------- ----------- --- ----------- ----------- --- -----------
Total assets...................... $ 616,560 $ 624,435 $ 680,259
----------- ----------- --- ----------- ----------- --- -----------
----------- ----------- --- ----------- ----------- --- -----------
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Deposits:
Premium Checking.................... $ 81,086 $ 1,126 1.4% $ 85,490 $ 1,304 1.5% $ 92,375
Custom Money Market/VIP............. 189,819 7,995 4.2 195,781 8,442 4.3 215,400
Savings Deposits.................... 48,830 1,278 2.6 54,125 1,448 2.7 62,615
Time Deposits....................... 59,753 2,904 4.9 62,184 2,804 4.5 79,607
----------- ----------- --- ----------- ----------- --- -----------
Total interest-bearing deposits... 379,488 13,303 3.5 397,580 13,998 3.5 449,997
Mortgage payable...................... 1,991 195 9.8 2,009 207 10.3 2,127
----------- ----------- --- ----------- ----------- --- -----------
Total interest-bearing
liabilities..................... 381,479 13,498 3.5 399,589 14,205 3.6 452,124
Noninterest-bearing deposits.......... 163,357 161,546 167,098
Other noninterest-bearing
liabilities......................... 4,097 2,809 1,836
----------- ----------- --- ----------- ----------- --- -----------
Stockholders' equity.................. 67,627 60,491 59,201
----------- ----------- --- ----------- ----------- --- -----------
Total liabilities and
stockholders' equity............ $ 616,560 $ 624,435 $ 680,259
----------- ----------- --- ----------- ----------- --- -----------
Net yield on earning assets........... 5.9% 6.0%
----------- ----------- --- ----------- ----------- --- -----------
----------- ----------- --- ----------- ----------- --- -----------
<CAPTION>
INTEREST YIELD/RATE
----------- ----------
<S> <C> <C>
Loans:(1)(2)
Commercial and industrial loans..... $ 11,095 8.5%
Consumer loans...................... 5,831 10.5
Real estate and construction
loans............................. 16,026 9.0
----------- ---
Total loans....................... 32,952 9.0
----------- ---
----------- ---
Investment securities:................
Taxable............................. 5,115 4.2
Non-taxable(3)...................... 2,453 11.1
----------- ---
Total securities.................. 7,568 5.3
Federal funds sold.................... 2,134 4.2
----------- ---
Total earning assets.............. $ 42,654 7.6%
----------- ---
----------- ---
Cash and due from banks...............
Premises and equipment................
Real estate owned.....................
Other non-earning assets..............
----------- ---
Total assets......................
----------- ---
----------- ---
Interest-bearing liabilities
Deposits:
Premium Checking.................... $ 1,362 1.5%
Custom Money Market/VIP............. 6,768 3.1
Savings Deposits.................... 1,527 2.4
Time Deposits....................... 2,582 3.2
----------- ---
Total interest-bearing deposits... 12,239 2.7
Mortgage payable...................... 182 8.6
----------- ---
Total interest-bearing
liabilities..................... 12,421 2.7
Noninterest-bearing deposits..........
Other noninterest-bearing
liabilities.........................
----------- ---
Stockholders' equity..................
----------- ---
Total liabilities and
stockholders' equity............
----------- ---
Net yield on earning assets........... 5.4%
----------- ---
----------- ---
</TABLE>
- ------------------------------
(1) Includes non-accrual loans.
(2) Interest income includes loan fees of $1,102,303 in 1996, $797,540 in 1995,
and $766,672 in 1994.
(3) Interest income and the average yield are presented on a fully taxable
equivalent basis using a tax rate of 34% in 1996, 1995 and 1994. The
resulting tax equivalent adjustments are $557,260 in 1996, $672,970 in 1995
and $833,974 in 1994.
(4) Average balance is based on average daily amounts.
7
<PAGE>
TABLE 2-- RATE AND VOLUME ANALYSIS FOR CHANGES IN INTEREST INCOME, INTEREST
EXPENSE AND NET INTEREST INCOME
<TABLE>
<CAPTION>
CHANGE 1996/1995 CHANGE 1995/1994
------------------------------------- -------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------- -------------------------------------
TOTAL YIELD/RATE(1) VOLUME(2) TOTAL YIELD/RATE(1) VOLUME(2)
--------- ------------- ----------- --------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Commercial and industrial loans......... $ (854) $ (633) $ (221) $ 1,090 $ 2,640 $ (1,550)
Consumer loans.......................... (359) (28) (331) (312) 438 (750)
Real estate and construction loans...... 1,770 564 1,206 1,092 10 1,082
--------- ----- ----------- --------- ------ -----------
Total loans........................... 557 (97) 654 1,870 3,088 (1,218)
Investment securities:
Taxable................................. (228) (300) 72 1,318 1,849 (531)
Non-taxable(3).......................... (340) (15) (325) (474) (54) (420)
--------- ----- ----------- --------- ------ -----------
Total investment securities........... (568) (315) (253) 844 1,795 (951)
Federal funds sold........................ (468) (274) (194) 983 888 95
--------- ----- ----------- --------- ------ -----------
Total interest income................. $ (479) $ (686) $ 207 $ 3,697 $ 5,771 $ (2,074)
--------- ----- ----------- --------- ------ -----------
INTEREST EXPENSE
Premium Checking........................ $ (178) $ (111) $ (67) $ (58) $ 44 $ (102)
Custom Money Market/VIP................. (447) (190) (257) 1,674 2,290 (616)
Savings Deposits........................ (170) (28) (142) (79) 128 (207)
Time Deposits........................... 100 210 (110) 222 787 (565)
--------- ----- ----------- --------- ------ -----------
Total interest on deposits............ (695) (119) (576) 1,759 3,249 (1,490)
Mortgage payable........................ (12) (10) (2) 25 35 (10)
--------- ----- ----------- --------- ------ -----------
Total interest expense................ $ (707) $ (129) $ (578) $ 1,784 $ 3,284 $ (1,500)
--------- ----- ----------- --------- ------ -----------
Net interest income....................... $ 228 $ (557) $ 785 $ 1,913 $ 2,487 $ (574)
--------- ----- ----------- --------- ------ -----------
--------- ----- ----------- --------- ------ -----------
</TABLE>
- ------------------------
(1) Change in yield/rate multiplied by volume of prior period, this includes
changes in rate volume.
(2) Changes in volume multiplied by yield/rate of prior period, this includes no
changes in rate volume.
(3) Interest income and the average yield are presented on a fully taxable
equivalent basis using a tax rate of 34% in 1996, 1995 and 1994.
STOCKHOLDERS' EQUITY
At year end, stockholders' equity totaled $72,975,307, a gain of 13% over a
year ago. The per share value of the stock went from $9.11 to $10.31 based on
7,077,332 shares outstanding. In 1996, the Bank's profitability and its
commitment to stockholders were reflected in the payment of a quarterly cash
dividend of $.05 per share beginning in the second quarter. We maintained the
strength of our capital position during the year with ratios in excess of all
requirements for a well capitalized bank.
8
<PAGE>
TABLE 3--CAPITAL RATIOS AND FDIC MINIMUM REQUIREMENTS
<TABLE>
<CAPTION>
SANTA ADEQUATELY WELL
MONICA CAPITALIZED CAPITALIZED
BANK BANKS BANKS
----------- ------------- -------------
<S> <C> <C> <C>
Tier 1 capital to adjusted assets.......................... 11.41% 4.00% 5.00%
Tier 1 capital to risk-weighted assets..................... 18.58 4.00 6.00
Total capital to risk-weighted assets...................... 19.84 8.00 10.00
</TABLE>
DEPOSITS
As of December 31, 1996, the Bank's deposits increased to $554.0 from $550.3
million in 1995. During the year, rates on interest-bearing accounts edged a
little lower overall and we improved upon our already favorable deposit mix.
Noninterest bearing demand deposits gained 2% and low-interest bearing Premium
Checking deposits were up 13%. Together they represented close to half of total
deposits with a percent share of 31% and 17%, respectively. Time deposits of
$100,000 and over were up 17% in terms of dollar amount, but continued to
represent only a small portion at 4% of the total. Like all of our deposits,
they are made up entirely of high quality local core deposits with no brokered
funds.
In 1996, our VIP Money Market Account remained an excellent and flexible
source of funds for the Bank, as well as a popular product with our customers
due to its combination of convenience and competitive market yields.
TABLE 4--DEPOSITS
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ----- ---------- ----- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand.............................. $ 163,357 $ 161,546 $ 167,098
Premium Checking........................................ 81,086 1.4% 85,490 1.5% 92,375 1.5%
Custom Money Market/VIP................................. 189,818 4.2 195,781 4.3 215,400 3.1
Savings Deposits........................................ 48,831 2.6 54,125 2.7 62,615 2.4
Time Deposits........................................... 59,753 4.9 62,184 4.5 79,607 3.2
---------- ---------- ----------
Total deposits...................................... $ 542,845 $ 559,126 $ 617,095
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
TABLE 5--TYPES OF DEPOSITS AND PERCENT OF TOTAL
The table below shows the types of deposits and changes in composition from
1995 to 1996:
<TABLE>
<CAPTION>
PERCENT PERCENT PERCENT
TYPES OF DEPOSITS 12/31/1996 OF TOTAL 12/31/1995 OF TOTAL OF CHANGE
- ----------------------------------------------- -------------- ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Demand Deposits................................ $ 172,161,860 31% $ 168,871,973 31% 2%
Premium Checking............................... 94,299,606 17 83,497,203 15 13
Custom Money Market/VIP........................ 180,106,374 33 189,910,185 34 (5)
Savings Deposits............................... 46,747,268 8 49,514,209 9 (6)
Time Deposits $100,000 and over................ 22,583,452 4 19,357,363 4 17
Other Time Deposits............................ 38,084,447 7 39,127,255 7 (3)
-------------- --- -------------- ---
Total deposits............................. $ 553,983,007 100% $ 550,278,188 100% 1%
-------------- --- -------------- ---
-------------- --- -------------- ---
</TABLE>
9
<PAGE>
TABLE 6--TIME CERTIFICATES OF DEPOSIT
The following table sets forth, by time remaining to maturity, time
certificates of deposit outstanding at December 31, 1996:
<TABLE>
<CAPTION>
TIME TIME
CERTIFICATES OF CERTIFICATES OF
DEPOSIT DEPOSIT
$100,000 AND LESS THAN
REMAINING MATURITY OVER $100,000
- --------------------------------------------------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Three months or less..................................... $ 10,365 $ 16,611
Over three through twelve months......................... 12,218 21,474
------- -------
Total $100,000 time deposits......................... $ 22,583 $ 38,085
------- -------
------- -------
</TABLE>
LOANS
Net loans rose 2% in 1996 to $365.9 million as compared to $358.2 million in
1995. With the tremendous improvement in the quality of the portfolio and the
ongoing progress in recoveries, we provided adequate protection and planned for
future growth without an addition to the allowance for loan losses, which
totaled $9.0 million at year end or 2.4% of loans outstanding.
As the economy throughout our region showed strong signs of recovery, we
continued the process of building a solid category of quality construction
loans. We also participated in the general renewal of consumer confidence by
offering promotional programs that helped us to increase the consumer loan
category during 1996.
TABLE 7--LOAN PORTFOLIO
The carrying value for loans (before deductions of unearned income and the
allowance for loan losses) by major categories is presented below for the Bank
at the end of each reported period:
<TABLE>
<CAPTION>
PERCENT PERCENT PERCENT
12/31/1996 OF TOTAL 12/31/1995 OF TOTAL 12/31/1994 OF TOTAL
---------- ----------- ---------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Conventional loans............................ $ 225,423 60% $ 229,253 62% $ 222,585 61%
Interim construction loans.................... 16,679 4 10,851 3 9,339 3
Commercial and industrial loans................. 95,805 26 96,450 26 92,689 25
Loans to individuals for household, family and
other consumer expenditures................... 36,103 10 31,823 9 38,912 11
All other loans (including overdrafts).......... 983 937 1,301
---------- --- ---------- --- ---------- ---
Total loans................................... $ 374,993 100% $ 369,314 100% $ 364,826 100%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
10
<PAGE>
TABLE 8--MATURITY DISTRIBUTION OF LOANS
The following table summarizes the maturity distribution of loans (excluding
non-accrual loans and unearned income) by interest rate structure at December
31, 1996. Actual maturities may vary from those stated below due to prepayments
by borrowers.
<TABLE>
<CAPTION>
AFTER ONE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS AFTER FIVE YEARS
--------------------- -------------------- ------------------------
FIXED FLOATING FIXED FLOATING FIXED FLOATING
RATE RATE RATE RATE RATE RATE TOTAL
--------- ---------- --------- --------- --------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial loans.... $ 5,556 $ 83,225 $ 10,967 $ 513 $ 6,618 $ 106,879
Real estate loans:
Conventional loans............... 9,765 87,915 43,831 36,204 27,496 205,211
Interim construction loans....... 16,680 16,680
Loans to individuals for household,
family and other consumer
expenditures..................... 3,634 25,531 9,158 2,271 40,594
--------- ---------- --------- --------- --------- -- ----------
Total.......................... $ 18,955 $ 213,351 $ 63,956 $ 36,717 $ 36,385 $ 0 $ 369,364
--------- ---------- --------- --------- --------- -- ----------
--------- ---------- --------- --------- --------- -- ----------
</TABLE>
Over the past twelve months, we kept up our good performance in the
reduction of real estate owned, which fell 54% to $8.6 million from $18.6
million a year ago. The Bank sold 22 properties in 1996 for a total of $11.2
million. A small loss on the sale of those properties amounting to $78,545
reflected continuing price stability in our local real estate market.
Delinquent loans also experienced excellent progress. At year end, accruing
loans past due 90 days or more stood at zero and credits past due 30-89 days
were down 75% to $1.4 million as compared to $5.5 million in 1995. Table 9 shows
that non-accrual loans fell 46% to $5.6 million as compared to $10.4 million.
There are no potential problem loans, other than those disclosed as non-accrual,
past due and restructured, which management has serious doubts as to the ability
of such borrowers to comply with the present repayment terms and which may
require disclosure.
Adding real estate owned to non-accruals and accruing loans past due 90 days
or more, and comparing the total to gross capital funds (equity capital plus
allowance for loan losses) over the past three years, we saw in 1996 a
continuation of the sharp downward trend as we drew close to accomplishing our
goals for the portfolio. In 1994 the total of non-performing assets to gross
capital funds was $60.4 million to $73.9 million, or 82%; while in 1995 it was
$29.0 million to $75.5 million, or 38%. By year end 1996, the total of
non-performing assets had fallen to $14.2 million, or 17% of gross capital funds
of $82.0 million.
