<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
JULY 15, 1997
Date of Report
(Date of Earliest Event Reported)
WESTERN BANCORP
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 0-13551 95-3863296
(State or Other Jurisdiction (Commission File Number) I.R.S. Employer
of Incorporation) Identification No.)
</TABLE>
<TABLE>
<S> <C>
30000 TOWN CENTER DRIVE LAGUNA NIGUEL 92677
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number (714) 495-3300
____NOT APPLICABLE____
(Former Name or Former Address, if Changed since Last Report)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS.
SECOND QUARTER EARNINGS
On July 15, 1997, Western Bancorp (the "Company") announced its second
quarter earnings. A copy of the press release issued by the Company in
connection with the announcement is attached hereto as Exhibit 99.1 and is
incorporated by reference in its entirety.
RESTATED CONSOLIDATED FINANCIAL STATEMENTS
On June 4, 1997, the Company consummated the merger of California Commercial
Bankshares ("CCB") with and into the Company (the "CCB Merger"). Each holder of
common stock, no par value, of CCB ("CCB Common Stock") received for each share
of CCB Common Stock held by such shareholder, except for shares held by
dissenting shareholders or shares held by the Company (other than shares held in
a fiduciary capacity or as a result of debts previously contracted) one share of
common stock, no par value, of the Company.
The Company hereby files restated consolidated financial statements for the
years ended December 31, 1996, 1995 and 1994, reflecting the effect of the CCB
Merger, which was accounted for by the pooling-of-interests method of
accounting. A restatement of Management's Discussion and Analysis of Financial
Condition and Results of Operation after giving effect to the CCB Merger and the
restated financial statements are set forth below.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following tables and data set forth statistical information relating to
the Company and its subsidiaries. Such tables and data reflect the combination
of the Company and CCB which was acquired by the Company on June 4, 1997, in a
merger accounted for as a pooling-of-interests. This summary should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1996(1) 1995 1994 1993 1992
----------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONDENSED STATEMENT OF OPERATIONS DATA:
Interest income............................. $ 39,270 $ 29,233 $ 26,659 $ 27,990 $ 33,889
Interest expense............................ 10,761 8,437 7,283 9,234 12,863
----------- -------------- -------------- -------------- -----------
Net interest income......................... 28,509 20,796 19,376 18,756 21,026
Provision for loan and lease losses......... 1,488 7,025 4,360 6,169 4,842
Non-interest income (other than gains or
losses on securities transactions)........ 4,201 3,360 2,818 3,078 2,936
Gains (losses) on securities transactions... 267 (72) (41) 40 114
Gain on sale of loans, net.................. 665 -- -- -- --
Other non-interest expense.................. 27,231 18,526 16,926 18,565 17,260
Lower of cost or market adjustment on
loans..................................... -- 756 -- -- --
Goodwill amortization....................... 499 -- -- -- --
OREO expense (income)....................... (573) 2,861 1,313 2,250 690
----------- -------------- -------------- -------------- -----------
Income (loss) before taxes................ 4,997 (5,084) (446) (5,110) 1,284
Income tax expense (benefit)................ 463 (2,426) 546 (953) 602
----------- -------------- -------------- -------------- -----------
Net income (loss)......................... $ 4,534 $ (2,658) $ (992) $ (4,157) $ 682
----------- -------------- -------------- -------------- -----------
----------- -------------- -------------- -------------- -----------
PER SHARE DATA:
Net income (loss) per share................. $ 0.95 $ (0.84) $ (0.39) $ (1.63) $ 0.26
Cash dividends declared..................... -- -- -- -- --
Book value per share........................ $ 11.26 $ 8.26 $ 8.12 $ 9.19 $ 10.93
Shares used to compute net income (loss) per
share..................................... 4,770,755 3,160,588 2,520,477 2,551,470 2,600,764
----------- -------------- -------------- -------------- -----------
----------- -------------- -------------- -------------- -----------
BALANCE SHEET DATA:
Assets...................................... $ 862,900 $ 404,144 $ 360,639 $ 391,669 $ 441,261
Loans and leases............................ 471,928 227,963 233,229 250,278 292,225
Securities.................................. 256,228 90,948 88,214 99,336 67,893
Interest-earning assets..................... 745,639 357,427 330,962 364,349 381,703
Goodwill.................................... 29,342 -- -- -- --
Deposits.................................... 761,688 367,246 336,032 363,441 407,100
Notes payable............................... 13,350 2,483 2,524 2,562 3,250
Shareholders' equity........................ 79,128 32,116 20,430 23,110 26,583
----------- -------------- -------------- -------------- -----------
----------- -------------- -------------- -------------- -----------
ASSET QUALITY:
Nonaccrual loans............................ $ 13,310 $ 15,918 $ 15,202 $ 20,915 $ 10,774
OREO........................................ 6,546 2,315 3,293 3,582 12,787
----------- -------------- -------------- -------------- -----------
Total nonaccrual loans and OREO........... $ 19,856 $ 18,233 $ 18,495 $ 24,497 $ 23,561
----------- -------------- -------------- -------------- -----------
----------- -------------- -------------- -------------- -----------
PERFORMANCE RATIOS:
Return on average assets.................... 0.85% (0.71)% (0.26)% (1.01)% 0.16%
Return on average shareholders' equity...... 10.18% (9.30)% (4.22)% (17.16)% 2.57%
Net interest spread......................... 4.84% 4.96 % 4.80 % 3.84 % 3.93%
Net interest margin......................... 6.11% 6.16 % 5.67 % 4.68 % 4.97%
Average shareholders' equity to average
assets.................................... 8.39% 7.62 % 6.15 % 5.87 % 6.29%
ASSET QUALITY RATIOS:
Nonaccrual loans to gross loans............. 2.82% 6.98 % 6.52 % 8.36 % 3.69%
Nonaccrual loans and OREO to total assets... 2.30% 4.51 % 5.13 % 6.25 % 5.34%
Allowance for loan and lease losses to total
loans..................................... 2.29% 3.24 % 2.91 % 3.31 % 2.34%
Allowance for loan and lease losses to
nonaccrual loans.......................... 81% 46 % 45 % 40 % 63%
Net charge-offs to average loans and
leases.................................... 1.16% 2.86 % 2.56 % 1.82 % 1.85%
</TABLE>
- ------------------------------
(1) Includes the accounts and operating results of Western since the September
30, 1996 acquisition date.
2
<PAGE>
OVERVIEW
The Company serves as the holding company for National Bank of Southern
California ("National"), Western Bank ("Western" and together with National,
"the Banks") and Venture Partners. On September 30, 1996, the Company acquired
Western, and that acquisition was treated as a purchase for accounting purposes
and thus results of operations contained herein include Western only from the
date of acquisition. On June 4, 1997, the Company acquired CCB in a merger
accounted for as a pooling-of-interests. Accordingly, all accompanying financial
information has been restated to combine the consolidated financial information
of CCB with that of the Company. As part of the CCB Merger, Monarch Bank
("Monarch") was merged into National, and references to National refer to the
merged entity except where indicated. In addition, as part of the CCB Merger,
the Company changed its name from Monarch Bancorp to "Western Bancorp." The
following paragraphs discuss certain material events or activities that occurred
in the first six months of 1997, and the years ended December 31, 1996 and 1995:
CAPITAL ACTIVITIES
On June 3, 1997, in connection with the CCB Merger, the Company completed an
8.5 to 1 reverse stock split of the common stock, no par value ("Company Common
Stock"), of the Company (the "Reverse Stock Split"). All share amounts herein
have been restated to give effect to the Reverse Stock Split. In addition, on
June 4, 1997, the Company consummated the CCB Merger, pursuant to which,
3,043,226 shares of Company Common Stock were issued as consideration in the CCB
Merger. On March 31, 1995, the Company completed a private placement offering
for approximately $6,139,000 and issued 534,954 new shares of Company Common
Stock. Proceeds from the offering were used to pay approximately $470,000 in
offering expenses; $3,550,000 to increase the Company's investment in Monarch;
and $53,500 to retire Company debt; and approximately $2,065,000 in cash was
retained by the Company for future operating needs or investments. The capital
increase for Monarch was sufficient to comply fully with the terms of certain
regulatory orders to increase its leverage capital ratio to 7.0 percent or more.
In the third quarter of 1995, the Company issued and sold 339,635 shares of
Company Common Stock pursuant to a rights and public offering. The net proceeds
from such offering were $3,464,000 which increased the Company's capital.
In November 1995, CCB sold 474,000 shares of CCB Common Stock, no par value,
through a private placement at $6.75 per share for the purpose of contributing
most of the proceeds into National as additional capital. Of the total proceeds
of $3,200,000, CCB contributed $2,900,000 into National's capital in December
1995. The increased capital allowed CCB and National to meet certain regulatory
commitments to increase capital, provided an additional source of funds that
could be used to fund earning assets, and to allow for possible future growth
opportunities.
On September 30, 1996, the Company acquired all of the issued and
outstanding shares of Western. The Company funded the purchase price with the
issuance of approximately $42.2 million of Company Common Stock (3,076,045
shares), net of approximately $1 million in issuance costs, in a private
placement, and from the proceeds of a three year loan of $26.5 million from The
Northern Trust Company. A $15.5 million dividend was declared by Western
concurrently with the completion of the acquisition and paid to the Company,
which was used to reduce the $26.5 million note to $11 million. For further
information on the Western acquisition, see note 2 of notes to consolidated
financial statements.
LIQUIDITY
During 1996, the Banks consistently maintained cash liquidity (cash and cash
equivalents and securities available for sale divided by total deposits) of
approximately 42% or greater, which was a product of low demand for loans and
very high underwriting standards established during the latter part of a major
recession. The Banks were also hesitant to commit liquid funds to mid- to
long-term investments
3
<PAGE>
during a period when the yield curve was reasonably flat, and in anticipation of
increased funding needs as the loan portfolio grows.
INVESTMENT PORTFOLIO
The fair value of securities available for sale at the dates indicated are
summarized in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government securities...................................................... $ 163,272 $ 40,328 $ 58,778
U.S. Agency securities or insured obligations................................... 64,793 29,234 10,259
Mortgage-backed securities...................................................... 6,438 3,201 6,725
Other debt securities........................................................... 1,860 416 2,903
---------- --------- ---------
Total debt securities........................................................... 236,363 73,179 78,665
Mutual funds.................................................................... 9,078 9,240 5,191
Other equity securities......................................................... 283 250 --
---------- --------- ---------
Total........................................................................... $ 245,724 $ 82,669 $ 83,856
---------- --------- ---------
---------- --------- ---------
</TABLE>
The US Government Mutual Fund represents shares held in the Monarch Fund, a
mutual fund wholly-comprised of US Government obligations. The Monarch Fund is
not a related entity to Monarch Bank.
The acquisition of Western added $141 million to securities available for
sale at December 31, 1996.
The following table shows the maturities of debt securities available for
sale at December 31, 1996 (Dollars in thousands):
<TABLE>
<CAPTION>
1 YEAR 5 YEARS
TOTAL 1 YEAR OR LESS THRU 5 YEARS THRU 10 YEARS
--------------------- ----------------------- --------------------- -----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ---------- ----------- ---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Government securities......... $ 163,272 5.80% $ 69,109 5.69% $ 93,639 5.89% $ -- --%
US Agency or insured
obligations..................... 64,793 5.91% 22,960 5.35% 40,590 6.20% 573 7.03%
Mortgage-backed Securities....... 6,438 6.70% -- --% -- --% 1,450 6.95%
Other securities................. 1,860 5.40% 411 4.88% 1,395 5.74% -- --%
--------- --- ----------- --- --------- --- ----------- ---
Total........................ $ 236,363 5.85% $ 92,480 5.60% $ 135,624 5.98% $ 2,023 6.98%
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Amortized cost............... $ 236,575 $ 92,444 $ 135,892 $ 2,021
--------- ----------- --------- -----------
--------- ----------- --------- -----------
<CAPTION>
OVER 10 YEARS
-----------------------
AMOUNT YIELD
----------- ----------
<S> <C> <C>
US Government securities......... $ 524 5.40%
US Agency or insured
obligations..................... 670 6.80%
Mortgage-backed Securities....... 4,988 6.63%
Other securities................. 54 0.55%
----------- ---
Total........................ $ 6,236 6.49%
-----------
-----------
Amortized cost............... $ 6,218
-----------
-----------
</TABLE>
The carrying amounts of the securities held to maturity at the dates
indicated are summarized in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government securities........................................................... $ 1,147 $ 485 $ 2,849
U.S. Agency securities............................................................... 4,202 4,500 1,508
Mortgage-backed securities........................................................... 1,921 1,676 --
--------- --------- ---------
$ 7,270 $ 6,661 $ 4,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
4
<PAGE>
The following table shows the maturities of debt securities held to maturity
at December 31, 1996 (Dollars in thousands):
<TABLE>
<CAPTION>
5 YEARS
1 YEAR THRU 10
TOTAL 1 YEAR OR LESS THRU 5 YEARS YEARS
----------------------- ----------------------- ----------------------- -----------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
----------- ---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
US Government Securities.......... $ 1,147 5.78% $ 250 6.98% $ 607 5.54% $ 290
US Agency Securities.............. 4,202 6.31% 212 -- 3,990 6.31% --
Mortgage-backed Securities........ 1,921 7.02% -- -- 931 6.30% --
----------- ----- ----------- -----
Total......................... $ 7,270 6.42% $ 462 6.98% $ 5,528 6.23% $ 290
----------- ----- ----------- -----
----------- ----- ----------- -----
Fair Value.................... $ 7,245 $ 462 $ 5,519 $ 298
----------- ----- ----------- -----
----------- ----- ----------- -----
<CAPTION>
OVER 10 YEARS
-----------------------
YIELD AMOUNT YIELD
---------- ----------- ----------
<S> <C> <C> <C>
US Government Securities.......... 5.26% $ -- --
US Agency Securities.............. -- -- --
Mortgage-backed Securities........ -- 990 7.69%
-----
Total......................... 5.26% $ 990 7.69%
-----
-----
Fair Value.................... $ 966
-----
-----
</TABLE>
At December 31, 1996, the Company did not have investments in securities
issued by any one non-federal issuer which exceeded ten percent of shareholders'
equity.
As part of its investment portfolios, the Banks may hold derivative
securities. Three Collateralized Mortgage Obligations (CMOs) were held in the
held to maturity portfolio of Monarch as of December 31, 1996. These FNMA and
FHLMC securities had a carrying value of $1.921 million and a current market
value of $1.883 million as of December 31, 1996. The weighted average yield of
these investments was 7.02 percent and the weighted average life was 1.69 years
as of December 31, 1996. All three CMOs have been tested no less than annually
using the FFIEC "High Risk Security Test," and each of the securities have
passed the tests. This stress test is used by bank regulators to assess relative
CMO's investment risks. A security that passes is not considered to be
"high-risk;" a security that fails the test may be subject to additional
regulatory scrutiny and under the most severe case, the bank could be asked to
sell the security.
Western holds $3 million in FNMA Multi Step securities with a weighted
average yield of 6.38% as of December 31, 1996. The securities do not have a
call date or repricing date in the remainder of 1997 and all will mature in
October 1998.
