<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
OCTOBER 10, 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>
4100 NEWPORT PLACE, SUITE 900, NEWPORT BEACH, 92660
CA
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number (714) 863-2300
____NOT APPLICABLE____
(Former Name or Former Address, if Changed since Last Report)
- - - --------------------------------------------------------------------------------
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<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Western Bancorp (the "Company") serves as the holding company for National
Bank of Southern California ("National"), Southern California Bank ("SC Bank"),
Western Bank ("Western" and together with National and SC Bank, the "Banks") and
Venture Partners. On October 10, 1997 the shareholders of the Company and the
shareholders of SC Bancorp ("SCB") each approved the principal terms of an
Agreement and Plan of Reorganization, dated as of April 29, 1997 (the "Merger
Agreement"), by and between the Company (formerly Monarch Bancorp) and SCB
providing for the merger of SCB with and into the Company (the "SCB Merger").
The SCB Merger was consummated on October 10, 1997.
Pursuant to the Merger Agreement, each outstanding share of common stock of
SCB ("SCB Common Stock") prior to the SCB Merger (other than shares held in a
fiduciary capacity or as a result of a debt previously contracted) was converted
into the right to receive 0.4556 shares (the "Conversion Number") of common
stock of the Company ("Company Common Stock"). In addition, each option or right
to purchase shares of SCB Common Stock (an "SCB Option") outstanding immediately
prior to the effective time of the SCB Merger was converted into the right to
receive, for each share otherwise issuable upon exercise thereof, a number of
shares of Company Common Stock equal to the quotient obtained by dividing the
Spread (as defined in the Merger Agreement) by $31.28. Pursuant to the Merger
Agreement, the Conversion Number was determined by dividing (i) $14.25 by (ii)
$31.28.
Upon consummation of the SCB Merger, the Company issued approximately
3,555,500 shares of Company Common Stock (prior to adjustment for fractional
shares) to former shareholders of SCB, and as a result, the former shareholders
of SCB own shares of Company Common Stock representing approximately 33.5
percent of the outstanding Company Common Stock.
The description of the Merger Agreement contained herein is qualified in its
entirety by reference to the Merger Agreement. After giving effect to the SCB
Merger, the total assets of the Company and its subsidiaries increased to
approximately $ 1.4 billion, total deposits increased to approximately $1.2
billion and total shareholders equity increased to approximately $131.6 million
as of June 30, 1997, on a restated basis, before merger and restructuring costs.
As a part of the SCB Merger, Harold A. Beisswenger, Larry D. Hartwig,
William C. Greenbeck and Donald E. Wood, former directors of SCB, were appointed
to the Board of Directors of the Company.
ITEM 5. OTHER EVENTS.
Item 5 includes the following:
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<CAPTION>
PAGE
-----
<C> <S> <C>
A. Western Bancorp third quarter earnings........................................................ 1
B. Santa Monica Bank Merger...................................................................... 2
C. Supplemental Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations as of June 30, 1997 and for the three and six
months periods ended June 30, 1997 and 1996................................................... 4
D. Supplemental Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations as of December 31, 1996 and 1995 and for each of
the years in the three year period ended December 31, 1996....................................
</TABLE>
1
<PAGE>
A. THIRD QUARTER EARNINGS
On October 14, 1997, the Company announced its third 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.
B. SANTA MONICA BANK MERGER
The following tables show unaudited summary pro forma balance sheet and
income statement information for the SCB Merger and for the pending merger of
Santa Monica Bank ("SMB") with and into the Company (the "SMB Merger").
Pooling-of-interests accounting is used for the pro forma information for the
SCB Merger, and purchase accounting is used for the pro forma information for
the SMB Merger. Information for SMB is included only in the balance sheet as of
September 30, 1997, and the income statement information for the nine month
periods ended September 30, 1997 and September 30, 1996. The balance sheet and
income statement adjustments shown below are based on management's estimates for
costs and, in the case of the SMB Merger, the fair value adjustments associated
with these transactions.
The unaudited summary pro forma balance sheet information is not necessarily
indicative of the actual financial position that would have existed had the SMB
Merger and the SCB Merger been consummated at the beginning of the periods
presented or that may exist in the future. The unaudited summary pro forma
income statement information is not necessarily indicative of the results that
would have occurred had either the SMB Merger or the SCB Merger been consummated
on the dates indicated or that may be achieved in the future. Assuming the
consummation of the SMB Merger, the actual financial position and results of
operations will differ, perhaps significantly, from the pro forma amounts
reflected herein because of a variety of factors, including changes in value of
assets and liabilities and changes in operating results between the dates of the
pro forma financial data and the date on which the SMB Merger takes place.
SUMMARY PRO FORMA BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------------------------------------------
SANTA ADJUST- PRO FORMA
WESTERN SCB MONICA MENTS COMBINED
---------- ---------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets....................................... $ 867,123 $ 502,692 $ 663,522 $ 81,722 $ 2,115,059
Securities......................................... 180,812 63,450 150,282 -- 394,544
Loans, net......................................... 512,532 346,591 375,866 2,390 1,237,379
Goodwill........................................... 27,845 3,220 -- 119,108 150,173
Deposits........................................... 762,064 437,344 579,632 (154) 1,778,886
Shareholders' equity............................... 81,209 53,318 78,877 49,862 263,266
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------------------
ADJUST- PRO FORMA
WESTERN SCB MENTS COMBINED
---------- ---------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total assets..................................................... $ 862,900 $ 476,013 $ 1,088 $ 1,340,001
Securities....................................................... 256,228 76,590 -- 332,818
Loans, net....................................................... 459,373 342,228 -- 801,601
Goodwill......................................................... 29,342 3,626 -- 32,968
Deposits......................................................... 761,688 415,326 -- 1,177,014
Shareholders' equity............................................. 79,128 49,919 (6,861) 122,186
</TABLE>
2
<PAGE>
SUMMARY PRO FORMA INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
-------------------------------------------------------
SANTA ADJUST- PRO FORMA
WESTERN SCB MONICA MENTS COMBINED
--------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net interest income and non-interest income............... $ 38,076 $ 22,255 $ 30,891 $ (3,385) $ 87,837
Provision for possible loan and lease losses.............. 1,125 1,000 -- -- 2,125
Non interest expense...................................... 28,266 14,390 18,531 6,423 67,610
Net income................................................ 3,514 4,014 8,022 (8,210) 7,340
Net income per share...................................... $ 0.48 $ 0.54 $ 1.13 $ 0.48
Weighted average shares................................... 7,291 7,500 7,077 15,332
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
-------------------------------------------------------
SANTA ADJUST- PRO FORMA
WESTERN SCB MONICA MENTS COMBINED
--------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net interest income and non-interest income............... $ 21,350 $ 21,018 $ 28,534 $ (3,385) $ 67,517
Provision for possible loan and lease losses.............. 865 (470) -- -- 395
Non interest expense...................................... 16,046 16,445 19,536 6,423 58,450
Net income................................................ 2,665 2,933 6,751 (8,210) 4,139
Net income per share...................................... $ 0.67 $ 0.39 $ 0.95 $ 0.34
Weighted average shares................................... 3,984 7,475 7,077 12,010
</TABLE>
3
<PAGE>
C. UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AS OF JUNE 30, 1997 AND FOR THE
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996.
On October 10, 1997, the Company consummated the SCB Merger. On June 4,
1997, the Company consummated the merger of California Commercial Bankshares
("CCB") with and into the Company (the "CCB Merger"). On July 15, 1997 the
Company filed, on a Form 8-K, restated 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.
The Company hereby files Unaudited Supplemental Condensed Consolidated
Financial Statements as of June 30, 1997 and for the three and six month periods
ended June 30, 1997 and 1996, reflecting the effect of the SCB 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 SCB Merger and the Unaudited Supplemental
Condensed Consolidated Financial Statements as of June 30, 1997 and for the
three and six month periods ended June 30, 1997 and June 30, 1996 are set forth
below.
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 as of June 30, 1997 and for the three months
and six months ended June 30, 1997 and June 30, 1996. Such tables and data
reflect the combination of the Company and both CCB and SCB which were acquired
by the Company on June 4, 1997 and October 10, 1997, respectively, each in a
merger accounted for as a pooling-of-interests. This discussion should be read
in conjunction with the Unaudited Supplemental Condensed Consolidated Financial
Statements as of June 30, 1997 and for the three and six month periods ended
June 30, 1997 and June 30, 1996 and related notes included elsewhere herein.
FINANCIAL CONDITION
Since December 31, 1996, the Company's total assets have grown by
approximately $29 million, or 2.1%. From December 31, 1996 to June 30, 1997, due
mostly to maturities, securities decreased by approximately $48.6 million. Due
to improvements in the local economy and a recent deposit promotion, deposits
grew by approximately $30.7 million, or 2.6%. The cash resulting from this
decrease in securities and increase in deposits was invested in federal funds
sold, which increased by $50.8 million, and net loans, which have grown by
approximately $31.3 million, or 3.8%, from December 31, 1996 to June 30, 1997.
RESULTS OF OPERATIONS
The acquisition of Western on September 30, 1996, was accounted for under
the purchase method of accounting and, as a result, Western's operations are
included in the results of 1997, but are not part of the results in 1996.
The Company has experienced significant improvement in normalized earnings
(earnings before goodwill amortization, merger costs (after tax) and gains on
sales of loans and other assets (after tax)) for the six months and three months
ended June 30, 1997, as compared to the same periods in 1996, which was
4
<PAGE>
attributable primarily to the Western acquisition in September 1996 and the CCB
acquisition in June 1997 as well as a focus on controlling costs and
centralizing operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE THREE MONTHS ENDED
30, JUNE 30,
--------------------- ---------------------
1997 1996 1997 1996
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Per share information:
Number of shares (weighted average, in thousands).............. 10,847.9 7,511.8 10,848.0 7,512.5
Income per share............................................... $ 0.32 $ 0.50 $ 0.04 $ 0.32
Income per share before goodwill amortization and merger costs
in 1997 and 1996 and before gain on sale of loans in 1996.... $ 0.71 $ 0.45 $ 0.38 $ 0.26
Return on average assets:........................................ 0.52% 0.87% 0.14% 1.13%
Return on average assets before merger costs and goodwill
amortization in 1997 and 1996 and before gain on sale of loans
in 1996:....................................................... 1.16% 0.79% 1.21% 0.91%
Return on average equity:........................................ 5.2% 9.6% 1.4% 12.3%
Return on average equity before merger costs and goodwill
amortization in 1997 and 1996 and before gain on sale of loans
in 1996:....................................................... 11.8% 8.6% 12.4% 9.9%
Efficiency ratio before merger costs and goodwill amortization in
1997 and 1996 and before gain on sale of loans in 1996:........ 63.9% 78.6% 62.3% 79.6%
</TABLE>
For the three months and six months ended June 30, 1997, the Company, on a
consolidated basis, recorded net income of $469 thousand and $3.45 million,
respectively, versus net income of $2.43 million and $3.74 million,
respectively, for the same periods of 1996. While net income decreased for the
three and six months ended June 30, 1997, compared to fiscal 1996, net income
before goodwill amortization, after-tax merger costs and after-tax gains on sale
of loans and other assets increased significantly. Before (i) the amortization
of goodwill of $1.27 million in 1997 and $235 thousand in 1996, respectively,
(ii) after-tax merger costs of $3.0 million in 1997, and (iii) an after-tax gain
on sale of loans and other assets of $606 thousand in 1996, net income for the
six month periods ended June 30, 1997 and 1996 would have been $7.72 million and
$3.37 million, respectively, or $0.71 and $0.45 per share, respectively, a
growth of approximately 58%.
Without the amortization of goodwill of $634 thousand and $121 thousand in
the second quarter of 1997 and 1996, respectively, and before after-tax merger
costs of $3.0 million in the second quarter of 1997, and before an after-tax
gain on sale of loans of $606 thousand in the second quarter of 1996, net income
for the three month periods would have been $4.11 million and $1.94 million in
1997 and 1996, respectively, or $0.38 and $0.26 per share, respectively, a
growth of approximately 46%.
Operating profits for the Company and the Banks are dependent on loan and
lease growth, controlling costs and continual efforts to prevent any unexpected
loan and lease losses which would require additions to the Allowance for Loan
and Lease Losses ("ALLL"). Demand for quality loans has increased in the
Company's primary market areas, and the Company expects to take advantage of
this increased demand, while maintaining its credit quality standards. While
deposits have grown by approximately $30.7 million since December 31, 1996, as a
result of a $32.6 million increase in gross loans, the Company's loan-to-deposit
ratio has also increased from 69.7%, as of December 31, 1996, to 70.5%, as of
June 30, 1997.
5
<PAGE>
NET INTEREST INCOME
Net interest income is the difference between interest earned on assets and
interest paid on liabilities. Net interest margin is net interest income
expressed as a percentage of average interest-earning assets. The following
table provides information concerning average interest-earning assets and
interest-bearing liabilities and yields and rates thereon for the six months and
three months ended June 30, 1997 and June 30, 1996, respectively. Nonaccrual
loans are included in the average earning assets amounts.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average interest-earning assets (in millions).......................... $ 1,182.0 $ 780.7 $ 1,187.6 $ 789.7
Yield.................................................................. 8.32% 8.55% 8.47% 8.71%
Average interest-bearing liabilities (in millions)..................... $ 775.7 $ 520.0 $ 792.3 $ 520.2
Cost................................................................... 3.75% 3.86% 3.77% 3.84%
Interest spread........................................................ 4.57% 4.69% 4.70% 4.87%
Net interest margin.................................................... 5.86% 5.98% 5.95% 6.18%
</TABLE>
The $5.4 million and $11.2 million increase in net interest income for the
comparative three months and six months ended June 30, 1997 and 1996,
respectively, is due primarily to increases in the volume of interest-earning
assets mostly due to the acquisition of Western. For the six month periods, net
interest margin decreased slightly from 5.98% to 5.86%, and the net interest
spread also decreased from 4.69% to 4.57%. The decline in net interest margin is
a result of the decrease in spread as the yield on interest-earning assets
declined more than the cost on interest-bearing liabilities.
The increase in interest income for the three and six months ended June 30,
1996, to the same periods of 1997 from approximately $17.0 million to $24.8
million and from $33.1 million to $48.8 million, respectively, was due almost
entirely to the increase in average interest-earning assets for the three and
six months ended June 30, 1997 compared to the same periods of 1996. Average
interest-earning assets, for the three month periods ended June 30, 1996 and
June 30, 1997, increased from approximately $789.7 million to $1,187.6 million,
respectively, resulting mostly from the acquisition of Western. Average
interest-earning assets, for the six months periods ended June 30, 1996 and June
30, 1997, increased from approximately $780.7 million to $1,182.0 million,
respectively, resulting mostly from the acquisition of Western. For the same
three and six month periods, the average yield on interest-earning assets
decreased from 8.71% in 1996 to 8.47% in 1997, and from 8.55% in 1996 to 8.32%
in 1997, respectively. The overall decrease in yield can be partially attributed
to the decrease in the average yield on loans, including the effect of the
interest rate swaps and the competitive pricing pressures experienced in the
Company's market area for commercial and real estate loans.