TABLE 9--NON-ACCRUAL, PAST DUE AND RESTRUCTURED
Following is a schedule of non-accrual, past due and restructured loans as
of December 31, 1996, 1995 and 1994 along with the associated interest income
for the loans on non-accrual:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ---------------------- --------------------
GROSS GROSS GROSS
PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
----------- ----------- --------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans................................... $ 5,629 $ 591 $ 10,423 $ 754 $ 26,520 $ 2,651
Accruing loans past due 90 days or more............. 5,054
----------- ----- --------- ----- --------- ---------
Total non-performing loans...................... $ 5,629 $ 10,423 $ 31,574
----------- ----- --------- ----- --------- ---------
Restructured loans included in total above.......... $ 1,444 $ 2,184 $ 4,056
----------- ----- --------- ----- --------- ---------
----------- ----- --------- ----- --------- ---------
</TABLE>
11
<PAGE>
Management's general policy is to place a loan on non-accrual status when
there is a reasonable doubt as to the ability of the creditor to make repayment,
with consideration given to any collateral.
As of December 31, 1996, 1995 and 1994, there was no interest included in
net income related to non-performing loans.
Table 10 below provides comparative statistics for 1996, 1995 and 1994 on
net loan losses, the provision for loan losses and the allowance for loan losses
at the beginning of each period. With the economy regaining its vigor and
delinquencies on a downward course, total charge-offs were about half the levels
of 1995. Net charge-offs also showed a steep drop to 0.6% of average loans
outstanding compared to 1.7%. As in 1995, an important factor was total
recoveries, which again reached close to $2.0 million.
TABLE 10--SUMMARY OF CREDIT LOSS EXPERIENCE
The following summarizes the allowance for loan losses for the three years
ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period................................................... $ 11,032 $ 14,898 $ 28,145
Provision charged to operations.................................................. 2,000 3,542
Recoveries:
Commercial and industrial loans................................................ 810 1,276 572
Consumer loans................................................................. 693 317 216
Real estate and construction loans............................................. 404 379 739
--------- --------- ---------
Total recoveries............................................................. 1,907 1,972 1,527
--------- --------- ---------
Charge-offs:
Commercial and industrial loans................................................ 2,294 2,455 5,030
Consumer loans................................................................. 1,154 1,646 2,572
Real estate and construction loans............................................. 536 3,737 10,714
--------- --------- ---------
Total charge-offs............................................................ 3,984 7,838 18,316
--------- --------- ---------
Net charge-offs.................................................................. 2,077 5,866 16,789
Balance at end of period......................................................... $ 8,955 $ 11,032 $ 14,898
--------- --------- ---------
--------- --------- ---------
Ratio of net charge-offs during the period to average loans outstanding.......... 0.56% 1.67% 4.59%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The amount charged to operations during the year and the related balance in
the allowance for loan losses is based on periodic evaluations of the loan
portfolio by senior management. These evaluations consider several factors
including, but not limited to, analysis of losses on specifically identified
impaired loans, examinations of monthly loan reports, examinations done by the
Federal and State regulators, loan portfolio composition, economic factors, and
prior loan loss experience.
As a result of provisions made pursuant to these evaluations, it is
management's opinion that the aggregate allowance of the Bank is currently
sufficient to provide for losses currently existing in the Bank's loan
portfolio. However, since each of the criteria is subject to change, there can
be no assurance that the Bank may not, in subsequent years, sustain actual
losses which are substantial in relationship to the size of the allowance.
12
<PAGE>
Table 11 shows how the allowance for loan losses was allocated in 1996, 1995
and 1994. Our management policy for determining the allocation has been to
assign risk levels to the various types of credits and then use these
classifications to establish the proper levels and monitor our allowance to
ensure adequate protection.
TABLE 11--ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The following allocation is based primarily on analysis of losses on
specifically identified impaired loans, as well as prior loss experience,
present and anticipated volume levels and historical charge-off levels by
individual categories and on management's evaluation of prevailing economic
conditions as they may affect segments of the portfolio. Accordingly, since each
of these criteria is subject to change, the allocation of the allowance below is
not necessarily indicative of the trend of future loan losses in any particular
loan category.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AS OF
DECEMBER 31,
---------------------------------------------------------
PERCENT OF LOANS IN EACH
AMOUNT CATEGORY TO TOTAL LOANS
------------------------------- ------------------------
1996 1995 1994 1996 1995
--------- --------- --------- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial loans.............................. $ 3,040 $ 3,984 $ 3,452 26% 26%
Consumer loans............................................... 537 1,020 2,731 10 9
Real estate and construction loans........................... 5,378 6,028 8,715 64 65
--------- --------- --------- --- ---
Total allowance for loan losses.......................... $ 8,955 $ 11,032 $ 14,898 100% 100%
--------- --------- --------- --- ---
--------- --------- --------- --- ---
<CAPTION>
1994
-----
<S> <C>
Commercial and industrial loans.............................. 25%
Consumer loans............................................... 11
Real estate and construction loans........................... 64
---
Total allowance for loan losses.......................... 100%
---
---
</TABLE>
SECURITIES
The Bank's total investment securities rose 5% to $141.1 million as compared
to $134.6 million a year ago. U.S. Treasuries increased to 64% of the portfolio
and had an average maturity of 12 months. During the year, we extended the
maturities of about a third of the Treasuries to take advantage of attractive
yields in the two-year range. U.S. government agency securities made up 26% of
the portfolio and had an average maturity of 2 months, while municipals
represented 10% and had an average maturity of 18 months. The quality of our
investments remained very high, with 99% in the top AAA grade and the remainder
in the AA grade.
Along with safety, we continued to make liquidity a top priority. Table 13,
which indicates maturity distribution, shows that 72% of the portfolio had
maturities within one year, thereby giving us the ability to adjust to changes
in deposit levels and loan requirements. As the Bank intends to utilize the
securities portfolio to meet liquidity needs and maintain flexibility, all
securities have been classified as available for sale at December 31, 1996 and
1995.
13
<PAGE>
TABLE 12--INVESTMENT PORTFOLIO
The carrying value of investment securities available for sale is presented
below for each reported period:
<TABLE>
<CAPTION>
12/31/1996 12/31/1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
U.S. treasury securities.................................................................. $ 90,375 $ 80,084
U.S. government agency securities......................................................... 36,271 36,604
Obligations of states and political subdivisions.......................................... 14,493 17,911
---------- ----------
Total securities available for sale..................................................... $ 141,139 $ 134,599
---------- ----------
---------- ----------
</TABLE>
TABLE 13--MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE WITH
WEIGHTED AVERAGE YIELDS
The maturity distribution of investment securities available for sale at
December 31, 1996 together with weighted average yields (effective yields
weighted for scheduled maturities) for each range of maturity are presented
below:
<TABLE>
<CAPTION>
AFTER ONE BUT WITHIN
WITHIN ONE YEAR FIVE YEARS
--------------------- --------------------
AMOUNT YIELD AMOUNT YIELD
---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. treasury securities.................................................. $ 60,192 5.86% $ 30,183 6.20%
U.S. government agency securities......................................... 36,271 5.38
Obligations of states and political subdivisions*......................... 5,265 10.82 9,228 10.71
---------- --------- --------- ---------
Total investment securities........................................... $ 101,728 5.95% $ 39,411 7.26%
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
- ------------------------
* Yields on tax-exempt obligations computed on tax equivalent basis, using the
composite tax rate of 34%.
14
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................................... $ 57,535,025 $ 53,302,225
Federal funds sold............................................................... 43,000,000 37,000,000
-------------- --------------
Cash and cash equivalents.................................................... 100,535,025 90,302,225
Investment securities available for sale......................................... 141,139,066 134,599,247
Loans, net....................................................................... 365,899,546 358,194,122
Bank premises and equipment, net................................................. 10,340,943 10,988,497
Other real estate owned.......................................................... 8,606,042 18,557,903
Accrued interest receivable...................................................... 3,496,127 3,402,983
Deferred tax asset............................................................... 796,447 1,738,961
Other assets..................................................................... 748,294 1,079,480
-------------- --------------
Total assets................................................................. $ 631,561,490 $ 618,863,418
-------------- --------------
LIABILITIES
Noninterest-bearing deposits..................................................... $ 172,161,860 $ 168,871,973
Interest-bearing deposits........................................................ 381,821,146 381,406,215
Total deposits............................................................... 553,983,006 550,278,188
Mortgage indebtedness............................................................ 1,981,863 2,000,500
Other liabilities................................................................ 2,621,314 2,118,326
-------------- --------------
Total liabilities............................................................ 558,586,183 554,397,014
-------------- --------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Capital stock (authorized, 10,000,000 shares of $3 par value; issued and
outstanding, 7,077,332 shares for 1996 and 1995)............................... 21,231,996 21,231,996
Surplus.......................................................................... 2,982,631 2,982,631
Undivided profits................................................................ 48,211,600 39,656,939
Unrealized holding gains on securities, net of income taxes of $381,985 and
$413,361 for 1996 and 1995, respectively....................................... 549,080 594,838
-------------- --------------
Total stockholders' equity................................................... 72,975,307 64,466,404
-------------- --------------
Total liabilities and stockholders' equity................................... $ 631,561,490 $ 618,863,418
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements.
15
<PAGE>
SANTA MONICA BANK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.......................................... $ 35,379,344 $ 34,822,229 $ 32,951,635
Interest on investment securities:
Taxable........................................................... 6,205,111 6,433,313 5,114,727
Tax-exempt........................................................ 1,081,468 1,306,353 1,618,892
Other interest income............................................... 2,648,535 3,116,450 2,134,057
------------- ------------- -------------
Total interest income............................................. 45,314,458 45,678,345 41,819,311
------------- ------------- -------------
INTEREST EXPENSE
Interest on deposits................................................ 13,303,545 13,998,103 12,238,462
Interest on other liabilities....................................... 194,801 207,492 182,355
------------- ------------- -------------
Total interest expense............................................ 13,498,346 14,205,595 12,420,817
------------- ------------- -------------
Net interest income................................................. 31,816,112 31,472,750 29,398,494
Provision for loan losses........................................... 2,000,000 3,542,000
------------- ------------- -------------
Net interest income after provision for loan losses................. 31,816,112 29,472,750 25,856,494
------------- ------------- -------------
NONINTEREST INCOME
Trust department income............................................. 3,160,453 3,059,546 3,019,658
Service charges on deposit accounts................................. 3,163,595 3,400,439 3,485,810
Other service charges, commissions and fees......................... 480,342 532,647 552,867
Other income........................................................ 220,139 216,394 218,409
------------- ------------- -------------
Total noninterest income.......................................... 7,024,529 7,209,026 7,276,744
------------- ------------- -------------
NONINTEREST EXPENSE
Salaries............................................................ 11,127,108 11,913,286 12,302,962
Profit sharing and other employee benefits.......................... 2,873,703 2,505,479 2,918,817
Net occupancy expense of bank premises.............................. 2,479,239 2,560,152 2,707,455
Furniture and equipment expense..................................... 1,580,679 1,614,476 1,814,671
Loss (gain) on sale of OREO......................................... 78,545 (400,449) (254,492)
FDIC assessment..................................................... 350,966 723,897 1,833,634
Legal fees.......................................................... 1,288,871 1,437,698 1,396,253
OREO related expenses............................................... 1,392,346 3,355,083 5,161,283
Other operating expense............................................. 4,585,995 4,663,468 4,350,643
------------- ------------- -------------
Total noninterest expense......................................... 25,757,452 28,373,090 32,231,226
------------- ------------- -------------
Income before income taxes.......................................... 13,083,189 8,308,686 902,012
Applicable income tax expense....................................... 3,466,929 3,041,346 380,728
------------- ------------- -------------
Net income.......................................................... $ 9,616,260 $ 5,267,340 $ 521,284
------------- ------------- -------------
Net income per share................................................ $ 1.36 $ .74 $ .07
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
16
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAINS ON
SECURITIES
CAPITAL UNDIVIDED NET OF
STOCK SURPLUS PROFITS INCOME TAXES TOTAL
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994............... $ 21,231,996 $ 2,982,631 $ 33,868,315 $1,307,649 $ 59,390,591
Net income............................. 521,284 521,284
Net change in unrealized holding gains
on investment securities available
for sale, net of income taxes........ (902,245) (902,245)
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1994............. 21,231,996 2,982,631 34,389,599 405,404 59,009,630
Net income............................. 5,267,340 5,267,340
Net change in unrealized holding gains
on investment securities available
for sale, net of income taxes........ 189,434 189,434
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1995............. 21,231,996 2,982,631 39,656,939 594,838 64,466,404
Net income............................. 9,616,260 9,616,260
Cash dividends at $.15 per share....... (1,061,599) (1,061,599)
Net change in unrealized holding gains
on investment securities available
for sale, net of income taxes........ (45,758) (45,758)
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1996............. $ 21,231,996 $ 2,982,631 $ 48,211,600 $ 549,080 $ 72,975,307
------------- ------------ ------------- ------------ -------------
------------- ------------ ------------- ------------ -------------
</TABLE>
See notes to financial statements.
17
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CASH FLOWS
INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 9,616,260 $ 5,267,340 $ 521,284
Adjustments to reconcile net income to net cash provided by
operating activities:
Net (accretion) amortization of premium/discount on
investments.................................................. (828,703) (5,589,303) 113,023
Gain on sale of investment securities.......................... (12,000)
Provision for loan losses...................................... 2,000,000 3,542,000
Write-downs of OREO............................................ 736,154 2,327,804 2,904,948
Accretion of deferred loan fees and costs...................... (701,414) (481,667) (501,121)
Loss (gain) on sale of OREO/premises and equipment............. 128,164 (414,127) (254,492)
Depreciation................................................... 1,291,145 1,303,780 1,402,000
Increase in accrued interest receivable........................ (93,144) (474,228) (737,339)
Decrease (increase) in other assets............................ 331,642 1,571,393 (1,032,761)
(Decrease) increase in accrued interest payable................ (19,200) 54,533 (35,523)
Deferred tax provision......................................... 973,890 983,631 2,451,313
Decrease in current income tax receivable...................... 2,253,366 9,595,834
Increase (decrease) in other liabilities....................... 522,188 849,579 (641,305)
--------------- --------------- ---------------
Total adjustments............................................ 2,340,722 4,384,761 16,794,577
--------------- --------------- ---------------
Net cash provided by operating activities...................... 11,956,982 9,652,101 17,315,861
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities.............. 174,287,012 391,140,000 149,440,273
Proceeds from sale of investment securities.................... 19,983,300
Purchase of investment securities.............................. (180,075,681) (352,795,444) (212,733,912)
Net (increase) decrease in loans............................... (9,413,816) (18,495,396) 36,410,051
Proceeds from sale of OREO/premises and equipment.............. 11,280,216 18,166,804 18,744,505
Capitalization of costs on OREO................................ (335,030) (1,888,794)
Loan origination fees received................................. 656,180 766,639 722,552
Purchases of Bank premises and equipment....................... (747,647) (613,301) (527,231)
--------------- --------------- ---------------
Net cash (used in) provided by investing activities.......... (4,348,766) 36,280,508 12,039,538
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings
accounts..................................................... 1,521,538 (45,307,113) (262,742)
Net increase (decrease) in time deposits....................... 2,183,282 (9,694,541) (19,330,908)
Repayments of notes payable.................................... (18,637) (15,316) (130,287)
Dividends paid................................................. (1,061,599)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities.......... 2,624,584 (55,016,970) (19,723,937)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents............. 10,232,800 (9,084,361) 9,631,462
Cash and cash equivalents, beginning of year..................... 90,302,225 99,386,586 89,755,124
--------------- --------------- ---------------
Cash and cash equivalents, end of year........................... $ 100,535,025 $ 90,302,225 $ 99,386,586
--------------- --------------- ---------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Loans transferred to OREO...................................... $ 1,752,933 $ 7,857,718 $ 8,154,367
OREO transferred to bank premises.............................. 280,740
Unrealized depreciation on investment securities available for
sale......................................................... (77,553) (321,072) (1,529,228)
--------------- --------------- ---------------
</TABLE>
See notes to financial statements.