The total amortized cost of the securities portfolio increased approximately
$164 million from $90.9 million at December 31, 1995 to $256.2 million at
December 31, 1996. This increase was due largely to the acquisition of Western
which added $134.4 million to securities available-for-sale.
The Banks do not have securities trading accounts and do not intend to trade
securities. Neither the Company nor the Banks are involved in any off-balance
sheet hedging-type activities. For further information, see note 4 of notes to
consolidated financial statements.
LOAN AND LEASE PORTFOLIO
The following table sets forth the amount of loans and leases outstanding at
the end of the following periods, according to type of loan. The Company's
lending activities are predominantly in Southern California. The Company has no
agricultural or foreign loans.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate construction............................. $ 51,408 $ 26,987 $ 33,824 $ 43,624 $ 68,800
Real estate mortgage................................. 208,497 81,180 87,019 85,775 77,435
Commercial........................................... 182,104 101,029 94,689 100,923 118,609
Leases............................................... 3,027 3,463 4,159 4,532 6,537
Installment and other................................ 26,892 15,304 13,538 15,424 20,844
---------- ---------- ---------- ---------- ----------
GROSS LOANS AND LEASES........................... 471,928 227,963 233,229 250,278 292,225
Less:
Unearned lease income.............................. (364) (399) (544) (562) (947)
Deferred loan fees................................. (1,381) (832) (834) (874) (1,103)
Allowance for loan and lease losses................ (10,810) (7,396) (6,797) (8,277) (6,828)
---------- ---------- ---------- ---------- ----------
NET LOANS AND LEASES........................... $ 459,373 $ 219,336 $ 225,054 $ 240,565 $ 283,347
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
5
<PAGE>
Gross loans increased $244 million to $471.9 million at December 31, 1996
from $228.0 million at December 31, 1995 and the allowance for loan and lease
losses increased $3.4 million from $7.4 million at December 31, 1995 to $10.8
million at December 31, 1996. The increases are attributable primarily to the
acquisition of Western which added $216 million to gross loans and $5.0 million
to the allowance.
With certain exceptions, a bank is permitted under California law to make
loans to a single borrower in aggregate amounts up to 25 percent of the sum of
shareholders' equity (excluding goodwill and effect of adjustments for FAS 115),
allowance for loan and lease losses, capital reserves, if any, and debentures,
if any, for "secured loans" (as defined for regulatory purposes), and up to 15
percent of such sum for the aggregate of "unsecured loans" (as defined for
regulatory purposes). As of December 31, 1996 these consolidated lending limits
for the Company's Banks were approximately $15.1 million for secured loans, and
approximately $9.1 million for unsecured loans. The Company sells participations
in loans between its subsidiaries and to outside parties where necessary to stay
within lending limits or to otherwise limit the Company's exposure in particular
credits. Where deemed appropriate to better utilize available funds, the Company
may purchase participations in loans.
MATURITIES OF LOANS AND LEASES
The loan maturities shown in the table below are based on contractual
maturities. As is customary in the banking industry, loans that meet sound
underwriting criteria can be renewed by mutual agreement between the Company and
the borrower. Because the Company is unable to estimate the extent to which its
borrowers will renew their loans, the table below is based on contractual
maturities at December 31, 1996:
<TABLE>
<CAPTION>
ONE YEAR
ONE YEAR THROUGH 5 OVER
OR LESS YEARS 5 YEARS TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate construction......................................... $ 49,170 $ 963 $ 1,275 $ 51,408
Real estate mortgage............................................. 53,814 99,636 55,047 208,497
Commercial....................................................... 91,985 58,435 31,684 182,104
Installment, leases, and other................................... 8,334 16,428 5,157 29,919
---------- ---------- ---------- ----------
$ 203,303 $ 175,462 $ 93,163 $ 471,928
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
6
<PAGE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES
The following table shows the Company's nonaccrual, past due and
restructured loans and leases.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992 (1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
NONACCRUAL LOANS AND LEASES:
Real Estate Construction................................. $ 1,031 $ 4,545 $ 7,021 $ 6,505
Real Estate Mortgage..................................... 10,025 10,368 549 4,519
Commercial............................................... 1,138 952 7,579 9,569
Leases................................................... -- 27 -- 26
Installment and other.................................... 1,116 26 53 296
--------- --------- --------- --------- ---------
Total................................................ $ 13,310 $ 15,918 $ 15,202 $ 20,915 $ 10,774
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total nonaccrual loans and leases as a percentage of gross
loans and leases.......................................... 2.82% 6.98% 6.52% 8.36% 3.69%
Allowance for loan and lease losses to nonaccrual loans and
leases.................................................... 81.22% 46.46% 44.71% 39.57% 63.37%
Loans past due 90 days or more on accrual status:
Real Estate Mortgage..................................... $ -- $ -- $ 199 $ 124
Commercial............................................... -- -- 1,014 375
Installment and other.................................... -- -- -- 6
--------- --------- --------- --------- ---------
Total................................................ $ -- $ -- $ 1,213 $ 505 $ 132
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RESTRUCTURED LOANS:
On accrual status........................................ $ 1,887 $ 3,038 $ 1,736 $ -- $ --
On nonaccrual status (2)................................. 3,870 168 7,921 -- --
--------- --------- --------- --------- ---------
Total................................................ $ 5,757 $ 3,206 $ 9,657 $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Detailed information is not available.
(2) Included in nonaccrual loans above.
Nonaccrual loans decreased $2.6 million to $13.3 million at December 31,
1996 from $15.9 million at December 31, 1995. The decrease represents an
improvement of $11.8 million in National's nonaccrual loans partially offset by
three real estate secured mortgage loans in the Western portfolio, totaling $7.6
million, being placed on nonaccrual. Total nonaccrual loans as a percentage of
total loans decreased from 6.98 percent at December 31, 1995 to 2.82 percent at
December 31, 1996.
There are no commitments to lend additional funds to borrowers listed as
nonaccrual or past due 90 days or more.
The Company's policy concerning non-performing loans is to cease accruing
interest, and to charge off all accrued and unpaid interest on loans which are
past due as to principal and/or interest for at least 90 days, or at such
earlier time as management determines timely collection of the interest to be in
doubt; except that in certain circumstances accrued interest is not charged off
on adequately secured loans which are deemed by management to be fully
collectible. Additionally, loans which are 90 days or more past due may continue
accruing interest if they are both well secured and in the process of being
collected.
The Company has not been active in areas that involve hazardous waste, and
based on portfolio reviews by the Company and during credit reviews during
regulatory examinations, no loans have been identified that would appear to be
of concern because of hazardous material.
7
<PAGE>
POTENTIAL PROBLEM LOANS
Except as noted above, management is not aware of any borrowers who are
experiencing severe financial difficulties, or in the normal course of business,
represent any identified loss potential. The Banks monitor all loans and
complete a monthly internal watch list, which is inclusive of both loans past
due and/ or borrowers that have been identified as having special difficulties.
LOAN CONCENTRATIONS
The Company's lending activities are predominantly in Southern California.
Otherwise, the Company considers the loan portfolios to be diverse, and there
are no specific concentrations to any one borrower or group of borrowers that
are engaged in similar activities which would cause them to be similarly
impacted by economic or other considerations.
SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The following table summarizes loan balances, loans charged off, the
provision for loan and lease losses charged to expense, the allowance, and loan
recoveries.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Allowance for loan and lease losses:
Balance at the beginning of the year................. $ 7,396 $ 6,797 $ 8,277 $ 6,828 $ 7,822
---------- ---------- ---------- ---------- ----------
Loans and leases charged off:
Real estate mortgage............................. 1,353 4,108 1,865 613 95
Real estate construction......................... 1,017 739 3,695 796 409
Commercial....................................... 1,059 1,733 1,317 3,362 5,758
Leases........................................... 27 11 48 120 126
Installment and other............................ 350 338 149 588 285
---------- ---------- ---------- ---------- ----------
Total loans and leases charged off........... 3,806 6,929 7,074 5,479 6,673
---------- ---------- ---------- ---------- ----------
Recoveries on loans and leases charged off:
Real estate mortgage............................. 117 413 273 8 --
Real estate construction......................... 9 -- 228 -- --
Commercial....................................... 396 38 626 674 809
Leases........................................... -- 34 52 12 3
Installment and other............................ 49 18 55 65 25
---------- ---------- ---------- ---------- ----------
Total recoveries on loans and leases charged
off.......................................... 571 503 1,234 759 837
---------- ---------- ---------- ---------- ----------
Net loans and leases charged off............... 3,235 6,426 5,840 4,720 5,836
---------- ---------- ---------- ---------- ----------
Provision charged to operating expense............. 1,488 7,025 4,360 6,169 4,842
Addition to allowance due to:
Acquisition of Western........................... 5,041 -- -- -- --
Loan portfolio purchases......................... 120 -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at the end of the year....................... $ 10,810 $ 7,396 $ 6,797 $ 8,277 $ 6,828
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Loans:
Average loans and leases outstanding during year... $ 279,272 $ 224,352 $ 227,922 $ 259,441 $ 315,236
Gross loans and leases at end of year.............. $ 471,928 $ 227,963 $ 233,229 $ 250,278 $ 292,225
Ratios:
Net loans and leases charged off to average loans
and leases....................................... 1.16% 2.86% 2.56% 1.82% 1.85%
Allowance as a percent of end of year loans and
leases........................................... 2.29% 3.24% 2.91% 3.31% 2.34%
</TABLE>
8
<PAGE>
The allowance for loan and lease losses increased from $7.4 million at
December 31, 1995, to $10.8 million at December 31, 1996. Net loans and leases
charged off decreased $3.2 million from $6.4 million for 1995 to $3.2 million
for 1996, and the provision charged to operating expense decreased $5.5 million
from $7.0 million for 1995 to $1.5 million for 1996, respectively.
The Bank's local markets were severly affected by the recession in 1993
through 1995, and in several instances borrowers who had never reported
financial difficulties or were past due declared bankruptcy. During 1996 the
economy started a slow recovery which was evidenced by the decrease in net
charge-offs for 1996.
The allowance as a percentage of end of year loans and leases has declined
since 1994 along with a decline in the percentage of net loans and leases
charged off to average loans and leases. While the allowance as a percentage of
end of year loans and leases has declined from 3.24 percent to 2.29 percent from
December 31, 1995 to 1996, respectively, the allowance as a percentage of
nonaccrual loans has increased from 46.46 percent to 81.22 percent from December
31, 1995 to December 31, 1996, respectively.
The following table reflects management's allocation of the allowance for
loan and lease losses by loan category and the ratio of loans or leases in each
category to total loans and leases at December 31 for each of the last five
years:
<TABLE>
<CAPTION>
ALLOWANCE AS OF DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate construction........................................ $ 649 $ 821 $ 2,566 $ 3,158 $ 1,651
Real estate mortgage............................................ 4,409 2,267 1,612 778 169
Commercial...................................................... 2,838 2,425 1,786 2,748 4,481
Leases.......................................................... 47 47 88 85 125
Installment and other........................................... 644 583 386 333 316
Not allocated................................................... 2,223 1,253 359 1,175 86
--------- --------- --------- --------- ---------
Total allowance for loan and lease losses................. $ 10,810 $ 7,396 $ 6,797 $ 8,277 $ 6,828
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
PERCENT OF LOANS TO TOTAL LOANS
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Real estate construction........................................ 11% 12% 15% 17% 24%
Real estate mortgage............................................ 44% 36% 37% 34% 27%
Commercial...................................................... 39% 44% 41% 40% 41%
Leases.......................................................... 1% 1% 2% 2% 2%
Installment and other........................................... 5% 7% 5% 7% 6%
--------- --------- --------- --------- ---------
Total loans and leases.................................... 100% 100% 100% 100% 100%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The allowance allocated to the loan and lease categories shown above is
based on previous loan and lease loss experience, the level of nonaccrual loans,
management's review of classified loans and evaluation of the current loan
portfolio, and anticipated economic conditions. While the allowance is allocated
to specific loans and to portfolio segments, the allowance is general in nature
and is available for the portfolio in its entirety.
At December 31, 1996, the Company had identified impaired loans with a
recorded investment of approximately $13.9 million. An allowance of $575
thousand, representing the difference between the value of collateral supporting
the loans and their outstanding balance is included in the allowance for loan
losses. The Company's policy is to record cash receipts received on nonaccrual
loans first as reductions to principal and then to interest income. For further
information see note 5 of notes to consolidated financial statements.
9
<PAGE>
DEPOSITS
In a rising interest rate environment, when rate sensitive assets ("RSA")
exceed rate sensitive liabilities ("RSL"), assets reprice to higher interest
rates faster than liabilities reprice, resulting in a net interest margin that
tends to rise. When RSL exceed RSA, net interest margin will tend to fall. The
opposite occurs in a decreasing interest rate environment. As a rule, the
Company works to keep the cumulative difference between RSA and RSL as balanced
as possible over a one year cycle. In 1995, banks in Southern California as a
group generally needed to progressively increase deposit rates which had been
held low in 1994 due to the lack of competition for deposits at a time when
banks were still operating with low or lower than normal loan demand. Starting
in mid-1995 and continuing into 1996, banks in Southern California as a group
have generally become much more aggressive in pricing time deposits, but have
yet to make a major jump in interest-bearing transactional accounts. These
pricing decisions appear to be consistent with recent patterns whereby
transactional and savings accounts do not mirror the repricing patterns on the
asset side.
The Company provides a range of deposit types to meet the needs of the local
communities. Time deposits, which are normally sensitive to competitive rate
changes, are generally used to expand or contract the overall liability position
needed to meet the various management ratios established for liquidity, capital,
loans to deposits, and other funding measurements. As a policy, the Company does
not accept or solicit brokered deposits.
The following table shows the average amount of interest bearing and
non-interest bearing deposits and rates as of December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 AVERAGE 1995 AVERAGE 1994 AVERAGE
----------------------- ----------------------- -----------------------
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits................... $ 181,095 0.00% $ 116,071 0.00% $ 114,580 0.00%
Interest bearing demand deposits................ 71,920 2.88% 25,106 2.12% 32,590 1.74%
Savings deposits................................ 135,532 2.82% 126,422 2.79% 127,489 2.55%
Time deposits................................... 87,779 5.01% 73,907 5.57% 78,167 4.04%
---------- ---------- ----------
Total(1)...................................... $ 476,326 2.16% $ 341,506 2.39% $ 352,826 1.98%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
- ------------------------
(1) Includes non-interest bearing deposits for both amount and rates. Rates
represent weighted averages.
The following table shows the maturity schedule of time certificates of
deposit of $100,000 or more as of December 31, 1996. All dollar amounts are in
thousands:
<TABLE>
<S> <C>
3 months or less................................................... $ 46,559
Over 3 months through 6 months..................................... 13,034
Over 6 months through 12 months.................................... 7,944
Over 1 year........................................................ 4,121
---------
Total............................................................ $ 71,658
---------
---------
</TABLE>
Deposits increased $394.4 million from $367.2 million at December 31, 1995
to $761.7 million at December 31, 1996. This growth was primarily attributable
to the acquisition of Western, which added $353.1 million in deposits, and the
increase in economic activity in Orange County as well as the opening of the
Laguna Beach and Fountain Valley branches.