Interest expense increased from approximately $4.9 million to $7.4 million
and from $9.9 million to $14.4 million for the three months and six months ended
June 30, 1996 and June 30, 1997, respectively. This increase is mostly due to
the volume increase in average interest-bearing liabilities as a result of the
acquisition of Western. The average cost of funds declined from 3.86% to 3.75%
for the six months ended June 30, 1997, compared to the same period in 1996. The
average cost of funds declined from 3.84% to 3.77% for the three month period
ended June 30, 1997, compared to the same period in 1996. As of June 30, 1997,
33.7% of the Company's deposits are in non-interest bearing accounts. This is a
decrease from December 31, 1996 when 35.9% of the Company's deposits were in
non-interest bearing accounts.
PROVISION FOR LOAN AND LEASE LOSSES
The ratio of the ALLL to total loans was 1.80% as of June 30, 1997, compared
to 1.92% as of December 31, 1996. The decline in ratio was largely due to an
increase in loans. During the same period, credit quality measures improved. Due
to continued decline in non-performing assets and an improved
6
<PAGE>
overall loan portfolio, management believes that ALLL is adequate based on all
currently available information.
NON-INTEREST INCOME
The following table shows the details of non-interest income (in thousands)
for the three and six months ended June 30, 1997. (Note: Due to purchase
accounting treatment of the acquisition of Western, Western is not included in
the 1996 numbers):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------
1997
-----------------------------------------
THE COMPANY, 1996
SC BANK -------------
WESTERN & NBSC CONSOLIDATED CONSOLIDATED
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Service charges and fee income.............................. $ 213 $ 1,636 $ 1,849 $ 1,738
Gain on sale of loans and other assets...................... -- -- -- 980
Securities gains............................................ -- 230 230 --
Other income................................................ 96 439 535 470
----- ------ ------ ------
Total non-interest income............................... $ 309 $ 2,305 $ 2,614 $ 3,188
----- ------ ------ ------
----- ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------
1997
-----------------------------------------
THE COMPANY, 1996
SC BANK -------------
WESTERN & NBSC CONSOLIDATED CONSOLIDATED
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Service charges and fee income.............................. $ 547 $ 3,306 $ 3,853 $ 3,420
Gain on sale of loans and other assets...................... -- 82 82 979
Securities gains............................................ 107 230 337 14
Other income................................................ 110 832 942 947
----- ------ ------ ------
Total non-interest income............................... $ 764 $ 4,450 $ 5,214 $ 5,360
----- ------ ------ ------
----- ------ ------ ------
</TABLE>
Non-interest income, for the three months ended June 30, 1996, includes a
gain on sale of loans and other assets in the amount of $980 thousand.
Non-interest income for the three months ended June 30, 1997, includes a gain on
sale of securities in the amount of $230 thousand. If adjusted for these non-
recurring items, and without the non-interest income contributed by Western,
total non-interest income decreased by $133 thousand from $2.2 million in 1996
to $2.1 million in 1997. $124 thousand of this decrease was in service charges
and fee income. Service charge income on deposit accounts decreased for the
three months ended June 30, 1997 over the comparable period in 1996 due to
competitive pricing on certain commercial accounts. In addition, a recent
deposit promotion featured a no service charge account for depositors using
direct deposit.
Non-interest income, for the six months ended June 30, 1996, includes a gain
on sale of loans and other assets in the amount of $979 thousand. Non-interest
income for the six months ended June 30, 1997, includes a gain on sale of
securities in the amount of $337 thousand and a gain on sale of loans and other
assets of $82 thousand. If adjusted for these non-recurring items, and without
the non-interest income contributed by Western, total non-interest income
decreased by $229 thousand from $4.37 million in 1996 to $4.14 million in 1997
including a $124 thousand decrease in service charges and fee income. Service
charge income on deposit accounts decreased for the six months ended June 30,
1997 over the comparable period in 1996 due to competitive pricing on certain
commercial accounts. In addition, a recent deposit promotion featured a no
service charge account for depositors using direct deposit.
7
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NON-INTEREST EXPENSE
The following table shows the details of non-interest expense for the three
and six months ended June 30, 1997 (in thousands). Due to purchase accounting
treatment of the acquisition of Western, Western results are not included in the
1996 numbers:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------
1997
----------------------------------------
THE COMPANY, 1996
SC BANK & ------------
WESTERN NBSC CONSOLIDATED CONSOLIDATED
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Salaries and benefits....................................... $ 1,391 $ 4,665 $ 6,056 $ 5,056
Occupancy................................................... 351 1,639 1,990 1,925
Advertising and business development........................ 70 309 379 423
Other real estate owned..................................... 46 (44) 2 63
Professional services....................................... 146 725 871 1,772
Telephone, stationery and supplies.......................... 119 588 707 591
Goodwill amortization....................................... 499 135 634 121
Data processing............................................. 192 211 403 216
Customer service cost....................................... 160 265 425 172
Merger related costs........................................ -- 3,404 3,404 --
Other....................................................... 326 1,324 1,650 1,110
----------- ------------- ------------ ------------
Total non-interest expense.............................. $ 3,300 $ 13,221 $ 16,521 $ 11,449
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
Non interest expense before goodwill amortization and merger
related costs............................................. $ 2,801 $ 9,682 $ 12,483 $ 11,328
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------
1997
----------------------------------------
THE COMPANY, 1996
SC BANK & ------------
WESTERN NBSC CONSOLIDATED CONSOLIDATED
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Salaries and benefits....................................... $ 2,931 $ 9,784 $ 12,715 $ 10,308
Occupancy................................................... 676 3,244 3,920 3,704
Advertising and business development........................ 144 542 686 695
Other real estate owned..................................... 22 26 48 230
Professional services....................................... 248 1,803 2,051 2,471
Telephone, stationery and supplies.......................... 217 1,203 1,420 1,191
Goodwill amortization....................................... 998 270 1,268 235
Data processing............................................. 306 485 791 407
Customer service cost....................................... 263 290 553 268
Merger related costs........................................ -- 3,404 3,404 --
Other....................................................... 590 2,436 3,026 2,359
----------- ------------- ------------ ------------
Total non-interest expense.............................. $ 6,395 $ 23,487 $ 29,882 $ 21,868
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
Non interest expense before goodwill amortization and merger
related costs............................................. $ 5,397 $ 19,813 $ 25,210 $ 21,633
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
</TABLE>
Merger related costs include approximately $1.4 million of investment
banking fees, $923 thousand of other professional and filing fees, and $1.1
million of compensation related costs. The tax benefits for these costs are
approximately $395 thousand.
8
<PAGE>
Non-interest expense, for the three and six months ended June 30, 1997,
includes goodwill amortization in the amount of $634 thousand and $1.3 million,
respectively. Also included in the three months and six months ended June 30,
1996 non-interest expense is non-recurring merger related cost of $3.4 million.
If adjusted for the above items, the total non-interest expense increased by
$1.2 million for the three months ending June 30, 1997, compared to the same
period in 1996, which was due mostly to expenses at Western of $2.8 million
mitigated by efficiency improvements at the Company overall.
Non-interest expense for the six months ended June 30, 1997, increased by
$8.0 million. If adjusted for the amortization of goodwill and merger related
costs, the net increase was $3.6 million due mostly to expenses at Western of
$5.4 million, less efficiency improvements at the Company.
The decrease in professional services from 1996 to 1997, for both the three
month and six month periods, is due mostly to the reduction in legal expenses
associated with various litigation.
CREDIT QUALITY AND ANALYSIS
The Company defines non-performing assets to include (i) loans on which it
has ceased to accrue interest ("Nonaccrual Loans"), (ii) foreclosed real estate
owned, and (iii) those loans whose terms have been modified such that the
interest rates charged to the borrowers have been reduced to levels below the
original contract rates and below market rates of interest at both the time of
modification and the reporting date ("Modified Loans").
Planned workout arrangements are currently in place for all non-performing
assets, and, unless there are any unexpected changes in the financial condition
of the borrowers, management is not aware of any additional significant loss
potential that has not already been included in the ALLL.
The following table shows the historical trends in non-performing assets and
comparative key credit statistics at the Company (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Loans past due 90 days and still accruing.............................................. $ 422 $ 193
---------- ------------
Nonaccrual loans....................................................................... 14,665 16,157
Other real estate owned................................................................ 7,680 7,082
---------- ------------
Non performing assets.............................................................. $ 22,345 $ 23,239
---------- ------------
---------- ------------
Impaired loans--gross.................................................................. $ 18,530 $ 21,034
Allocated reserves..................................................................... 1,806 2,172
---------- ------------
Net investment in impaired loans................................................... $ 16,724 $ 18,862
---------- ------------
---------- ------------
ALLL................................................................................... $ 15,345 $ 15,757
Gross loans and leases................................................................. $ 851,147 $ 819,792
ALLL to loans and leases............................................................... 1.80% 1.92%
ALLL to nonaccrual loans and leases.................................................... 104.6% 97.5%
ALLL to non performing assets.......................................................... 68.7% 67.8%
Non performing assets to loans, leases and OREO........................................ 2.60% 2.81%
</TABLE>
The Company has established a monitoring system for its loans in order to
identify impaired loans, potential problem loans and to permit periodic
evaluation of impairment and the adequacy of the allowance for loan losses in a
timely manner. The monitoring system and ALLL methodology have evolved over a
period of years and loan classifications have been incorporated into the
determination of the ALLL. This monitoring system and allowance methodology
include a loan-by-loan analysis for all classified loans as well as loss factors
for the balance of the portfolio that are based on migration analysis relative
to the
9
<PAGE>
unclassified portfolio. This analysis includes such factors as historical loss
experience, current portfolio delinquency and trends and other inherent risk
factors such as economic conditions, risk levels of particular loan categories,
internal loan review and oversight, concentrations in the portfolio and changes
in the quality of the lending staff of the Banks.
On June 30, 1997, the Company had approximately $18.5 million of loans which
were considered to be impaired, which decreased from $21.0 million at December
31, 1996. The Company had allocated reserves of approximately $1.8 million on
these loans at June 30, 1997. Of these loans, $12.6 million are on nonaccrual
status.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
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.
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers who may need assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Historically, the overall liquidity of the Company is based on its core
deposit base. The Company has not relied on large denomination time deposits.
To meet short-term liquidity needs, the Company has maintained adequate
balances in federal funds sold, certificates of deposits with other financial
institutions and investments securities having maturities of five years or less.
Liquid assets (cash, federal funds sold and investment securities available for
sale) as a percentage of total deposits are 36.5% and 37.3% as of June 30, 1997
and December 31, 1996, respectively.
REGULATORY MATTERS
The Regulatory Capital Guidelines as well as the actual capitalization for
NBSC, SC Bank, Western Bank and the Company, as of June 30, 1997, follow:
<TABLE>
<CAPTION>
REGULATORY REQUIREMENTS
(GREATER THAN OR EQUAL
TO STATED PERCENTAGE) ACTUAL
------------------------ ------------------------------------------
ADEQUATELY WELL SC CONSOLI-
CAPITALIZED CAPITALIZED NBSC BANK WESTERN DATED
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Detailed computations of
Tier 1 leverage capital ratio....................... 4.00% 5.00% 7.52% 9.56% 7.15% 7.54%
Tier 1 risk-based capital ratio..................... 4.00% 6.00% 10.46% 11.37% 12.17% 10.40%
Total risk-based capital............................ 8.00% 10.00% 11.71% 12.57% 13.43% 11.65%
</TABLE>
10
<PAGE>
WESTERN BANCORP
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and due from banks......................................................... $ 95,295 $ 96,202
Federal funds sold.............................................................. 73,304 22,517
------------- -----------------
Total Cash and Cash Equivalents............................................... 168,599 118,719
FRB and FHLB stock.............................................................. 5,441 5,291
Securities:
Securities held to maturity................................................... 6,902 7,270
Securities available for sale................................................. 271,848 320,257
------------- -----------------
Total Securities............................................................ 284,191 332,818
Net loans....................................................................... 833,796 801,601
Property, plant and equipment................................................... 13,897 14,955
Other real estate owned......................................................... 7,680 7,082
Goodwill........................................................................ 31,699 32,968
Other assets.................................................................... 27,803 30,770
------------- -----------------
Total Assets................................................................ $ 1,367,665 $ 1,338,913
------------- -----------------
------------- -----------------
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Non-interest bearing deposits................................................... $ 407,278 $ 422,854
Interest bearing deposits....................................................... 800,436 754,160
------------- -----------------
Total Deposits.............................................................. 1,207,714 1,177,014
Borrowings...................................................................... 18,194 20,290
Accrued interest payable & other liabilities.................................... 10,115 12,562
------------- -----------------
Total Liabilities........................................................... 1,236,023 1,209,866
SHAREHOLDERS' EQUITY:
Preferred stock................................................................. -- --
Common stock.................................................................... 111,186 111,326
Additional paid-in capital...................................................... -- --
Retained earnings (deficit)..................................................... 21,279 18,583
Unrealized net gains (losses) on investments available for sale, net............ (823) (862)
------------- -----------------
Total Shareholders' equity.................................................. 131,642 129,047
Total Liabilities & Shareholders' Equity.................................... $ 1,367,665 $ 1,338,913
------------- -----------------
------------- -----------------
Number of common shares outstanding............................................. 10,618.2 10,438.7
Common shareholders' equity per share........................................... $ 12.40 $ 12.36
</TABLE>
See accompanying Notes to Unaudited Supplemental Condensed Consolidated
Financial Statements.
11
<PAGE>
WESTERN BANCORP
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans.................................. $ 19,560 $ 13,500 $ 38,605 $ 26,434
Interest on investment securities........................... 4,192 2,806 8,500 5,281
Interest of federal funds sold.............................. 1,041 655 1,653 1,380
---------- ---------- ---------- ----------
Total interest income..................................... 24,793 16,961 48,758 33,095
INTEREST EXPENSE:
Interest expense on deposits................................ 7,059 4,676 13,735 9,325
Interest expense on other borrowings........................ 303 255 699 620
---------- ---------- ---------- ----------
Total interest expense.................................... 7,362 4,931 14,434 9,945
---------- ---------- ---------- ----------
NET INTEREST INCOME........................................... 17,431 12,030 34,324 23,150
Less: provision for loan and lease and lease losses......... 675 (295) 1,400 335
---------- ---------- ---------- ----------
Net interest income after provision for loan and lease
losses...................................................... 16,756 12,325 32,924 22,815
NON-INTEREST INCOME:
Service charges and fees.................................... 1,849 1,738 3,853 3,420
Gain on sale of loans and other assets...................... -- 980 82 979
Securities gains............................................ 230 -- 337 14
Other income................................................ 535 470 942 947
---------- ---------- ---------- ----------
Total non-interest income................................. 2,614 3,188 5,214 5,360
NON-INTEREST EXPENSE:
Salaries and benefits....................................... 6,056 5,056 12,715 10,308
Occupancy, furniture and equipment.......................... 1,990 1,925 3,920 3,704
Advertising and business development........................ 379 423 686 695
Other real estate owned..................................... 2 63 48 230
Professional services....................................... 871 1,772 2,051 2,471
Telephone, stationery and supplies.......................... 707 591 1,420 1,191
Goodwill amortization....................................... 634 121 1,268 235
Data processing for company................................. 403 216 791 407
Customer services cost...................................... 425 172 553 268
Merger costs................................................ 3,404 -- 3,404 --
Other....................................................... 1,650 1,110 3,026 2,359
---------- ---------- ---------- ----------
Total non-interest expense................................ 16,521 11,449 29,882 21,868
---------- ---------- ---------- ----------
Income before income taxes.................................... 2,849 4,064 8,256 6,307
Income taxes.................................................. 2,380 1,639 4,811 2,565
---------- ---------- ---------- ----------
Net income................................................ $ 469 $ 2,425 $ 3,445 $ 3,742
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PER SHARE INFORMATION:
Number of shares (weighted average)......................... 10,848.0 7,512.5 10,847.9 7,511.8
Income per share (dollars).................................. $ 0.04 $ 0.32 $ 0.32 $ 0.50
</TABLE>
See accompanying Notes to Unaudited Supplemental Condensed Consolidated
Financial Statements.