18
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Santa Monica Bank (the "Bank") are
in accordance with generally accepted accounting principles and conform to
practices within the banking industry.
(A.) NATURE OF OPERATIONS: The Bank's primary operations are related to
traditional banking activities, including the acceptance of deposits, the
lending and investing of money, and trust department operations. The Bank's
customers consist of small to mid-sized businesses and individuals located in
western Los Angeles County. The Bank operates 7 branches with the headquarters
located in the city of Santa Monica.
(B.) CASH AND CASH EQUIVALENTS: For the purpose of presentation in the
statements of cash flows, cash and cash equivalents are defined as those amounts
included in the balance-sheet caption "cash and due from banks" and "federal
funds sold."
(C.) INVESTMENT SECURITIES: Investment securities available for sale are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of stockholders' equity. Accretion of
discounts and amortization of premiums are recognized as an adjustment to
interest income. Realized gains or losses upon disposition are recognized in
earnings based upon the specific identification method.
(D.) LOANS: Loans are carried at amounts advanced less payments collected,
deferred net loan origination fees, unearned income and the allowance for loan
losses. Interest on loans is computed by methods which generally result in level
rates of return on principal amounts outstanding. Interest is accrued daily as
earned except where reasonable doubt exists as to collectibility of the loan, in
which case the accrual of income is discontinued.
Interest accruals may be continued for loans that have become contractually
past due ninety days when such loans are well secured and in the process of
collection and accordingly, management has determined such loans to be fully
collectible as to both principal and interest. For this purpose, loans are
considered well secured if they are collateralized by property having a
realizable value in excess of the amount of principal and accrued interest
outstanding or are guaranteed by a financially capable party. Loans are
considered to be in the process of collection if collection of the loan is
proceeding in due course either through legal action or through other collection
efforts which management reasonably expects to result in repayment of the loan
or its restoration to a current status in the near future.
When a loan is placed on nonaccrual status, all interest previously accrued
but uncollected is reversed against current period operating results. Income on
such loans is then recognized only to the extent that cash is received and where
the ultimate collection of the carrying amount of the loan is probable, after
giving consideration to borrowers' current financial condition, historical
repayment performance and other factors. Accrual of interest is resumed only
when (i) principal and interest are brought fully current and (ii) such loans
are either considered, in management's judgment, to be fully collectible or
otherwise become well secured and in the process of collection. Generally, under
regulatory guidelines a sustained period of repayment performance for a minimum
of six months must be achieved for such loans to be returned to accrual status.
On January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosure". These statements prescribe the
recognition criteria for loan impairment and the measurement methods for certain
impaired loans and
19
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
loans whose terms are modified in troubled debt restructurings. SFAS No. 114
states that a loan is impaired when it is probable that a creditor will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. The Bank measures impairment by
discounting expected future cash flows at the loan's effective interest rate, or
by reference to an observable market price, or the fair value of the collateral
for a collateral dependent loan. The effective interest rate is the contractual
rate adjusted for any deferred loan fees, premiums or discounts that existed at
the time the loans were originated or acquired. The adoption of SFAS No. 114, as
amended, did not have a material effect on the Bank's financial statements.
Troubled debt restructurings are those loans for which the Bank has, for
reasons related to borrowers' financial difficulties, granted concessions to
borrowers (including reductions of either interest or principal) that it would
not otherwise consider, whether or not such loans are secured or guaranteed by
others. Subsequent to the adoption of SFAS No. 114, troubled debt restructurings
have been accounted for as impaired loans in accordance with the provisions of
that Statement. Prior to the adoption of SFAS No. 114, troubled debt
restructurings involving only a modification of terms were accounted for
prospectively from the time of restructuring and, accordingly, no gain or loss
was recorded at the time of such restructuring unless the recorded investment in
such loans exceeded the total future cash receipts specified by the new loan
terms.
Loan losses are charged to the allowance for loan losses and recoveries are
credited to the allowance. The annual provision for loan losses charged to
operating expense and added to the allowance is determined based upon the
measurement of impairment for specifically identified impaired loans under the
provisions of SFAS No. 114, as well as economic conditions, volume, growth, past
losses and collection experience, risk characteristics of the portfolio and such
other factors which, in management's judgment, deserve current recognition.
These estimates are inherently uncertain and depend on the outcome of future
events. Regulatory authorities have in recent years required substantial
increases in the allowance for loan losses, in many cases, in recognition of the
inherent risk in the existing economic environment. Although management believes
that the level of the allowance is adequate to absorb losses inherent in the
loan portfolio, additional declines in the local economy or rising interest
rates may result in increasing losses that cannot reasonably be predicted at
this time.
Loan origination fees, net of associated costs, are deferred and recognized
over the life of the loan as an adjustment of the loan yield using the effective
interest method. Total unearned fees on loans as of December 31, 1996 and 1995
amounted to $1,357,658 and $1,402,199, respectively.
(E.) OTHER REAL ESTATE OWNED ("OREO") includes real property acquired in
full or partial satisfaction of loans through foreclosure, including direct
foreclosure or deed in lieu of foreclosure. Such loans are excluded from OREO
until the Bank has taken possession of the collateral. Prior to the adoption of
SFAS No. 114, loans collateralized by real property were considered in-substance
foreclosed, and thus included in OREO, when the borrower had little or no equity
in the collateral and had effectively abandoned control of the property or had
no economic interest to continue involvement in the property. Subsequent to
adoption of SFAS No. 114, such loans are excluded from OREO until the Bank has
taken possession of the collateral.
OREO is classified as held for sale and recorded at the property's estimated
fair value at the time of foreclosure less selling cost, which becomes its cost.
Subsequent declines in the property's fair value, taking into consideration
management's intended plans for disposition, less estimated costs to sell, are
reflected in
20
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OREO related expenses in the periods in which they become known. Costs of
holding OREO are reflected in OREO related expenses as incurred. Gains and
losses on sales of OREO are recognized in conformity with standards governing
accounting for sales of real estate, including criteria relating to the nature
of the property sold and the terms of the sale. Valuation estimates for OREO are
inherently uncertain. Although management believes it has adequately provided
for existing losses, further declines in real estate values could result in
additional losses being recorded in future periods.
(F.) PREMISES AND EQUIPMENT: Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation is charged to
operating expense over the estimated useful lives of the assets (buildings: 15
to 45 years; equipment: 3 to 30 years). Depreciation on buildings and equipment
is computed by use of the straight-line method. Leasehold improvements are
amortized by use of the straight-line method over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
Expenditures for remodelings and improvements are capitalized, and maintenance
and repairs are charged to expense as incurred.
(G.) FINANCIAL INSTRUMENTS: The Bank does not enter into any derivative
transaction, as defined by SFAS No. 119, other than standby letters of credits
and commitments to extend credit.
OTHER OFF-BALANCE-SHEET INSTRUMENTS. In the ordinary course of business the
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commercial letters of credit, and standby letters
of credit. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.
(H.) FAIR VALUES OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used by the Bank in estimating fair values of financial
instruments as disclosed herein:
CASH AND SHORT-TERM INSTRUMENTS. The carrying amounts of cash and
short-term instruments approximate their fair value.
AVAILABLE-FOR-SALE SECURITIES. Fair values for securities, excluding
restricted equity securities, are based on quoted market prices. The carrying
values of restricted equity securities approximate fair values.
LOANS RECEIVABLE. For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
Fair values for commercial real estate and commercial loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
DEPOSIT LIABILITIES. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
MORTGAGE INDEBTEDNESS. The fair value of the Bank's mortgage indebtedness
is estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of
21
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
borrowing arrangements.
ACCRUED INTEREST. The carrying amounts of accrued interest approximate
their fair values.
OFF-BALANCE-SHEET INSTRUMENTS. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standings.
(I.) INCOME TAXES: Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income.
(J.) EMPLOYEE RETIREMENT PLANS: The Bank records expense for contributions
to employee retirement plans during the years for which such contributions are
declared.
(K.) CAPITAL STOCK AND INCOME PER SHARE: Income per share is computed on
the basis of the weighted average number of common shares and equivalents
outstanding.
(L.) TRUST FEES: Trust fees are recorded on the accrual basis.
(M.) POSTRETIREMENT BENEFITS: Expense is provided for postretirement
benefits other than pensions during the years in which the employee's service is
rendered, based upon an estimate of the expected cost of providing such
benefits.
(N.) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. AVERAGE FEDERAL RESERVE BALANCES
The average cash reserve balances required to be maintained at the Federal
Reserve Bank under the Federal Reserve Act and Regulation D were approximately
$14.9 million and $13.6 million for the years ended December 31, 1996 and 1995,
respectively.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale with total amortized cost of
$29,323,453 as of December 31, 1996 and $32,600,650 as of December 31, 1995 were
pledged to secure trust funds and public deposits and for other purposes
required or permitted by law.
22
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)
The total amortized cost and aggregate fair values of investment securities
available for sale at December 31, 1996 were:
<TABLE>
<CAPTION>
GROSS GROSS
TOTAL UNREALIZED UNREALIZED
TYPE AND MATURITY GROUPING AMORTIZED COST GAIN LOSS FAIR VALUE
- ------------------------------------------------------ -------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
U.S. treasury securities:
Due within one year................................. $ 60,006,723 $ 185,465 $ $ 60,192,188
After one but within five years..................... 29,975,306 207,507 30,182,813
U.S. government agency securities:
Due within one year................................. 36,317,079 45,741 36,271,338
-------------- ------------ ----------- --------------
Total............................................. 126,299,108 392,972 45,741 126,646,339
-------------- ------------ ----------- --------------
Obligations of states and political subdivisions:
Due within one year............................... 5,176,198 88,737 5,264,935
After one but within five years................... 8,733,114 494,678 9,227,792
-------------- ------------ ----------- --------------
Total............................................. 13,909,312 583,415 14,492,727
-------------- ------------ ----------- --------------
Total investment securities available
for sale........................................ $ 140,208,420 $ 976,387 $ 45,741 $ 141,139,066
-------------- ------------ ----------- --------------
-------------- ------------ ----------- --------------
</TABLE>
The Bank had a security gain of $7,200 in 1996.
The total amortized cost and aggregate fair values of investment securities
available for sale at December 31, 1995 were:
<TABLE>
<CAPTION>
GROSS GROSS
TOTAL UNREALIZED UNREALIZED
TYPE AND MATURITY GROUPING AMORTIZED COST GAIN LOSS FAIR VALUE
- ------------------------------------------------------ -------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
U.S. treasury securities:
Due within one year................................. $ 80,043,830 $ 40,570 $ $ 80,084,400
U.S. government agency securities:
Due within one year................................. 36,632,664 29,057 36,603,607
-------------- ------------ ----------- --------------
Total............................................. 116,676,494 40,570 29,057 116,688,007
-------------- ------------ ----------- --------------
Obligations of states and political subdivisions:
Due within one year............................... 2,517,871 41,056 2,558,927
After one but within five years................... 14,396,683 955,630 15,352,313
-------------- ------------ ----------- --------------
Total............................................. 16,914,554 996,686 17,911,240
-------------- ------------ ----------- --------------
Total investment securities available
for sale........................................ $ 133,591,048 $ 1,037,256 $ 29,057 $ 134,599,247
-------------- ------------ ----------- --------------
-------------- ------------ ----------- --------------
</TABLE>
4. LOANS
The Bank has limited its lending activity to its immediate service area,
resulting in a natural concentration of loans secured primarily by real estate
in western Los Angeles County. As a result, the
23
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LOANS (CONTINUED)
performance of the Bank's loan portfolio will be impacted by trends in the local
economy, to the extent such trends influence borrowers' repayment ability.
Classification of loans at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Real estate loans:
Conventional loans............................................................. $ 225,409,589 $ 229,253,833
Interim construction loans..................................................... 16,679,165 10,851,109
Commercial and industrial loans.................................................. 95,773,016 96,450,108
Loans to individuals for household, family and other consumer expenditures....... 36,148,612 31,822,528
All other loans (including overdrafts)........................................... 983,327 936,607
-------------- --------------
Gross loans...................................................................... 374,993,709 369,314,185
Less: unearned income............................................................ 139,147 87,739
allowance for possible loan losses........................................... 8,955,096 11,032,324
-------------- --------------
Total loans, net............................................................. $ 365,899,466 $ 358,194,122
-------------- --------------
-------------- --------------
</TABLE>
The following is a summary of the transactions in the allowance for loan
losses for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year........................................ $ 11,032,324 $ 14,897,660 $ 28,145,467
Recoveries credited to allowance.................................... 1,906,637 1,971,741 1,526,686
Losses charged to allowance......................................... (3,983,865) (7,837,077) (18,316,493)
------------- ------------- -------------
Net chargeoffs...................................................... (2,077,228) (5,865,336) (16,789,807)
Provision for loan losses charged to expense........................ 2,000,000 3,542,000
------------- ------------- -------------
Balance at end of year.............................................. $ 8,955,096 $ 11,032,324 $ 14,897,660
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The allowance for loan losses is an estimate involving both subjective and
objective factors and its measurement is inherently uncertain, pending the
outcome of certain events. Management's determination of the adequacy of the
allowance is based upon the measurement of impairment for specifically
identified impaired loans under the provisions of SFAS No. 114, as well as an
evaluation of economic conditions, growth, volume, past losses and collection
experience, risk characteristics of the portfolio and other factors which, in
management's judgment, deserve current recognition. Although management believes
the level of the allowance as of December 31, 1996 is adequate to absorb losses
inherent in the loan portfolio, additional deterioration in the economy of the
Bank's lending area or rising interest rates could result in levels of loan
losses that could not be predicted at that date.
24
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LOANS (CONTINUED)
Past due and non-accrual loans as of December 31 are as follows:
<TABLE>
<CAPTION>
PAST DUE OVER 90 DAYS
AND STILL ACCRUING
INTEREST NON-ACCRUAL
-------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
A) Commercial and industrial loans...................... $ -- $ -- $ 1,224,217 $ 3,444,082
B) Consumer loans....................................... 2,814,244 2,273,743
C) Real estate and construction loans................... 1,590,668 4,705,320
------------ ------------ ------------ -------------
Total............................................... $ -- $ -- $ 5,629,129 $ 10,423,145
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
The total non-accrual loan balance above includes restructured loans of
$1,443,682 and $2,183,874 at December 31, 1996 and 1995, respectively. During
1996 and 1995 income recognized on non-accruals was $0 and $0, respectively.