BORROWED FUNDS
On September 30, 1996, the Company borrowed $26.5 million from the Northern
Trust Company of Chicago under a three year revolving loan agreement.
Concurrently, the Company reduced the loan by
10
<PAGE>
$15.5 million as a result of a dividend in the same amount from Western. The
balance at December 31, 1996 was $11 million. The highest amount outstanding
during 1996 was $26.5 million; the average balance outstanding during the year
was $2.75 million and the average rate paid was 6.95 percent for the year. The
interest rate at year end was 6.75 percent. The revolving loan agreement expires
on September 30, 1999, and there were no amounts borrowed against this loan
agreement in 1995 or 1994.
CCB entered into a note with a shareholder in March 1996 bearing an interest
rate of 3 percent over the prime rate with interest only payable monthly for the
first year; thereafter, quarterly principal payments of $125,000 plus interest
payable monthly. The note matures on April 1, 1999. On March 17, 1997, the
Company paid down $2.0 million on this note with the remaining unpaid principal
balance of $350,000 subject to the original terms of the note. For further
information, see note 8 of the notes to consolidated financial statements.
LIQUIDITY AND INTEREST RATE RISK
On a stand-alone basis, the Company's sources of liquidity include dividends
from the Banks and outside borrowings. The amount of dividends that the Banks
can pay to the Company is restricted by regulatory guidelines.
Major sources of liquidity for the Company and the Banks include deposits,
maturities and sales of securities, and loan repayments. Deposits are a volatile
source of funds because of changing conditions in the interest rate markets and
competition. The ability to sell securities without significant loss is subject
to changing market conditions. Loan repayments are dependent on the financial
wherewithal of the Company's borrowers.
Management believes that current levels and sources of liquidity are
sufficient to meet the Company's and the Banks' commitments. For further
information on commitments, see notes 11 and 14 of notes to consolidated
financial statements.
The following table for the Company breaks down RSA and RSL at December 31,
1996 based on the earliest possible repricing dates for variable rate
instruments, or for fixed rate assets and liabilities, on scheduled maturities.
The table uses data from FDIC Call Reports and is similar to the reporting
assumptions used during bank examinations. In the past few years, various models
and rate sensitive studies have focused on the interest rate risk
characteristics of interest-bearing transactional accounts. Based on historical
reviews and documentation, it appears that these accounts do not have the same
degree of short-term interest rate sensitivity associated with loans that are
tied to any immediate change in prime rate or to short-term investments such as
Federal Funds Sold. The following table makes certain assumptions as to the
interest rate sensitivity of savings accounts that have had limited rate
fluctuation during the past three years, as to money market accounts which are
based on a tiered rate structure
11
<PAGE>
depending on the account deposit level, and as to NOW accounts that have had
very little price fluctuation in the past three years:
<TABLE>
<CAPTION>
90 DAYS
OR LESS 90-365 DAYS 1-5 YEARS 5+ YEARS TOTAL
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Federal Funds Sold..................................... $ 18,717 $ -- $ -- $ -- $ 18,717
Securities............................................. 57,359 59,382 134,463 1,790 252,994
Loans.................................................. 211,724 74,130 124,075 61,999 471,928
Total RSA........................................ 287,800 133,512 258,538 63,789 743,639
Savings................................................ 46,179 9,728 9,729 -- 65,636
Interest-bearing demand deposits....................... 57,407 76,590 76,588 -- 210,585
NOW accounts........................................... 15,438 24,578 24,579 -- 64,595
Time Certificates of Deposit over $100,000............. 49,779 18,113 3,654 112 71,658
Time Certificates of Deposit less than $100,000........ 29,539 16,177 6,481 66 52,263
Notes payable.......................................... 13,350 -- -- -- 13,350
--------- ----------- --------- --------- ---------
Total RSL........................................ 211,692 145,186 121,031 178 478,087
--------- ----------- --------- --------- ---------
Net RSA-RSL............................................ $ 76,108 $ (11,674) $ 137,507 $ 63,611 $ 265,552
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
Cumulative RSA-RSL..................................... $ 64,434 $ 201,941 $ 265,552
--------- ----------- --------- ---------
--------- ----------- --------- ---------
Cumulative as a % of Total Assets...................... 8.8% 7.5% 23.4% 30.7% 30.7%
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
INTEREST RATES AND INTEREST RATE DIFFERENTIALS. The Company's consolidated
earnings depend primarily upon the difference between the income the Banks
receive from their loan portfolios and investment securities, and their cost of
funds, including principally interest paid on savings and time deposits.
Interest rates charged on the Banks' loans are influenced principally by the
demand for such loans, the supply of money for lending purposes, and competitive
factors. These factors are, in turn, affected by general economic conditions and
other factors beyond the Banks' control, such as federal economic and tax
policies, the general supply of money in the economy, governmental budgetary
actions, and the actions of the Federal Reserve Board.
12
<PAGE>
The following table provides information on net interest income for the past
three fiscal years, setting forth average balances of interest-earning assets
and interest-bearing liabilities, the income earned and expense recorded thereon
and the resulting average yield-cost ratios:
<TABLE>
<CAPTION>
INTEREST RATES AND INTEREST RATE DIFFERENTIALS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------ ------------------------------------ ---------
AVERAGE AVERAGE AVERAGE
BALANCE INCOME/ AVERAGE BALANCE INCOME/ AVERAGE BALANCE
(1) EXPENSE YIELD/ COST (1) EXPENSE YIELD/ COST (1)
--------- ----------- ------------ --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks... $ 53 $ 3 5.66% $ 1,016 $ 43 4.23% $ 2,712
Securities held to maturity............ 8,011 516 6.44% 6,538 429 6.56% 5,508
Securities available for sale.......... 134,897 8,090 6.00% 75,954 3,998 5.26% 88,333
Federal funds sold..................... 44,181 2,432 5.50% 29,531 1,709 5.79% 17,072
Loans and leases, net(2)............... 279,272 28,229 10.11% 224,352 23,054 10.28% 227,922
--------- ----------- --------- ----------- ---------
INTEREST EARNING ASSETS.............. 466,414 39,270 8.42% 337,391 29,233 8.66% 341,547
----------- ----- ----------- -----
NON INTEREST-EARNING ASSETS:
Cash and due from banks................ 40,027 26,014 27,319
Premises and equipment (net)........... 3,248 1,675 1,909
Other real estate owned................ 3,895 5,360 5,051
Goodwill............................... 7,419 -- --
Other assets........................... 10,003 4,507 6,612
--------- --------- ---------
TOTAL ASSETS......................... $ 531,006 $ 374,947 $ 382,438
--------- --------- ---------
--------- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits....... $ 71,920 $ 2,068 2.88% $ 25,106 $ 533 2.12% $ 32,590
Savings deposits....................... 135,532 3,827 2.82% 126,422 3,522 2.79% 127,489
Time deposits.......................... 87,779 4,397 5.01% 73,907 4,114 5.57% 78,167
Federal funds purchased................ 5 -- -- -- -- -- --
Capital note........................... 2,350 273 11.62% 2,351 259 11.02% 2,351
Other borrowings....................... 2,857 196 6.86% 132 9 6.82% 1,189
--------- ----------- --------- ----------- ---------
INTEREST BEARING LIABILITIES......... $ 300,443 10,761 3.58% 227,918 8,437 3.70% 241,786
--------- ----------- ----- --------- ----------- ----- ---------
NON INTEREST-BEARING LIABILITIES AND
EQUITY:
Non-interest bearing demand............ 181,095 116,071 114,580
Non-interest bearing liabilities....... 4,935 2,374 2,543
Shareholders' equity................... 44,533 28,584 23,529
--------- --------- ---------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY............................. $ 531,006 $ 374,947 $ 382,438
--------- --------- ---------
--------- --------- ---------
Net interest income.................... $ 28,509 $ 20,796
----------- -----------
----------- -----------
Net interest margin on interest-earning
assets(3)............................ 6.11% 6.16%
----- -----
----- -----
Net interest spread.................... 4.84% 4.96%
----- -----
----- -----
<CAPTION>
INCOME/ AVERAGE
EXPENSE YIELD/ COST
----------- ------------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks... $ 111 4.09%
Securities held to maturity............ 258 4.68%
Securities available for sale.......... 4,409 4.99%
Federal funds sold..................... 656 3.84%
Loans and leases, net(2)............... 21,225 9.31%
-----------
INTEREST EARNING ASSETS.............. 26,659 7.81%
----------- -----
NON INTEREST-EARNING ASSETS:
Cash and due from banks................
Premises and equipment (net)...........
Other real estate owned................
Goodwill...............................
Other assets...........................
TOTAL ASSETS.........................
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits....... $ 568 1.74%
Savings deposits....................... 3,256 2.55%
Time deposits.......................... 3,157 4.04%
Federal funds purchased................ -- --
Capital note........................... 241 10.25%
Other borrowings....................... 61 5.13%
-----------
INTEREST BEARING LIABILITIES......... 7,283 3.01%
----------- -----
NON INTEREST-BEARING LIABILITIES AND
EQUITY:
Non-interest bearing demand............
Non-interest bearing liabilities.......
Shareholders' equity...................
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY.............................
Net interest income.................... $ 19,376
-----------
-----------
Net interest margin on interest-earning
assets(3)............................ 5.67%
-----
-----
Net interest spread.................... 4.80%
-----
-----
</TABLE>
- ------------------------------
(1) Average balances are primarily computed on daily balances during the period.
When such balances are not available, averages are computed on a monthly
basis. Average balances include the effect of discounts and premiums on
loans, investment securities, deposits and borrowings acquired in
acquisitions, as well as deferred loan fees.
(2) Non accrual loans are included in the average balances for the periods;
however, interest on such loans has been excluded in computing the average
yields for the periods.
(3) The net interest margin on interest-earning assets for a period is net
interest income divided by average interest-earning assets.
13
<PAGE>
The following table sets forth changes in interest income and interest
expense, and the amount of change attributable to variances in volume, rates and
the combination of volume and rates. The Company has no tax-exempt assets.
<TABLE>
<CAPTION>
INTEREST RATES AND INTEREST RATE DIFFERENTIALS
(DOLLARS IN THOUSANDS)
-----------------------------------------------
YEAR ENDED
DECEMBER
31,
1995
YEAR ENDED DECEMBER 31, COMPARED
1996 COMPARED TO 1995 TO 1994
---------------------------------- ----------
CHANGE DUE TO
TOTAL --------------------- TOTAL
INCREASE VOLUME INCREASE
(DECREASE) VOLUME RATE & RATE (DECREASE)
---------- ------ ----- ------ ----------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans................................................. $5,175 $5,643 $(376) $ (92) $1,829
Interest-bearing deposits with banks....................................... (40) (41) 15 (14) (68)
Securities held to maturity................................................ 87 97 (8) (2) 171
Securities available for sale.............................................. 4,092 3,103 557 432 (411)
Federal funds sold......................................................... 723 848 (84) (41) 1,053
---------- ------ ----- ------ ----------
Total interest income................................................ 10,037 9,650 104 283 2,574
INTEREST EXPENSE:
Interest-bearing demand deposits........................................... 1,535 994 189 352 (35)
Savings deposits........................................................... 305 254 48 3 266
Time deposits.............................................................. 283 772 (412) (77) 957
Capital note............................................................... 14 -- 14 -- 18
Other borrowings........................................................... 187 186 -- 1 (52)
---------- ------ ----- ------ ----------
Total interest expense................................................. 2,324 2,206 (161) 279 1,154
---------- ------ ----- ------ ----------
Net interest income.................................................. $7,713 $7,444 $ 265 $ 4 $1,420
---------- ------ ----- ------ ----------
---------- ------ ----- ------ ----------
<CAPTION>
CHANGE DUE TO
-----------------------
VOLUME
VOLUME RATE & RATE
------ ------ ------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans................................................. $(332) $2,196 $(35)
Interest-bearing deposits with banks....................................... (69) 4 (3)
Securities held to maturity................................................ 48 103 20
Securities available for sale.............................................. (618) 241 (34)
Federal funds sold......................................................... 479 332 242
------ ------ ------
Total interest income................................................ (492) 2,876 190
INTEREST EXPENSE:
Interest-bearing demand deposits........................................... (130) 124 (29)
Savings deposits........................................................... (27) 296 (3)
Time deposits.............................................................. (172) 1,194 (65)
Capital note............................................................... -- 18 --
Other borrowings........................................................... (54) 20 (18)
------ ------ ------
Total interest expense................................................. (383) 1,652 (115)
------ ------ ------
Net interest income.................................................. $(109) $1,224 $305
------ ------ ------
------ ------ ------
</TABLE>
INTEREST INCOME
Interest income increased $10.0 million for the year ended December 31, 1996
compared to 1995 and $2.6 million for the year ended December 31, 1995 compared
to 1994. The increase for 1996 compared to 1995 is due to an increase in average
earning assets resulting largely from the acquisition of Western while the
increase in interest income in 1995 compared to 1994 was due primarily to a rise
in the average yield on interest-earning assets.
INTEREST EXPENSE
Interest expense increased $2.3 million for the year ended December 31, 1996
compared to 1995 and $1.2 million for the year ended December 31, 1995 compared
to 1994. The increase for 1996 compared to 1995 is attributable to an increase
in average interest-bearing deposits, arising mainly from the Western
acquisition, which was offset slightly by a decrease in the average cost of
deposits. The cost of funds decreased as deposits shifted away from time
deposits and into interest-bearing demand and saving deposits. The increase in
interest expense for 1995 compared to 1994 was due to an increase in the average
cost of interest-bearing liabilities partially offset by a decrease in
interest-bearing liabilities prompted by increasing market rates.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses charged to operations reflects
management's judgment of the adequacy of the allowance for loan and lease losses
and is determined through periodic analysis of the loan and lease portfolio.
This analysis includes a detailed review of the classification and
categorization of problem and potential problem loans and loans to be charged
off; an assessment of the overall quality and collectibility of the portfolio;
and consideration of the loan loss experience, trends in problem loans and
concentrations of credit risk, as well as current and expected future economic
conditions (particularly in Southern California).
Provisions for loan and lease losses totaled $1.5 million, $7.0 million and
$4.4 million for the years ended December 31, 1996, 1995 and 1994, respectively.
The reduction in the provision in 1996 was due primarily to a decline in
nonperforming loans and leases and lower overall charge-offs as well as
14
<PAGE>
management's assessment that the inherent risk in the loan and lease portfolio
has decreased. The percentage of the allowance for loan and lease losses to
outstanding loans and leases at December 31, 1996 and 1995 was 2.29% and 3.24%,
respectively. While the allowance as a percent of end of year loans and leases
declined as of December 31, 1996 compared with 1995 and 1994, the ratio of the
allowance to nonaccrual loans and leases increased during these same time
periods.
Based on the foregoing discussion and all of the factors analyzed by
management in determining the adequacy of the allowance, management believes
that the Banks' allowance for loan and lease losses is adequate at December 31,
1996. For additional information on the loan portfolio, the allowance for loan
and lease losses and nonaccrual, past due and restructured loans, see "Loan
Portfolio" within this section and note 5 of notes to consolidated financial
statements.