12
<PAGE>
WESTERN BANCORP
UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 3,445 $ 3,742
Adjustments
(Gain) on sale of securities available for sale......................................... (337) (14)
(Gain) on sale of loans................................................................. (78) --
(Gain) loss on sale of fixed assets..................................................... (4) 24
Loss on sale of other real estate owned................................................. -- 16
Provision for loan and lease losses..................................................... 1,400 335
Provision for loss on other real estate owned........................................... -- 369
Goodwill amortization................................................................... 998 --
Depreciation and amortization........................................................... 1,140 1,068
Amortization of (discounts) and premiums on investment securities....................... (1) 708
Net increase (decrease) in accrued interest payable and other liabilities............... (1,291) 1,909
Net decrease in accrued interest receivable and other assets............................ 3,165 577
---------- ----------
Net cash provided by operating activities............................................. 8,437 8,734
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:......................................................
Proceeds from sale of investment securities available for sale.......................... 8,414 8,549
Proceeds from maturities of investment securities available for sale.................... 8,867 4,005
Proceeds from sale of loans............................................................. 1,299 --
Proceeds from sale of fixed assets and other assets..................................... 4 197
Principal payments received on investment securities.................................... 109,018 20,135
Purchase of investment securities....................................................... (77,222) (43,053)
(Increase) in net loans and leases...................................................... (34,847) (10,811)
(Additions) to premises and equipment................................................... (82) (623)
(Additions) to other real estate owned.................................................. (480) 991
---------- ----------
Net cash provided by (used in) investing activities................................... 14,971 (20,610)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Cash received from exercise of options.................................................. 367 93
Dividends paid.......................................................................... (749) --
Common stock repurchased and retired.................................................... (507) --
Net increase (decrease) in deposits..................................................... 30,700 21,463
Additional borrowings................................................................... 2,852 5,657
Repayments of borrowed funds............................................................ (6,191) (2,351)
---------- ----------
Net cash provided by financing activities............................................. 26,472 24,862
---------- ----------
Net increase in cash...................................................................... 49,880 12,986
Cash and cash equivalents at the beginning of the period.................................. 118,719 110,322
---------- ----------
Cash and cash equivalents at the end of the period........................................ 168,599 123,308
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Property acquired through foreclosure................................................... $ 7,147 $ 1,413
Repayment of KSOP debt.................................................................. -- 11
Increase of unrealized gain on investment securities available for sale, net of tax..... $ 39 $ 459
</TABLE>
See accompanying Notes to Unaudited Supplemental Condensed Consolidated
Financial Statements.
13
<PAGE>
WESTERN BANCORP
NOTES TO UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
1. On October 10, 1997, the Company completed the merger with SCB whereby
the Company issued approximately 3,555,500 shares of Company Common Stock to the
SCB stockholders and SCB merged with and into the Company. The SCB Merger has
been accounted for as a pooling-of-interests. These Unaudited Supplemental
Condensed Consolidated Financial Statements, Notes to Unaudited Supplemental
Condensed Consolidated Financial Statements and management's discussion and
analysis as of June 30, 1997 and for the three months and six months ended June
30, 1997 and June 30, 1996 have been restated as if the SCB Merger had occurred
at the beginning of the periods indicated.
2. The Company is the holding company for the Banks. The Unaudited
Supplemental Condensed Consolidated Financial Statements of the Company and the
Banks included herein reflect all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary to
present a fair statement of the results for the interim periods indicated.
Certain reclassifications have been made to the Unaudited Supplemental Condensed
Consolidated Financial Statements for 1996 to conform to the 1997 presentation.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The results of operations for the
three months and six months ended June 30, 1997 and 1996, are not necessarily
indicative of the results of operations to be expected for the remainder of the
year.
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.
These Unaudited Supplemental Condensed Consolidated Financial Statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report filed on Form 10-KSBA, for
the year ended December 31, 1996, as amended, CCB's Annual Report filed on Form
10-K/A, for the year ended December 31, 1996, as amended, SCB's Annual Report
filed on Form 10-K/A, for the year ended December 31, 1996, as amended, the
Company's Current Report filed on Form 8-K on July 17, 1997 and the Company's
Supplemental Consolidated Financial Statements for the years ended December 31,
1996, 1995 and 1994 and the notes thereto filed as part of this Form 8-K.
3. COMPLETED ACQUISITIONS
WESTERN BANK ACQUISITION: On September 30, 1996, the Company acquired, for
cash, all of the issued and outstanding shares of Western, a state chartered
bank located in West Los Angeles. Western has five offices, including its head
office in Westwood. In connection with the acquisition, Western began operating
as a wholly-owned subsidiary of the Company. The acquisition of Western was
accounted for under the purchase method of accounting. As such, the results of
operations for Western were included in the Company's results of operations
beginning October 1, 1996.
CALIFORNIA COMMERCIAL BANKSHARES ACQUISITION: On December 18, 1997, the
Company reached an agreement to merge with CCB, a bank holding company operating
in Orange County, California. The shareholders of the Company approved the
acquisition on June 2, 1997, and the transaction was closed on June 4, 1997. The
Company issued approximately 3,043,200 shares of Company Common Stock to the CCB
stockholders based upon an exchange ratio of one (after the Company completed a
reverse stock split of 8.5 to 1 just prior to this merger). Also on June 4,
1997, Monarch was merged into NBSC. The acquisition
14
<PAGE>
WESTERN BANCORP
NOTES TO UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996 (CONTINUED)
of CCB was accounted for under the pooling-of-interests method of accounting,
and all financial information presented has been restated for this combination.
SC BANCORP ACQUISITION: On April 29, 1997, the Company entered into an
agreement to merge with SCB, a bank holding company operating in Orange, San
Diego and Los Angeles counties in California. The shareholders of SCB and the
Company approved the merger on October 10, 1997, and the SCB Merger was
completed on that date. The exchange ratio was 0.4556 shares of the Company
Common Stock issued for each share of SCB Common Stock. Approximately 3,555,500
shares of the Company's Common Stock (before adjustments for fractional shares)
were issued as part of the SCB Merger. The Company has also submitted an
application to the appropriate regulatory authorities to merge NBSC into SC
Bank.
The acquisition of SCB was accounted for under the pooling-of-interests
method of accounting, and all financial information presented has been restated
for this combination.
4. PENDING ACQUISITION OF SMB
On July 30, 1997, the Company and SMB entered into a definitive agreement
for the merger of SMB with a subsidiary of the Company subject to approval by
the banking regulators and shareholders of both companies. Upon the SMB Merger
becoming effective, each share of common stock, $3.00 par value, of SMB (the
"SMB Common Stock") issued and outstanding at the time (other than shares that
have not been voted in favor of the approval of the principal terms of the
Merger and with respect to which the dissenters' rights have been perfected in
accordance with the California General Corporation Law) will be converted into
the right to receive either (i) $28.00 in cash (the "Cash Consideration") or
(ii) 0.875 shares of Company Common Stock (the "Stock Consideration"). Each
holder of SMB Common Stock may elect to, and may, receive the Cash Consideration
and, if the number of holders of SMB Common Stock electing to receive the Cash
Consideration, is so great as to prevent a tax-free reorganization, all the
holders of SMB Common Stock shall receive the Cash Consideration. If the value
of shares of holders of SMB Common Stock electing to receive the Cash
Consideration is such as to permit a tax-free reorganization, the remaining
holders of SMB Common Stock shall receive the Stock Consideration subject to the
limitation that no more than 50% of the outstanding shares of SMB Common Stock
shall be converted into the right to receive Stock Consideration and that in the
event that holders of SMB Common Stock elect to receive Stock Consideration in
exchange for more than 50% of the outstanding shares of SMB Common Stock, the
holders of SMB Common Stock electing Stock Consideration shall receive both cash
and stock, subject to the option of the Company to increase the Stock
Consideration.
The SMB Merger is expected to be accounted for using the purchase method of
accounting. At December 31, 1996, SMB had total assets, deposits, shareholders'
equity and number of shares of SMB Common Stock outstanding of $632 million,
$554 million, $73 million and 7.1 million, respectively; these amounts were not
audited in connection with the preparation of these financial statements. For
the year ended December 31, 1996, SMB reported net income and net income per
share of approximately $9.6 million and $1.36, respectively; these amounts were
not audited in connection with the preparation of these financial statements.
15
<PAGE>
D. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AS OF DECEMBER 31, 1996 AND 1995
AND FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
On October 10, 1997, the Company consummated the SCB Merger. On June 4,
1997, the Company consummated the merger of California Commercial Bankshares
("CCB") with and into the Company (the "CCB Merger"). On July 15, 1997 the
Company filed, on a Form 8-K, 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.
The Company hereby files Supplemental Consolidated Financial Statements as
of December 31, 1996 and 1995 and for each of the years in the three year period
ended December 31, 1996, reflecting the effect of the SCB 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 SCB Merger and the Supplemental
Consolidated Financial Statements, as of December 31, 1996 and 1995 and for each
of the years in the three year period ended December 31, 1996 are set forth
below.
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 as of December 31, 1996 and 1995 and for each
of the years in the three year period ended December 31, 1996. Such tables and
data reflect the combination of the Company and both CCB and SCB which were
acquired by the Company on June 4, 1997 and October 10, 1997, respectively, each
in a merger accounted for as a pooling-of-interests. This discussion should be
read in conjunction with the Supplemental Consolidated Financial Statements as
of December 31, 1996 and 1995 and for each of the years in the three year period
ended December 31, 1996 and related notes included elsewhere herein.
16
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1996(1) 1995 1994 1993 1992
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED STATEMENT OF OPERATIONS DATA:
Interest income............................ $ 74,237 $ 62,629 $ 53,079 $ 57,722 $ 69,804
Interest expense........................... 22,488 20,452 13,562 18,853 26,528
----------- ------------- ------------- ------------- -------------
Net interest income........................ 51,749 42,177 39,517 38,869 43,276
Provision for loan and lease losses........ 1,018 8,564 3,510 17,919 13,914
Non-interest income (other than gains or
losses on securities and sale of loans
transactions)............................ 8,929 8,373 8,256 8,757 7,931
Gains (losses) on securities
transactions............................. 281 (692) (24) 7,114 2,509
Gain on sale of loans, net................. 665 145 215 -- --
Other non-interest expense................. 47,091 40,304 37,705 40,594 39,170
Lower of cost or market adjustment on
loans.................................... -- 756 -- -- --
Goodwill amortization...................... 1,004 821 211 167 160
OREO expense (income)...................... (134) 3,080 3,145 4,888 1,722
----------- ------------- ------------- ------------- -------------
Income (loss) before taxes............... 12,645 (3,522) 3,393 (8,828) (1,250)
Income tax expense (benefit)............... 3,656 (1,733) 1,680 (1,979) (529)
----------- ------------- ------------- ------------- -------------
Income (loss) before cumulative effect of a
change in accounting principle........... 8,989 (1,789) 1,713 (6,849) (721)
Cumulative effect of change in accounting
principle................................ -- -- -- (41) --
----------- ------------- ------------- ------------- -------------
Net income (loss)........................ $ 8,989 $ (1,789) $ 1,713 $ (6,890) $ (721)
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
PER SHARE DATA (2):
Net income (loss) per share................ $ 1.08 $ (0.27) $ 0.33 $ (1.67) $ (0.17)
Cash dividends declared.................... -- -- -- -- --
Book value per share....................... $ 12.36 $ 10.64 $ 10.52 $ 12.59 $ 14.40
Shares used to compute net income (loss)
per share................................ 8,320,341 6,563,355 5,123,043 4,131,721 4,165,015
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Assets..................................... $ 1,338,913 $ 866,385 $ 759,194 $ 799,558 $ 905,490
Loans and leases net of deferred fees and
unearned income.......................... 817,358 543,042 439,241 460,975 547,797
Allowance for loan and lease losses........ 15,757 13,130 12,115 19,077 13,687
Securities................................. 332,818 184,978 220,095 248,879 232,439
Goodwill................................... 32,968 4,131 2,464 2,616 2,008
Deposits................................... 1,177,014 774,057 675,971 731,829 809,992
Borrowings................................. 20,290 7,366 15,161 10,168 28,396
Shareholders' equity....................... 129,047 77,628 62,274 51,572 57,778
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
ASSET QUALITY:
Nonaccrual loans and leases................ $ 16,157 $ 17,303 $ 16,814 $ 27,996 $ 18,200
OREO....................................... 7,082 4,388 9,130 9,715 19,105
----------- ------------- ------------- ------------- -------------
Total nonaccrual loans and leases and
OREO................................... $ 23,239 $ 21,691 $ 25,944 $ 37,711 $ 37,305
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
PERFORMANCE RATIOS:
Return on average assets................... 0.90% (0.21)% 0.22 % (0.79)% (0.08)%
Return on average shareholders' equity..... 9.78% (2.59)% 2.65 % (12.54)% (1.24)%
Net interest spread........................ 4.62% 4.51 % 4.88 % 4.18 % 4.41 %
Net interest margin........................ 5.86% 5.69 % 5.71 % 4.91 % 5.30 %
Average shareholders' equity to average
assets................................... 9.25% 8.31 % 8.20 % 6.26 % 6.52 %
ASSET QUALITY RATIOS:
Nonaccrual loans and leases to gross
loans.................................... 1.97% 3.18 % 3.81 % 6.05 % 3.31 %
Nonaccrual loans and leases and OREO to
total assets............................. 1.74% 2.50 % 3.42 % 4.72 % 4.12 %
Allowance for loan and lease losses to
total loans and leases................... 1.92% 2.41 % 2.75 % 4.12 % 2.49 %
Allowance for loan and lease losses to
nonaccrual loans and leases.............. 98% 76 % 72 % 68 % 75 %
Net charge-offs to average loans and
leases................................... 0.59% 1.68 % 2.43 % 2.50 % 2.11 %
</TABLE>
- - - ------------------------------
(1) Includes the accounts and operating results of Western since the September
30, 1996 acquisition date.
(2) Excludes stock options as common stock equivalents in 1995, 1993 and 1992 as
the effect thereof was antidilutive.
17
<PAGE>
OVERVIEW
The Company serves as the holding company for National Bank of Southern
California ("National"), Southern California Bank ("SC Bank"), Western Bank
("Western" and together with National and SC Bank, the "Banks") and Venture
Partners. The Company acquired Western on September 30, 1996 in a transaction
which was accounted for using the purchase method of accounting. Consequently,
the results of operations contained herein include Western only from the date of
acquisition by the Company. On June 4, 1997 the Company consummated the CCB
Merger, which resulted in the merger of Monarch Bank ("Monarch"), a then
wholly-owned subsidiary of the Company, with and into National with National
being the surviving association as a wholly-owned subsidiary of the Company.