Interest income that would have been recorded under the original terms of
such loans was $590,749, $754,216 and $2,650,951 for the years ended December
31, 1996, 1995 and 1994, respectively.
The Bank reviews for impairment all loans which are 90 days or more
delinquent and not currently accruing interest. As permitted under SFAS No. 114,
impairment recognition need not be applied during a period of delay in payment
if the creditor expects to collect all amounts due, including principal and
interest, for the period of delay. As of December 31, 1996 the Bank had
classified $6,483,603 in loans as impaired. No specific allowance was
established for these loans under the provisions of SFAS No. 114. Generally,
this is due to identified losses on such loans having been charged off under
regulatory guidelines, or because sufficient collateral exists to provide for
recovery of the recorded loan amount. The average balance of impaired loans
during the year ended December 31, 1996 was $5,203,036 and interest income
recognized on such loans during such year was $230,784.
TRANSACTIONS INVOLVING DIRECTORS AND SHAREHOLDERS:
In the ordinary course of business, the Bank has granted loans to certain
directors, executive officers and the businesses with which they are associated.
All such loans and commitments to loan were made under the terms that are
consistent with the Bank's normal lending policies.
The following is an analysis of all activity of all such loans for the year
ending December 31 as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Outstanding balance, beginning of year.......................... $ 8,227,900 $ 8,889,457
Credit granted, including renewals.............................. 809,760
Repayments...................................................... (5,726,021) (1,471,317)
------------- -------------
Outstanding balance, end of year................................ $ 2,501,879 $ 8,227,900
------------- -------------
------------- -------------
</TABLE>
25
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. OTHER REAL ESTATE OWNED
A summary of the components of OREO at December 31, 1996 and 1995 is
presented below.
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Foreclosed assets................................................ $ 8,606,042 $ 18,557,903
------------ -------------
Total OREO................................................... $ 8,606,042 $ 18,557,903
------------ -------------
------------ -------------
</TABLE>
6. BANK PREMISES AND EQUIPMENT
The following is a summary of the major categories of bank premises and
equipment:
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND BOOK
COST AMORTIZATION VALUE
------------- ---------------- -------------
<S> <C> <C> <C>
December 31, 1996
Premises, including land of $4,911,000....... $ 10,366,414 $ 3,450,957 $ 6,915,457
Equipment.................................... 9,590,814 7,757,022 1,833,792
Leasehold improvements....................... 5,792,595 4,200,901 1,591,694
------------- ---------------- -------------
Total.................................... $ 25,749,823 $ 15,408,880 $ 10,340,943
------------- ---------------- -------------
------------- ---------------- -------------
December 31, 1995
Premises, including land of $4,850,000....... $ 10,560,304 $ 3,506,974 $ 7,053,330
Equipment.................................... 9,410,320 7,273,017 2,137,303
Leasehold improvements....................... 5,691,182 3,893,318 1,797,864
------------- ---------------- -------------
Total.................................... $ 25,661,806 $ 14,673,309 $ 10,988,497
------------- ---------------- -------------
------------- ---------------- -------------
</TABLE>
Depreciation included in operating expenses was $1,291,145 in 1996,
$1,303,780 in 1995 and $1,402,000 in 1994. Included in operating expenses are
net rental payments for bank premises and equipment of $1,261,449 in 1996,
$1,300,404 in 1995 and $1,331,892 in 1994.
The future minimum rental commitments, primarily representing noncancelable
operating leases for premises, were as follows at December 31, 1996:
<TABLE>
<CAPTION>
MINIMUM
RENTAL
PERIOD COMMITMENTS
- ------------------------------------------------------------------------------- -------------
<S> <C>
1997........................................................................... $ 1,125,756
1998........................................................................... 1,125,756
1999........................................................................... 1,125,756
2000........................................................................... 920,669
2001........................................................................... 825,417
Thereafter..................................................................... 1,667,744
-------------
Total...................................................................... $ 6,791,098
-------------
-------------
</TABLE>
Certain of these leases contain renewal or purchase options, escalation
clauses, related guarantees and obligations assumed which are immaterial.
26
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEPOSITS:
Interest expense for the years ended December 31, 1996, 1995 and 1994
relating to interest-bearing deposits is set forth as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Demand, interest-bearing........................ $ 1,125,869 $ 1,303,998 $ 1,361,871
Money market and savings........................ 9,273,846 9,889,963 8,297,028
Time certificates of deposit:
Under $100,000................................ 1,838,113 1,776,939 1,414,480
$100,000 and over............................. 1,065,717 1,027,203 1,165,083
------------- ------------- -------------
Interest expense on deposits................ $ 13,303,545 $ 13,998,103 $ 12,238,462
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Bank made interest payments of $13,514,230, $14,205,595 and $12,420,817
during the years ended December 31, 1996, 1995 and 1994, respectively.
8. INCOME TAXES
The Bank made tax payments of $2,236,498 and $1,770,800 during the years
ended December 31, 1996 and 1995, respectively. The Bank received refunds of $0,
$2,660,977 and $12,015,613 in 1996, 1995 and 1994, respectively.
The components for the three years ended December 31, 1996 of income tax
expense (benefit) were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Current provision (benefit)
Federal.......................................... $ 2,478,832 $ 2,027,901 $ (2,071,385)
State............................................ 14,207 29,814 800
------------ ------------ -------------
2,493,039 2,057,715 (2,070,585)
------------ ------------ -------------
Deferred provision (benefit)
Federal.......................................... 99,327 194,912 2,248,049
State............................................ 874,563 788,719 203,264
------------ ------------ -------------
973,890 983,631 2,451,313
------------ ------------ -------------
Total.......................................... $ 3,466,929 $ 3,041,346 $ 380,728
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
27
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
COMPONENTS OF NET DEFERRED TAX ASSET FOR THE YEARS ENDED DECEMBER 31:
<TABLE>
<CAPTION>
1996 1995
TAX EFFECT TAX EFFECT
------------- -------------
<S> <C> <C>
Deferred tax liabilities
Depreciation.................................................. $ 65,303 $ 205,872
California franchise tax...................................... -- 28,598
Unrealized gains on securities................................ 381,985 413,361
Prepaids...................................................... 245,911 356,342
------------- -------------
Gross deferred liability.................................... $ 693,199 $ 1,004,173
------------- -------------
------------- -------------
Deferred tax assets
Bad debt and loan loss deductions............................. $ (1,559,225) $ (4,011,095)
Reserve for post-employment................................... (498,150) (398,569)
OREO charge-offs.............................................. (1,429,415) (1,931,955)
CA franchise tax.............................................. (293,497) --
AMT credit.................................................... (18,043) (293,578)
State NOL..................................................... (284,862) (357,008)
Other......................................................... (26,486) (172,969)
------------- -------------
Gross deferred asset............................................ (4,109,678) (7,165,174)
Valuation allowance............................................. 2,620,032 4,422,040
------------- -------------
Net deferred tax asset...................................... $ (796,447) $ (1,738,961)
------------- -------------
------------- -------------
</TABLE>
Valuation allowances were established to the extent uncertainty exists as to
the recoverability of the deferred tax asset as of December 31, 1996 and 1995.
During 1996 and 1995, the valuation allowance was reversed by approximately $1.8
million due to management's reassessment of the ultimate realizability of the
deferred tax asset.
A reconciliation of the Statutory Federal Income Tax Rate with the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
PERCENT OF PERCENT OF PERCENT OF
PRETAX INCOME PRETAX INCOME PRETAX LOSS
--------------- --------------- ---------------
<S> <C> <C> <C>
Tax expense at statutory rate:..................................... 35.00% 35.00% 35.00%
Tax-exempt interest................................................ (2.72) (4.97) (62.77)
State taxes, net of federal benefit................................ 7.40 6.50 5.93
Executive life insurance........................................... 0.22 0.26 (7.30)
Valuation allowance................................................ (12.16) (1.25) 71.14
Other permanent items.............................................. (1.24) 1.06 0.21
------ ------ ------
Total.......................................................... 26.50% 36.60% 42.21%
------ ------ ------
------ ------ ------
</TABLE>
As of December 31, 1996, the Bank has a net operating loss carryforward for
state income tax purposes of $4,913,603 of which $1,979,801 expires in 1998,
with the remainder expiring in 1999.
28
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank's commitments under standby letters of credit amounted to
$2,226,243 on December 31, 1996 and $1,291,293 on December 31, 1995.
At December 31, 1996 and 1995, the Bank had outstanding undisbursed loan
commitments of $44,016,458 and $68,355,000, respectively. The Bank considers
these commitments in its determination of the adequacy of the allowance for loan
losses.
The Bank faces legal claims in the ordinary conduct of its business which,
in the opinion of counsel and the judgment of management, will not materially
affect its financial position or results of operations.
10. COMMON STOCK
California banking law places the following restrictions on the availability
of surplus and undivided profits for dividend purposes:
"A bank may not make distribution to its shareholders in excess of the
lesser of (1) retained earnings or (2) net income for its last three fiscal
years, less the amount of any such distributions made by the bank to the
shareholders of the bank during such period." Therefore, the Bank could not
pay dividends during the three years ending December 31, 1996, unless
approved by the State Banking Department. The Bank applied and received
approval for cash dividends during 1996.
The Bank had an incentive stock option plan which expired on January 15,
1993 and provided options to purchase 440,698 shares as of January 15, 1993 of
the Bank's common stock.
Options were granted at prices at least equal to the fair market value at
the time of the grant and were exercisable over periods of up to ten years.
The following is a summary of the transactions under the stock option plan:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of period............... 19,905 $ 21.12-$32.50 24,705 $ 6.84-$32.50
Expired................................................ (3,681) (4,800)
----------- --------------- ----------- ---------------
Options outstanding, end of period..................... 16,224 $ 21.12-$32.50 19,905 $ 21.12-$32.50
----------- --------------- ----------- ---------------
----------- --------------- ----------- ---------------
</TABLE>
11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Bank using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Bank could realize in a current market exchange.
The use of different market
29
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents....................................... $ 100,535 $ 100,535 $ 90,302 $ 90,302
Investment securities available for sale........................ 141,139 141,139 134,599 134,599
Loans........................................................... 365,899 368,289 358,194 367,303
Accrued interest receivable..................................... 3,496 3,496 3,403 3,403
Off-balance-sheet instruments................................... 2,226 2,226 1,291 1,291
Liabilities:
Noninterest-bearing deposits.................................... $ 172,162 $ 172,162 $ 168,872 $ 168,872
Interest-bearing deposits....................................... 381,821 381,667 381,406 381,533
Mortgage indebtedness........................................... 1,982 1,982 2,001 2,001
</TABLE>
The fair value of investment securities available for sale is based on
quoted market prices, dealer quotes, and prices obtained from independent
pricing services. The fair value of loans, time deposits, other financial
instruments, commitments, and guarantees is estimated based on present values
using applicable risk-adjusted spreads to the U.S. Treasury curve to approximate
current entry-value interest rates applicable to each category of such financial
instruments.
No adjustment was made to the entry-value interest rates for changes in
credit of performing commercial loans for which there are no known credit
concerns. Management segregates loans in appropriate risk categories. Management
believes that the risk factor embedded in the entry-value interest rates along
with the general reserves applicable to the performing commercial loan portfolio
for which there are no known credit concerns result in a fair valuation of such
loans on an entry-value basis. The fair value of nonperforming loans with a
recorded book value of approximately $6 million and $10 million in 1996 and 1995
were not estimated because it is not practicable to reasonably assess the credit
adjustment that would be applied in the marketplace for such loans. Demand
deposits are shown at their face value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996 and 1995. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
30
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Bank provides post-retirement health care benefits to eligible retirees
as follows:
Employees hired before January 1, 1992 are eligible for retiree medical and
dental benefits when they reach age 65 or at age 62 with 15 years of service.
Employees hired during calendar year 1992 are eligible for retiree medical
and dental benefits when they reach age 62 with at least 15 years of service.
Employees hired on or after January 1, 1993 are not eligible for retirement
benefits.
A person with a title of Director for 5 years immediately before the date of
retirement will automatically qualify for benefits regardless of the person's
age at retirement.
The health care benefits for retirees and eligible dependents are the same
as for active employees and subject to the same limitations and exclusions. The
maximum monthly employer contribution for single retirees is $300 and retirees
with dependents is $600.
The cost of such benefits, which are primarily health care, is recognized in
the financial statements throughout an employee's active working career. The
cumulative effect of the adoption of this accounting method in 1993 of
$2,624,885 is being amortized over 20 years.
The periodic expenses for post-retirement benefits using a discount factor
of 7% for both 1996 and 1995 includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
HEALTH HEALTH HEALTH
CARE PLAN CARE PLAN CARE PLAN
---------- ---------- ----------
<S> <C> <C> <C>
Service cost............................................. $ 81,000 $ 96,400 $ 119,100
Interest cost............................................ 168,000 190,000 183,400
Amortization of transition obligation.................... 131,244 131,244 131,244
Amortization of unrecognized gains....................... (56,244) (47,700) (1,500)
---------- ---------- ----------
Total expense........................................ $ 324,000 $ 369,944 $ 432,244
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
31
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The actuarial and recorded liabilities for post-retirement benefits were as
follows:
<TABLE>
<CAPTION>
1996 1995
HEALTH CARE HEALTH CARE
PLAN PLAN
------------ ------------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees............................................................................ $ 1,863,912 $ 1,359,000
Fully eligible active plan participants............................................. 273,245 604,000
Other active plan participants...................................................... 788,025 853,000
------------ ------------
Accumulated post-retirement benefit obligation........................................ $ 2,925,182 $ 2,816,000
------------ ------------
Funded status......................................................................... $ 2,925,182 $ 2,816,000
Unrecognized cumulative gains......................................................... 284,658 365,515
Unrecognized transition obligation.................................................... (2,100,000) (2,231,153)
------------ ------------
Accrued post-retirement benefit cost.................................................. $ 1,109,840 $ 950,362
------------ ------------
------------ ------------
</TABLE>
EMPLOYEE RETIREMENT PLANS
The Bank maintains a funded non-contributory profit sharing retirement plan
for all eligible employees with one year of continuous service. As of the last
day of a Plan year, the Board of Directors may in its sole discretion determine
whether the Bank shall make a contribution to the Plan. The extent of an
employee's participation is determined by length of service and salary level.
The Bank made a profit sharing contribution of $232,232 in 1996. No
contributions were made to the retirement plan in the years 1995 and 1994.
On September 1, 1995, the Bank introduced a 401(K) plan to its employees
meeting the eligibility requirements set forth above. Based on the provisions
set forth in the plan, employees can contribute up to 15% of their salaries for
a maximum contribution of $9,250. As of January 1, 1996, this amount was
increased to $9,500. Furthermore, the Board of Directors reserves the right to
approve matching of contributions based on its sole discretion. The Bank's
matching 401(K) plan contributions were made in 1996 amounting to $157,768.