NON-INTEREST INCOME
Non-interest income totaled $5.1 million for 1996 compared with $3.3 million
and $2.8 million for 1995 and 1994, respectively. The $1.8 million increase in
non-interest income between 1996 and 1995 is due mainly to the gain on sale of
loans and the acquisition of Western. The acquisition of Western contributed
$605 thousand to non-interest income of which $267 thousand related to gains on
sales of securities which did not meet the asset/liability management strategy
of the Company. Further, service charges on deposits was affected favorably due
to the increase in deposits, and escrow fees increased as the Company
concentrated marketing efforts in this area, increased the staff in the escrow
division and experienced the benefit of greater activity in the local real
estate market. The increase in non-interest income from 1994 to 1995 was due
primarily to a non-recurring legal settlement.
NON-INTEREST EXPENSE
Non-interest expense totaled $27.2 million for 1996 compared with $22.1
million and $18.2 million for 1995 and 1994, respectively. The increase in
non-interest expense of $5.1 million is largely a result of the acquisition of
Western. Western added $3.8 million of expenses to the Company for the fourth
quarter including $499 thousand for goodwill amortization and $1.1 million of
non-recurring items including an employment contract buyout, merger costs,
consulting and KSOP termination.
Non-interest expense increased due to higher salary and occupancy costs.
Staff additions related to the increased business activity including the escrow
division, the business development group and opening two new branches in
Fountain Valley and Laguna Beach. Occupancy costs increased due to an assessment
of common area maintenance charges by the management company for the years 1993
through 1996 in addition to the new branches. Additional litigation reserves of
$950 thousand were charged to expense to provide for potential losses regarding
on-going litigation matters. These increases were partially offset by a decline
in the FDIC regulatory assessment rate and net gains in OREO operations of $573
thousand in 1996 compared to $2.9 million in OREO related expenses in fiscal
1995.
The increase in non-interest expense from 1994 to 1995 was due primarily to
a rise in salary costs, OREO related expenses and professional services.
PROVISION FOR INCOME TAXES
The provision for income taxes represents an effective tax rate of 9.3% in
1996, compared to an effective tax benefit rate of 47.7% in 1995. The difference
from the expected rate of 34% in 1995 is the result of state income taxes and
the adjustment to the deferred tax asset valuation allowance. The difference
from the expected rate of 34% in 1996 relates to state taxes and the
non-deductibility of goodwill for tax purposes which is offset primarily by a
deferred tax asset valuation allowance adjustment. In 1994, income tax expense
was increased by $581,000 in recognition of management's concern, at that time,
about realization of the net deferred tax asset. At December 31, 1996, the
Company had a deferred tax asset of approximately $6.5 million. Management has
determined that the deferred tax asset is more likely than not to be realized
based on current and expected taxable income. For further information on income
taxes, see note 10 of notes to consolidated financial statements.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
Western Bancorp:
We have audited the accompanying consolidated balance sheet of Western
Bancorp (formerly Monarch Bancorp) and subsidiaries as of December 31, 1996, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We did not audit the 1996 consolidated financial statements of California
Commercial Bankshares, acquired by the Company on June 4, 1997 in a
pooling-of-interests, which statements reflect total assets constituting 40.7%
and net interest income and net income constituting 70.0% and 83.7%,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for California Commercial
Bankshares, is based solely on the report of the other auditors.
The consolidated balance sheet of Western Bancorp (formerly Monarch Bancorp)
as of December 31, 1995, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1995, prior to their restatement for the 1997
pooling-of-interests transaction described in notes 1 and 2 of the notes to the
consolidated financial statements, were audited by other auditors whose report
dated February 29, 1996, expressed an unqualified opinion on those statements.
The separate financial statements of California Commercial Bankshares also
included in the 1995 and 1994 restated consolidated financial statements were
audited by other auditors whose report dated January 24, 1997, and March 17,
1997, as to notes 7 and 13, expressed an unqualified opinion on those
statements.
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, based on our audit and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Western Bancorp and subsidiaries as
of December 31, 1996, and the results of their operations and their cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
We also audited the combination of the accompanying consolidated balance
sheet as of December 31, 1995, and the combination of the related statements of
operations, changes in shareholders' equity and cash flows for each of the years
in the two-year period ended December 31, 1995, after restatement for the 1997
pooling-of-interests; in our opinion, such consolidated financial statements
have been properly combined on the basis described in notes 1 and 2 of the notes
to the accompanying consolidated financial statements.
KPMG PEAT MARWICK LLP
Los Angeles, California
June 4, 1997
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
California Commercial Bankshares:
We have audited the consolidated balance sheets of California Commercial
Bankshares and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996
(such consolidated financial statements are not included herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
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 statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of California Commercial
Bankshares and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 (such consolidated financial statements are not included
herein) in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
January 24, 1997
(March 17, 1997 as to Notes 7 and 13)
Los Angeles, California
17
<PAGE>
To the Shareholders and Directors of
Monarch Bancorp
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated balance sheet of Monarch Bancorp and
Subsidiaries as of December 31, 1995 and December 31, 1994, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years then ended. These financial statements, which are not
presented separately herein, are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Monarch Bancorp and
Subsidiaries as of December 31, 1995 and December 31, 1994, and the results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
DAYTON & ASSOCIATES
February 29, 1996
Laguna Hills, California
18
<PAGE>
WESTERN BANCORP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................................................ $ 66,234 $ 33,296
Federal funds sold................................................................. 18,717 47,938
------------ ------------
Total cash and cash equivalents.................................................. 84,951 81,234
Interest-bearing deposits in other banks........................................... -- 198
Federal Reserve Bank and Federal Home Loan Bank stock, at cost..................... 3,234 1,618
Securities held to maturity (fair value of $7,245 and $6,693)...................... 7,270 6,661
Securities available for sale (amortized cost of $245,740 and $82,338)............. 245,724 82,669
------------ ------------
Total securities................................................................. 256,228 90,948
Loans and leases held for investment, net.......................................... 458,139 209,716
Loans and leases available for sale, net........................................... 1,234 9,620
Premises and equipment............................................................. 7,215 1,694
Other real estate owned............................................................ 6,546 2,315
Deferred tax asset, net............................................................ 6,524 2,689
Taxes receivable................................................................... 2,628 --
Goodwill........................................................................... 29,342 --
Accrued interest receivable........................................................ 5,733 3,011
Other assets....................................................................... 4,360 2,719
------------ ------------
Total assets................................................................... $ 862,900 $ 404,144
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing.............................................................. $ 296,951 $ 150,591
Interest bearing demand.......................................................... 275,180 87,828
Savings.......................................................................... 65,636 49,945
Time certificates of deposit of $100,000 or more................................. 71,658 38,220
Time certificates of deposit less than $100,000.................................. 52,263 40,662
------------ ------------
Total deposits................................................................. 761,688 367,246
Notes payable...................................................................... 13,350 2,483
Taxes payable...................................................................... -- 822
Accrued interest payable........................................................... 754 296
Other liabilities.................................................................. 7,980 1,181
------------ ------------
Total liabilities................................................................ 783,772 372,028
------------ ------------
Shareholders' equity:
Preferred stock no par value, 5 million shares authorized, none issued........... -- --
Common stock no par value 100,000,000 shares authorized 7,027,885 and 3,890,051
issued and outstanding in 1996 and 1995........................................ 73,588 31,047
Retained earnings................................................................ 5,528 994
Unrealized gain on investment securities available for sale, net of taxes........ 12 207
Deferred charge related to KSOP.................................................. -- (132)
------------ ------------
Total shareholders' equity..................................................... 79,128 32,116
------------ ------------
Total liabilities and shareholders' equity..................................... $ 862,900 $ 404,144
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Interest income
Interest and fees on loans.............................................. $ 28,229 $ 23,054 $ 21,225
Interest on interest bearing deposits in other banks.................... 3 43 111
Interest on investment securities....................................... 8,606 4,427 4,667
Interest on Federal funds sold.......................................... 2,432 1,709 656
--------- --------- ---------
Total interest income................................................. 39,270 29,233 26,659
--------- --------- ---------
Interest expense
Deposits................................................................ 10,292 8,169 6,981
Notes payable........................................................... 469 268 302
--------- --------- ---------
Total interest expense................................................ 10,761 8,437 7,283
--------- --------- ---------
Net interest income....................................................... 28,509 20,796 19,376
Provision for loan and lease losses....................................... 1,488 7,025 4,360
--------- --------- ---------
Net interest income after provision for loan and lease losses............. 27,021 13,771 15,016
--------- --------- ---------
Non-interest income
Service charges and fees on deposits.................................... 1,880 1,489 1,370
Loan servicing and late fees............................................ 989 487 734
Service charges commissions and other fees.............................. 684 550 250
Gain (loss) on sale of securities available for sale.................... 267 (72) (41)
Gain (loss) on sale of loans............................................ 665 -- --
Other................................................................... 648 834 464
--------- --------- ---------
Total non-interest income............................................. 5,133 3,288 2,777
--------- --------- ---------
Non-interest expense
Salaries and benefits................................................... 12,869 9,170 8,242
Occupancy............................................................... 3,593 2,751 2,690
Advertising and business development.................................... 499 359 198
Other real estate owned................................................. (573) 2,861 1,313
Professional services................................................... 3,533 1,699 954
Telephone, stationery and supplies...................................... 1,095 729 652
Lower of cost or market adjustment on loans available for sale.......... -- 756 --
Goodwill amortization................................................... 499 -- --
Data processing for company............................................. 773 174 130
Customer services cost.................................................. 832 322 329
Regulatory assessments.................................................. 661 897 1,120
Other................................................................... 3,376 2,425 2,611
--------- --------- ---------
Total non-interest expense............................................ 27,157 22,143 18,239
--------- --------- ---------
Income (loss) before income taxes......................................... 4,997 (5,084) (446)
Income taxes (benefit).................................................... 463 (2,426) 546
--------- --------- ---------
Net income (loss)..................................................... $ 4,534 $ (2,658) $ (992)
--------- --------- ---------
--------- --------- ---------
Per share information.....................................................
Weighted-average number of common and common equivalent shares
outstanding........................................................... 4,770.8 3,160.6 2,520.5
Net income (loss) per share............................................. $ .95 $ (.84) $ (.39)
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED GAIN
(LOSS) ON DEFERRED
COMMON STOCK RETAINED SECURITIES CHARGE TOTAL
---------------------- EARNINGS AVAILABLE FOR RELATED TO SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) SALE, NET KSOP EQUITY
----------- --------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993, as previously
reported.............................. 93 $ 7,368 $ (4,286) $ 53 $ (211) $ 2,924
Adjustments for the CCB
pooling-of-interests................ 2,423 11,257 8,930 -- -- 20,187
----- --------- ----------- ------ ----- -------------
Balance at December 31, 1993, as
restated.............................. 2,516 18,625 4,644 53 (211) 23,111
Repayment on KSOP debt................ -- -- -- -- 38 38
Unrealized depreciation on investments
securities available for sale,
net................................. -- -- -- (1,727) -- (1,727)
Net loss.............................. -- -- (992) -- -- (992)
----- --------- ----------- ------ ----- -------------
Balance December 31, 1994............... 2,516 18,625 3,652 (1,674) (173) 20,430
Repayment on KSOP debt................ -- -- -- -- 41 41
Unrealized appreciation on investment
securities available for sale,
net................................. -- -- -- 1,881 -- 1,881
Stock options exercised............... 25 12 -- -- -- 12
Tax benefit of stock options
exercised........................... -- 78 -- -- -- 78
Issuance of common stock.............. 1,349 12,332 -- -- -- 12,332
Net loss.............................. -- -- (2,658) -- -- (2,658)
----- --------- ----------- ------ ----- -------------
Balance December 31, 1995............... 3,890 31,047 994 207 (132) 32,116
Repayment on KSOP debt................ -- -- -- -- 132 132
Unrealized depreciation on investment
securities available for sale,
net................................. -- -- -- (195) -- (195)
Stock options exercised............... 62 281 -- -- -- 281
Tax benefit of stock options
exercised........................... -- 51 -- -- -- 51
Issuance of common stock.............. 3,076 42,213 -- -- -- 42,213
Repurchase of shares.................. -- (4) -- -- -- (4)
Net income............................ -- -- 4,534 -- -- 4,534
----- --------- ----------- ------ ----- -------------
Balance December 31, 1996 7,028 $ 73,588 $ 5,528 $ 12 $ -- $ 79,128
----- --------- ----------- ------ ----- -------------
----- --------- ----------- ------ ----- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)............................................................. $ 4,534 $ (2,658) $ (992)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan and lease losses......................................... 1,488 7,025 4,360
Deferred income taxes....................................................... (379) (2,844) 1,412
Provision for losses on other real estate owned............................. 339 207 444
Depreciation................................................................ 713 638 767
Amortization of bond discounts and premiums, net............................ 187 797 750
Goodwill amortization....................................................... 499 -- --
Loans originated for sale................................................... -- (9,620) --
Lower of cost or market adjustment on loans available for sale.............. -- 756 --
Proceeds from sale of loans originated for sale............................. 3,466 -- --
(Gain) loss on sale of other real estate owned.............................. (1,175) 1,675 4
Gain on sale of loans originated for sale................................... (665) -- --
(Gain) loss on sale of securities available for sale........................ (267) 72 41
Net increase (decrease) in other liabilities................................ 1,614 555 (1,132)
Net (increase) decrease in other assets..................................... 278 933 (420)
---------- --------- ---------
Net cash provided by (used in) operating activities....................... 10,632 (2,464) 5,234
---------- --------- ---------
Cash flows from investing activities:
Net decrease in interest-bearing deposits at other banks...................... 198 1,184 2,173
Securities held to maturity:
Proceeds from maturities.................................................... 5,267 3,394 4,140
Purchases................................................................... (4,880) (5,704) (5,201)
Securities available for sale:
Proceeds from maturities.................................................... 72,927 18,583 22,653
Sales....................................................................... 24,766 21,160 49,217
Purchases................................................................... (127,096) (37,540) (63,332)
Purchases of FRB and FHLB stocks.............................................. (1,616) (1,618) --
Net (increase) decrease in loans and leases................................... (50,006) 656 1,833
Recoveries of loans and investment in leases.................................. 553 494 1,156
Additions to other real estate owned.......................................... (284) -- (297)
Sales of other real estate owned.............................................. 6,733 6,300 8,938
Additions to premises and equipment, net of proceeds from sales............... (1,127) (762) (264)
Increase in assets and liabilities due to the acquisition of Western Bank:
Securities available for sale............................................... (134,394) -- --
Securities held to maturity................................................. (988) -- --
Loans and leases............................................................ (198,418) -- --
Deferred taxes.............................................................. (3,663) -- --
Other assets................................................................ (11,729) -- --
Premises and equipment...................................................... (5,099) -- --
Deposits.................................................................... 353,111 -- --
Other liabilities........................................................... 3,932 -- --
Goodwill.................................................................... (29,841) -- --
---------- --------- ---------
Net cash provided by (used in) investing activities....................... (101,654) 6,147 21,016
---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flow from financing activities:
Net increase (decrease) in deposits........................................... $ 41,331 $ 31,214 $ (27,409)
Increase (decrease) in notes payable.......................................... 10,867 (53) --
Purchase of treasury shares................................................... (4) -- --
Proceeds from issuance of common stock and exercise of options, net of
issuance costs.............................................................. 42,545 12,422 --
--------- --------- ----------
Net cash provided by (used in) financing activities......................... 94,739 43,583 (27,409)
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents............................ 3,717 47,266 (1,159)
Cash and cash equivalents at the beginning of the year.......................... 81,234 33,968 35,127
--------- --------- ----------
Cash and cash equivalents at the end of the year................................ $ 84,951 $ 81,234 $ 33,968
--------- --------- ----------
--------- --------- ----------
Supplemental disclosure of cash flow information
Property acquired through foreclosure......................................... $ 4,059 $ 7,296 $ 9,324
Assumptions of debt through foreclosure....................................... $ 854 -- $ 67
Loans to facilitate the sale of other real estate owned....................... $ 2,936 $ 800 --
Cash paid for
Interest.................................................................... $ 10,931 $ 8,434 $ 7,268
Taxes....................................................................... $ 1,389 $ 627 $ 602
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
WESTERN BANCORP-CALIFORNIA COMMERCIAL BANKSHARES MERGER
On June 4, 1997, CCB merged with and into the Company. National is the
wholly-owned subsidiary of CCB. The merger was accounted for as a
pooling-of-interests, and, accordingly, the financial information for all prior
periods presented has been restated to present the combined consolidated
financial condition and results of operations of the Company and CCB as if the
merger had been in effect for all periods presented. Further details pertaining
to the merger are presented in note 2.