References to National refer to the merged entity except where indicated. In
addition, at the time of the CCB Merger, the Company changed its name from
"Monarch Bancorp" to "Western Bancorp."
On October 10, 1997, the Company consummated the SCB Merger, as a result of
which SC Bank became a wholly-owned subsidiary of the Company. National and SC
Bank executed an Agreement and Plan of Merger, dated as of October 10, 1997,
pursuant to which National will merge with and into SC Bank with SC Bank being
the surviving corporation (the "Bank Merger"). The Bank Merger is expected to be
consummated in the fourth quarter of 1997. Each of the CCB Merger and the SCB
Merger were accounted for using the pooling-of-interests method of accounting.
Accordingly, all accompanying financial information has been restated to combine
the consolidated financial information of CCB and SCB with that of the Company.
The consolidated financial information of CCB was combined with that of the
Company in restated financial statements filed on Form 8-K on July 15, 1997. The
following paragraphs discuss certain material events or activities that occurred
in the first nine months of 1997, and the years ended December 31, 1996, 1995
and 1994.
CAPITAL ACTIVITIES
In August 1997 the Company instituted a quarterly dividend and declared a
dividend of $0.15 per share payable on December 10, 1997 to shareholders of
record on November 10, 1997.
On October 10, 1997, the Company consummated the SCB Merger, pursuant to
which, approximately 3,555,500 shares of Company Common Stock (prior to
adjustment for fractional shares) were issued as consideration in the SCB
Merger. (For further information on the SCB Merger, see Note 2 of Notes to
Supplemental Consolidated Financial Statements.)
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. In addition, on June 3, 1997, in connection with the CCB Merger, the
Company completed an 8.5 to 1 reverse stock split of the Company Common Stock
(the "Reverse Stock Split"). (For further information on the CCB Merger, see
Note 2 of Notes to Supplemental Consolidated Financial Statements) All share
amounts herein have been restated to give effect to the Reverse Stock Split. 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
3,076,045 shares of Company Common Stock in a private placement from which the
Company raised approximately $ 42.2 million, net of approximately $1 million in
issuance costs, and from the proceeds of a three year loan of $26.5 million from
The Northern Trust Company of Chicago. 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.
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 $3.5 million which increased the Company's capital. On
March 31, 1995, the Company completed a private placement offering of 534,958
shares of Company Common Stock from which it raised approximately $6.1 million.
Proceeds from the offering were used (i) to pay approximately $470 thousand in
offering expenses; (ii) to increase the Company's investment in Monarch by $3.6
million; and (iii) $54 thousand to retire Company debt. Approximately $2.1
million in cash from such proceeds 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 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 $3.2 million, CCB invested $2.9 million in National as paid in 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.
18
<PAGE>
During the second quarter of 1994, SCB completed a rights offering which
resulted in the issuance of 4,000,000 shares of SCB Common Stock at $4.00 per
share (1,822,400 shares of Company Common Stock and approximately $8.78 per
share after adjustment for the SCB Merger). Net proceeds of $14.2 million were
realized on this offering after issuance costs of approximately $1.8 million.
For further information on these acquisitions, see Note 2 of Notes to
Supplemental 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 26% 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 during a period when the yield curve was reasonably flat,
and in anticipation of increased funding needs as the loan portfolio grows. See
"--Liquidity and Interest Rate Risk."
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Notes to Supplemental Consolidated Financial Statements
for information on current accounting pronouncements and their impact on the
Company's consolidated financial statements.
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................................................... $ 168,353 $ 45,452 $ 64,744
U.S. Agency securities or insured obligations................................ 92,393 65,783 76,151
Mortgage-backed securities................................................... 48,290 54,353 6,725
Other debt securities........................................................ 1,860 416 2,903
---------- ---------- ----------
Total debt securities.................................................... 310,896 166,004 150,523
Mutual funds................................................................. 9,078 9,240 5,191
Other equity securities...................................................... 283 250 --
---------- ---------- ----------
Total.................................................................... $ 320,257 $ 175,494 $ 155,714
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The fair value of securities available for sale increased approximately
$144.8 million to $320.3 million at December 31, 1996. This increase is due
largely to the acquisition of Western which added $134.4 million to securities
available for sale; the Western securities available for sale at December 31,
1996 totaled $141 million.
The investment in mutual funds represents shares held in the Monarch Fund, a
mutual fund comprised wholly of US Government obligations; the Monarch Fund is
not an entity related to Monarch Bank.
In 1995, SCB adopted FAS 115 and reclassified its entire held-to-maturity
portfolio to available-for-sale. At that time, SCB held approximately $60
million in mortgage-backed securities which represented the majority of the
increase in mortgage-backed securities available for sale from 1994 to 1995.
19
<PAGE>
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........ $ 168,353 5.77% $ 74,111 5.62% $ 93,639 5.89% $ -- --
US Agency or insured
obligations.................... 92,393 5.61% 37,792 5.19% 53,358 5.87% 573 7.03%
Mortgage-backed Securities...... 48,290 5.62% 8,253 5.41% 33,599 5.46% 1,450 6.95%
Other securities................ 1,860 5.40% 411 4.88% 1,395 5.74% -- --
--------- --------- --------- -----------
Total....................... $ 310,896 5.69% $ 120,567 5.47% $ 181,991 5.80% $ 2,023 6.97%
--------- --------- --------- -----------
--------- --------- --------- -----------
Amortized cost.............. $ 312,602 $ 120,585 $ 183,699 $ 2,021
--------- --------- --------- -----------
--------- --------- --------- -----------
<CAPTION>
OVER 10 YEARS
-----------------------
AMOUNT YIELD
----------- ----------
<S> <C> <C>
US Government securities........ $ 603 5.41%
US Agency or insured
obligations.................... 670 6.80%
Mortgage-backed Securities...... 4,988 6.63%
Other securities................ 54 0.55%
-----------
Total....................... $ 6,315 6.48%
-----------
-----------
Amortized cost.............. $ 6,297
-----------
-----------
</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 $ 2,908
U.S. Agency securities.............................................................. 4,202 4,500 1,508
Mortgage-backed securities.......................................................... 1,921 1,676 59,964
--------- --------- ---------
$ 7,270 $ 6,661 $ 64,380
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 6.31% 3,990 6.31% --
Mortgage-backed Securities........ 1,921 7.02% -- -- 931 6.30% --
----------- ----- ----------- -----
Total......................... $ 7,270 6.42% $ 462 6.67% $ 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 in the held
to maturity portfolio of Monarch as of December 31, 1996. These Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("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 Federal Financial Institutions Examination Council ("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 CMOs 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.
The Banks do not have securities trading accounts and do not intend to trade
securities. SC Bank has entered into two interest rate swap agreements to reduce
the impact of changes in interest rates on its floating rate loan portfolio and
does not use them for trading purposes. For further information, see Notes 4 and
14 of Notes to Supplemental Consolidated Financial Statements. As part of the
SCB Merger, the Company intends to liquidate these interest rate swap
agreements.
20
<PAGE>
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 the type of loan. The Company's
lending activities are predominantly in Southern California and 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............................. $ 59,952 $ 31,403 $ 33,854 $ 45,615 $ 77,735
Real estate mortgage................................. 313,620 188,842 170,731 184,965 194,715
Commercial........................................... 342,737 248,259 174,058 174,143 207,370
Leases............................................... 3,027 3,463 4,159 4,532 6,537
Installment and other................................ 100,456 72,837 58,115 53,430 64,115
---------- ---------- ---------- ---------- ----------
Gross loans and leases........................... 819,792 544,804 440,917 462,685 550,472
---------- ---------- ---------- ---------- ----------
Less:
Unearned lease income.............................. (364) (399) (544) (562) (947)
Deferred loan fees................................. (2,070) (1,363) (1,132) (1,148) (1,728)
Allowance for loan and lease losses................ (15,757) (13,130) (12,115) (19,077) (13,687)
---------- ---------- ---------- ---------- ----------
Net loans and leases........................... $ 801,601 $ 529,912 $ 427,126 $ 441,898 $ 534,110
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Gross loans increased $275.0 million to $819.8 million at December 31, 1996
from $544.8 million at December 31, 1995 and the allowance for loan and lease
losses increased $2.7 million from $13.1 million at December 31, 1995 to $15.8
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 the effect of adjustments for
unrealized gain or loss on securities available for sale recorded through
equity), 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 $28.2 million for
secured loans, and approximately $16.9 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
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
21
<PAGE>
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......................................... $ 52,961 $ 2,240 $ 4,751 $ 59,952
Real estate mortgage............................................. 74,111 161,991 77,518 313,620
Commercial....................................................... 176,514 112,546 53,677 342,737
Installment, leases, and other................................... 32,064 40,565 30,854 103,483
---------- ---------- ---------- ----------
Total.......................................................... $ 335,650 $ 317,342 $ 166,800 $ 819,792
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Loan maturing after one year with:
Fixed interest rates........................................... $ 126,593 $ 60,692
Variable interest rates........................................ 190,749 106,108
---------- ----------
Total........................................................ $ 317,342 $ 166,800
---------- ----------
---------- ----------
</TABLE>
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 N/A
Real estate mortgage..................................... 11,471 10,983 1,479 10,308 N/A
Commercial............................................... 2,454 1,572 7,862 10,838 N/A
Leases................................................... -- 27 -- 26 N/A
Installment and other.................................... 1,201 176 452 319 N/A
--------- --------- --------- --------- ---------
Total................................................ $ 16,157 $ 17,303 $ 16,814 $ 27,996 $ 18,200
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total nonaccrual loans and leases as a percentage of gross
loans and leases.......................................... 1.97% 3.18% 3.81% 6.05% 3.31%
Allowance for loan and lease losses to nonaccrual loans and
leases.................................................... 97.52% 75.88% 72.05% 68.14% 75.20%
Loans past due 90 days or more on accrual status:
Real estate mortgage..................................... $ -- $ -- $ 199 $ 124 N/A
Commercial............................................... 193 -- 1,014 375 N/A
Installment and other.................................... -- -- -- 6 N/A
--------- --------- --------- --------- ---------
Total................................................ $ 193 $ -- $ 1,213 $ 505 $ 132
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RESTRUCTURED LOANS:
On accrual status........................................ $ 1,887 $ 4,528 $ 3,262 $ -- N/A
On nonaccrual status (2)................................. 5,170 168 8,024 1,399 N/A
--------- --------- --------- --------- ---------
Total................................................ $ 7,057 $ 4,696 $ 11,286 $ 1,399 $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- - - ------------------------
(1) Detailed information is not available.
(2) Included in nonaccrual loans above.
Nonaccrual loans decreased $1.1 million to $16.2 million at December 31,
1996 from $17.3 million at December 31, 1995. The decrease represents an
improvement of $11.8 million in National's nonaccrual
22
<PAGE>
loans and leases partially offset by three real estate secured mortgage loans in
the Western portfolio, totaling $7.6 million, being placed on nonaccrual status.
Nonaccrual loans and leases at SC Bank increased by approximately $1.5 million
during the same period of time. Total nonaccrual loans and leases as a
percentage of gross loans and leases decreased from 3.18 percent at December 31,
1995 to 1.97 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. However, in certain circumstances loans which are 90 days or more past
due may continue accruing interest or interest may not be charged off when the
related loans are well secured or in the process of being collected. When the
Company receives cash on nonaccrual loans or leases, the Company's policy is to
record such receipts first as a reduction to the principal and then as interest
income.
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.
POTENTIAL PROBLEM LOANS
Except as noted above, management is not aware of any borrowers who are
experiencing severe financial difficulties, or who, in the normal course of
business, represent any identified loss potential. The Banks monitor all loans
and complete a monthly internal watch list report, which is inclusive of both
loans past due and borrowers that have been identified for closer monitoring.
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.
23
<PAGE>
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>
AT OR FOR THE 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.......................... $ 13,130 $ 12,115 $ 19,077 $ 13,687 $ 12,397
--------- --------- --------- --------- ---------
Loans and leases charged off:
Real estate mortgage...................................... 1,632 5,335 5,318 4,503 4,014
Real estate construction.................................. 1,017 739 3,695 1,394 636
Commercial................................................ 1,481 2,567 3,321 7,066 8,318
Leases.................................................... 27 11 48 120 126
Installment and other..................................... 518 925 511 969 747
--------- --------- --------- --------- ---------
Total loans and leases charged off.................... 4,675 9,577 12,893 14,052 13,841
--------- --------- --------- --------- ---------
Recoveries on loans and leases charged off:
Real estate mortgage...................................... 138 542 488 10 --
Real estate construction.................................. 9 -- 228 2 --
Commercial................................................ 873 625 1,541 1,281 1,004
Leases.................................................... -- 34 52 12 3
Installment and other..................................... 103 210 112 218 210
--------- --------- --------- --------- ---------
Total recoveries on loans and leases charged off........ 1,123 1,411 2,421 1,523 1,217
--------- --------- --------- --------- ---------
Net loans and leases charged off........................ 3,552 8,166 10,472 12,529 12,624
--------- --------- --------- --------- ---------
Provision charged to operating expense...................... 1,018 8,564 3,510 17,919 13,914
Addition to allowance due to:
Acquisition of Western.................................... 5,041 -- -- -- --
Loan portfolio purchases.................................. 120 617 -- -- --
--------- --------- --------- --------- ---------
Balance at the end of the year................................ $ 15,757 $ 13,130 $ 12,115 $ 19,077 $ 13,687
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loans:
Average loans and leases outstanding during year............ $ 601,115 $ 485,983 $ 431,429 $ 501,166 $ 598,227
Gross loans and leases at end of year....................... $ 819,792 $ 544,804 $ 440,917 $ 462,685 $ 550,472
Ratios:
Net loans and leases charged off to average loans and
leases.................................................... 0.59% 1.68% 2.43% 2.50% 2.11%
Allowance as a percent of end of year loans and leases...... 1.92% 2.41% 2.75% 4.12% 2.49%
</TABLE>
The allowance for loan and lease losses increased from $13.1 million at
December 31, 1995, to $15.8 million at December 31, 1996. Net loans and leases
charged-off decreased $4.6 million from $8.2 million for 1995 to $3.6 million
for 1996, and the provision charged to operating expense decreased $7.6 million
from $8.6 million for 1995 to $1.0 million for 1996, respectively.
The Bank's local markets were severely affected by the recession in 1993
through 1995, and in several instances borrowers who had never reported
financial difficulties as well as borrowers whose loans 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 2.41 percent to 1.92 percent from
December 31, 1995 to 1996, respectively, the allowance as a percentage of
nonaccrual loans has increased from 75.9 percent to 97.5 percent from December
31, 1995 to December 31, 1996, respectively.