13. REGULATORY EXAMINATIONS AND REGULATORY AGREEMENTS
All Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, 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 to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 1996, that
the Bank meets all capital adequacy requirements to which it is subject.
32
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY EXAMINATIONS AND REGULATORY AGREEMENTS (CONTINUED)
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. No conditions or events
have occurred since this notification that management believes will change the
institution's classification. The Bank's actual capital amounts and ratios are
also presented in the table.
<TABLE>
<CAPTION>
WELL CAPITALIZED
REQUIREMENTS UNDER
PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------------- ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk-Weighted Assets)........... $ 77,350,227 19.84% $ 31,191,000 8.00% $ 38,989,000 10.00%
Tier 1 Capital
(to Risk-Weighted Assets)........... 72,426,227 18.58 15,595,000 4.00 23,393,000 6.00
Tier 1 Capital
(to Adjusted Assets)................ 72,426,227 11.41 25,380,000 4.00 31,725,000 5.00
------------- --------- ------------- --------- ------------- ---------
As of December 31, 1995:
Total Capital
(to Risk-Weighted Assets)........... $ 68,854,000 17.54% $ 31,408,000 8.00% $ 39,260,000 10.00%
Tier 1 Capital
(to Risk-Weighted Assets)........... 63,871,000 16.27 15,704,000 4.00 23,556,000 6.00
Tier 1 Capital
(to Adjusted Assets)................ 63,871,000 10.27 24,755,000 4.00 30,943,000 5.00
------------- --------- ------------- --------- ------------- ---------
</TABLE>
33
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total interest income................ $ 11,121,442 $ 10,981,626 $ 11,392,554 $ 11,818,836 $ 45,314,458
Total interest expense............... 3,471,854 3,252,482 3,338,921 3,435,089 13,498,346
------------- ------------- ------------- ------------- -------------
Net interest income.................. 7,649,588 7,729,144 8,053,633 8,383,747 31,816,112
Provision for loan losses............
------------- ------------- ------------- ------------- -------------
Net interest income after provision
for loan losses.................... 7,649,588 7,729,144 8,053,633 8,383,747 31,816,112
Total other operating income......... 1,717,114 1,700,398 1,684,112 1,922,905 7,024,529
Total other operating expense........ 6,876,962 6,599,328 6,060,095 6,221,067 25,757,452
------------- ------------- ------------- ------------- -------------
Income before income taxes........... 2,489,740 2,830,214 3,677,650 4,085,585 13,083,189
Applicable income taxes.............. 519,252 694,416 1,033,184 1,220,077 3,466,929
------------- ------------- ------------- ------------- -------------
Net income........................... $ 1,970,488 $ 2,135,798 $ 2,644,466 $ 2,865,508 $ 9,616,260
------------- ------------- ------------- ------------- -------------
Net income per share................. $ .28 $ .30 $ .37 $ .41 $ 1.36
------------- ------------- ------------- ------------- -------------
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
Total interest income................ $ 11,192,019 $ 11,567,279 $ 11,425,359 $ 11,493,688 $ 45,678,345
Total interest expense............... 3,446,885 3,574,124 3,553,984 3,630,602 14,205,595
------------- ------------- ------------- ------------- -------------
Net interest income.................. 7,745,134 7,993,155 7,871,375 7,863,086 31,472,750
Provision for loan losses............ 600,000 800,000 600,000 -- 2,000,000
------------- ------------- ------------- ------------- -------------
Net interest income after provision
for loan losses.................... 7,145,134 7,193,155 7,271,375 7,863,086 29,472,750
Total other operating income......... 1,788,247 1,709,846 1,807,421 1,903,512 7,209,026
Total other operating expense........ 8,073,279 7,031,396 6,781,320 6,487,095 28,373,090
------------- ------------- ------------- ------------- -------------
Income before income taxes........... 860,102 1,871,605 2,297,476 3,279,503 8,308,686
Applicable income taxes.............. 236,944 701,703 847,160 1,255,539 3,041,346
------------- ------------- ------------- ------------- -------------
Net income........................... $ 623,158 $ 1,169,902 $ 1,450,316 $ 2,023,964 $ 5,267,340
------------- ------------- ------------- ------------- -------------
Net income per share................. $ .09 $ .16 $ .20 $ .29 $ .74
------------- ------------- ------------- ------------- -------------
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Santa Monica Bank
We have audited the statement of condition of Santa Monica Bank (the "Bank")
as of December 31, 1995 and the related statements of operations, changes in
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Santa Monica Bank as of December 31, 1995,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche, LLP
Deloitte & Touche, LLP
Los Angeles, California
January 19, 1996
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Santa Monica Bank
We have audited the statement of condition of Santa Monica Bank as of
December 31, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements, referred to above, present fairly,
in all material respects, the financial position of Santa Monica Bank as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
January 21, 1997
- ------------------------
This annual report is the Bank's annual disclosure statement required by Part
350, Sec. 350.1 et seq. of the Federal Deposit Insurance Corporation rules.
However, this report has not been reviewed, or confirmed for accuracy or
relevance, by the Federal Deposit Insurance Corporation.
36
<PAGE>
SANTA MONICA BANK
1251 FOURTH STREET, SANTA MONICA, CALIFORNIA 90401
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 17, 1997
To the Stockholders of Santa Monica Bank:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of Santa
Monica Bank, a California corporation (the "Bank"), will be held in the
Starlight Room of the Miramar Hotel, Ocean Avenue and Wilshire Boulevard, Santa
Monica, California, on Thursday, April 17, 1997, at 3:00 p.m., for the following
purposes:
(1) To elect three Class III Directors to hold office for three years
until the Annual Meeting of the Shareholders in 2000;
(2) To approve the 1997 Incentive Stock Option Plan adopted by the Board
of Directors of the Santa Monica Bank on January 22, 1997, subject to
the approval of the stockholders. The details and description of the plan
are set forth in the Proxy Statement, Exhibit C;
(3) To approve the amendment to the Articles of Incorporation of the Bank to
increase the authorized number of shares of capital stock from 10,000,000
shares to 50,000,000 shares;
(4) To ratify the appointment of the accounting firm of Arthur Andersen,
LLP as auditors of the Bank and as independent public accountants for
the year 1996; and
(5) To transact such other business as may properly come before the meeting.
The Board of Directors of the Bank has fixed the close of business on March
3, 1997 as the record date for the determination of stockholders entitled to
receive notice of and to vote at the meeting and at any adjournment thereof.
Your attention is directed to the Proxy Statement accompanying this Notice
for a more complete statement regarding the matters proposed to be acted upon at
the meeting.
By Order of the Board of Directors,
DARIO O. QUIROGA
SECRETARY OF THE BANK
Dated: March 7, 1997
THIS NOTICE OF ANNUAL MEETING OF STOCKHOLDERS AND PROXY STATEMENT AND THE
ENCLOSED PROXY WILL BE FIRST SENT OR GIVEN TO STOCKHOLDERS ON APPROXIMATELY
MARCH 17, 1997.
________________________________________________________________
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE IF YOU DO NOT EXPECT TO BE
PERSONALLY PRESENT AND WISH YOUR STOCK TO BE VOTED. IF YOU LATER
FIND THAT YOU MAY BE PRESENT OR FOR ANY REASON DESIRE TO REVOKE
YOUR PROXY YOU MAY DO SO ANY TIME BEFORE IT IS VOTED BY WRITTEN
NOTICE TO THE SECRETARY OF THE BANK.
________________________________________________________________
The disclosure statement requirements of Part 350, Sec. 350.1 et seq. of
the Federal Deposit Insurance Corporation Rules and specifically Sec.
350.4(a) are met and satisfied by delivering a copy of the Santa Monica Bank
Annual Report with this "Notice of Annual Meeting of Stockholders"; further
copies of the Bank's Annual Report may be obtained at any time on request of
Dario O. Quiroga --Secretary of the Bank, P.O. Box 550, 1251 Fourth Street,
Santa Monica, California 90406, telephone (310) 394-9611, and further copies
will be available during the year as posted in lobby notices in all branch
offices of the Santa Monica Bank until superceded by the following year's
disclosure statement.
<PAGE>
SANTA MONICA BANK
1251 FOURTH STREET, SANTA MONICA, CALIFORNIA 90401
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Santa Monica Bank (the "Bank") of proxies for use at the
annual meeting of stockholders to be held Thursday, April 17, 1997, as set forth
in the accompanying notice, and will be mailed on or about March 17, 1997.
PROXIES, REVOCATION AND SOLICITATION
Shares of Capital Stock of the Bank represented by properly executed proxies
will be voted by the persons named as "proxies" in the election of Directors and
in transacting such other business as may properly come before the meeting. Any
stockholder who executes and delivers such proxy has the right to revoke it at
any time before it is exercised, (a) by filing with Dario O. Quiroga, Secretary
of the Bank, an instrument revoking it, or (b) by executing a proxy bearing a
later date, or (c) by attending the meeting and voting in person. So far as the
management is aware, no matters other than those described in the Proxy
Statement will be acted upon at the meeting. If, however, any other matters
properly come before the meeting, it is the intention of the persons named in
the enclosed proxy to vote the same in accordance with their judgment on such
other matters.
Expenses in connection with the solicitation of proxies will be paid by the
Bank. Solicitation of proxies will be done principally by mail. In addition,
several of the officers or employees of the Bank may solicit proxies, either
personally, by telephone, or by letter, from some of the stockholders. The Bank
will also make arrangements with brokerage houses and other custodians, nominees
and fiduciaries to send proxies and proxy material to their principals, and will
reimburse them for their expenses in so doing.
STOCKHOLDERS' PROPOSALS FOR NEXT ANNUAL MEETING
Stockholders' proposals intended to be presented at the 1998 Annual Meeting
of Stockholders must be received in writing by the Secretary of the Bank no
later than December 8, 1997 for inclusion in the Bank's Proxy Statement and form
of proxy relating to that meeting.
OUTSTANDING STOCK AND VOTING RIGHTS
Stockholders of record at the close of business March 3, 1997 will be
entitled to vote at the meeting.
On that date, there were 7,077,332 shares of Capital Stock of the Bank
outstanding, and each share is entitled to one vote on all matters including the
election of Directors. Stockholders may not cumulate their votes. Each
Stockholder, including any proxy holders of Stockholders who have given proxies,
may vote as many votes as the Stockholder's shares are entitled for each Class
III Director.
The affirmative vote of the holders of a majority of the shares entitled to
vote by proxy or present at the Annual Meeting of the Stockholders is required
to approve any matter proposed, including the election of each Class III
Director. Votes withheld from any Director nominee are counted for purposes of
determining the presence or absence of a quorum and the total number of votes
cast with respect to the election of Directors. Broker non-votes will not be
counted for purposes of determining the number of votes cast for the election of
Directors.
1
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth the shares of Capital Stock owned
beneficially, by the persons known to the Bank as holding 5% or more of the
outstanding shares of Capital Stock of the Bank:
<TABLE>
<CAPTION>
PERCENT OF
SHARES OF
TOTAL CAPITAL
BENEFICIAL STOCK
NAME ADDRESS OWNERSHIP OUTSTANDING
----- ------- ---------- -----------
<S> <C> <C> <C>
Doris J. Carver 1324 5th Street 981,690(1) 13.87
Santa Monica, CA 90401
W. Paul Carver 1235 4th Street 849,942(2) 12.01
Santa Monica, CA 90401 ---------- ----------
Total beneficial ownership of
W. Paul Carver and Doris J. Carver 1,831,632 25.88
</TABLE>
- ------------
(1) Consists of 930,872 shares held as Trustee under the Aubrey E. Austin, Jr.
and Doris J. Austin 1987 Trust, of which 818,260 shares are held as Trustee
with a life estate interest under a Marital Trust, and 112,612 shares are
held as Trustee and Beneficiary under a Survivor's Trust. In addition
33,401 shares are held as Trustee of an irrevocable trust for Mrs. Carver's
two daughters who are associates, 16,322 shares are held as Trustee under
the Herman Klabunde Trust, and 1,095 shares are held by Doris J. Carver as
an individual.
(2) Consists of 812,995 shares which are held as Trustee with a life estate
interest under the W. Paul Carver Trust, and 4,282 shares which are held by
Wendell Paul Carver as Trustee of the Wendell Paul Carver 1990 Trust. In
addition 32,665 shares are also held as Trustee for Mr. Carver's
stepdaughter who is an associate.
CLASSIFICATION OF DIRECTORS
The authorized number of Directors of the Bank is nine. The Board of
Directors is divided into three classes, consisting of Class I Directors (3 in
number) to serve three years until the 1998 Annual Meeting of the Shareholders
of the Bank, Class II Directors (3 in number) to serve three years until the
1999 Annual Meeting, and Class III Directors (3 in number) to serve three years
until the 1997 Annual Meeting. Each nominee for Director of each class will
stand for election for a three-year term when his or her term expires. The
successor to a Director who leaves the Board prior to the end of his or her term
will serve for the remainder of the term of the Director he or she replaces.
Only nominees for Class III Directors will be elected at the 1997 annual meeting
of the Shareholders of the Bank.
On January 22, 1997, the Board of Directors adopted a resolution fixing the
number of directors at nine. Directors Lawrence Wayne Harding and Charles F.
Hathaway retired from the Board on December 31, 1996. The California
Corporations Code requires that one-third of the directors, or as close an
approximation as possible, shall be elected at each Annual Meeting of
Shareholders. For that reason, Dorothy Menzies, who is now serving as a Class
III Director, has been elected by the Board to fill the vacancy in Class II
created by the retirement of Lawrence Wayne Harding. The Board will now have
three directors in each of the three classes.
2
<PAGE>
The following persons have been elected by the Shareholders of the Bank as
Class I Directors, Class II Directors (except for Dorothy F. Menzies who was
elected by the Board of Directors to fill a vacancy on the Board created by the
retirement of Lawrence Wayne Harding and to serve for the balance of his term),
and Class III Directors respectively:
CLASS I: Joe Crail
(Term expires 1998) Donald E. Dickerson
William B. Fritzsche
CLASS II: John W. Garacochea
(Term expires 1999) Dorothy F. Menzies
Willard L. Cummings, Jr.
CLASS III: Aubrey L. Austin
(Term expires 1997) Doris J. Carver
W. Paul Carver
INFORMATION REGARDING NOMINEES FOR DIRECTORS
Information regarding the three nominees for election to the Board of
Directors (Class III Directors) and the remaining Class I and Class II Directors
of the Bank and the number of shares of Capital Stock of the Bank beneficially
owned March 3, 1997 is set forth below.
<TABLE>
<CAPTION>
CAPITAL
STOCK
FIRST HELD OF PERCENT OF
PRESENT PRINCIPAL OCCUPATION ELECTED RECORD AND CAPITAL
AND PRINCIPAL OCCUPATION AS BENEFICIALLY STOCK
NAME AGE DURING THE PAST FIVE YEARS DIRECTOR OWNED(d) OUTSTANDING
---- --- ---------------------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Aubrey L. Austin (a)* 49 President and Chief Executive 1985 30,961 .44
Officer, Santa Monica Bank.