BASIS OF PRESENTATION
The accounting and reporting policies of Western Bancorp (the "Company",
formerly Monarch Bancorp) and its wholly-owned subsidiaries, National Bank of
Southern California ("National") and Western Bank ("Western"), (collectively
"the Banks"), are in accordance with generally accepted accounting principles
and conform to general practices within the banking industry. Western was
acquired by the Company on September 30, 1996. The acquisition was accounted for
as a purchase. Accordingly, results of operations include Western only from the
date of acquisition. All significant inter-company balances and transactions
have been eliminated.
NATURE OF OPERATION
The Company conducts business through its bank subsidiaries. National is a
full service bank with seven banking offices, and Western is a full service bank
with five banking offices. The Banks are subject to the laws of the State of
California and the regulations of the Federal Deposit Insurance Corporation and
the Office of the Comptroller of the Currency. The Company is a regulated bank
holding company under the Bank Holding Company Act of 1956, and is also subject
to regulation and supervision by the Federal Reserve Board. The areas served by
the Banks are Orange County and the western area of Los Angeles.
ESTIMATES
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
disclosure 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. Material
estimates subject to change include the allowance for loan and lease losses, the
carrying value of other real estate owned, and the deferred tax asset.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include the
balance sheet captions "Cash and due from banks" and "Federal funds sold."
SECURITIES
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and carried at amortized cost.
Investments that are purchased and held principally for the purpose of selling
them in the near term are classified as "trading" and carried at fair value,
with unrealized gains and losses included in earnings. Investments not
classified as either "held to maturity" or "trading" are classified as
"available for sale" and carried at fair value, with unrealized gains and losses
24
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
excluded from earnings and reported as a separate component of shareholders'
equity. When a debt security is transferred into the "held to maturity" category
from the "available for sale" category, the unrealized gain or loss at the
transfer date continues to be reported as a separate component of shareholders'
equity and is amortized over the remaining life of the related security as a
yield adjustment. If a decline in fair value below amortized cost basis of an
investment is judged by management to be other than temporary, the cost basis of
the investment is written down to fair value and the amount of the writedown is
included in earnings. The Company's investments in Federal Reserve Bank and
Federal Home Loan Bank Stock are carried at cost as these equity securities are
not readily marketable.
Premiums and discounts on investment and mortgage-backed securities are
recognized in the statements of income using a method that approximates the
level-yield method over the lives of the securities. Gains and losses on
securities are recognized when realized with the cost basis of investments sold
determined on a specific identification basis.
LOANS
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest income is ordinarily discontinued
when a loan becomes 90 days past due as to principal or interest; however,
management may elect to continue the accrual when the estimated net realizable
value of collateral is sufficient to cover the principal balance and the accrued
interest. When the loan is determined to be uncollectible, interest accrued in
prior years and the principal are charged to the allowance for loan losses.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are
capitalized and recognized as an adjustment of the yield on the related loan.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained at a level believed by
management to be adequate to meet reasonably foreseeable loan and lease losses
on the basis of many factors including the risk characteristics of the
portfolio, underlying collateral, current and anticipated economic conditions
that may affect the borrower's ability to pay, specific problem loans and trends
in loan delinquencies and charge-offs. Losses on loans and leases are provided
for under the allowance method of accounting. The allowance is increased by
provisions charged to income and reduced by loan charge-offs, net of recoveries.
Loans, including impaired loans, are charged off in whole or in part when, in
management's opinion, collectibility is not probable.
While management uses available information to establish the allowance for
loan and lease losses, future additions to the allowance may be necessary if
economic developments differ substantially from the assumptions used in making
the evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowances for loan
losses. Such agencies may require the Banks to recognize additions to the
allowance based on judgments different from those of management.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due
25
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
according to contractual terms of the loan agreement. The definition of
"impaired loans" is not the same as the definition of "nonaccrual loans,"
although the two categories overlap. Nonaccrual loans include impaired loans and
are those on which the accrual of interest is discontinued when collectibility
of principal or interest is uncertain or payments of principal or interest have
become contractually past due 90 days. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan impaired, if (i) it is probable that the Company will
collect all amounts due in accordance with the contractual terms of the loan or
(ii) the loan is not a commercial, commercial real estate or an individually
significant mortgage or consumer loan. Factors considered by management in
determining impairment include payment status and collateral value. The amount
of impairment for these types of impaired loans is determined by the difference
between the present value of the expected cash flows related to the loan, using
the original contractual interest rate, and its recorded value, or, as a
practical expedient in the case of collateralized loans, the difference between
the fair value of the collateral and the recorded amount of the loans. When
foreclosure is probable, impairment is measured based on the fair value of the
collateral. Mortgage and consumer loans which are not individually significant
are measured for impairment collectively. Loans that experience insignificant
payment delays and insignificant shortfalls in payment amounts generally are not
classified as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower's prior payment record, and
the amount of the shortfall in relation to the principal and interest owed.
LOANS HELD FOR SALE
Loans held for sale are recorded at the lower of cost or estimated market
value, determined on an aggregate basis, and include loan origination costs and
related fees. Any transfers of loans held for sale to the investment portfolio
are recorded at the lower of cost or estimated market value on the transfer
date. Gains or losses resulting from sales of loans are recorded at the time of
sale and are determined by the difference between the net sales proceeds and the
carrying value of the loans sold.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of real estate acquired
through foreclosure. These assets are recorded at the lower of the carrying
value of the receivable or the fair value less selling costs of the related real
estate. The excess carrying value, if any, over the fair value of the asset
received is charged to the allowance for loan losses at the time of acquisition.
Any subsequent decline in the fair value of OREO is recognized as a charge to
operations and in a corresponding increase to the valuation allowance. Gains
from sales and net operating expense of OREO are included in operations;
realized losses are charged to the valuation allowance.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization which are charged to expense on a straight-line basis over the
estimated useful lives of the assets or the terms of the leases if shorter.
26
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is amortized to expense using the straight-line method over fifteen
years. On an ongoing basis, management reviews the valuation and amortization of
goodwill. During this review, management estimates the value of the Company's
goodwill, taking into consideration any events and circumstances that might have
diminished its value.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return.
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share of common stock is based on the weighted-average
number of common and common equivalent shares outstanding during the year.
EFFECT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which
establishes financial accounting and reporting standards for stock-based
employee compensation plans. This statement encourages all entities to adopt a
new method of accounting to measure compensation cost of all employee stock
compensation plans based on the estimated fair value of the award at the date it
is granted. Companies are, however, allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net income and
earnings per share as if this statement had been adopted. The Company elected to
continue accounting for stock options under the intrinsic value method and has
provided the pro forma disclosure.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In June 1996, the FASB issued the Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of
27
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Management of the Company does
not expect that adoption of SFAS 125 will have a material impact on the
Company's financial condition and results of operations.
NOTE 2--ACQUISITIONS
WESTERN BANCORP-CCB MERGER
CCB merged with and into the Company on June 4, 1997. The merger was
accounted for as a pooling-of-interests, and under the terms of the merger
agreement 3,043,226 Company common shares were exchanged for all of the
outstanding common shares of CCB on a 1-for-1 exchange ratio (after giving
effect to the reverse stock split of 8.5-for-1). The financial information for
all prior periods presented has been restated to present the combined
consolidated financial condition and results of operations of the Company and
CCB as if the merger had been in effect for all periods presented. At the date
of the merger, the Company charged to expense merger costs of $3.0 million
(after tax), representing investment banking, filing and professional fees,
employee compensation, and costs of computer system conversions. Such costs are
not included in the accompanying consolidated financial statements. The
following table presents certain financial data reported separately by each
company and on a combined basis for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net interest income
The Company (formerly Monarch Bancorp).................................. $ 8,545 $ 3,343 $ 2,991
CCB..................................................................... 19,964 17,453 16,385
Combined................................................................ 28,509 20,796 19,376
Net income (loss)
The Company (formerly Monarch Bancorp).................................. $ 738 $ 683 $ (1,851)
CCB..................................................................... 3,796 (3,341) 859
Combined................................................................ 4,534 (2,658) (992)
Net income (loss) per share
The Company (formerly Monarch Bancorp).................................. $ 0.42 $ 1.14 $ (19.81)
CCB..................................................................... 1.26 (1.30) 0.35
Combined................................................................ 0.95 (0.84) (0.39)
Issuances of common stock
The Company (formerly Monarch Bancorp).................................. $ 42,213 $ 9,132 --
CCB..................................................................... 332 3,290 --
Combined................................................................ 42,545 12,422 --
</TABLE>
28
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
WESTERN BANK
On September 30, 1996, the Company completed the acquisition of Western in
which Western became a wholly-owned subsidiary of the Company.
The Company paid $17.25 per share, or approximately $61.1 million, for the
3,543,156 outstanding shares of Western, and an additional $5.5 million related
to the outstanding stock options of Western. The net consideration for the
acquisition of Western was thus approximately $66.6 million. The acquisition was
accounted for under the purchase method of accounting which resulted in
approximately $30 million of goodwill being recorded.
The Company funded the purchase price with the issuance of approximately
$42.2 million of common stock, net of approximately $1 million in issuance
costs, in the 1996 Private Placement, and from the proceeds of a three year loan
of $26.5 million from The Northern Trust Company (the "Lender"). A $15.5 million
dividend was declared by Western concurrently with the completion of the
acquisition and paid to the Company, which was used to reduce the $26.5 million
note to $11 million.
The following table presents unaudited pro forma results of operations of
the Company for the years ended December 31, 1996 and 1995 as if the acquisition
of Western had been effective at the beginning of each year presented. The
unaudited pro forma combined summary of operations is intended for informational
purposes only and is not necessarily indicative of the future operating results
of the Company or of the operating results of the Company that would have
occurred had the Western acquisition been in effect for the years presented.
UNAUDITED PRO FORMA COMBINED SUMMARY OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest income......................................................... $ 60,620 $ 56,091 $ 48,150
Interest expense........................................................ 17,850 15,722 11,140
------------ ------------ ------------
NET INTEREST INCOME................................................. 42,770 40,369 37,010
Provision for loan and lease losses..................................... 2,291 7,735 5,412
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES....... 40,479 32,634 31,598
Non interest income..................................................... 6,257 6,793 5,754
Non interest expense.................................................... 39,772 39,518 33,757
------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES.......................................... 6,964 (91) 3,595
Income tax expense...................................................... 1,902 516 2,141
------------ ------------ ------------
NET INCOME (LOSS)................................................... $ 5,062 $ (607) $ 1,454
------------ ------------ ------------
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE......................................... $ 0.72 $ (0.09) $ 0.40
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding..................................... 7,053,094 6,608,094 3,675,037
</TABLE>
NOTE 3--RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain average reserve balances with the
Federal Reserve Bank based on a percentage of deposits. The total average amount
of those reserve balances for the year ended December 31, 1996 was approximately
$16.5 million.
29
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES
SECURITIES
Investment securities at December 31 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
Securities Held to Maturity:
US Government Securities....................................... $ 1,147 $ 13 $ -- $ 1,160
US Agency Securities........................................... 4,202 2 (1) 4,203
Mortgage-backed Securities..................................... 1,921 -- (39) 1,882
---------- ----- ----- ----------
$ 7,270 $ 15 $ (40) $ 7,245
---------- ----- ----- ----------
---------- ----- ----- ----------
Securities Available for Sale:
US Government securities....................................... $ 163,325 $ 53 $ (106) $ 163,272
US Agency securities or insured obligations.................... 65,033 17 (257) 64,793
Mortgage-backed securities..................................... 6,414 34 (10) 6,438
State and political subdivisions............................... 413 -- (2) 411
Other debt securities.......................................... 1,390 68 (9) 1,449
---------- ----- ----- ----------
Total debt securities........................................ 236,575 172 (384) 236,363
Mutual funds................................................... 9,042 36 -- 9,078
Other equity securities........................................ 123 160 -- 283
---------- ----- ----- ----------
Total........................................................ $ 245,740 $ 368 $ (384) $ 245,724
---------- ----- ----- ----------
---------- ----- ----- ----------
1995
Securities Held to Maturity:
US Government Securities....................................... $ 485 $ 16 $ -- $ 501
US Agency Securities........................................... 4,500 5 (4) 4,501
Mortgage-backed Securities..................................... 1,676 25 (10) 1,691
---------- ----- ----- ----------
$ 6,661 $ 46 $ (14) $ 6,693
---------- ----- ----- ----------
---------- ----- ----- ----------
Securities Available for Sale:
US Government securities....................................... $ 40,182 $ 173 $ (27) $ 40,328
US Agency securities or insured obligations.................... 29,146 106 (18) 29,234
Mortgage-backed securities..................................... 3,163 45 (7) 3,201
State and political subdivisions............................... 423 -- (7) 416
Other debt securities.......................................... -- -- -- --
---------- ----- ----- ----------
Total debt securities........................................ 72,914 324 (59) 73,179
Mutual funds................................................... 9,240 -- -- 9,240
Other equity securities........................................ 184 80 (14) 250
---------- ----- ----- ----------
Total........................................................ $ 82,338 $ 404 $ (73) $ 82,669
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
30
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES (CONTINUED)
The amortized cost and estimated fair value of debt securities at December
31, 1996, by contractual maturity, are shown below. Mortgage-backed securities
included in the held to maturity and available for sale portfolios which are not
due at a single maturity date are allocated over several maturity groupings
based on anticipated maturities of the underlying assets. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
HELD TO MATURITY
Due in one year or less............................................... $ 462 $ 462
Due after one year through five years................................. 5,528 5,519
Due after five years through ten years................................ 290 298
Due after ten years................................................... 990 966
---------- ----------
$ 7,270 $ 7,245
---------- ----------
---------- ----------
AVAILABLE FOR SALE
Due in one year or less............................................... $ 92,444 $ 92,480
Due after one year through five years................................. 135,892 135,624
Due after five years through ten years................................ 2,021 2,023
Due after ten years................................................... 6,218 6,236
---------- ----------
$ 236,575 $ 236,363
---------- ----------
---------- ----------
</TABLE>
Gross gains and losses on sale of available for sale securities were
$267,000 and $0, respectively, for 1996, and $0 and $72,000, respectively, for
1995. Gross gains and losses were $12,000 and $53,000, respectively, for 1994.
Investment securities available for sale with a carrying amount of
approximately $34 million and $7 million, were pledged as collateral to secure
public deposits at December 31, 1996 and 1995, respectively.