24
<PAGE>
The following table reflects management's allocation of the allowance for
loan and lease losses by loan category and the ratio of loans and 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
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate construction................................... $ 726 $ 864 $ 2,576 $ 3,297 $ 1,900
Real estate mortgage....................................... 6,891 4,439 3,978 5,193 3,239
Commercial................................................. 4,118 4,246 3,192 5,311 7,453
Leases..................................................... 47 47 88 85 125
Installment and other...................................... 1,109 1,243 978 714 884
Not allocated.............................................. 2,866 2,291 1,303 4,477 86
--------- --------- --------- --------- ---------
Total................................................ $ 15,757 $ 13,130 $ 12,115 $ 19,077 $ 13,687
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
PERCENT OF LOANS AND LEASES
TO TOTAL LOANS AND LEASES AT DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Real estate construction................................... 8% 6% 8% 10% 14%
Real estate mortgage....................................... 38 35 39 40 35
Commercial................................................. 42 45 39 38 38
Leases..................................................... 0 1 1 1 1
Installment and other...................................... 12 13 13 11 12
--------- --------- --------- --------- ---------
Total................................................ 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 $21.0 million. An allowance of $2.2
million, representing the difference between the value of collateral supporting
the loans and their outstanding balance is included in the allowance for loan
losses.
For further information on loans and leases, see Note 5 of Notes to
Supplemental Consolidated Financial Statements.
DEPOSITS
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.
25
<PAGE>
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................... $ 300,665 0.00% $ 239,886 0.00% $ 232,624 0.00%
Interest bearing demand deposits................ 167,018 2.71 106,921 1.86 111,450 1.73
Savings deposits................................ 179,805 2.65 181,626 2.57 206,047 2.34
Time deposits................................... 231,361 5.23 219,462 5.70 157,854 3.92
---------- ---------- ----------
Total(1).................................. $ 878,849 2.43% $ 747,895 2.56% $ 707,975 1.83%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
- - - ------------------------
(1) Includes non-interest bearing deposits for both amounts 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 (dollars in thousands):
<TABLE>
<S> <C>
3 months or less.................................................. $ 87,575
Over 3 months through 6 months.................................... 22,204
Over 6 months through 12 months................................... 19,041
Over 1 year....................................................... 6,494
---------
Total........................................................... $ 135,314
---------
---------
</TABLE>
Deposits increased $402.9 million from $774.1 million at December 31, 1995
to $1,177.0 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.
BORROWINGS
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 $15.5 million as a result of a
dividend in the same amount from Western. The balance and interest rate at
December 31, 1996 was $11 million and 6.75 percent, respectively. 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 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
were 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. On April 1, 1997,
the Company paid down the remaining $350,000 principal balance of the note.
For further information, see Note 8 of the Notes to Supplemental
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.
26
<PAGE>
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 Supplemental
Consolidated Financial Statements.
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 in the
same interest rate environment. The opposite effect on the net interest margin
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. 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 Federal Deposit Insurance
Corporation ("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 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.................................. $ 22,517 $ -- $ -- $ -- $ 22,517
Securities.......................................... 57,359 79,216 183,071 7,881 327,527
FRB and FHLB stocks................................. 3,234 -- -- 2,057 5,291
Loans............................................... 444,071 97,290 189,051 89,380 819,792
Interest rate swaps................................. 25,000 -- 50,000 -- 75,000
----------- ----------- --------- --------- -----------
Total RSA..................................... 552,181 176,506 422,122 99,318 1,250,127
Savings............................................. 46,179 16,884 37,557 4,771 105,391
Interest-bearing demand deposits.................... 57,407 88,525 123,001 7,956 276,889
NOW accounts........................................ 15,438 31,441 51,271 4,576 102,726
TCD's of $100K or more.............................. 90,795 38,380 6,027 112 135,314
TCD's less than $100K............................... 61,360 56,385 16,029 66 133,840
Borrowings.......................................... 20,290 -- -- -- 20,290
Interest rate swaps................................. 75,000 -- -- -- 75,000
----------- ----------- --------- --------- -----------
Total RSL..................................... 366,469 231,615 233,885 17,481 849,450
----------- ----------- --------- --------- -----------
Net RSA-RSL......................................... $ 185,712 $ (55,109) $ 188,237 $ 81,837 $ 400,677
----------- ----------- --------- --------- -----------
----------- ----------- --------- --------- -----------
Cumulative RSA-RSL.................................. $ 130,603 $ 318,840 $ 400,677
----------- --------- ---------
----------- --------- ---------
Cumulative as a percentage of total assets.......... 13.9% 9.8% 23.8% 29.9% 29.9%
----------- ----------- --------- --------- -----------
----------- ----------- --------- --------- -----------
</TABLE>
27
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
Net income for 1996 was approximately $9.0 million or $1.08 per share,
compared to a net loss of approximately $1.8 million or $0.27 per share in 1995
and net income of approximately $1.7 million or $0.33 per share in 1994. The
increase in net income from 1995 to 1996 was primarily the result of the
acquisition of Western on September 30, 1996, and a $17.1 million increase in
net interest income after provision for loan and lease losses offset by a $3.0
million increase in non-interest expense. The decline in net income from 1994 to
1995 was largely the result of an increased provision for loan and lease losses
and a loss on sale of securities classified as available for sale.
NET INTEREST INCOME
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.
28
<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
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------- --------------------------------------- -----------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INCOME/ YIELD/ BALANCE INCOME/ YIELD/ BALANCE
(1) EXPENSE COST (1) EXPENSE COST (1)
----------- ----------- ------------- ----------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<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% 62,092 3,564 5.74% 69,964
Securities available for
sale.................. 218,504 12,346 5.65% 142,898 7,162 5.01% 163,868
Federal funds sold...... 54,852 2,998 5.47% 48,995 2,846 5.81% 23,552
Loans and leases
(net)(2).............. 601,115 58,374 9.71% 485,983 49,014 10.09% 431,429
----------- ----------- ----------- ----------- -----------
Interest earning
assets.............. 882,535 74,237 8.41% 740,984 62,629 8.45% 691,525
----------- ----- ----------- -----
NON INTEREST-EARNING
ASSETS:
Cash and due from
banks................. 69,198 57,584 57,823
Premises and equipment
(net)................. 11,916 11,879 11,522
Other real estate
owned................. 5,580 9,818 11,601
Goodwill................ 7,419 -- --
Other assets............ 17,442 11,878 14,471
----------- ----------- -----------
Total assets.......... $ 994,090 $ 832,143 $ 786,942
----------- ----------- -----------
----------- ----------- -----------
INTEREST-BEARING
LIABILITIES:
Interest-bearing demand
deposits.............. $ 167,018 $ 4,525 2.71% $ 106,921 $ 1,984 1.86% $ 111,450
Savings deposits........ 179,805 4,759 2.65% 181,626 4,672 2.57% 206,047
Time deposits........... 231,361 12,098 5.23% 219,462 12,511 5.70% 157,854
Federal funds
purchased............. 462 26 5.63% 303 18 5.94% 620
Notes payable........... 5,207 469 9.01% 2,483 268 10.79% 3,540
Other borrowings........ 9,298 611 6.57% 7,755 999 12.88% 5,070
----------- ----------- ----------- ----------- -----------
Interest bearing
liabilities......... $ 593,151 22,488 3.79% 518,550 20,452 3.94% 484,581
----------- ----- ----------- -----
NON INTEREST-BEARING
LIABILITIES AND EQUITY:
Non-interest bearing
demand................ 300,665 239,886 232,624
Non-interest bearing
liabilities........... 8,363 4,548 5,165
Shareholders' equity.... 91,911 69,159 64,572
----------- ----------- -----------
Total liabilities &
shareholders'
equity.............. $ 994,090 $ 832,143 $ 786,942
----------- ----------- -----------
----------- ----------- -----------
Net interest income..... $ 51,749 $ 42,177
----------- -----------
----------- -----------
Net interest margin on
interest-earning
assets(3)............. 5.86% 5.69%
----- -----
----- -----
Net interest spread..... 4.62% 4.51%
----- -----
----- -----
<CAPTION>
AVERAGE
INCOME/ YIELD/
EXPENSE COST
----------- -------------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing
deposits with banks... $ 111 4.09%
Securities held to
maturity.............. 3,662 5.23%
Securities available for
sale.................. 8,171 4.99%
Federal funds sold...... 939 3.99%
Loans and leases
(net)(2).............. 40,196 9.32%
-----------
Interest earning
assets.............. 53,079 7.68%
----------- -----
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.............. $ 1,931 1.73%
Savings deposits........ 4,820 2.34%
Time deposits........... 6,186 3.92%
Federal funds
purchased............. 28 4.52%
Notes payable........... 302 8.53%
Other borrowings........ 295 5.82%
-----------
Interest bearing
liabilities......... 13,562 2.80%
----------- -----
NON INTEREST-BEARING
LIABILITIES AND EQUITY:
Non-interest bearing
demand................
Non-interest bearing
liabilities...........
Shareholders' equity....
Total liabilities &
shareholders'
equity..............
Net interest income..... $ 39,517
-----------
-----------
Net interest margin on
interest-earning
assets(3)............. 5.71%
-----
-----
Net interest spread..... 4.88%
-----
-----
</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) Nonaccrual 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.
29
<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, YEAR ENDED DECEMBER 31,
1996 COMPARED TO 1995 1995 COMPARED TO 1994
-------------------------------------------------- ---------------------------------
CHANGE DUE TO CHANGE DUE TO
TOTAL ------------------------------------- TOTAL --------------------
INCREASE VOLUME & INCREASE
(DECREASE) VOLUME RATE RATE (DECREASE) VOLUME RATE
---------- ----------- ---------- ---------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans.......... $9,360 $11,612 $(1,820) $(432) $8,818 $5,083 $3,316
Interest-bearing deposits with
banks.............................. (40) (41) 15 (14) (68) (69) 4
Securities held to maturity......... (3,048) (3,104) 435 (379) (98) (412) 354
Securities available for sale....... 5,184 3,789 912 483 (1,009) (1,046) 42
Federal funds sold.................. 152 340 (168) (20) 1,907 1,014 429
---------- ----------- ---------- ---------- ---------- ----------- ------
Total interest income......... 11,608 12,596 (626) (362) 9,550 4,570 4,145
---------- ----------- ---------- ---------- ---------- ----------- ------
INTEREST EXPENSE:
Interest-bearing demand deposits.... 2,541 1,115 913 513 53 (78) 137
Savings deposits.................... 87 (47) 135 (1) (148) (571) 480
Time deposits....................... (413) 678 (1,035) (56) 6,325 2,414 2,813
Federal funds purchased............. 8 10 (1) (1) (10) (14) 9
Notes payable....................... 201 294 (44) (49) (34) (90) 80
Other borrowings.................... (388) 199 (490) (97) 704 157 358
---------- ----------- ---------- ---------- ---------- ----------- ------
Total interest expense.......... 2,036 2,249 (522) 309 6,890 1,817 3,877
---------- ----------- ---------- ---------- ---------- ----------- ------
Net interest income........... $9,572 $10,347 $ (104) $(671) $2,660 $2,753 $ 268
---------- ----------- ---------- ---------- ---------- ----------- ------
---------- ----------- ---------- ---------- ---------- ----------- ------
<CAPTION>
VOLUME
& RATE
-------
<S> <C>
INTEREST INCOME:
Interest and fees on loans.......... $ 419
Interest-bearing deposits with
banks.............................. (3)
Securities held to maturity......... (40)
Securities available for sale....... (5)
Federal funds sold.................. 464
-------
Total interest income......... 835
-------
INTEREST EXPENSE:
Interest-bearing demand deposits.... (6)
Savings deposits.................... (57)
Time deposits....................... 1,098
Federal funds purchased............. (5)
Notes payable....................... (24)
Other borrowings.................... 190
-------
Total interest expense.......... 1,196
-------
Net interest income........... $ (361)
-------
-------
</TABLE>
INTEREST INCOME
Interest income increased $11.6 million for the year ended December 31, 1996
compared to 1995 and $9.6 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 to a combination of
a rise in the average yield on all categories of interest-earning assets and an
increased loan volume.
INTEREST EXPENSE
Interest expense increased $2.0 million for the year ended December 31, 1996
compared to 1995 and $6.9 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 both an increase in the
average cost of interest-bearing liabilities and an increase 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 $1.0 million, $8.6 million and
$3.5 million for the years ended December 31, 1996, 1995 and 1994, respectively.
The reduction in the provision in 1996 was due
30
<PAGE>
primarily to a decline in nonperforming loans and leases and lower overall
charge-offs as well as 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 1.92% and 2.41%, 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 Supplemental Consolidated
Financial Statements.
NON-INTEREST INCOME
Non-interest income totaled $9.9 million for 1996 compared with $7.8 million
and $8.4 million for 1995 and 1994, respectively. The $2.1 million increase in
non-interest income between 1996 and 1995 is due mainly to the gain on sale of
loans and securities 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 decrease in non-interest income from 1994 to 1995 was
due primarily to a $692 thousand loss on sale of securities in 1995.
NON-INTEREST EXPENSE
Non-interest expense totaled $48.0 million for 1996 compared with $45.0
million and $41.1 million for 1995 and 1994, respectively. The increase in
non-interest expense of $3.0 million from 1995 to 1996 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. Non-interest expense for the year ended December 31, 1996 also
included $1.1 million of non-recurring items consisting of an employment
contract buyout, merger costs, consulting and KSOP termination.
Salary and benefits increased in 1996 due to the acquisition of Western and
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. 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, net gains in OREO operations of $134
thousand in 1996 compared to $3.1 million in OREO related expenses in fiscal
1995 and a $756 thousand lower of cost or market adjustment on loans available
for sale in 1995 which did not reoccur in 1996.
The increase in non-interest expense from 1994 to 1995 was due primarily to
a rise in salary costs, occupancy costs, professional services, the lower of
cost or market adjustment on loans available for sale mentioned above and an
increase of $610 thousand in goodwill amortization. These increases were
partially offset by a $733 thousand decrease in regulatory assessments.
PROVISION FOR INCOME TAXES
The provision for income taxes represents an effective tax rate of 28.9% in
1996, compared to an effective tax benefit rate of 49.2% in 1995. The difference
from the expected rate of 34% in 1995 is the result of state income taxes and
the reduction of the deferred tax asset valuation allowance. The difference from
the expected rate of 35% in 1996 relates to state taxes and the
non-deductibility of goodwill for tax purposes which is offset primarily by a
reduction in the deferred tax asset valuation allowance. In 1994, income tax
expense was increased by $581 thousand 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 $8.7 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 Supplemental Consolidated
Financial Statements.
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Western Bancorp:
We have audited the accompanying Supplemental Consolidated Balance Sheet of
Western Bancorp and subsidiaries (formerly Monarch Bancorp) as of December 31,
1996, and the related Supplemental Consolidated Statements of Operations,
changes in shareholders' equity, and cash flows for the year then ended. These
Supplemental Consolidated Financial Statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
Supplemental 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 26.3%
and net interest income and net income constituting 38.6% and 42.2%,
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.
We did not audit the 1996 consolidated financial statements of SC Bancorp,
acquired by the Company on October 10, 1997 in a pooling-of-interests, which
statements reflect total assets constituting 35.6% and net interest income and
net income constituting 44.9% and 49.6%, 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 SC Bancorp, is based solely on the report of the other
auditors.
The consolidated balance sheet of Western 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
transactions described in Notes 1 and 2 of the Notes to the Supplemental
Consolidated Financial Statements, were audited by other auditors whose report
dated February 29, 1996, expressed an unqualified opinion on those statements.
The separate consolidated financial statements of California Commercial
Bankshares also included in the 1995 and 1994 Supplemental 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. The separate consolidated financial statements of
SC Bancorp also included in the 1995 and 1994 Supplemental Consolidated
Financial Statements were audited by other auditors whose report dated January
24, 1997, 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.