Doris J. Carver (a)* 67 Personal investments in 1988 981,690(b) 13.87
banking and real estate.
W. Paul Carver (a)* 84 Oil and gas developer and 1986 849,942(c) 12.01
consultant.
Joe Crail 53 Chairman of the Board, Presi- 1991 1,300 .02
dent and Chief Executive
Officer of Western Mutual In-
surance Company and Resi-
dence Mutual Insurance
Company. Associated with
such firms since 1974.
Willard L. Cummings, 64 Chairman of the Board of 1995 11,256 .16
Jr. Cummings Leasing and Presi-
dent of South West Coach,
since 1962.
Donald E. Dickerson, 64 Ophthalmologist and Presi- 1992 1,345 .02
MD dent of Santa Monica Eye
Medical Group. Associated
with this firm since 1965.
3
<PAGE>
<CAPTION>
CAPITAL
STOCK
FIRST HELD OF PERCENT OF
PRESENT PRINCIPAL OCCUPATION ELECTED RECORD AND CAPITAL
AND PRINCIPAL OCCUPATION AS BENEFICIALLY STOCK
NAME AGE DURING THE PAST FIVE YEARS DIRECTOR OWNED(d) OUTSTANDING
---- --- -------------------------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
William B. Fritzsche 66 President of Aqua-0 Corpora- 1994 1,500 .02
tion which operates Rayne
Water Systems, Santa Monica
since 1960. Partner in Rayne
Water Conditioning, Long
Beach since 1984.
John W. Garacochea 60 President and Co-Owner of the 1987 3,843 .05
Pioneer French Baking Co.,
Inc. Associated with such firm
since 1969.
Dorothy F. Menzies 51 Headmistress of Carlthorp 1994 368 .01
School since 1982.
All Directors and policy 1,959,042 27.68
making officers as a
group (15 persons)
</TABLE>
- ------------
* Class III Directors nominated for three year term to serve until 2000.
(a) Doris J. Carver is the wife of W. Paul Carver and the stepmother of
Aubrey L. Austin.
(b) Consists of 930,872 shares held as Trustee under the Aubrey E. Austin, Jr.
and Doris J. Austin 1987 Trust, of which 818,260 shares are held as Trustee
with a life estate interest under a Marital Trust, and 112,612 shares are
held as Trustee and Beneficiary under a Survivor's Trust. In addition
33,401 shares are held as Trustee of an irrevocable trust for Mrs. Carver's
two daughters who are associates, 16,322 shares are held as Trustee under
the Herman Klabunde Trust and 1,095 shares are held by Doris J. Carver as
an individual.
(c) Consists of 812,995 shares which are held as Trustee with a life estate
interest under the W. Paul Carver Trust, and 4,282 shares which are held by
Wendell Paul Carver as Trustee of the Wendell Paul Carver 1990 Trust. In
addition 32,665 shares are also held as Trustee for one stepdaughter who is
an associate.
(d) Except as disclosed on footnotes (b) and (c), all shares held by Directors
are with sole voting and/or investment power, except as follows: William B.
Fritzsche: 1,500 shares are held jointly with his spouse as an associate;
Willard L. Cummings, Jr.: 3,500 shares are held by his spouse as an
associate; John W. Garacochea: 1,750 shares are held jointly with his
spouse as an associate and 172 shares are held by his spouse as an
associate.
4
<PAGE>
BOARD OF DIRECTORS COMMITTEES
Executive Committee: The committee function is to have and exercise such
powers of the Board of Directors in the management of
the business and affairs of the Bank as may be required
between the meetings of the Board of Directors, but
shall not adopt, amend or repeal the Bylaws, shall not
declare dividends or fill vacancies in the Board's
membership and as further limited by California
Corporation Code Sec. 311.
The committee members for 1996, were Aubrey L. Austin,
Lawrence Wayne Harding, W. Paul Carver, Joe Crail, John
W. Garacochea, and Charles F. Hathaway.
The number of committee meetings held in 1996 was four.
Audit Committee: The committee function is to establish internal audit
procedures and to be responsible for reviewing
operations so as to assure compliance with such audit
procedures.
The committee members for 1996 were Joe Crail, Willard
L. Cummings, Jr., William B. Fritzsche, Lawrence Wayne
Harding, and Charles F. Hathaway.
The number of committee meetings held in 1996 was
twelve.
Loan Review The committee function is to review and report to
Committee: the Board of Directors all loans brought to its
attention which for any reason may not be worthy of
credit from the Bank and/or may be or result in an
unsound banking lending practice.
The committee members for 1996 were W. Paul Carver,
Willard L. Cummings, Jr., William B. Fritzsche, John W.
Garacochea, Lawrence Wayne Harding, and Donald E.
Dickerson.
The number of committee meetings held in 1996 was
twelve.
Loan Committee: The committee function is to review and approve new
loans over certain dollar amounts established by the
Bylaws of the Bank and to review past due loans over
certain dollar amounts in order to determine and
recommend for charge-off uncollectible loans.
The committee members for 1996 were Aubrey L. Austin,
W. Paul Carver, Willard L. Cummings, Jr., Donald E.
Dickerson, William B. Fritzsche, John W. Garacochea,
and Lawrence Wayne Harding.
The number of committee meetings held in 1996 was
twelve.
Trust Executive The committee function is to review and approve
Committee the administration of the fiduciary responsibilities of
the corporation under the banking laws in the
operations of the Trust Department.
The committee members for 1996 were Aubrey L. Austin,
Doris J. Carver, W. Paul Carver, Willard L. Cummings,
Jr., William B. Fritzsche, John W. Garacochea, Charles
F. Hathaway, and Dorothy F. Menzies.
The number of committee meetings held in 1996 was
twelve.
Human Resources The committee function is to review personnel policies,
Committee: procedures and benefits in all major areas of the Bank.
The committee members for 1996 were Aubrey L. Austin,
Joe Crail, Doris J. Carver, W. Paul Carver, John W.
Garacochea, Lawrence Wayne Harding, and Dorothy F.
Menzies.
The number of committee meetings held in 1996 was four.
Nominating Committee: The Bank does not have a formal nominating committee.
During 1996, the Bank's Board of Directors held twelve meetings. Each of the
Directors attended at least 75% of the total number of Board of Directors
meetings and meetings held by committees of the board on which he or she served
during 1996.
5
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by the Bank to or on behalf of the Bank's Chief
Executive Officer and each of the four other highest paid executive officers of
the Bank (determined as of December 31, 1996) for each of the fiscal years ended
December 31, 1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND COMPEN- COMPEN-
PRINCIPAL POSITIONS YEAR SALARY($) BONUS($)(3) SATION($)(2) SATION($)(1)
------------------- ---- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Aubrey L. Austin 1996 237,748 96,162 - 11,454
President/Chief 1995 224,200 17,840 - 348
Executive Officer 1994 224,200 - - 348
Dan T. Atkins 1996 189,000 17,010 - 9,862
Executive Vice President/ 1995 180,000 14,400 - 900
Chief Credit Administrator 1994 180,000 - - 900
Richard Ratkovic 1996 167,604 16,760 - 9,860
Senior Vice President/ 1995 167,604 13,408 - 900
Trust Manager 1994 167,604 - - 900
Dario O. Quiroga 1996 139,860 11,189 - 8,071
Senior Vice President/Cashier 1995 135,780 10,862 - 576
Chief Financial Officer 1994 135,780 - - 576
Ron D. Makela 1996 115,740 9,259 - 6,286
Senior Vice President 1995 110,940 8,875 - 576
Operations Administrator 1994 110,940 - - 576
</TABLE>
- ------------
(1) Represents amount contributed by the Bank to the Profit Sharing and 401k
Plans and allocated to the Named Executives' vested or unvested account
under such plan. Term life insurance premiums are also included in this
column.
(2) No Named Executive officer received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of each such officer's
total annual salary and bonus. The Bank supplied automobiles to five of
the named officers, but records any personal use as taxable income to
them. These personal benefits were less than $11,500 and are not
disclosed.
(3) Bonus paid in the current year based on the previous year's performance
are shown on this table. Refer to page 7 "Compensation Committee Report
on Executive Compensation" for additional information.
SUMMARY OF STOCK OPTION PLAN
On January 17, 1983, the Bank's Board of Directors adopted, and on March 17,
1983, the Bank's shareholders approved, the 1983 Incentive Stock Option Plan.
Options were granted to key personnel of the Bank, with the exception of
Directors, and 440,698 shares of Capital Stock, as adjusted for stock dividends,
were available for this purpose at the expiration of the Plan on January 15,
1993.
The Board of Directors administered and interpreted the stock option plan
and made decisions as to the number of shares, the length of time and the
individuals receiving the grant. Options were granted at prices at least equal
to the fair market value at the time of the grant and were exercisable over
periods of up to ten years. The Incentive Stock Option Plan expired on January
15, 1993 and it was not renewed.
6
<PAGE>
No option shares were granted, exercised, or outstanding to any Executive
Officer in 1996.
The Bank has never granted share appreciation rights (SARs) or other grants
to its employees which fluctuate depending upon the value of its Capital Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Bank's executive compensation is determined by the Human Resources
Committee of the Board of Directors. Aubrey L. Austin, President and Chief
Executive Officer serves on this Committee. Mr. Austin did not and does not
participate in, and is absent from, those portions of any meeting of the Board
of Directors or Human Resources Committee in which his compensation was or is
discussed or established.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During the years 1993, 1994, and 1995, Aubrey L. Austin, President & Chief
Executive Officer did not receive any merit increases to his base compensation
as a result of the Bank's performance during those years. A 1996 Officer Merit
Increase Plan approved by the Human Resources Committee and the Board of
Directors granted Mr. Austin a 5% merit increase retroactive to October 1996 and
payable in February 1997. Mr. Austin also received a $200 per month promotional
increase in recognition of his promotion to Chief Executive Officer in October
1993.
In February 1996, the Human Resources Committee and the Board of Directors
recommended and approved an Incentive Bonus Plan for Mr. Aubrey L. Austin,
President & Chief Executive Officer. Mr. Austin was eligible to receive 1% of
the Bank's 1996 net (after tax) profit. The Bank's net profit in 1996 was
$9,616,246. Based on the performance of the Bank the Board of Directors approved
the payment of this bonus to Mr. Austin in the amount of $96,162 in February
1997.
Also, during the first quarter of 1996, the Human Resources Committee and the
Board approved an Incentive Bonus Plan for other officers to be paid in 1997 if
the Bank made a pre-tax profit of $11,870,000 and attained a Return on Assets of
1.22% in the year 1996. The Bank accrued $240,000 in 1996 for this purpose. The
actual 1996 pre-tax profit was $13,083,169 and Return on Assets was 1.52%. These
bonuses were paid in February 1997 and amounted to $224,000. The bonuses for
senior executives ranged from 8% to 10% of base salary. The bonuses for the five
most highly compensated executive officers are disclosed under the Summary
Compensation Table located on page six of this proxy statement. Highly
compensated executive officers' compensation did not increase during 1993, 1994
or 1995. They were also eligible for the 1996 Officer Merit Plan.
Historically, the Human Resources Department conducts industry surveys of
peer group banks for executive officers and all officers as a group. In
addition, established and reputable consulting firms such as Wyatt Data
Services, Findley Reports, the Hay Group and the State Banking Department
publish annual compensation surveys to which the Bank subscribes. These sources
provide valuable comparison data and market rates for key positions which are
then used when recruiting the most highly qualified officers. Compensation for
all new officers is approved by senior management and ratified by the Board of
Directors.
The base salary compensation for each executive was determined by first
establishing a range of base salary compensation for each executive. This salary
range is predicated on the industry data mentioned above. In addition, the range
is further determined by the executive's ability, experience, past/potential
performance and contribution to the Bank.
The Human Resources Committee is provided with and relies on the above
mentioned information which assists them in evaluating and approving
compensation for the Chief Executive Officer and all highly compensated
executive officers. This analysis is based on current industry information,
salary market rates, officer's individual performance, and the performance of
the Bank.
7
<PAGE>
The Bank's Incentive Stock Option Plan expired in 1993. None of the highly
compensated executive officers, including the Chief Executive Officer, have any
outstanding options under this Plan.
Human Resources Committee
Joe Crail, CHAIRMAN
W. Paul Carver
Doris J. Carver
L. Wayne Harding
John W. Garacochea
Dorothy Menzies
Aubrey L. Austin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PERFORMANCE GRAPH
The following graph compares the stock performance of the Bank to the
performance of a specific industry index over the past five year calendar
period. The price performance compares the Bank to the S&P 500 and Montgomery
Securities "WESTERN BANK MONITOR" Southern California Proxy. However, the
"Western Bank Monitor" Southern California Proxy Index is no longer available
and it will be replaced by the SNL $500 Million to $1 Billion Bank Asset-Size
Index provided by SNL Securities L.P. Both indices are shown on this chart. This
graph assumes $100 invested on December 31, 1991 in each of the Bank's Capital
Stock, The S&P 500 Composite Stock Index, the Southern California Proxy Index
and the SNL $500 Million to $1 Billion Bank Asset-Size Index. Total return
assumes reinvestment of dividends.
SANTA MONICA BANK STOCK PRICE PERFORMANCE
Index Value TOTAL RETURN PERFORMANCE
<TABLE>
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Santa Monica Bank 100 57.14 46.82 46.03 87.30 109.15
S & P 500 100 107.62 118.47 120.03 165.13 202.89
Southern California Proxy 100 99.53 121.69 138.83 176.08 265.81
SNL Banks ($500M to $1B) Index 100 141.98 178.12 190.16 252.46 315.61
</TABLE>
8
<PAGE>
INTEREST OF DIRECTORS, NOMINEES, OFFICERS
AND ASSOCIATES IN CERTAIN TRANSACTIONS
A member of the Board of Directors, John W. Garacochea, is the president and
principal stockholder of Pioneer French Baking Co., Inc. (Pioneer). During the
year 1996, in the ordinary course of business, the Bank has made loans to
Pioneer on substantially the same terms (including interest rates and
collateral) as, and following credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions by the
Bank with other persons that are not executive officers, directors or principal
stockholders of the Bank and do not involve more than the normal risk of
repayment or present other unfavorable features. Furthermore, the Bank expects
to have future banking transactions with this entity as well as other directors
of the Bank and their associates on the same basis.
The following is year end and the highest possible aggregate of extensions of
credit, direct and indirect, at any time since the beginning of the year 1996 to
the foregoing named entity:
PERCENTAGE OF
NAME DEC. 31, 1996 HIGHEST EQUITY CAPITAL
---- ------------- ------- --------------
Pioneer French Baking
Co., Inc.............. Loan Paid 9/9/96 $5,500,172 7.59%
The aggregate extensions of credit, direct and indirect, to all directors and
policymaking officers, as a group, totaled $2,501,877 at year end, with the
highest aggregate extensions of credit being at $8,227,901 since the beginning
of the year 1996.