The Banks may hold derivative securities as part of their investment
portfolios. Three Collateralized Mortgage Obligations (CMOs) were in the held to
maturity portfolio at Monarch as of December 31, 1996. These FNMA and FHLMC
securities are carried at book value of approximately $1.92 million and had a
current market value of approximately $1.88 million as of December 31, 1996. The
weighted average yield of these investments was 7.02% and the weighted average
life was 1.69 years as of December 31, 1996. All three CMOs have been tested no
less than annually using the FFIEC "High Risk Security Test," and each of the
securities have passed the tests. This stress test is used by bank regulators to
assess the relative risks of investments in CMOs. A security that passes this
test is not considered to be "high-risk;" a security that fails the test may be
subject to additional regulatory scrutiny and under the most severe case, the
bank could be asked to sell the security.
Western holds $3 million in FNMA Multi Step securities with a weighted
average yield of 6.38% as of December 31, 1996. The securities do not have a
call date or repricing date in the remainder of 1997 and all will mature in
October 1998.
31
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES
LOANS AND LEASES
Most of the loans and leases made by the Banks are to customers located in
Orange County and the western part of Los Angeles, California. Mortgage and
construction loans are collateralized by real estate trust deeds. The Banks
generally require security in the form of assets, including real estate, on
commercial and installment loans. The ability of the Banks' customers to honor
their loan agreements is dependent upon the general economy of the Banks' market
areas. The distribution of the Company's loan portfolio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate construction.............................................. $ 51,408 $ 26,987
Real estate mortgage.................................................. 207,263 71,560
Commercial............................................................ 182,104 101,029
Leases................................................................ 3,027 3,463
Installment and other................................................. 26,892 15,304
---------- ----------
GROSS LOANS AND LEASES............................................ 470,694 218,343
Less:
Unearned lease income............................................... (364) (399)
Deferred loan fees.................................................. (1,381) (832)
Allowance for loan and lease losses................................. (10,810) (7,396)
---------- ----------
NET LOANS AND LEASES.............................................. $ 458,139 $ 209,716
---------- ----------
---------- ----------
</TABLE>
At December 31, 1996, National had pledged real estate loans amounting to
approximately $3 million as collateral for a line of credit with the Federal
Home Loan Bank.
32
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses for the three years ended
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan and lease losses:
Balance at the beginning of the period.......................... $ 7,396 $ 6,797 $ 8,277
--------- --------- ---------
Loans and leases charged off:
Real estate mortgage and construction....................... 2,370 4,847 5,560
Commercial.................................................. 1,059 1,733 1,317
Installment and other....................................... 350 338 149
Leases...................................................... 27 11 48
--------- --------- ---------
Total loans and leases charged off........................ 3,806 6,929 7,074
--------- --------- ---------
Recoveries on loans and leases charged off:
Real estate mortgage and construction....................... 126 413 501
Commercial.................................................. 396 38 626
Installment and other....................................... 49 18 55
Leases...................................................... -- 34 52
--------- --------- ---------
Total recoveries on loans and leases charged off.......... 571 503 1,234
--------- --------- ---------
Net loans and leases charged off.......................... 3,235 6,426 5,840
Provision charged to operating expense........................ 1,488 7,025 4,360
Other additions due to:
Acquisition of Western...................................... 5,041 -- --
Loan portfolio purchases.................................... 120 -- --
--------- --------- ---------
Balance at the end of the period................................ $ 10,810 $ 7,396 $ 6,797
--------- --------- ---------
--------- --------- ---------
</TABLE>
CREDIT QUALITY
A summary of loans on which the accrual of interest has been discontinued as
of December 31 follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Real estate construction................................... $ 1,031 $ 4,545 $ 7,021
Real estate mortgage....................................... 10,024 10,368 549
Commercial................................................. 1,138 952 7,579
Leases..................................................... -- 27 --
Installment and other...................................... 1,117 26 53
--------- --------- ---------
Total.................................................... $ 13,310 $ 15,918 $ 15,202
--------- --------- ---------
--------- --------- ---------
</TABLE>
33
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
If interest on nonaccrual loans had been recognized at the original interest
rates, interest income would have increased approximately $606,000, $642,000 and
and $994,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
If the measurement of an impaired loan is less than the recorded amount of
the loan, impairment is recognized through a valuation allowance with a
corresponding charge to the provision for loan and lease losses. At December 31,
1996 and 1995, impaired loans and the related specific loan loss allowances were
as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------
RECORDED ALLOWANCE FOR NET
INVESTMENT LOAN LOSSES INVESTMENT
----------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances.............................. $ 2,844 $ 575 $ 2,269
Without specific allowances........................... 11,096 -- 11,096
----------- ----- -----------
Total impaired loans................................ $ 13,940 $ 575 $ 13,365
----------- ----- -----------
----------- ----- -----------
<CAPTION>
1995
-----------------------------------------
RECORDED ALLOWANCE FOR NET
INVESTMENT LOAN LOSSES INVESTMENT
----------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances.............................. $ 2,438 $ 524 $ 1,914
Without specific allowances........................... 15,158 -- 15,158
----------- ----- -----------
Total impaired loans................................ $ 17,596 $ 524 $ 17,072
----------- ----- -----------
----------- ----- -----------
</TABLE>
The average recorded investment in impaired loans for the years ended
December 31, 1996 and 1995 was approximately $7,778,000 and $14,399,000,
respectively. Interest income on impaired loans of approximately $247,000 and
$333,000 was recognized for cash payments in 1996 and 1995, respectively.
NOTE 6--PROPERTY AND EQUIPMENT
The components of premises and equipment at December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and building........................................................ $ 3,892 $ --
Furniture, fixtures and equipment........................................ 6,496 5,087
Leasehold improvements................................................... 1,867 1,433
--------- ---------
12,255 6,520
Less accumulated depreciation and amortization........................... 5,040 4,826
--------- ---------
$ 7,215 $ 1,694
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEPOSITS
At December 31, 1996, the scheduled contractual maturities of certificates
of deposit are as follows (In thousands):
<TABLE>
<S> <C>
1997.............................................................. $ 113,135
1998.............................................................. 6,059
1999.............................................................. 2,240
2000.............................................................. 2,089
2001 and thereafter............................................... 398
---------
$ 123,921
---------
---------
</TABLE>
NOTE 8--NOTES PAYABLE
On September 30, 1996, the Company borrowed $26.5 million from the Northern
Trust Company of Chicago under a three year revolving loan agreement.
Concurrently with the acquisition of Western, the Company reduced the loan by
$15.5 million as a result of a dividend in the same amount from Western. The
balance at December 31, 1996 was $11 million, and the interest rate was 6.75%.
The highest amount outstanding during 1996 was $26.5 million; the average
balance outstanding during the year was $2.75 million; and the average rate paid
was 6.95% for the year. The revolving loan agreement expires on September 25,
1999. The loan agreement contains covenants which impose certain restrictions on
activities of the Company and its financial position. Such covenants include
minimum net worth ratios, maximum debt ratios, a minimum return on average
assets, and minimum and maximum credit quality ratios. As of December 31, 1996,
the Company, and where applicable, its subsidiaries, were in compliance with
each of such covenants.
In December 1988 CCB obtained a $3 million term loan from another financial
institution for the purpose of providing additional capital to National. The
credit agreement for this loan was amended pursuant to a Second Amendment to the
credit agreement, dated August 25, 1994 (the "Second Amendment"). Interest was
payable monthly on the unpaid principal balance of the loan and required
prepayment of 40% of the proceeds of any stock offering or placement of debt or
equity. The Second Amendment was supported by a Support Agreement (the "Support
Agreement") between a shareholder and director of CCB (the "Shareholder") and
CCB whereby the Shareholder guaranteed the payment of the loan.
To compensate the Shareholder for signing the Support Agreement and
subsequently paying off the lending institution CCB had signed a Holding Company
Support Agreement (the "Holding Company Support Agreement") whereby CCB agreed
to: (1) pay to the Shareholder a fee equal to 1% of the unpaid principal amount
of the note on each anniversary date and (2) issue to the Shareholder on or
prior to March 31, 1997, and there after on each anniversary date, warrants to
purchase 25,000 shares of common stock of the Company at an exercise price per
share equal to 80% of the book value per share of the Company on December 31,
1996 and subsequent ending periods respectively. The Shareholder paid off the
outstanding balance of $2,350,000 to the lending institution in March of 1996
and CCB entered into a new note with the shareholder (the "New Note"). The New
Note bears an interest rate of 3% over prime rate with interest only payable
monthly for the first year; and thereafter, quarterly principal payable of
$125,000 plus interest payable monthly. Any remaining principal and interest is
due on April 1, 1999. On March 17, 1997, the Company paid down $2,000,000 on
this note and based on the $350,000 remaining balance of the note issued to the
Shareholder a proportionate number of warrants to purchase 3,723 shares of the
35
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--NOTES PAYABLE (CONTINUED)
Company's common stock at an exercise price of $6.60 per share pursuant to the
terms of the Holding Company Support Agreement. The Company also paid the
Shareholder a fee equal to 1% of the unpaid principal balance on March 17, 1997.
The remaining unpaid principal balance of $350,000 is subject to the original
terms of the note.
National maintains two lines of credit with outside financial institutions
for the purpose of purchasing Federal funds. The lines of credit bear interest
at a floating rate and provide for borrowing up to $8,000,000 and $5,000,000
respectively. At December 31, 1996 and 1995, no amounts were outstanding on
these lines of credit.
Under an agreement with the Federal Home Loan Bank, National may obtain an
extension of credit of up to 50% of total assets collateralized by real estate
loans. At December 31, 1996, National had pledged loans amounting to $2,935,000
and had available credit of $1,468,000 based on 50% of the outstanding balance
of pledged loans. No amounts were outstanding on this line of credit at December
31, 1996 and 1995.
NOTE 9--SHAREHOLDERS' EQUITY
EQUITY TRANSACTIONS
During 1995, the Company completed two capital raising transactions. Under a
private placement which closed in March, 1995, the Company issued approximately
535,000 shares of common stock for net proceeds of approximately $5,668,000. In
September, 1995, pursuant to a shareholders' rights and public offering, the
Company issued approximately 340,000 shares of common stock for net proceeds of
approximately $3,464,000. Pursuant to the September 1995 equity transaction, the
Company issued to parties related to Belle Plaine Financial, LLC, 48,402
warrants to acquire common stock at $13.77 per share. The warrants expire on
September 30, 2005.
In November 1995, the Company sold 474,000 shares of its common stock
through private placement at $6.75 per share for the purpose of contributing
most of the proceeds into National as additional capital. Of the total proceeds
of $3,200,000, the Company contributed $2,900,000 into National's capital in
December 1995.
As part of the September 30, 1996 Western acquisition, the Company sold
approximately 3,076,000 shares of common stock in a private placement for net
proceeds of approximately $42,213,000. Pursuant to this equity transaction, the
Company issued to parties related to Belle Plaine Financial, LLC, 92,281
warrants to acquire common stock at $16.83 per share. The warrants expire on
September 30, 2006.
RESTRICTIONS ON PAYMENTS OF DIVIDENDS
The Banks are subject to certain restrictions under regulations governing
state banks which limit their ability to transfer funds to the Company through
inter-company loans, advances, or cash dividends.
36
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal.......................................................... $ 438 $ (341) $ (79)
State............................................................ 230 39 4
--------- --------- ---------
668 (302) (75)
--------- --------- ---------
Deferred expense (benefit):
Federal.......................................................... (33) (1,141) 621
State............................................................ (172) (983) --
--------- --------- ---------
(205) (2,124) 621
--------- --------- ---------
Total income taxes................................................. $ 463 $ (2,426) $ 546
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes differs from that which would result from
applying the U.S. statutory rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense at statutory rate.................... $ 1,699 $ (1,729) $ (152)
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefits................... 38 (344) 97
Unbenefited state net operating losses........................ -- -- 20
Amortization of goodwill...................................... 170 -- --
Valuation allowance........................................... (1,576) (413) 581
Other, net.................................................... 132 60 --
--------- --------- ---------
Total income taxes.............................................. $ 463 $ (2,426) $ 546
--------- --------- ---------
--------- --------- ---------
</TABLE>
37
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1996 and 1995
are presented below. December 31, 1995 information does not reflect deferred tax
assets of Western which was acquired on September 30, 1996.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Unrealized loss on loans................................................ $ 265 $ 342
Loans, principally due to allowance for losses.......................... 2,750 2,667
Other real estate owned................................................. 788 614
Interest on nonaccrual loans............................................ 239 171
Net operating loss carryovers........................................... 392 615
Purchase accounting adjustments......................................... 1,022 --
Self-insurance reserve.................................................. 128 106
Loss on mortgage division............................................... 163 --
Depreciation............................................................ 473 233
Contingencies........................................................... 382 184
Other................................................................... 465 404
--------- ---------
Deferred tax assets....................................................... 7,067 5,336
Valuation allowance..................................................... -- (1,576)
--------- ---------
Deferred tax assets....................................................... 7,067 3,760
--------- ---------
Deferred tax liabilities:
FHLB stock dividends.................................................... (215) (59)
Financial accounting lease difference................................... (183) (846)
Other................................................................... (145) (166)
--------- ---------
Deferred tax liabilities.................................................. (543) (1,071)
--------- ---------
Net deferred tax asset.................................................... $ 6,524 $ 2,689
--------- ---------
--------- ---------
</TABLE>
Realization of the net deferred tax assets may be based on utilization of
carrybacks to prior taxable periods, anticipation of future taxable income and
the utilization of tax planning strategies. At December 31, 1995, the Company
established a valuation allowance on deferred tax assets which management
believed was more likely than not would not be realized. Based on current period
earnings, management believes the future income of the Company is sufficient to
conclude that it is more likely than not that all deferred tax assets will be
realized. As a result, no valuation allowance is recorded at December 31, 1996,
and the valuation allowance existing at December 31, 1995 was recognized in 1996
earnings.