The Supplemental Consolidated Financial Statements give retroactive effect
to the acquisition of SC Bancorp on October 10, 1997, which has been accounted
for as a pooling-of-interests as described in Notes 1 and 2 of the Notes to the
Supplemental Consolidated Financial Statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These Supplemental Consolidated Financial
Statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of Western Bancorp after
financial statements covering the date of consummation of the business
combination with SC Bancorp are issued.
32
<PAGE>
In our opinion, based on our audit and the reports of the other auditors,
the Supplemental 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 after financial statements are issued covering the date of
consummation of the business combination with SC Bancorp.
We also audited the combination of the accompanying Supplemental
Consolidated Balance Sheet as of December 31, 1995, and the combination of the
related Supplemental 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, after restatement for the 1997 pooling-of-interests
transactions; in our opinion, such Supplemental Consolidated Financial
Statements have been properly combined on the basis described in Notes 1 and 2
of the Notes to the accompanying Supplemental Consolidated Financial Statements.
KPMG PEAT MARWICK LLP
Los Angeles, California
October 10, 1997
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
SC Bancorp:
We have audited the accompanying consolidated balance sheets of SC Bancorp
and its subsidiary 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. 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 audit to obtain
reasonable assurance about whether the financial statements are free of
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of SC Bancorp and its subsidiary
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
January 24, 1997
34
<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
35
<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
36
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL 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 (Note 3)................................................... $ 96,202 $ 62,384
Federal funds sold................................................................. 22,517 47,938
------------ ------------
Total cash and cash equivalents.................................................. 118,719 110,322
Interest-bearing deposits in other banks........................................... -- 198
Federal Reserve Bank and Federal Home Loan Bank stock, at cost..................... 5,291 2,823
Securities held to maturity (fair value of $7,245 and $6,693) (Note 4)............. 7,270 6,661
Securities available for sale (amortized cost of $321,767 and $176,436) (Note 4)... 320,257 175,494
------------ ------------
Total securities................................................................. 332,818 184,978
Loans and leases held for investment, net (Notes 5 and 8).......................... 800,367 520,292
Loans and leases available for sale, net........................................... 1,234 9,620
Premises and equipment (Note 6).................................................... 14,955 11,428
Other real estate owned............................................................ 7,082 4,388
Deferred tax asset, net (Note 10).................................................. 8,735 6,179
Taxes receivable................................................................... 3,769 --
Goodwill (Note 2).................................................................. 32,968 4,131
Accrued interest receivable........................................................ 9,664 7,308
Other assets....................................................................... 8,602 7,541
------------ ------------
Total assets................................................................... $1,338,913 $ 866,385
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 7):
Noninterest bearing.............................................................. $ 422,854 $ 280,969
Interest bearing demand.......................................................... 379,615 168,714
Savings.......................................................................... 105,391 99,360
Time certificates of deposit of $100,000 or more................................. 135,314 84,368
Time certificates of deposit less than $100,000.................................. 133,840 140,646
------------ ------------
Total deposits................................................................. 1,177,014 774,057
Borrowings (Note 8)................................................................ 20,290 7,366
Taxes payable...................................................................... -- 1,284
Accrued interest payable........................................................... 2,258 1,921
Other liabilities.................................................................. 10,304 4,129
------------ ------------
Total liabilities................................................................ 1,209,866 788,757
------------ ------------
Shareholders' equity (Notes 8, 9, 13, 16, 18 and 19):
Preferred stock no par value, 5 million shares authorized, none issued........... -- --
Common stock no par value 100,000,000 shares authorized 10,438,677 and 7,294,069
issued and outstanding in 1996 and 1995........................................ 111,326 68,705
Retained earnings................................................................ 18,583 9,594
Unrealized loss on investment securities available for sale, net of taxes........ (862) (539)
Deferred charge related to KSOP.................................................. -- (132)
------------ ------------
Total shareholders' equity..................................................... 129,047 77,628
------------ ------------
Total liabilities and shareholders' equity..................................... $1,338,913 $ 866,385
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
37
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest income
Interest and fees on loans................................................ $ 58,374 $ 49,014 $ 40,196
Interest on interest bearing deposits in other banks...................... 3 43 111
Interest on investment securities......................................... 12,862 10,726 11,833
Interest on Federal funds sold............................................ 2,998 2,846 939
--------- --------- ---------
Total interest income................................................... 74,237 62,629 53,079
--------- --------- ---------
Interest expense
Deposits.................................................................. 21,382 19,167 12,937
Notes payable............................................................. 469 268 302
Other interest-bearing liabilities........................................ 637 1,017 323
--------- --------- ---------
Total interest expense.................................................. 22,488 20,452 13,562
--------- --------- ---------
Net interest income......................................................... 51,749 42,177 39,517
Provision for loan and lease losses (Note 5)................................ 1,018 8,564 3,510
--------- --------- ---------
Net interest income after provision for loan and lease losses............... 50,731 33,613 36,007
--------- --------- ---------
Non-interest income
Service charges, commissions and fees..................................... 6,747 6,297 6,217
Loan servicing and late fees.............................................. 1,080 541 764
Gain (loss) on sale of securities available for sale...................... 281 (692) (24)
Gain on sale of loans..................................................... 665 145 215
Other..................................................................... 1,102 1,535 1,275
--------- --------- ---------
Total non-interest income............................................... 9,875 7,826 8,447
--------- --------- ---------
Non-interest expense
Salaries and benefits..................................................... 23,016 19,575 17,760
Occupancy................................................................. 7,649 7,878 7,368
Advertising and business development...................................... 971 889 624
Other real estate owned................................................... (134) 3,080 3,145
Professional services..................................................... 5,209 2,987 2,430
Telephone, stationery and supplies........................................ 2,375 2,187 1,949
Software.................................................................. 340 395 214
Lower of cost or market adjustment on loans available for sale............ -- 756 --
Goodwill amortization (Note 2)............................................ 1,004 821 211
Data processing for company............................................... 1,064 427 365
Customer services cost.................................................... 832 322 329
Regulatory assessments.................................................... 762 1,434 2,167
Other..................................................................... 4,873 4,210 4,499
--------- --------- ---------
Total non-interest expense.............................................. 47,961 44,961 41,061
--------- --------- ---------
Income (loss) before income taxes........................................... 12,645 (3,522) 3,393
Income taxes (benefit) (Note 10)............................................ 3,656 (1,733) 1,680
--------- --------- ---------
Net income (loss)....................................................... $ 8,989 $ (1,789) $ 1,713
--------- --------- ---------
--------- --------- ---------
Per share information.......................................................
Weighted-average number of common and common equivalent shares
outstanding............................................................. 8,320.3 6,563.4 5,123.0
Net income (loss) per share............................................... $ 1.08 $ (0.27) $ 0.33
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
38
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) DEFERRED
COMMON STOCK RETAINED ON SECURITIES CHARGE TOTAL
--------------------- EARNINGS AVAILABLE FOR RELATED TO SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) SALE, NET KSOP EQUITY
--------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993, as previously
reported.................................. 93 $ 7,368 $ (4,286) $ 53 $ (211) $ 2,924
Adjustment for the CCB pooling-of-
interests............................... 2,423 11,257 8,930 -- -- 20,187
Adjustment for the SCB pooling-of-
interests............................... 1,580 23,436 5,026 -- -- 28,462
--------- ---------- ----------- ------ ----- -------------
Balance at December 31, 1993, as restated... 4,096 42,061 9,670 53 (211) 51,573
Repayment on KSOP debt.................... -- -- -- -- 38 38
Unrealized depreciation on investment
securities available for sale, net...... -- -- -- (5,257) -- (5,257)
Issuance of common stock.................. 1,823 14,207 -- -- -- 14,207
Net loss.................................. -- -- 1,713 -- -- 1,713
--------- ---------- ----------- ------ ----- -------------
Balance at December 31, 1994................ 5,919 56,268 11,383 (5,204) (173) 62,274
Repayment on KSOP debt.................... -- -- -- -- 41 41
Unrealized appreciation on investment
securities available for sale, net...... -- -- -- 4,665 -- 4,665
Stock options exercised................... 25 12 -- -- -- 12
Tax benefit of stock options exercised.... -- 78 -- -- -- 78
Issuance of common stock.................. 1,350 12,347 -- -- -- 12,347
Net loss.................................. -- -- (1,789) -- -- (1,789)
--------- ---------- ----------- ------ ----- -------------
Balance at December 31, 1995................ 7,294 68,705 9,594 (539) (132) 77,628
Repayment on KSOP debt.................... -- -- -- -- 132 132
Unrealized depreciation on investment
securities available for sale, net...... -- -- -- (323) -- (323)
Stock options exercised................... 62 281 -- -- -- 281
Tax benefit of stock options exercised.... -- 51 -- -- -- 51
Issuance of common stock.................. 3,083 42,293 -- -- -- 42,293
Repurchase of shares...................... -- (4) -- -- -- (4)
Net income................................ -- -- 8,989 -- -- 8,989
--------- ---------- ----------- ------ ----- -------------
Balance at December 31, 1996................ 10,439 $ 111,326 $ 18,583 $ (862) $ -- $ 129,047
--------- ---------- ----------- ------ ----- -------------
--------- ---------- ----------- ------ ----- -------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
39
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL 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)............................................................. $ 8,989 $ (1,789) $ 1,713
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan and lease losses......................................... 1,018 8,564 3,510
Deferred income taxes....................................................... 992 (3,385) 2,904
Provision for losses on other real estate owned............................. 767 335 1,626
Depreciation and amortization............................................... 2,519 2,693 2,662
Amortization of discounts and premiums on investment securities, net........ 1,094 2,962 2,445
Goodwill amortization....................................................... 1,004 821 211
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.............................. (1,260) 1,545 (1)
Gain on sale of loans originated for sale................................... (665) (145) (215)
(Gain) loss on sale of securities available for sale........................ (281) 692 24
Net increase (decrease) in other liabilities................................ 1,197 357 (487)
Net (increase) decrease in other assets..................................... (195) 557 (821)
---------- --------- ---------
Net cash provided by operating activities................................. 18,645 4,343 13,571
---------- --------- ---------
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 10,924 4,140
Purchases................................................................... (4,880) (5,704) (5,201)
Securities available for sale:
Proceeds from maturities.................................................... 81,559 24,583 32,948
Proceeds from sales......................................................... 33,315 48,020 54,462
Purchases................................................................... (127,100) (37,541) (68,278)
Purchases of FRB and FHLB stocks.............................................. (2,468) (2,823) --
Net increase in loans and leases.............................................. (82,615) (112,008) (2,715)
Recoveries of loans and investment in leases.................................. 1,123 1,411 2,421
Additions to other real estate owned.......................................... (284) -- (297)
Proceeds from sales of other real estate owned................................ 8,524 11,989 11,642
Additions to premises and equipment, net of proceeds from sales............... (1,173) (2,296) (1,908)
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....................... (115,623) (62,261) 29,387
---------- --------- ---------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
40
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL 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......................................... $ 49,846 $ 98,086 $ (55,858)
Increase (decrease) in notes payable........................................ 10,867 (53) --
Increase (decrease) in other interest-bearing liabilities................... 2,041 (7,316) 5,088
Purchase of treasury shares................................................. (4) -- --
Proceeds from issuance of common stock and exercise of options, net of
issuance costs............................................................ 42,625 12,437 14,207
---------- ---------- ----------
Net cash provided by (used in) financing activities....................... 105,375 103,154 (36,563)
---------- ---------- ----------
Net increase in cash and cash equivalents..................................... 8,397 45,236 6,395
Cash and cash equivalents at the beginning of the year........................ 110,322 65,086 58,691
---------- ---------- ----------
Cash and cash equivalents at the end of the year.............................. $ 118,719 $ 110,322 $ 65,086
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information
Property acquired through foreclosure....................................... $ 4,758 $ 9,117 $ 12,909
Loans to facilitate the sale of other real estate owned..................... $ 2,936 $ 3,386 $ 2,020
Transfer of securities held-to-maturity to available-for-sale............... -- $ 51,991 $ 81,137
Cash paid for
Interest.................................................................. $ 22,151 $ 19,235 $ 13,688
Taxes..................................................................... $ 4,789 $ 1,492 $ 754
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
41
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
WESTERN BANCORP-SC BANCORP MERGER
On October 10, 1997, SC Bancorp ("SCB") merged (the "SCB Merger") with and
into Western Bancorp (the "Company"). Southern California Bank ("SC Bank") was a
wholly-owned subsidiary of SCB prior to the SCB Merger. On June 4, 1997,
California Commercial Bankshares ("CCB") merged with and into the Company (the
"CCB Merger"), and in connection therewith, National Bank of Southern California
("National"), a wholly-owned subsidiary of CCB prior to the CCB Merger, merged
with Monarch Bank ("Monarch") a wholly-owned subsidiary of the Company prior to
the CCB Merger. The SCB Merger and the CCB Merger each were accounted for as a
pooling-of-interests, and, accordingly, the financial information for all
periods presented has been restated to present the combined consolidated
financial condition and results of operations of the Company, CCB and SCB as if
the CCB Merger and the SCB Merger had been in effect for all periods presented.
Further details pertaining to the CCB Merger and the SCB Merger are presented in
Note 2.
BASIS OF PRESENTATION
The accounting and reporting policies of the Company and its wholly-owned
subsidiaries, National, SC Bank, Western Bank ("Western"), (collectively "the
Banks") and Venture Partners, 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. The CCB Merger and the SCB
Merger were accounted for using the pooling-of-interests method of accounting.
Accordingly, the financial information for all periods presented has been
restated to present the combined consolidated financial condition and results of
operations of the Company, SCB and CCB as if the mergers had been in effect for
all periods presented. 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. SC Bank is a full service bank
with fourteen banking offices, and Western is a full service bank with five
banking offices. The Company has applied to the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") to merge National into SC
Bank. 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, as amended, and is also subject to
regulation and supervision by the Federal Reserve Board. The areas served by the
Banks are San Diego, Orange and Los Angeles counties.
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 carrying value of the
deferred tax asset.
42
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
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.
Securities 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. Securities 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 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 the fair market value of a security below the amortized cost
basis is judged by management to be other than temporary, the cost basis of the
security 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 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 securities sold determined on a specific identification basis.
INTEREST ON 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, the unpaid principal
is charged to the allowance for loan losses.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are
capitalized at origination and the net amount deferred is taken into interest
income over the contractual lives of the loans using the interest method.
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.
43
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
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 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 fair
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 fair 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 market value of the
asset received is charged to the allowance for loan losses at the time of
acquisition. Any subsequent decline in the fair
44
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
market value of the 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 the 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.
GOODWILL
Goodwill is amortized to expense using the straight-line method over its
estimated useful life, not to exceed 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.
INTEREST RATE SWAP AGREEMENTS
SC Bank entered into two interest rate swap agreements in the management of
its interest rate exposure. Revenue or expense associated with these agreements,
which are intended to convert the interest-rate characteristics of
interest-bearing assets, are accounted for on a settlement accounting basis and
are recognized as an adjustment to interest income, based on the interest rates
currently in effect for such contracts. SC Bank uses hedge accounting treatment
which requires identification of the asset or liability to be hedged and linking
the swap to the specified asset or liability. The notional amount of interest
rate swaps are not reflected in the Supplemental Consolidated Financial
Statements, but are disclosed in Note 14.