PROPOSED ADOPTION OF 1997 INCENTIVE STOCK OPTION PLAN
The Board of Directors adopted on January 22, 1997, subject to the approval
of the stockholders, the 1997 Incentive Stock Option Plan (the "Plan"). The Plan
is intended to promote the growth and profitability of the Bank by providing a
means of attracting and retaining highly talented persons as key employees and
giving them an additional incentive to assert their best efforts on behalf of
the Bank. The Plan is designed to take advantage of the opportunities afforded
by the Internal Revenue Code of 1986, which permits favorable tax treatment for
incentive stock options ("ISOs") granted to employees in accordance with that
Act. Non-employee Directors will not be eligible for the same favorable tax
treatment as the recipients of ISOs. The Board of Directors believes that the
Plan will help the Bank secure and retain valuable personnel while offering them
flexibility in tax and financial planning.
ADMINISTRATION
The Plan is to be administered by the Board of Directors of the Bank, which
will designate from time to time the officers and key employees of the Bank who
are to be granted options under the Plan.
Interpretation of the Plan, as well as the adoption of rules and regulations
for administration of the Plan, will be the responsibility of the Board; its
decisions shall be final and binding upon all participants.
A grant of option to a Director will be authorized by a committee of
disinterested Directors in compliance with 17 CFR Section 240.16b-3.
ELIGIBILITY
The persons eligible to receive options are the Directors (see Stock Options
for Directors), officers, and other key employees of the Bank. The Bank had
approximately 35 eligible employees as of January 22, 1997. No options have been
granted, nor have any optionees been designated.
NUMBER OF OPTIONS
The maximum number of options to be granted under the Plan is 350,000. The
fair market value of the Bank's Capital Shares on January 22, 1997 was $17.875
per share. If all 350,000 ISOs were granted and exercised, the total market
value as of January 22, 1997 of the Bank's Capital Shares to
9
<PAGE>
be sold pursuant to the Plan would be $6,256,250. Each ISO entitles the holder
to purchase one Capital Share. The maximum number of options to be granted to an
individual participant is to be established from time to time by the Board.
Limitations on the number of shares to be granted under the Plan and the number
and price of outstanding ISOs are subject in all cases to adjustment in the
event of changes made in the Bank's Capital Shares on account of any
recapitalization, stock split, stock dividend, combination or exchange of
shares, merger, consolidation, reorganization, liquidation or any other change
in the corporate structure or shares of the Bank.
Any Capital share subject to an ISO which for any reason expires, lapses, is
forfeited or is terminated unexercised as to such share may again be subjected
to an option under the Plan.
PRICE AND TERMS OF OPTIONS
The option price to be paid for each Capital Share issued upon exercise of an
ISO is determined by the Board but in no event may the price be less than 100%
of the fair market value of the stock on the date the option is granted. Fair
market value for this purpose is determined by the Board, acting in good faith,
using such information and advice as it deems necessary. Each option is
exercisable for such terms as may be fixed in the grant thereof, but no option
may be exercised more than ten years from the date of the grant. The Plan also
provides that if at the time of grant the employee owns more than 10% of the
Bank's Capital Shares, the price of such option must be at least 110% of the
fair market value of the stock at the date of grant and the option may not be
exercisable more than five years after the date of the grant.
NO RIGHTS AS STOCKHOLDER
No optionee has the rights of a stockholder as to the shares subject to an
ISO until the certificate representing the shares purchased by him upon exercise
of the option has been delivered to him or for his account.
NONTRANSFERABILITY
The rights and interests of a participant under the Plan in an ISO may not
be assigned or transferred other than by will or the laws of descent and
distribution and are exercisable, during his lifetime, only by the optionee.
DURATION OF PLAN
Unless terminated prior thereto by the Board of Directors, the authority to
grant options under the Plan expires on January 21, 2007. Options granted prior
to that date may be exercisable in accordance with their terms as long as ten
years from the date of grant.
RIGHTS ON DEATH OR TERMINATION OF EMPLOYMENT
In the event an optionee ceases to be employed by the Company for any reason
other than his death or disability, his ISOs will be exercisable only within the
three-month period from the date of termination of employment (unless by its
terms it sooner expires). If an optionee dies while employed by the Bank, his
exercisable ISOs may be exercised within one year after his death (but in no
event after the normal expiration date of the option) by the person or persons
to whom his rights under the ISO shall pass by will or by the applicable laws of
descent and distribution. All ISOs not exercisable on the date of death or
disability or date of termination of employment shall be cancelled and may not
be exercised.
ADJUSTMENTS AND AMENDMENTS
The number and kind of securities available under the Plan and subject to
outstanding options granted under the Plan, as well as the applicable purchase
prices under the ISOs, are subject to equitable adjustment in the event of a
recapitalization, stock dividend, stock split, combination or exchange of
shares, merger, consolidation, reorganization or liquidation or any other change
in the corporate structure or shares of the Bank.
10
<PAGE>
The Board of Directors of the Bank may amend, modify, alter, or terminate the
Plan, except that no amendment may be made without prior approval of the
stockholders of the Bank if that amendment would materially (i) increase the
benefits accruing to participants under the Plan, (ii) increase the number of
securities which may be issued under the Plan, or (iii) modify the requirements
as to eligibility for participation in the Plan, other than the adjustments
referred to in the preceding paragraph.
The Board of Directors may insert into any options granted under the Plan any
other terms, provisions, and conditions not inconsistent with the Plan as may be
determined by the Board of Directors, and shall include such terms, provisions
and conditions as are necessary to qualify the Plan as an Incentive Stock Option
Plan.
PAYMENT FOR STOCK
The Plan permits, in the discretion of the Board, optionees to pay, in whole
or in part, for Capital Shares acquired on the exercise of the ISOs by delivery
of stock of the Bank already owned by the optionee. The stock used to exercise
ISOs will be valued at its fair market value on the day preceding the exercise
date.
FEDERAL INCOME TAX CONSEQUENCES OF INCENTIVE STOCK OPTIONS
An employee will not recognize any income on the grant or exercise of an ISO.
An employee will recognize long-term capital gain on the sale of shares acquired
upon exercise of ISOs ("ISO Shares") if the employee (a) does not dispose of the
ISO Shares within two years from the date the ISO was granted and (b) holds the
ISO Shares for more than one year from the date the ISO was exercised. The
long-term capital gain will be an amount equal to the difference between the net
proceeds of the sale and the option price.
If an employee sells or makes certain other dispositions of ISO Shares within
two years from the date the option was granted, or within one year from the date
the option was exercised, the employee will realize ordinary income. Except as
described in the following paragraph, the ordinary income will be in an amount
equal to the difference between the fair market value of the ISO Shares on the
date the option was exercised and the option price. In addition, the employee
will realize capital gain or loss in an amount equal to the difference between
the net proceeds of the sale and the fair market value of the ISO Shares on the
date the option was exercised. The capital gain or loss will be long-term if the
ISO Shares were held for more than one year before sale, and short-term if the
ISO Shares were held for one year or less before sale.
If an employee sells or disposes of ISO Shares within two years from the date
the ISO was granted, and the fair market value of the ISO Shares on the date of
the sale is LESS than their fair market value on the date the ISO was exercised,
the employee will realize ordinary income on the sale or other disposition of
ISO Shares. The ordinary income will be in an amount equal to the difference
between the net proceeds of the sale and the option price for such ISO Shares.
The amount by which the fair market value of the shares on the date of
exercise of an ISO exceeds the exercise price of the ISO is treated as a tax
preference item. Accordingly, an employee who exercises an ISO must include that
amount in determining whether he is subject to the alternative minimum tax in
the year of exercise.
The Bank is not entitled to a tax deduction on either its grant of an ISO or
an employee's exercise of an ISO. In addition, the Bank is not entitled to a tax
deduction as a result of an employee's disposition of the shares if the employee
does not sell or otherwise dispose of ISO Shares within two years from the date
the ISO was granted or within one year after the date the ISO was exercised. The
Bank will be entitled to a tax deduction, in an amount equal to the amount of
ordinary income reportable by the employee, if the employee sells or makes
certain other dispositions of ISO Shares within two years from the date the ISO
was granted or fails to hold the ISO Shares for more than one year from the date
the ISO was exercised, provided the amount of compensation is reasonable.
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STOCK OPTIONS FOR DIRECTORS
Stock options granted under the Plan to Directors who are not employees do
not qualify as ISOs and will not qualify for any special tax benefits to the
optionee. An optionee will not recognize any taxable income at the time he or
she is granted a nonqualified option. However, upon its exercise, the optionee
will generally recognize ordinary income for federal income tax purposes
measured by the excess of the then fair market value of the shares over the
exercise price. The income realized by the optionee will be subject to income
tax withholding by the Bank out of the current earnings paid to the optionee. If
such earnings are insufficient to pay the tax, the optionee will be required to
make a direct payment to the Bank for the tax liability.
Upon a sale of any shares acquired pursuant to the exercise of a nonqualified
stock option, the difference between the sale price and the optionee's basis in
the shares will generally be treated as a capital gain or loss and will be
characterized as long-term capital gain or loss if the shares have been held for
more than one year at the date of their sale. The optionee's basis for
determination of gain or loss upon any subsequent disposition of shares acquired
upon the exercise of a nonqualified stock option will be the amount paid for
such shares plus any ordinary income recognized as a result of the exercise of
such option.
In general, there will be no federal income tax consequences to the Bank upon
the grant or termination of a nonqualified stock option or a sale or disposition
of the shares acquired upon the exercise of a nonqualified stock option.
However, upon the exercise of a nonqualified stock option, the Bank will be
entitled to a deduction for federal income tax purposes equal to the amount of
ordinary income that an optionee is required to recognize as a result of the
exercise, provided the Bank has satisfied its reporting obligations under the
Code for the compensation comprising such income.
PERMIT FROM THE CALIFORNIA SUPERINTENDENT OF BANKS
Prior to the granting of any options under the Plan, the Bank must obtain
from the California Superintendent of Banks an appropriate permit or exemption.
The permit or exemption has not yet been obtained, and it is possible that the
California Superintendent of Banks may require amendments to the Plan as a
condition to issuing the permit.
PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED NUMBER OF SHARES OF CAPITAL STOCK
Attached as Exhibit A is the proposed amendment to the Articles of
Incorporation to increase the authorized shares from 10,000,000 to 50,000,000.
The Board of Directors approved the amendment and directed that it be submitted
to the stockholders for their approval subject to the approval of the State
Banking Department. The purpose of the amendment is that it is desirable to have
additional authorized shares of Capital Stock available for possible future
financing and acquisitions, stock dividends or splits and other general
corporate purposes. The common stockholders do not have preemptive rights. While
the Board of Directors has no present intention of issuing any additional shares
of Capital Stock of the Bank in any such transaction, the Board of Directors
recommends that the stockholders of the Bank vote in favor of the proposal.
AUDITORS' APPROVAL
FDIC rules and regulations require that "If a change or changes in
accountants have taken place since the date of the proxy statement for the most
recent annual meeting of shareholders, and if in connection with such change(s)
a disagreement between the accountant and bank has been reported on Form F-3 or
in the accountants letter filed as an exhibit thereto, the disagreement shall be
described" in the proxy statement.
A disagreement arose between the Bank's former accountants Deloitte & Touche
LLP and Bank management in connection with identification and disclosure of
impaired loans under Statement of Financial Accounting Standards No. 114
"Accounting by Creditors from Impairment of the Loan." (FAS 114)
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Under Bank management's interpretation of FAS 114, the Bank had no impaired
loans to report as of December 31, 1995. Deloitte & Touche LLP disagreed. After
an investigation, the Bank agreed with Deloitte & Touche LLP's interpretation of
FAS 114. The appropriate disclosures of impaired loans were made on the 1995
financial statements of the Bank. Deloitte & Touche LLP then rendered their
opinion on the 1995 financial statements of the Bank without exception.
The Bank has employed a team of three internal auditors on a full-time basis
and has employed independent accountants for an audit of the Bank's accounts. In
1996, the Bank contracted with Arthur Andersen LLP, an independent public
accounting firm, to perform the following accounting services: examination of
the financial statements of the Bank; examination of the financial statements of
each of the Common Trust Funds; preparation and signing of the tax returns; and
preparation of a Single Audit Letter for the Trust Department for a set yearly
fee.
The Bank's contract, entered into with Arthur Andersen LLP in 1996, was
approved by the Audit Committee of the Board of Directors. Arthur Andersen LLP
continues to perform as the Bank's outside auditors pending approval of a formal
contract for the year 1997 by the Audit Committee of the Board of Directors. A
representative of Arthur Andersen LLP will be present at the stockholders'
meeting and will be available to respond to appropriate questions.
The stockholders are requested to ratify the appointment of the accounting
firm of Arthur Andersen LLP as the auditors and as independent public
accountants for the Bank for the year 1996.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Bank's Directors and Executive Officers, and persons who own more than ten
percent of a registered class of the Bank's equity securities, to file with the
Federal Deposit Insurance Corporation initial reports of ownership and reports
of changes in ownership of common stock of the Bank. Officers, Directors and
greater than ten-percent stockholders are required by Securities and Exchange
Commission regulation to furnish the Bank with copies of all Section 16(a) forms
they file.
To the Bank's knowledge, based solely on review of the copies of such reports
furnished to the Bank and written representations that no other reports were
required during the fiscal year ended December 31, 1996, all Section 16(a)
filing requirements applicable to its officers, Directors and greater than
ten-percent beneficial owners were completed.
OTHER BUSINESS TO BE TRANSACTED
The Board of Directors of the Bank knows of no other matters which may come
before the meeting. However, if any matters other than those listed herein
should properly come before the meeting, it is the intention of the persons
named in the enclosed proxy to vote such proxy in accordance with their best
judgment on such matters.
By Order of the Board of Directors
DARIO O. QUIROGA
SECRETARY OF THE BANK
MARCH 7, 1997
ANY STOCKHOLDER OF RECORD MAY RECEIVE WITHOUT CHARGE A COPY OF THE BANK'S
1996 ANNUAL REPORT AS FILED WITH THE FEDERAL DEPOSIT INSURANCE CORPORATION (FORM
F-2). IF YOU DESIRE TO RECEIVE A COPY OF THE REPORT DIRECT YOUR REQUEST TO:
SANTA MONICA BANK
CASHIER'S DEPARTMENT
P. O. BOX 550
SANTA MONICA, CALIFORNIA 90406
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EXHIBIT A
AMENDMENT TO ARTICLES OF INCORPORATION
RELATING TO INCREASE IN AUTHORIZED
NUMBER OF SHARES OF CAPITAL STOCK
The Articles of Incorporation of the Company shall be amended to adopt a new
Article Sixth which will read as follows:
ARTICLE SIXTH: The total number of shares which this corporation
is authorized to issue is 50,000,000 shares. The aggregate par value
of said shares is $150,000,000 and the par value of each share is
$3.00.
The common shares of stock of this corporation shall be subject
to assessment by the Board of Directors upon order of the
Superintendent of Banks of the State of California for the purpose of
correcting an impairment of contributed capital in the manner provided
by Financial Code Section 600.2 of the State of California.