On December 31, 1996 the Company had $2,694,348 and $1,079,823 of federal
and California net operating loss carryovers, respectively, and $333,480 in tax
credit carryforwards. During 1995, the Company entered into a recapitalization
plan which resulted in a change in ownership for purposes of Internal Revenue
Code ("IRC") Section 382. IRC section 382 imposes restrictions on the
utilizations of certain tax loss and credit carryforwards which resulted in
$1,741,155 and $126,628 of the federal and California net operating loss
carryovers and $333,486 of tax credit carryovers no longer being available for
utilization.
Management believes that the remaining $953,193 and $953,195 of the federal
and California net operating losses will be realized. The net operating loss
carryovers have various expiration dates through
38
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
the year 2010. In 1996, the 1995 deferred tax assets, which are unrealizable
pursuant to IRC Section 382, have been reclassified to eliminate those deferred
tax assets and their corresponding valuation allowance.
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES
The Company and the Banks conduct operations from leased facilities under
operating leases which expire on various dates and which contain certain renewal
options.
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Year ended December 31:
1997........................................................................ $ 1,868
1998........................................................................ 1,850
1999........................................................................ 1,810
2000........................................................................ 1,719
2001........................................................................ 1,409
Thereafter.................................................................. 2,410
-------
$ 11,066
-------
-------
</TABLE>
Rental expense was $1,817,000 in 1996, $1,403,000 in 1995 and $1,369,000 in
1994. Rental expense for 1996 includes that for Western since the date of its
acquisition.
Sublease rental income for the years ended December 31, 1996, 1995 and 1994
totaled approximately $54,000, $66,000 and $71,000, respectively. The lease and
sublease related to $34,000 of the sublease income expired without renewal in
June 1996. Of the remaining amount, $5,000 relates to a sublease on a month to
month basis and $15,000 relates to a sublease that expires in October, 1999.
The Company and the Banks are parties to litigation and claims arising in
the normal course of business. After taking into consideration information
furnished by counsel to the Company and the Banks as to the current status of
various claims and legal proceedings to which the Company or the Banks are a
party, management accrued $950,000 as a reserve for various cases pending as of
December 31, 1996.
NOTE 12--RELATED PARTY TRANSACTIONS
The Banks had loans outstanding to principal officers and directors and
their affiliated companies which were made substantially on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other borrowers and do not involve more than the
normal risks of collectibility.
39
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--RELATED PARTY TRANSACTIONS (CONTINUED)
An analysis of the activity with respect to such loans to related parties is
as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Balance, January 1.................................................... $ 2,096 $ 2,764
Additions due to acquisitions......................................... 184 --
New loans............................................................. 1,813 1,650
Repayments............................................................ (1,533) (2,318)
--------- ---------
Balance, December 31.................................................. $ 2,560 $ 2,096
--------- ---------
--------- ---------
</TABLE>
The 1996 balance does not include $784,000 in overdraft arrangements on
deposit accounts, consumer credit cards and lines of credit. New loans in 1996
include an existing loan for $470,000 which became a related party loan when the
person joined the Company as an officer in 1996.
Some of Western's health and life insurance programs have been contracted
based on competitive bids through Rice Brown Financial. The principal of Rice
Brown Financial is an insurance broker and a director of the Company.
On January 1, 1996 the Company engaged one of its directors as a financial
advisor. The engagement agreement provides for a monthly fee of $3,000 plus
expenses beginning January 1, 1996. The agreement may be terminated by either
the Company or the director upon 30 days written notice.
Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. are entities
related to a director of the Company. Belle Plaine Partners, Inc. serves as
financial advisor to the Company under an engagement letter dated May, 1995. In
that capacity, Belle Plaine Partners, Inc. was paid fees of approximately $1.4
million for evaluating and identifying potential acquisitions including the
acquisition of Western which closed September 30, 1996. It is also anticipated
that Belle Plaine Partners, Inc. will be paid fees of approximately $1.35
million in connection with the acquisition of CCB by the Company. Belle Plaine
Financial, LLC was engaged by the Company to raise capital to consummate the
acquisition of Western. Belle Plaine Financial, LLC was paid $863,000 for its
services and was reimbursed for expenses incurred in the course of that
engagement. The agreement may be terminated by either party upon 30 days written
notice.
NOTE 13--BENEFITS PLANS
On May 16, 1995, the Board of Directors of the Company approved the 1995
Directors Deferred Compensation Plan which was approved by shareholders on July
17, 1995. The plan is effective for fees earned on and after July 1, 1995. No
compensation has been awarded under the plan.
During 1992 the Company adopted an employee stock ownership and salary
deferral plan ("KSOP"). The Company's contributions to the KSOP totaled
approximately $20,000 and $46,000 in 1995 and 1994, respectively. No
contributions were made in 1996. In September of 1996 the Company terminated the
KSOP plan and recorded a related expense of approximately $189,000 for repayment
of a loan and other termination expenses. The loan was classified in other
liabilities as of December 31, 1996 and was paid off in January of 1997.
40
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--BENEFITS PLANS (CONTINUED)
The Banks have 401(k) plans covering substantially all employees. Amounts
contributed by the Banks and charged to expense were approximately $121,000,
$108,000, and $88,000 in 1996, 1995 and 1994, respectively.
In 1987, CCB purchased cost recovery life insurance with aggregate death
benefits in the amount of $2,473,000 on the lives of the senior management
participants. CCB is the sole owner and beneficiary of such policies, which were
purchased to fund CCB's obligation under separate deferred compensation
arrangements. The cash surrender values and obligation under deferred
compensation agreements at December 31, 1996 and 1995 of $1,296,000 and
$1,231,000, respectively, and $529,000 and $317,000, respectively, have been
included in other assets and in other liabilities, respectively, in the
accompanying consolidated balance sheets.
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company and its banking subsidiaries are parties to financial
instruments with off-balance sheet risk in the normal course of business in
meeting the financial needs of their customers. These financial instruments
consist primarily of commitments to extend credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Company and the Banks have in
particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The same
credit policies are used in making commitments and conditional obligations as
those used for on-balance sheet instruments.
The Company had the following commitments to extend credit at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Loan commitments.................................................... $ 130,665 $ 62,326
Standby letters of credit........................................... 9,005 2,042
---------- ---------
$ 139,670 $ 64,368
---------- ---------
---------- ---------
</TABLE>
In addition to the amounts above, approximately $50,778,000 and $47,075,000
in consumer credit card and overdraft commitments were outstanding as of
December 31, 1996 and 1995. Loan commitment arrangements represent commercial
lines of credit with variable interest rates determined at the time funds are
drawn by adding an interest spread to an agreed upon index. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract; they generally have
fixed expiration dates or other termination clauses and may require a fee. The
total commitment amount generally represents future cash requirements. However,
many commitments expire without being used. Standby letters of credit are
conditional commitments issued by the Banks to guarantee performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers.
41
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a large portion of the financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in the estimates.
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash and due from banks, federal funds sold, and
interest bearing deposits are considered to approximate fair value. The fair
value of investment securities is generally based on quoted market prices. The
fair value of loans is estimated using a combination of techniques, including
discounting estimated future cash flows and quoted market prices of similar
instruments, where available, taking into consideration the varying degrees of
credit risk. The carrying amounts of accrued interest receivable are considered
to approximate fair value.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand is considered
to approximate fair value. For fixed maturity deposits, fair value is estimated
by discounting estimated future cash flows using currently offered rates for
deposits of similar remaining maturities. The fair value of notes payable is
based on rates currently available to the Company for debt with similar terms
and remaining maturities. The carrying amounts of accrued interest payable are
considered to approximate fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of credit
is estimated using the fees currently charged to enter into similar agreements.
The fair value of these financial instruments is not material.
42
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of financial instruments at December 31, 1996 and
1995 is summarized as follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1996
Financial Assets:
Cash and due from banks........................................... $ 66,234 $ 66,234
Federal funds sold................................................ 18,717 18,717
Investment securities............................................. 256,228 256,203
Loans and leases, net............................................. 459,373 458,271
Accrued interest receivable....................................... 5,733 5,733
Financial Liabilities:
Deposits.......................................................... $ 761,688 $ 761,905
Notes payable..................................................... 13,350 13,350
Accrued interest payable.......................................... 754 754
DECEMBER 31, 1995
Financial Assets:
Cash and due from banks........................................... $ 33,296 $ 33,296
Federal funds sold................................................ 47,938 47,938
Interest bearing deposit.......................................... 198 198
Investment securities............................................. 90,948 90,980
Loans and leases, net............................................. 219,336 218,553
Accrued interest receivable....................................... 3,011 3,011
Financial Liabilities:
Deposits.......................................................... 367,246 367,247
Notes payable..................................................... 2,483 2,483
Accrued interest payable.......................................... 296 296
</TABLE>
NOTE 16--REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by federal and State of California 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 Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items, as calculated under
regulatory accounting practices, must be met. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. The banking regulators have
advised the Company and the Banks that they are considered well-capitalized at
December 31, 1996.
43
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum ratios based on average
and risk weighted assets as set forth below. Actual capital ratios for the
Company and the Banks as of December 31, 1996 are also shown in the table:
<TABLE>
<CAPTION>
REQUIREMENT ACTUAL
------------------------ ----------------------------------
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED WESTERN NATIONAL CONSOLIDATED
----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital
ratio....................... 34.00% 36.00% 10.93% 11.33% 9.67%
Total risk-based capital...... 38.00% 310.00% 12.19% 12.59% 10.92%
Tier 1 leverage capital
ratio....................... 34.00% 35.00% 6.05% 7.68% 5.98%
</TABLE>
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash and due from banks............................................ $ 5,360 $ 781
Other real estate owned............................................ 83 83
Investments in subsidiaries........................................ 86,668 28,435
Securities available for sale...................................... 262 5,186
Other assets....................................................... 957 122
---------- ---------
Total assets..................................................... $ 93,330 $ 34,607
---------- ---------
---------- ---------
Liabilities:
Notes payable...................................................... $ 13,350 $ 2,483
Other liabilities.................................................. 852 8
---------- ---------
14,202 2,491
Shareholders' equity................................................. 79,128 32,116
---------- ---------
Total liabilities and shareholders' equity....................... $ 93,330 $ 34,607
---------- ---------
---------- ---------
</TABLE>
44
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Interest income............................................. $ 238 $ 128 $ 13
Management fees............................................. 58 -- --
---------- --------- ---------
Total income.............................................. 296 128 13
Interest expense............................................ 464 260 243
Other expense............................................... 1,211 114 29
---------- --------- ---------
Total expense............................................. 1,675 374 272
---------- --------- ---------
Loss before taxes and equity in undistributed subsidiary
earnings.............................................. (1,379) (246) (259)
Income tax expense (benefit)................................ (645) 52 (89)
---------- --------- ---------
Loss before equity in undistributed earnings of bank
subsidiaries.............................................. (734) (298) (170)
Equity in undistributed income (loss) of bank
subsidiaries.............................................. 5,268 (2,360) (822)
---------- --------- ---------
Net income (loss)......................................... $ 4,534 $ (2,658) $ (992)
---------- --------- ---------
---------- --------- ---------
</TABLE>
45
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Net income (loss)........................................... $ 4,534 $ (2,658) $ (992)
Change in other assets...................................... (835) 35 99
Change in other liabilities................................. 844 3 (4)
Equity in undistributed subsidiary (earnings) losses........ (5,268) 2,360 822
---------- --------- ---------
Cash flows from operating activities...................... (725) (260) (75)
---------- --------- ---------
Acquisition of Western Bank, including acquisition costs.... (53,154) -- --
Net change in securities available for sale................. 4,924 -- --
Other investing activities.................................. 126 (8,939) --
---------- --------- ---------
Cash flows from investing activities...................... (48,104) (8,939) --
---------- --------- ---------
Net proceeds from issuance of common stock, net of issuance
costs, and from exercise of common stock options.......... 42,545 12,958 --
Increase in investment in subsidiaries...................... -- (2,900) --
Issuance of debt............................................ 11,000 -- --
Other financing activities.................................. (137) (589) --
---------- --------- ---------
Cash flows from financing activities...................... 53,408 9,469 --
Net increase (decrease) in cash............................. 4,579 270 (75)
Cash beginning of year...................................... 781 511 586
---------- --------- ---------
Cash end of year............................................ $ 5,360 $ 781 $ 511
---------- --------- ---------
---------- --------- ---------
Supplemental disclosure of cash flow information Cash paid
for interest.............................................. 464 260 243
---------- --------- ---------
---------- --------- ---------
Supplemental disclosure of noncash investment activity:
Tax benefit for exercise of non-qualified stock options... 51 78 --
---------- --------- ---------
---------- --------- ---------
</TABLE>
NOTE 18--STOCK OPTION PLAN AND WARRANTS
At the time of the CCB acquisition, all outstanding CCB stock options were
converted into Western Bancorp stock options at the exchange rate. The following
disclosures reflect the combination of Western Bancorp and CCB stock option
data.
The Company has a stock option plan (the "Plan") pursuant to which the
Company's Board of Directors may grant stock options to officers, directors and
key employees. The Plan authorizes grants of options to purchase shares of
authorized but unissued common stock. Stock options are granted with an exercise
price greater than or equal to the stock's fair market value at the date of
grant. Qualified stock options have 5-year terms and vest over a three year
period from the date of grant. Non-qualified stock options have 10-year terms
and vest over a three year period from the date of grant
46
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
The per share weighted-average fair value of stock options granted during
1996 was $9.15 using the Black Scholes option-pricing model with the following
weighted-average assumptions: (i) no dividends are expected to be paid; (ii)
risk-free interest rate of 5.20% to 7.90%; (iii) an expected life of 2 1/2 to 10
years; and (iv) an estimated volatility of 40%.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
123, the Company's net income and earnings per share, net of related tax effect,
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C> <C>
Net income (loss) As reported...................................... $ 4,534 $ (2,658)
Pro forma........................................ 4,263 (2,822)
Earnings (loss) per
share As reported...................................... $ 0.95 $ (0.84)
Pro forma........................................ 0.89 (0.89)
</TABLE>
The pro forma earnings per share for December 31, 1996 and 1995 was based on
4,770.8 thousand and 3,160.6 thousand, respectively, of weighted average common
shares. The pro forma amounts shown above may not be representative of the
effects on reported net income for future periods.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at December 31, 1994................................... 242,271 $ 4.33-36.13
Granted...................................................... 142,000
Exercised.................................................... (44,249)
Canceled..................................................... (64,075)
----------
Balance at December 31, 1995................................... 275,947 4.67-13.00
Granted...................................................... 148,473
Exercised.................................................... (73,267)
Forfeited.................................................... (1,699)
Canceled..................................................... (25,000)
----------
Balance at December 31, 1996................................... 324,454 $ 5.25-14.03
----------
----------
</TABLE>
At December 31, 1996, the number of options exercisable was 106,022.
At December 31, 1996 and 1995, there were also exercisable warrants
outstanding of 140,684 and 48,402, respectively, and the weighted average
exercise price of those warrants exercisable was $15.81 and $13.77,
respectively. Of the warrants outstanding on December 31, 1996, 48,402 expire on
September 30, 2000 and 92,282 expire on September 30, 2001.