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.
45
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS
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.
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 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.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Financial Information About Capital Structure" ("SFAS 129"). SFAS 128 simplifies
the standards found in Accounting Principles Board Opinion No. 15 ("APB 15") for
computing earnings per share ("EPS"), and makes them comparable to international
standards.
Under SFAS 128, the Company is required to present both basic and diluted
EPS on the face of its statements of operations. Basic EPS, which replaces
primary EPS required by APB 15 for entities with complex capital structures,
excludes common stock equivalents and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS gives effect to all dilutive potential
common shares that were outstanding during the period.
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997 and earlier application is not permitted.
Upon adoption of SFAS 128, all prior-period EPS data will be restated. The
Company will adopt SFAS 128 effective December 31, 1997. The Company is
evaluating the impact of this pronouncement on its consolidated financial
statements.
SFAS 129 supersedes capital structure disclosure requirements found in
previous accounting pronouncements and consolidates them into one statement for
ease of retrieval and greater visibility for non-public entities. These
disclosures are required for financial statements for periods ending after
December 15, 1997. As SFAS 129 makes no changes to previous accounting
pronouncements as those pronouncements applied to the Bank, adoption of SFAS 129
will have no impact on the Bank's results of operations and financial condition.
46
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
inclusion of comprehensive income, either in a separate statement for
comprehensive income, or as part of a combined statement of income and
comprehensive income in a full-set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances,
excluding those resulting from investments by and distributions to owners. SFAS
130 requires that comprehensive income is to be presented beginning with net
income, adding the elements of comprehensive income not included in the
determination of net income, to arrive at comprehensive income. SFAS 130 also
requires that an enterprise display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
SFAS 130 is effective for the Company on January 1, 1998. SFAS 130 requires
the presentation of information already contained in the Company's financial
statements and therefore is not expected to have an impact on the Company's
financial position or results of operation.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the reporting of
information about operating segments by public business enterprises in their
annual and interim financial reports issued to shareholders.
SFAS 131 requires that a public business enterprise report financial and
descriptive information, including profit or loss, certain specific revenue and
expense items, and segment assets, about its reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 is effective for the Company's financial statements for the year
ended December 31, 1998. SFAS 131 is a disclosure requirement and therefore is
not expected to have an effect on the Company's financial position or results of
operations.
NOTE 2--ACQUISITIONS
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 Common Stock 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 3,076,045 shares
of common stock ("Company Common Stock") in a private placement pursuant to
which the Company raised approximately $42.2 million, net of approximately $1
million in issuance costs and from the proceeds of a three year loan of $26.5
million from The Northern Trust Company of Chicago (the "Lender"). A $15.5
million dividend was declared by Western concurrently with the completion of the
acquisition and paid to the Company; the proceeds of such dividend were used to
reduce the $26.5 million note to $11 million.
47
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
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.......................................................... $ 95,587 $ 89,487 $ 74,570
Interest expense......................................................... 29,577 27,737 17,419
------------ ------------ ----------
Net interest income.................................................. 66,010 61,750 57,151
Provision for loan and lease losses...................................... 1,821 9,274 4,562
------------ ------------ ----------
Net interest income after provision for loan and lease losses........ 64,189 52,476 52,589
Non interest income...................................................... 10,999 11,331 11,424
Non interest expense..................................................... 60,576 62,336 56,579
------------ ------------ ----------
Income before taxes.................................................. 14,612 1,471 7,434
Income tax expense....................................................... 5,095 1,209 3,275
------------ ------------ ----------
Net income........................................................... $ 9,517 $ 262 $ 4,159
------------ ------------ ----------
------------ ------------ ----------
Net income per share................................................. $ 0.90 $ 0.03 $ 0.66
------------ ------------ ----------
------------ ------------ ----------
Weighted average shares outstanding...................................... 10,602,680 10,010,861 6,277,603
</TABLE>
WESTERN BANCORP--CCB MERGER
CCB merged with and into the Company in a transaction accounted for using
the pooling-of-interests method of accounting. On June 4, 1997 in the CCB
Merger, 3,043,226 shares of common stock of the Company were issued to holders
of common stock of CCB based on a 1-for-1 exchange ratio (after a reverse stock
split of 8.5-to-1.0) and all of the outstanding shares of common stock of CCB
were canceled. 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 CCB Merger had been in
effect for all periods presented. At the date of the CCB 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 conversions. Such costs are not included in the accompanying
supplemental consolidated financial statements.
WESTERN BANCORP-SCB MERGER
SCB merged with and into the Company in a transaction accounted for using
the pooling-of-interests method of accounting on October 10, 1997. In the SCB
Merger approximately 3,555,500 shares of common stock of the Company (prior to
adjustment for fractional shares) were issued based on a 0.4556-for-1 exchange
ratio and all of the outstanding shares of common stock of SCB were cancelled.
The financial information for all prior periods presented has been restated to
present the combined consolidated
48
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
financial condition and results of operations of the Company and SCB as if the
SCB Merger had been in effect for all periods presented. Management estimates
charging to expense merger costs of $6.9 million (after tax), representing
severance costs, termination of interest rate swaps, and costs of computer
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 (before mergers with CCB and SCB)........................... $ 8,545 $ 3,343 $ 2,991
CCB..................................................................... 19,964 17,453 16,385
SCB..................................................................... 23,240 21,381 20,141
Combined................................................................ 51,749 42,177 39,517
Net income (loss)
The Company (before mergers with CCB and SCB)........................... $ 738 $ 683 $ (1,851)
CCB..................................................................... 3,796 (3,341) 859
SCB..................................................................... 4,455 869 2,705
Combined................................................................ 8,989 (1,789) 1,713
Net income (loss) per share
The Company (before mergers with CCB and SCB)........................... $ 0.42 $ 1.14 $ (19.81)
CCB..................................................................... 1.26 (1.30) 0.35
SCB..................................................................... 0.60 0.12 0.49
Combined................................................................ 1.08 (0.27) 0.33
Issuances of common stock
The Company (before mergers with CCB and SCB)........................... $ 42,213 $ 9,132 $ --
CCB..................................................................... 332 3,290 --
SCB..................................................................... 80 15 14,207
Combined................................................................ 42,625 12,437 14,207
</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
$18 million.
49
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--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....................................... $ 168,411 $ 53 $ (111) $ 168,353
US Agency securities or insured obligations.................... 92,914 17 (538) 92,393
Mortgage-backed securities..................................... 49,474 34 (1,218) 48,290
State and political subdivisions............................... 413 -- (2) 411
Other debt securities.......................................... 1,390 68 (9) 1,449
---------- ----- ----------- ----------
Total debt securities........................................ 312,602 172 (1,878) 310,896
Mutual funds................................................... 9,042 36 -- 9,078
Other equity securities........................................ 123 160 -- 283
---------- ----- ----------- ----------
Total........................................................ $ 321,767 $ 368 $ (1,878) $ 320,257
---------- ----- ----------- ----------
---------- ----- ----------- ----------
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....................................... $ 45,342 $ 173 $ (63) $ 45,452
US Agency securities or insured obligations.................... 66,022 106 (345) 65,783
Mortgage-backed securities..................................... 55,225 45 (917) 54,353
State and political subdivisions............................... 423 -- (7) 416
Other debt securities.......................................... -- -- -- --
---------- ----- ----------- ----------
Total debt securities........................................ 167,012 324 (1,332) 166,004
Mutual funds................................................... 9,240 -- -- 9,240
Other equity securities........................................ 184 80 (14) 250
---------- ----- ----------- ----------
Total........................................................ $ 176,436 $ 404 $ (1,346) $ 175,494
---------- ----- ----------- ----------
---------- ----- ----------- ----------
</TABLE>
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
50
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES (CONTINUED)
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............................................... $ 120,585 $ 120,567
Due after one year through five years................................. 183,699 181,991
Due after five years through ten years................................ 2,021 2,023
Due after ten years................................................... 6,297 6,315
---------- ----------
$ 312,602 $ 310,896
---------- ----------
---------- ----------
</TABLE>
Gross gains and losses on sale of available for sale securities were
$281,000 and $0, respectively, for 1996, and $0 and $692,000, respectively, for
1995. Gross gains and losses were $29,000 and $53,000, respectively, for 1994.
Investment securities available for sale with a carrying amount of
approximately $49.5 million and $25.6 million, were pledged as collateral to
secure public deposits at December 31, 1996 and 1995, respectively.
In December 1995, SCB reclassified its entire held-to-maturity investment
portfolio to the available-for-sale category under a special one-time exemption
authorized by the Financial Accounting Standards Board ("FASB") that allowed
companies to reclassify their investment securities portfolio categories. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
held-to-maturity investment securities were transferred to available-for-sale at
their fair market values. The net result of the transfer was an aggregate
unrealized net loss of $910,000 at December 31, 1995.
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 Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("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 Federal Financial Institutions
Examination Council ("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.
51
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL 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
San Diego, Orange and Los Angeles counties. 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 held for investment loan and lease portfolio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate construction.............................................. $ 59,952 $ 31,403
Real estate mortgage.................................................. 312,386 179,222
Commercial............................................................ 342,737 248,259
Leases................................................................ 3,027 3,463
Installment and other................................................. 100,456 72,837
---------- ----------
Gross loans and leases............................................ 818,558 535,184
Less:
Unearned lease income............................................... (364) (399)
Deferred loan fees.................................................. (2,070) (1,363)
Allowance for loan and lease losses................................. (15,757) (13,130)
---------- ----------
Net loans and leases.............................................. $ 800,367 $ 520,292
---------- ----------
---------- ----------
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses for the three years ended
December 31, 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....................... $ 13,130 $ 12,115 $ 19,077
--------- --------- ---------
Loans and leases charged off:
Real estate mortgage and construction.................... 2,649 6,074 9,013
Commercial............................................... 1,481 2,567 3,321
Installment and other.................................... 518 925 511
Leases................................................... 27 11 48
--------- --------- ---------
Total loans and leases charged off..................... 4,675 9,577 12,893
--------- --------- ---------
</TABLE>
52
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Recoveries on loans and leases charged off:
Real estate mortgage and construction.................... $ 147 $ 542 $ 716
Commercial............................................... 873 625 1,541
Installment and other.................................... 103 210 112
Leases................................................... -- 34 52
--------- --------- ---------
Total recoveries on loans and leases charged off....... 1,123 1,411 2,421
--------- --------- ---------
Net loans and leases charged off....................... 3,552 8,166 10,472
Provision charged to operating expense..................... 1,018 8,564 3,510
Other additions due to:
Acquisition of Western................................... 5,041 -- --
Loan portfolio purchases................................. 120 617 --
--------- --------- ---------
Balance at the end of the period............................. $ 15,757 $ 13,130 $ 12,115
--------- --------- ---------
--------- --------- ---------
</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....................................... 11,471 10,983 1,479
Commercial................................................. 2,454 1,572 7,862
Leases..................................................... -- 27 --
Installment and other...................................... 1,201 176 452
--------- --------- ---------
Total.................................................... $ 16,157 $ 17,303 $ 16,814
--------- --------- ---------
--------- --------- ---------
</TABLE>
If interest on nonaccrual loans had been recognized at the original interest
rates, interest income would have increased approximately $859,000, $849,000 and
and $1,087,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
53
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
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.............................. $ 9,938 $ 2,172 $ 7,766
Without specific allowances........................... 11,096 -- 11,096
----------- ------ -----------
Total impaired loans................................ $ 21,034 $ 2,172 $ 18,862
----------- ------ -----------
----------- ------ -----------
<CAPTION>
1995
---------------------------------------
RECORDED ALLOWANCE FOR NET
INVESTMENT LOAN LOSSES INVESTMENT
----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances.............................. $ 3,900 $ 667 $ 3,233
Without specific allowances........................... 15,158 -- 15,158
----------- ------ -----------
Total impaired loans................................ $ 19,058 $ 667 $ 18,391
----------- ------ -----------
----------- ------ -----------
</TABLE>
The average recorded investment in impaired loans for the years ended
December 31, 1996 and 1995 was approximately $13,098,000 and $17,583,000,
respectively. Interest income on impaired loans of approximately $589,000 and
$593,000 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....................................................... $ 11,106 $ 6,211
Furniture, fixtures and equipment....................................... 13,628 16,897
Leasehold improvements.................................................. 5,013 7,031
--------- ---------
29,747 30,139
Less accumulated depreciation and amortization.......................... 14,792 18,711
--------- ---------
$ 14,955 $ 11,428
--------- ---------
--------- ---------
</TABLE>
54
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL 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.............................................................. $ 246,431
1998.............................................................. 15,126
1999.............................................................. 4,011
2000.............................................................. 2,728
2001 and thereafter............................................... 858
---------
$ 269,154
---------
---------
</TABLE>
NOTE 8--BORROWINGS
At December 31, 1996 and 1995, borrowings were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes payable...................................................................... $ 13,350 $ 2,483
Federal funds purchased............................................................ 1,852 --
Treasury, tax and loan............................................................. 5,088 4,883
--------- ---------
$ 20,290 $ 7,366
--------- ---------
--------- ---------
</TABLE>
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. Shares of Company Common Stock have been pledged as
collateral against the note payable to The Northern Trust Company of Chicago.
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
55
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--BORROWINGS (CONTINUED)
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 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.
SCB also had an agreement with the Federal Home Loan Bank as of December 31,
1996. SCB had pledged loans amounting to $11,036,000 and had available credit of
$6,539,000; no amounts were outstanding on this line of credit at December 31,
1996 and 1995. Under separate agreements with three commercial banks, SC Bank
may borrow an aggregate of up to $30 million through Federal funds lines of
credit. Federal funds arrangements are subject to the terms of the individual
arrangements and may be terminated at the discretion of the correspondent bank.
$1,852,000 and $0 were outstanding on these lines of credit at December 31, 1996
and 1995, respectively.
NOTE 9--SHAREHOLDERS' EQUITY
EQUITY TRANSACTIONS
The Company declared a cash dividend of $0.15 per share payable on December
10, 1997 to shareholders of record on November 10, 1997.
As part of the September 30, 1996 acquisition of Western, the Company sold
approximately 3,076,000 shares of Company 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 Company Common Stock at $16.83 per share. The
warrants expire on September 30, 2006.
56
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SHAREHOLDERS' EQUITY (CONTINUED)
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 Company Common Stock for net proceeds of approximately
$5,669,000. In September 1995, pursuant to a shareholders' rights and public
offering, the Company issued approximately 340,000 shares of Company 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 Company Common Stock at $13.77 per
share. The warrants expire on September 30, 2005.
In November 1995, CCB 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, CCB contributed $2,900,000 into National's capital in December 1995.
SCB declared three cash dividends during 1997. On each of January 23, March
27, and July 24, 1997, SCB declared a $0.05 per share cash dividend, payable to
its shareholders of record at the close of business on February 6, May 2, and
August 4, 1997, respectively. The dividends were paid on February 20, May 20,
and August 20, 1997, respectively, totaling $374,000, $375,000, and $375,000,
respectively. During 1994, SCB completed a rights offering which resulted in the
issuance of an additional 1.8 million shares of common stock of SCB at $8.78 per
share. Net proceeds of $14.2 million were realized on this offering after
issuance costs of approximately $1.8 million.