EXHIBIT B
RESOLUTION ADOPTING 1997 INCENTIVE STOCK OPTION PLAN
WHEREAS, there has been presented to and considered at this meeting a
proposed Incentive Stock Option Plan (the "Option Plan") which provides the
grant, at the discretion of the Board or Stock Option Committee described
therein, of options to purchase an aggregate of not to exceed 350,000 shares of
Common Stock of this corporation all upon the terms and subject to the provision
of the Option Plan; and
WHEREAS, it is deemed to be in the best interests of this corporation
and its stockholders that the Option Plan be approved and adopted;
NOW, THEREFORE, BE IT RESOLVED, that the stockholders approve and adopt
the Option Plan, in the form presented in Exhibit C.
EXHIBIT C
SANTA MONICA BANK
1997 INCENTIVE STOCK OPTION PLAN
1. PURPOSE.
The purpose of the 1997 Santa Monica Bank Incentive Stock Option Plan (the
"Plan") is to provide a means whereby Directors, Officers and key employees of
Santa Monica Bank, a California corporation (the "Company"), or any parent or
subsidiary thereof may be given an opportunity to purchase stock in the Company
under options which are intended to qualify as Incentive Stock Options under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
The underlying objectives which the Plan seeks to accomplish are to retain
the services of the key employees of the Company and its subsidiaries, and to
grant to such employees an opportunity to acquire a proprietary interest in the
business and thereby provide an added incentive to increase the Company's
earnings.
2. ADMINISTRATION.
The Plan shall be administered by the Board of Directors of the Company.
Subject to the express provisions of the Plan, the Board of Directors shall have
the authority to construe and interpret the Flan and to define the terms used
therein, to prescribe, amend and rescind rules and regulations relating to the
administration of the Plan, to determine the duration and purpose of leaves of
absence which may be granted to participants without constituting a termination
of their employment for the
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purposes of the Plan, to grant the options and to make all other determinations
necessary or advisable for the administration of the Plan. The Board of
Directors may insert into any options granted under the Plan any other terms,
provisions, and conditions not inconsistent with the Plan as may be determined
by the Board of Directors, and shall include such terms, provisions and
conditions as are necessary to qualify the Plan as an Incentive Stock Option
Plan. The determination of the Board of Directors on the matters referred to in
this paragraph shall be conclusive.
The Board of Directors may appoint a committee consisting of not less than
three Directors who shall serve at the pleasure of the Board of Directors to
administer the Plan. Such committee shall have all or such part of the authority
of the Board of Directors with respect to the Plan, as provided in the
resolution establishing the committee or in resolutions adopted form time to
time thereafter. As used herein, the term "Stock Option Committee" shall mean
such committee or, if no such committee has been appointed, shall mean the Board
of Directors.
3. STOCK SUBJECT TO THE PLAN.
The stock to be offered under the Plan shall be shares of the Company's
authorized but unissued Capital Stock, par value $3 per share, or any shares of
authorized but unissued shares of such class into which share shares are
changed, reclassified or converted ("Common Stock"). Subject to adjustment as
provided in Paragraph 13 hereof, the aggregate number of shares to be issued
upon exercise of all options granted under the Plan shall not exceed 350,000,
less the amount of shares subject to options under all other employee stock
option plans of the Company.
If any options shall expire or terminate for any reason without having been
exercised, the shares subject thereto shall revert to the Plan and again be
available for the purposes of the Plan.
No options may be granted under the Plan to any participant if such grant
would cause the "Option Stock Value" (as defined below), of all Incentive Stock
Options exercisable by such participant during any calendar year to exceed the
sum of $100,000. In the event an employee receives an option which is
subsequently determined to have violated the provisions of the previous
sentence, such option shall be amended, if necessary, in accordance with
applicable Treasury Regulations and rulings, to preserve to the maximum possible
extent the status of the option as an Incentive Stock Option. As used herein,
the term "Option Stock Value" shall be the market value of one share of Common
Stock on the date of grant multiplied by the number of shares purchasable under
Incentive Stock Options granted to the participant on that date.
4. OBLIGATION OF COMPANY TO ISSUE SHARES.
The Plan, and the grant and exercise of options thereunder, and the Company's
obligation to issue and deliver shares of Common Stock under such options, shall
be subject to all applicable federal and state laws, rules and regulations and
to such approvals by any regulatory agencies as may be required or advisable. In
no event shall the Company be required to issue fractional shares upon the
exercise of an option.
5. ELIGIBILITY.
Directors, officers and other key employees of the Company or of any parent
or subsidiary corporation (as that term is defined in Section 424 of the Code)
shall be eligible for selection to participate in the Plan. No key employee
shall be disqualified from participation in the Plan because he is already a
shareholder of the Company or because he is a member of the Board of Directors
of the Company. The Stock Option Committee shall determine the individuals to
whom options shall be granted, the terms and provisions of the respective stock
option agreements (which need not be identical), the time at which such options
shall be granted, and the number of shares subject to each option, and the Stock
Option Committee shall grant such options. An individual who has been granted an
option may, if otherwise eligible, be granted an additional option or options if
the Stock Option Committee shall so determine.
If options are granted to any person owning, at the time of the grant of the
option, ten percent (10%) or more of the total combined voting power of all
classes of stock of the Company or its parent
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or subsidiaries (if any), the option price must be at least one hundred and ten
percent (110%) of the fair market value (computed at the time of the grant of
the option) of the stock subject to the option, and such option by its terms
must expire not later than the day of the fifth anniversary of the date on which
the option is granted.
6. OPTION PRICE.
The option price per share of stock purchasable under options granted
pursuant to the Plan shall be determined by the Stock Option Committee. In every
case the option price shall not be less than one hundred percent (100%) of fair
market value of the Common Stock of the Company on the day the option is
granted, unless the provisions of Paragraph 5 of the Plan require that the price
be at least one hundred and ten percent (110%) of fair market value of such
stock. For the purposes hereof the fair market value of the Common Stock shall
be determined in good faith by the Stock Option Committee each time an option is
granted hereunder, acting upon such information and advice as it shall deem
necessary, which determination shall be conclusive.
7. OPTION PERIOD.
Each option and all right or obligations thereunder by its terms shall expire
on such date as the Stock Option Committee may determine, but not later than the
day of the tenth anniversary of the date on which the option is granted, and
shall be subject to earlier termination as hereinafter provided; provided, that
if the provisions of Paragraph 5 hereof so require, such option shall expire not
later than the day of the fifth anniversary of the date on which the option is
granted.
8. CONTINUATION OF EMPLOYMENT.
Nothing contained in the Plan (or in any option granted pursuant to the Plan)
shall confer upon any Director and/or employee any right to continue in the
employ of the Company or any parent or subsidiary corporation or interfere in
any way with the right of the Company or any parent or subsidiary corporation to
terminate his employment at any time or to increase or decrease his compensation
from the rate in existence at the time of the granting of an option, and nothing
contained herein or in any option agreement shall affect any contractual rights
of any employee.
9. EXERCISE OF OPTIONS.
Each option shall be exercisable, and the total number of shares of Common
Stock subject thereto shall be purchasable, in such installments, which need not
be equal, as the Stock Option Committee shall determine. Except as required by
the provisions of Paragraph 5 hereof or unless otherwise provided for by the
Stock Option Committee on the grant of the option, any option granted hereunder
shall be exercisable in four equal annual installments, commencing one year
after the date of the grant of the option. Unless otherwise determined by the
Stock Option Committee, (i) no option or installment thereof shall be
exercisable except in respect of whole shares, and fractional share interests
shall be disregarded, and (ii) not less than ten shares may be purchased at any
one time unless the number purchased is the total number at the time available
for purchase under the option.
Options may be exercised only by written notice to the Company, stating the
number of shares being purchased and accompanied by payment in full of the
option price for the number of shares being purchased by (1) cash, (2) a
certified or bank cashier's check, or (3) Common Stock of the Company with a
fair market value at least equal to the aggregate exercise price under the
option.
10. NON-TRANSFERABILITY OF OPTIONS.
Options granted under the Plan shall, by their terms, be nontransferable by
the grantee other than by will or the laws of descent and distribution, and
shall be exercisable during his lifetime only by the grantee.
11. TERMINATION OF EMPLOYMENT.
If the grantee of any option granted under the Plan ceases to be employed by
the Company or any parent or subsidiary corporation for any reason other than
his death or disability, his option shall,
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subject to earlier termination pursuant to Paragraph 7, expire three months
thereafter (or after such shorter period as may be provided in the Incentive
Stock Option Agreement), and during such period after he ceases to be an
employee such option shall be exercisable only as to that number of shares which
the grantee could have purchased as of the date of such termination of
employment.
12. DEATH OR DISABILITY OF EMPLOYEE OR DIRECTOR.
If any grantee of any option granted under the Plan dies or becomes disabled
while employed by the Company or any parent or subsidiary, or during the three
month period after termination referred to in Paragraph 11 hereof, his option
shall, subject to earlier termination pursuant to Paragraph 7, expire one year
after the option holder ceases to be an employee or Director of the Company (or
after such shorter period as may be provided in the Incentive Stock Option
Agreement). During such one year period the grantee, or if the grantee has died
the person or person to whom the grantee's rights under the option have passed
by will or by the applicable laws of descent and distribution, may, to the
extent of the number of shares exercisable as of the date of the termination of
his employment, exercise such option.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
If the outstanding shares of Common Stock of the Company are increased,
decreased, changed into, or exchanged for a different number or kind of shares
or securities of the Company through reorganization, recapitalization,
reclassification, stock split-up, stock dividend, stock consolidation or
otherwise, an appropriate and proportionate adjustment shall be made in the
number and kind of shares as to which options may be granted. A corresponding
adjustment changing the number or kind of shares and the exercise price per
share allocated to unexercised options or portions thereof, which options shall
have been granted prior to any such change, shall likewise be made. Any such
adjustment in an outstanding option shall be made without change in the total
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for each share covered by the option.
Upon the dissolution or liquidation of the Company, or upon a reorganization,
merger or consolidation of the Company with one or more corporations as a result
of which the Company is not the surviving corporation, or upon the sale of
substantially all of the property of the Company to another corporation, the
Plan shall terminate, and any option theretofore granted hereunder shall
terminate, unless, in connection with such transaction, the Company provides for
the substitution of options, as defined below. In the event that provision is
not made for the substitution of options in connection with a reorganization,
merger or consolidation in which the Company is not the surviving corporation,
or a sale of substantially all of the Company's assets, option holders shall
have the right, immediately prior to or concurrently with such transaction, to
exercise any unexpired option rights granted hereunder to the full extent
theretofore not exercised and regardless of any installment provisions for the
exercise of such option rights which may be provided in any stock option
agreement entered into hereunder but in any event subject to the expiration date
of the option under the option agreement. The phrase "provides for the
substitution of options" as used in this paragraph shall mean either the
reissuance of a new option or the assumption of the Company's option by the
surviving corporation or its parent or subsidiary in such form and on such terms
and conditions that the substituted option shall meet the requirements of
Section 424 of the Code; and the phrase "parent or subsidiary" shall have the
meaning assigned in Section 424 of the Code. A substituted option shall not be
less favorable to the option holder than his prior option except to the extent
required so as to qualify the same under Section 424 of the Code.
Adjustments under this Paragraph 13 shall be made by the Stock Option
Committee of the Company, whose determination as to what adjustments shall be
made, and the extent thereof, shall be final, binding and conclusive. No
fractional shares of stock shall be issued under the Plan on account of any such
adjustment.
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14. AMENDMENT AND TERMINATION.
The Board of Directors of the Company may at any time suspend, amend or
terminate the Plan without further action on the part of the shareholders of the
Company, provided that, except as set forth in Paragraph 13 above, no amendment
may be adopted without further approval of the shareholders of the Company which
will:
(a) increase the number of shares which are to be reserved for options
under the Plan;
(b) decrease the minimum option price;
(c) extend the maximum term of an option;
(d) change the designation of the class of employees eligible to receive
options.
In the event the Plan is terminated by the Board of Directors, no option may
be granted after such termination. The amendment or termination of the Plan
shall not, without the consent of the grantee of any option granted under the
Plan, affect the grantee's rights under an option theretofore granted to him.
15. TIME OF GRANTING OF OPTIONS.
The granting of an option pursuant to the Plan shall take place at the time
of the Stock Option Committee's action, as described herein; provided, however,
that if the appropriate resolutions of the Stock Option Committee indicate than
an option is to be granted as of and at some future date, the date of grant
shall be such future date.
16. PRIVILEGES OF STOCK OWNERSHIP; PURCHASE FOR INVESTMENT.
The holder of an option granted under the Plan shall not be entitled to the
privilege of stock ownership as to any shares of stock not actually issued and
delivered to him. No shares of Common Stock shall be issued upon the exercise of
any option unless and until there has been full compliance with any then
applicable requirements of the Securities and Exchange Commission, the
California Commissioner of Corporations, the Federal Deposit Insurance
Corporation, the California Superintendent of Banks, any other regulatory
agencies having jurisdiction, and of any securities exchanges upon which stock
of the Company may be listed.
17. DURATION OF THE PLAN AND OPTION PROVISIONS.
Unless previously terminated by the Board of Directors the Plan shall
terminate at the close of business on January 21, 2007 (which is before the
tenth anniversary of the adoption of this Plan by the Board of Directors), and
no options shall be granted under it thereafter, but such termination shall not
affect any option holder's rights under an option theretofore granted to him.
18. EFFECTIVE DATE OF THE PLAN.
The Plan shall become effective and options may be granted hereunder upon its
adoption by the Company's Board of Directors; provided, however, that the Plan
shall be approved within twelve months thereafter by the shareholders of the
Company, and any options granted under the Plan after the Plan's adoption by the
Board of Directors, but prior to the Plan's approval by the shareholders, shall
not be exercisable until such shareholder approval has been obtained, and shall
be subject to such approval.
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Item 7. Financial Statements and Exhibits.
(c) Exhibits.
The following exhibits are filed with this Current Report on Form 8-K:
Exhibit
Number Description
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunder duly authorized.
Dated: September 30, 1997
WESTERN BANCORP
By: /s/ Arnold C. Hahn
------------------------------
Name: Arnold C. Hahn
Title: Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
Report of Independent Public Accountants dated January 21, 1997 on the
financial statements of Santa Monica Bank (the Bank) as of and for the year
ended December 31, 1996 in this Form 8-K of Western Bancorp. It should be
noted that we have not audited any financial statements of the Bank
subsequent to December 31, 1996 or performed any audit procedures subsequent
to the date of our report.
Arthur Andersen LLP
Los Angeles, California
October 2, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Amendment No. 1 to
Registration Statement No. 333-35271 of Western Bancorp (formerly Monarch
Bancorp) on Form S-4 of our report dated January 19, 1996, appearing in this
Current Report on Form 8-K of Western Bancorp, on the statement of condition
of Santa Monica Bank as of December 31, 1995 and the related statements of
operations, changes in stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1995.
Deloitte & Touche LLP
Los Angeles, California
October 2, 1997