CCB maintained a stock bonus plan that covers substantially all of its
employees. The plan provided for the issuance to participating employees of
share units in the plan, which entitled participants to distributions primarily
of common stock of CCB. Contributions to the plan are held in trust and invested
in
47
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
common stock of CCB (which is purchased from third parties) or other investments
under the terms of the plan agreement. Contributions are determined based on
management's discretion. CCB's contributions for 1996, 1995 and 1994 were
$45,000, $45,000 and $5,000, respectively.
NOTE 19--SUBSEQUENT EVENT
On April 29, 1997, the Company and SC Bancorp ("SCB") jointly announced that
they entered into a definitive agreement to merge, subject to approval by the
banking regulators and shareholders of both companies. Under the terms of the
merger, each shareholder of SC Bancorp will receive shares in the Company based
upon a purchase price of $14.25 per share of SC Bancorp common stock and a
floating exchange ratio for Western Bancorp common stock within a market price
ranging from $23.38 to $31.88 per share. Based upon the mean ($27.63) of the
price range referred to in the previous sentence, each shareholder of SC Bancorp
would receive approximately 0.5157 shares of Western Bancorp common stock. The
merger is expected to be accounted for as a pooling-of-interests. At December
31, 1996, SCB had total assets, deposits, debt, shareholders' equity, and number
of common shares outstanding of $476.0 million, $415.3 million, $8.1 million,
$49.9 million and 7,486,375, respectively; these amounts are unaudited. For the
year ended December 31, 1996, SCB reported net income and net income per share
of approximately $4.5 million and $0.60, respectively; these amounts are
unaudited.
48
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
The following exhibits are filed with this Current Report on Form 8-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP;
23.2 Consent of Deloitte & Touche LLP;
23.3 Consent of Dayton & Associates;
27.1 Restated Financial Data Schedule; and
99.1 Press Release of Western Bancorp, dated July 15, 1997.
</TABLE>
49
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Date: July 16, 1997 WESTERN BANCORP
By: /s/ ARNOLD C. HAHN
-----------------------------------------
Name: Arnold C. Hahn
Title: CHIEF FINANCIAL OFFICER
50
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP;
23.2 Consent of Deloitte & Touche LLP;
23.3 Consent of Dayton & Associates;
27.1 Restated Financial Data Schedule; and
99.1 Press Release of Western Bancorp, dated July 15, 1997.
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Western Bancorp:
We consent to the use of our report, dated June 4, 1997, included herein.
Our report, dated June 4, 1997, contains explanatory paragraphs indicating
that: (i) We did not audit the 1996 consolidated financial statements of
California Commercial Bankshares. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for California Commercial Bankshares in
the 1996 consolidated financial statements of Western Bancorp, is based on
the report of the other auditors; (ii) The consolidated balance sheet of
Western Bancorp (formerly Monarch Bancorp) as of December 31, 1995, and the
related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1995 were audited by other auditors; (iii) Separate consolidated
financial statements of California Commercial Bankshares also included in the
1995 and 1994 restated consolidated financial statements were audited by
other auditors; and (iv) We also audited the combination of the consolidated
balance sheet as of December 31, 1995, and the combination of the related
statements of operations, changes in shareholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1995, after
restatement for the pooling of interests.
KPMG PEAT MARWICK LLP
Los Angeles, California
July 15, 1997
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report dated January 24, 1997 (March 17, 1997 as to
Notes 7 and 13) on the consolidated balance sheets of California Commercial
Bankshares and subsidiary as of December 31, 1996 and 1995 and the related
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996 (such consolidated financial
statements are not included herein), in Form 8-K of Western Bancorp (formerly
Monarch Bancorp) dated July 16, 1997.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
July 16, 1997
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent, as successor accountants of Dayton & Associates (said firm
being merged with and into Vavrinek, Trine, Day & Co. on September 1, 1996) to
the inclusion of their Independent Auditor's Report dated February 29, 1996
regarding the consolidated balance sheets of Monarch Bancorp and Subsidiaries as
of December 31, 1995 and December 31, 1994, and the related statements of
operations, changes in capital, and cash flows for each of the two years in the
period ended December 31, 1995, in the Form 8-K filed with the Securities and
Exchange Commission.
/s/ Vavrinek, Trine, Day & Co.
July 15, 1997
Laguna Hills, California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 8-K
WESTERN BANCORP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<CASH> 66,234 33,296 0
<INT-BEARING-DEPOSITS> 0 198 0
<FED-FUNDS-SOLD> 18,717 47,938 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 245,724 82,669 0
<INVESTMENTS-CARRYING> 7,270 6,661 0
<INVESTMENTS-MARKET> 7,245 6,693 0
<LOANS> 459,373 219,336 0
<ALLOWANCE> 10,810 7,396 0
<TOTAL-ASSETS> 862,900 404,144 0
<DEPOSITS> 761,688 367,246 0
<SHORT-TERM> 13,350 2,483 0
<LIABILITIES-OTHER> 8,734 2,299 0
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 73,588 31,047 0
<OTHER-SE> 5,540 1,069 0
<TOTAL-LIABILITIES-AND-EQUITY> 862,900 404,144 0
<INTEREST-LOAN> 28,229 23,054 21,225
<INTEREST-INVEST> 8,606 4,427 4,667
<INTEREST-OTHER> 2,435 1,752 767
<INTEREST-TOTAL> 39,270 29,233 26,659
<INTEREST-DEPOSIT> 10,292 8,169 6,981
<INTEREST-EXPENSE> 10,761 8,437 7,283
<INTEREST-INCOME-NET> 28,509 20,796 19,376
<LOAN-LOSSES> 1,488 7,025 4,360
<SECURITIES-GAINS> 267 (72) (41)
<EXPENSE-OTHER> 27,157 22,143 18,239
<INCOME-PRETAX> 4,997 (5,084) (446)
<INCOME-PRE-EXTRAORDINARY> 4,997 (5,084) (446)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,534 (2,658) (992)
<EPS-PRIMARY> .95 (.84) (.39)
<EPS-DILUTED> 0 0 0
<YIELD-ACTUAL> 6.11 6.16 5.67
<LOANS-NON> 13,310 15,918 15,202
<LOANS-PAST> 0 0 1,213
<LOANS-TROUBLED> 5,757 3,206 9,657
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 7,396 6,797 8,277
<CHARGE-OFFS> 3,806 6,929 7,074
<RECOVERIES> 571 503 1,234
<ALLOWANCE-CLOSE> 10,810 7,396 6,797
<ALLOWANCE-DOMESTIC> 10,810 7,396 6,797
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 2,223 1,253 359
</TABLE>
<PAGE>
[LOGO]
WESTERN BANCORP
PRESS RELEASE
Western Bancorp (NASDAQ: WEBC)
30000 Town Center Drive
Laguna Niguel, CA 92677
<TABLE>
<S> <C> <C>
Contacts: Hugh S. Smith, Jr. Arnold C. Hahn
CHAIRMAN AND CHIEF FINANCIAL OFFICER
CHIEF EXECUTIVE OFFICER
Phone: 310/477-2401 714/863-2351
FAX: 310/477-8611 714/757-5845
</TABLE>
FOR IMMEDIATE RELEASE
WESTERN BANCORP ANNOUNCES SECOND-QUARTER EARNINGS
July 15, 1997
Laguna Niguel, California...Western Bancorp today announced that its
consolidated net income for the six months ended June 30, 1997 was $998,000, or
$0.14 per share. This compares with earnings of $2,059,000 and $0.52 per share
for the six months ended June 30, 1996. Without the amortization of goodwill of
$998,000 and after tax merger costs of $3,009,000 in 1997 and before an after
tax gain on sale of loans of $606,000 in 1996, net income for the six month
periods would have been $5,005,000 and $1,453,000 in 1997 and 1996,
respectively, or $0.69 and $0.37 per share, a growth of approximately 86%.
The Company had a consolidated net loss of $834,000, or $0.11 per share, for the
three months ended June 30, 1997. This compares with earnings of $1,510,000 or
$0.38 per share for the three months ended June 30, 1996. Without the
amortization of goodwill of $449,000 and after tax merger costs of $3,009,000 in
1997 and before an after tax gain on sale of loans of 606,000 in 1996, net
income for the three month period would have been $2,674,000 and $904,000 in
1997 and 1996, respectively, or $0.37 and $0.23 per share, a growth of
approximately 61%.
Earnings for the first six months of 1997 include the earnings of Western Bank,
which was acquired on September 30, 1996. The acquisition was accounted for as a
purchase and, therefore, the earnings of Western Bank were not included in the
results for the first six months of 1996.
Before the amortization of goodwill and merger costs in 1997 and before the
after tax gain on sale of loans in 1996, return on average assets increased to
1.18% for the first six months of 1997 versus 0.72% for the first six months of
1996. Return on average equity increased from 8.9% to 12.4% for the first six
months of 1997 versus the first six months of 1996. Before goodwill amortization
and merger costs, the efficiency ratio
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in the second quarter of 1997 was 61.2% versus 73.5% for the same period in
1996. The efficiency ratio for the first six months of 1997 versus 1996 declined
to 63.0% from 76.5%.
During the quarter, the Company and SC Bancorp (AMEX: SCK) jointly announced
that they had signed a definitive agreement to merge, subject to approval by the
banking regulators and shareholders of both companies. The regulatory process is
proceeding at this time.
On June 2, 1997, the Company changed its name to Western Bancorp, completed an
8.5 to 1 reverse stock split and began trading on NASDAQ under the symbol WEBC.
Also, on June 4, 1997, Western Bancorp completed the acquisition of California
Commercial Bankshares ("CCB") and its wholly owned subsidiary, National Bank of
Southern California ("NBSC"), headquartered in Newport Beach, California, in
which NBSC became a wholly-owned subsidiary of the Company. At the time of the
merger, Monarch Bank was legally and operationally integrated into NBSC.
Concurrent with the acquisition, Mr. Mark H. Stuenkel, Mr. William H. Jacoby and
Mr. Robert L. McKay were appointed to the Board of Directors of the Company.
Mr. Hugh S. Smith, Jr., Chairman and CEO of Western Bancorp, stated "This has
been a very exciting quarter. There have been a long list of accomplishments: We
have completed one merger and announced another and, as our results indicate,
even though we still have much work to do to meet our financial goals, we are
accomplishing significant operating improvements."
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CONSOLIDATED CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans......................................... $ 22,846 $ 11,666 $ 11,563 $ 6,110
Interest on investment securities.................................. 6,541 3,077 3,184 1,746
Interest on federal funds sold..................................... 936 1,208 525 564
--------- --------- --------- ---------
TOTAL INTEREST INCOME............................................ 30,323 15,951 15,272 8,420
INTEREST EXPENSE:
Interest expense on deposits....................................... 7,704 3,964 3,895 1,975
Interest expense on other borrowings............................... 484 131 202 72
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE........................................... 8,188 4,095 4,097 2,047
--------- --------- --------- ---------
NET INTEREST INCOME.................................................. 22,135 11,856 11,175 6,373
Less: provision for loan and lease losses.......................... 750 805 375 455
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.................. 21,385 11,051 10,800 5,918
NON-INTEREST INCOME:
Service charges.................................................... 1,440 837 674 403
Escrow fees........................................................ 337 311 182 190
Gain on sale of loans.............................................. -- 1,003 -- 1,003
Securities gains................................................... 337 -- 230 --
Other income....................................................... 657 676 341 346
--------- --------- --------- ---------
TOTAL NON-INTEREST INCOME........................................ 2,771 2,827 1,427 1,942
NON-INTEREST EXPENSE:
Salaries and benefits.............................................. 7,764 5,130 3,631 2,527
Occupancy, furniture and equipment................................. 2,200 1,516 1,117 847
Advertising and business development............................... 447 395 221 218
Other real estate owned............................................ 53 (252) 5 (357)
Professional services.............................................. 1,294 1,470 491 1,120
Telephone, postage, stationery and supplies........................ 785 516 388 269
Goodwill amortization.............................................. 998 -- 499 --
Data processing for company........................................ 666 260 340 138
Customer services cost............................................. 553 268 388 144
Merger costs....................................................... 3,404 -- 3,404 --
Other.............................................................. 1,928 1,168 1,126 470
--------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE....................................... 20,092 10,471 11,610 5,376
--------- --------- --------- ---------
Income before income taxes........................................... 4,064 3,407 617 2,484
Income taxes......................................................... 3,066 1,348 1,451 974
--------- --------- --------- ---------
NET INCOME (LOSS)................................................ $ 998 $ 2,059 $ (834) $ 1,510
--------- --------- --------- ---------
--------- --------- --------- ---------
PER SHARE INFORMATION:
Number of shares (weighted average)................................ 7,303.2 3,969.1 7,301.5 3,969.1
Income (loss) per share (dollars).................................. $ 0.14 $ 0.52 $ (0.11) $ 0.38
Income per share before goodwill amortization and merger costs in
1997 and before gain on sale of loans in 1996.................... $ 0.69 $ 0.37 $ 0.37 $ 0.23
Return on average assets............................................. 0.24% 1.02% (0.39%) 1.51%
Return on average assets before merger costs and goodwill
amortization in 1997 and before gain on sale of loans in 1996...... 1.18% 0.72% 1.26% 0.90%
Return on average equity............................................. 2.5% 12.6% (4.1%) 18.5%
Return on average equity before merger costs and goodwill
amortization in 1997 and before gain on sale of loans in 1996...... 12.4% 8.9% 13.2% 11.1%
</TABLE>
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CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks...................................................... $ 57,656 $ 66,234
Federal funds sold........................................................... 45,500 18,717
------------- --------
TOTAL CASH & CASH EQUIVALENTS............................................ 103,156 84,951
Federal Reserve Bank and Federal Home Loan Bank stock........................ 3,325 3,234
Securities:
Securities held to maturity................................................ 6,902 7,270
Securities available for sale.............................................. 198,383 245,724
------------- --------
TOTAL SECURITIES......................................................... 205,285 252,994
Net loans.................................................................... 488,510 459,373
Property, plant and equipment................................................ 6,880 7,215
Other real estate owned...................................................... 7,428 6,546
Goodwill..................................................................... 28,344 29,342
Other assets................................................................. 16,843 19,245
------------- --------
TOTAL ASSETS............................................................. $ 859,771 $ 862,900
------------- --------
------------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits................................................ $ 269,662 $ 296,951
Interest bearing deposits.................................................... 491,807 464,737
------------- --------
TOTAL DEPOSITS........................................................... 761,469 761,688
Borrowed funds............................................................... 10,852 13,350
Accrued interest payable & other liabilities................................. 7,593 8,734
------------- --------
TOTAL LIABILITIES........................................................ 779,914 783,772
SHAREHOLDERS' EQUITY
Preferred stock.............................................................. -- --
Common stock................................................................. 73,609 73,588
Retained earnings............................................................ 6,296 5,528
Unrealized net gains (losses) on investments available for sale, net......... (48) 12
------------- --------
TOTAL SHAREHOLDERS' EQUITY............................................... 79,857 79,128
------------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY................................. $ 859,771 $ 862,900
------------- --------
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Number of common shares outstanding.......................................... 7,070.1 7,027.9
Common shareholders' equity per share........................................ $ 11.30 $ 11.26
</TABLE>
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