RESTRICTIONS ON PAYMENTS OF DIVIDENDS
The Banks are subject to certain restrictions under regulations governing
banks which limit their ability to transfer funds to the Company through
inter-company loans, advances, or cash dividends.
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....................................................... $ 2,002 $ 704 $ (439)
State......................................................... 488 228 6
--------- --------- ---------
Total......................................................... 2,490 932 (433)
--------- --------- ---------
Deferred expense (benefit):
Federal....................................................... 725 (1,461) 2,432
State......................................................... 441 (1,204) (319)
--------- --------- ---------
Total......................................................... 1,166 (2,665) 2,113
--------- --------- ---------
Total income taxes.............................................. $ 3,656 $ (1,733) $ 1,680
--------- --------- ---------
--------- --------- ---------
</TABLE>
57
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
The provision for income taxes differs from that which would result from
applying the U.S. statutory rate of 35% in 1996, and 34% in 1995 and 1994 as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense (benefit) at statutory rate......... $ 4,425 $ (1,198) $ 1,153
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefits.................. 613 (219) (114)
Amortization of goodwill..................................... 210 196 54
Change in valuation allowance................................ (1,576) (413) 581
Other, net................................................... (16) (99) 6
--------- --------- ---------
Total income tax expense (benefit)............................. $ 3,656 $ (1,733) $ 1,680
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 the deferred
tax assets and liabilities of Western which was acquired on September 30, 1996.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Unrealized loss on investment securities............................... $ 627 $ 461
Unrealized loss on loans............................................... 265 342
Loans, principally due to allowance for losses......................... 2,613 4,014
Other real estate owned................................................ 788 1,099
Interest on nonaccrual loans........................................... 239 171
Net operating loss carryovers.......................................... 392 615
Purchase accounting adjustments........................................ 1,022 --
Deferred compensation.................................................. 1,190 1,099
Self-insurance reserve................................................. 128 106
Loss on mortgage division.............................................. 163 --
Depreciation........................................................... 987 815
Contingencies.......................................................... 382 184
Other.................................................................. 875 484
--------- ---------
Total deferred tax assets................................................ 9,671 9,390
Valuation allowance.................................................... -- (1,576)
--------- ---------
Net deferred tax assets.................................................. 9,671 7,814
--------- ---------
Deferred tax liabilities:
FHLB stock dividends................................................... (215) (59)
Deductible prepaid expense............................................. (301) (301)
Financial accounting lease difference.................................. (183) (846)
Other.................................................................. (237) (429)
--------- ---------
Total deferred tax liabilities........................................... (936) (1,635)
--------- ---------
Net deferred tax asset................................................... $ 8,735 $ 6,179
--------- ---------
--------- ---------
</TABLE>
58
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
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, the realization of
which management believed was not more likely than not to 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, respectively, will be realized. The net
operating loss carryovers have various expiration dates through 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........................................................................ $ 2,651
1998........................................................................ 2,642
1999........................................................................ 2,743
2000........................................................................ 2,657
2001........................................................................ 2,360
Thereafter.................................................................. 8,571
-------
Total....................................................................... $ 21,624
-------
-------
</TABLE>
Rental expense was $2,617,000 in 1996, $2,603,000 in 1995 and $2,269,000 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 $155,000, $187,000 and $213,000, respectively.
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.
59
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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.................................................... $ 4,141 $ 5,217
Additions due to acquisitions......................................... 184 --
New loans............................................................. 2,303 2,364
Repayments............................................................ (2,114) (3,440)
--------- ---------
Balance, December 31................................................ $ 4,514 $ 4,141
--------- ---------
--------- ---------
</TABLE>
The 1996 balance does not include $1,084,000 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 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 17, 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. The Company also paid
Belle Plaine Partners, Inc. fees of approximately $1.35 million in connection
with the acquisition of CCB by the Company and expects to pay approximately $1.8
million and $2.7 million in connection with the acquisition of SCB and Santa
Monica Bank ("SMB"), respectively, 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. In addition
Belle Plaine Financial, LLC is expected to raise capital on behalf of the
Company in connection with the acquisition of SMB by the Company for which it
will not receive a fee. 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
60
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--BENEFITS PLANS (CONTINUED)
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.
The Banks have 401(k) plans covering substantially all employees. Amounts
contributed by the Banks and charged to expense were approximately $250,000,
$247,000, and $196,000 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.
SCB has established deferred compensation plans which permit certain
directors and management employees to defer portions of their compensation and
earn interest at a predetermined amount above a specified interest rate index on
the deferred amounts. Interest expense incurred on deferred balances was
approximately $177,000, $648,000 and $174,000 in 1996, 1995 and 1994,
respectively. The deferred compensation liability at December 31, 1996 and 1995
was approximately $2.1 million, of which $1.2 million represented principal and
was classified with other interest-bearing liabilities in the accompanying
consolidated balance sheets. Approximately $948,000 and $946,000 represented
accrued interest payable at December 31, 1996 and 1995, respectively, and was
classified as other liabilities in the accompanying consolidated balance sheets.
In conjunction with the plans, SCB has purchased life insurance policies on the
participants with SCB as beneficiary. The cash surrender values of the life
insurance policies were included in other assets in the accompanying
consolidated balance sheets and totaled approximately $3.5 million and $3.0
million at December 31, 1996 and 1995, respectively.
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
LENDING COMMITMENTS
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.
61
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The Company had the following commitments to extend credit at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Loan commitments................................................... $ 240,563 $ 146,593
Standby letters of credit.......................................... 13,145 6,310
---------- ----------
$ 253,708 $ 152,903
---------- ----------
---------- ----------
</TABLE>
In addition to the amounts above, approximately $51,422,000 and $47,805,000
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.
INTEREST RATE SWAPS
SCB has entered into two interest rate swap agreements to reduce the impact
of changes in interest rates on its floating rate loan portfolio and does not
use them for trading purposes. The agreements were intended to reduce SCB's
exposure to declines in prime lending rates by artificially converting $75
million of SCB's prime-based loans to fixed rates for the duration of the
agreements.
SCB accrues monthly interest income and expense on the swaps, the net of
which is included in interest income on loans. For the years ended December 31,
1996, 1995, and 1994, net interest income or (expense) of ($563,000),
($929,000), and $141,000 from the swap agreements is included in interest income
on loans in the consolidated statements of operations. SCB is required to pledge
collateral on the transactions. U.S. Agency notes having a fair value of
approximately $5.2 million were pledged as collateral for the agreements as of
December 31, 1996. SCB is exposed to credit loss in the event of nonperformance
by the counterparties to the agreements. However, SCB does not anticipate
nonperformance by the counterparties. The following table summarizes the
characteristics of the swap agreements as of December 31, 1996:
<TABLE>
<CAPTION>
INTEREST
NOTIONAL INTEREST RATE RATE UNREALIZED ESTIMATED MATURITY
AMOUNT PAID RECEIVED LOSS FAIR VALUE DATE
--------- --------------- ------------ ------------- ---------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Swap #1............... $ 50,000 3-mo LIBOR 4.865% $ 899 $ (899) September 14, 1998
Swap #2............... $ 25,000 3-mo LIBOR 5.04 % $ 1 $ (1) January 7, 1997
(in arrears)
</TABLE>
62
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL 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 readily discernable
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 other short-term borrowings
and 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. The fair values
of the interest rate swap agreements are based on quoted market prices.
63
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL 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........................................... $ 96,202 $ 96,202
Federal funds sold................................................ 22,517 22,517
Investment securities............................................. 332,818 332,793
Loans and leases, net............................................. 801,601 803,312
Accrued interest receivable....................................... 9,664 9,664
Financial Liabilities:
Deposits.......................................................... $ 1,177,014 $ 1,177,345
Borrowings........................................................ 20,290 20,290
Accrued interest payable.......................................... 2,258 2,258
Off-Balance Sheet Financial Instrument:
Interest rate swap agreements in a net payable position........... -- (900)
DECEMBER 31, 1995
Financial Assets:
Cash and due from banks........................................... $ 62,384 $ 62,384
Federal funds sold................................................ 47,938 47,938
Interest bearing deposit.......................................... 198 198
Investment securities............................................. 184,978 185,010
Loans and leases, net............................................. 529,912 534,056
Accrued interest receivable....................................... 7,308 7,308
Financial Liabilities:
Deposits.......................................................... 774,057 774,589
Borrowings........................................................ 7,366 7,366
Accrued interest payable.......................................... 1,921 1,921
Off-Balance Sheet Financial Instrument:
Interest rate swap agreements in a net payable position........... -- (1,070)
</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
64
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--REGULATORY MATTERS (CONTINUED)
regulators have advised the Company and the Banks that they are considered
well-capitalized at December 31, 1996.
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 SC BANK CONSOLIDATED
----------- ----------- --------- --------- --------- ------------
(GREATER THAN OR EQUAL
TO)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based
capital ratio......... 4.00% 6.00% 10.93% 11.33% 10.68% 10.12%
Total risk-based
capital............... 8.00% 10.00% 12.19% 12.59% 11.86% 11.34%
Tier 1 leverage capital
ratio................. 4.00% 5.00% 6.05% 7.68% 9.51% 7.26%
</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............................................ $ 7,401 $ 3,086
Other real estate owned............................................ 83 83
Investments in subsidiaries........................................ 134,389 71,548
Securities available for sale...................................... 262 5,186
Other assets....................................................... 1,253 217
---------- ---------
Total assets..................................................... $ 143,388 $ 80,120
---------- ---------
---------- ---------
Liabilities:
Notes payable...................................................... $ 13,350 $ 2,483
Other liabilities.................................................. 991 9
---------- ---------
14,341 2,492
Shareholders' equity................................................. 129,047 77,628
---------- ---------
Total liabilities and shareholders' equity....................... $ 143,388 $ 80,120
---------- ---------
---------- ---------
</TABLE>
65
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL 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............................................. $ 301 $ 236 $ 106
Management fees............................................. 58 -- --
Dividend income............................................. -- -- 163
---------- --------- ---------
Total income.............................................. 359 236 269
Interest expense............................................ 465 260 243
Other expense............................................... 1,757 461 199
---------- --------- ---------
Total expense............................................. 2,222 721 442
---------- --------- ---------
Loss before taxes and equity in undistributed subsidiary
earnings.............................................. (1,863) (485) (173)
Income tax expense (benefit)................................ (846) (47) (118)
---------- --------- ---------
Loss before equity in undistributed earnings of bank
subsidiaries.............................................. (1,017) (438) (55)
Equity in undistributed income (loss) of bank
subsidiaries.............................................. 10,006 (1,351) 1,768
---------- --------- ---------
Net income (loss)......................................... $ 8,989 $ (1,789) $ 1,713
---------- --------- ---------
---------- --------- ---------
</TABLE>
66
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL 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)......................................... $ 8,989 $ (1,789) $ 1,713
Change in other assets.................................... (1,034) 78 56
Change in other liabilities............................... 982 (91) (4)
Equity in undistributed subsidiary (earnings) losses...... (10,006) 1,351 (1,931)
---------- --------- ---------
Cash flows from operating activities.................... (1,069) (451) (166)
---------- --------- ---------
Acquisition of Western Bank, including acquisition
costs................................................... (53,154) -- --
Net change in securities available for sale............... 4,924 -- --
Dividends received from subsidiary........................ -- -- 163
Increase in investment in subsidiaries.................... -- (7,900) (6,810)
Other investing activities................................ 126 (8,939) --
---------- --------- ---------
Cash flows from investing activities.................... (48,104) (16,839) (6,647)
---------- --------- ---------
Net proceeds from issuance of common stock, net of
issuance costs, and from exercise of common stock
options................................................. 42,625 12,973 14,207
Issuance of debt.......................................... 11,000 -- --
Other financing activities................................ (137) (589) --
---------- --------- ---------
Cash flows from financing activities.................... 53,488 12,384 14,207
Net increase (decrease) in cash........................... 4,315 (4,906) 7,394
Cash beginning of year.................................... 3,086 7,992 598
---------- --------- ---------
Cash end of year.......................................... $ 7,401 $ 3,086 $ 7,992
---------- --------- ---------
---------- --------- ---------
Supplemental disclosure of cash flow information Cash paid
for interest............................................ 465 260 243
---------- --------- ---------
---------- --------- ---------
</TABLE>
NOTE 18--STOCK OPTION PLAN AND WARRANTS
At the time of the CCB acquisitions, all outstanding stock options of CCB
were converted into stock options of the Company at an exchange rate of
one-to-one. At the time of the SCB acquisitions, all outstanding stock options
of SCB were converted into shares of Company Common Stock based upon the
difference between $14.25 and the exercise price of each SCB option divided by
$31.28. The following disclosure reflects the combination of the Company, CCB
and SCB 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 Company 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. The Company's non-qualified stock options
("NQSO") have 10-year terms and vest over a three year period from the date
67
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
of grant. SCB's NQSO have 10-year terms and vest over a five year period from
the date of grant. The following table summarizes the activity relating to the
Company's stock options for the years indicated.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ------------------------
WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG.
NO. OF EXERCISE NO. OF EXERCISE NO. OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January 1...... 491,036 $ 9.59 415,240 $ 10.00 349,922 $ 9.93
Options granted..................... 211,460 14.38 221,616 7.42 69,342 10.95
Options exercised................... (80,042) 5.74 (45,616) 5.64 -- --
Options forfeited................... (1,699) 13.77 -- -- -- --
Options expired..................... (16,648) 13.50 (36,129) 14.18 (3,554) 18.00
Options cancelled................... (25,000) 5.83 (64,075) 11.12 (470) 36.13
--------- ------ --------- ------ --------- ------
Options outstanding, December
31.............................. 579,107 $ 11.24 491,036 $ 9.59 415,240 $ 10.00
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
Weighted-average grant date fair
value of options granted during
the year.......................... $ 9.28 $ 5.94 $ 6.98
</TABLE>
The fair market value of options granted during 1996 and 1995 was estimated
using the Black-Scholes option-pricing model. The following assumptions were
incorporated into the valuation calculation: an option contract life of 2 1/2 to
10 years, a stock price volatility of 40% based on daily market prices for the
preceding five year period, no dividends and a risk-free interest rate of 5.2%
to 7.9%.
The table below provides the range of exercise prices, weighted-average
exercise prices and weighted-average remaining contractual lives for options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVG. --------------------------
NUMBER REMAINING NUMBER WEIGHTED-AVG.
RANGE OF OUTSTANDING CONTRACTUAL WEIGHTED-AVG. EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE EXERCISE PRICE AT 12/31/96 PRICE
- - - ------------------ ----------- --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$4.34 to $6.50 177,680 6.2 years $ 5.46 91,012 $ 5.44
$9.88 to $11.39 118,160 8.1 years $ 11.04 56,977 $ 11.02
$13.17 to $16.74 271,763 8.1 years 14.54 83,620 14.18
$22.17 to $26.05 11,504 3.3 years 24.80 11,504 24.80
----------- --------------- ------ ----------- ------
$4.34 to 26.05 579,107 7.4 years $ 11.24 243,113 $ 10.67
----------- --------------- ------ ----------- ------
----------- --------------- ------ ----------- ------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its Plan. Accordingly, no compensation cost
has been recognized for its stock option plans in the consolidated financial
statements. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method
68
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
of SFAS No. 123, the Company's net income (loss) and earnings (loss) per share
for 1996 and 1995 would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net income (loss)
As reported................................................................................. $ 8,989 $ (1,789)
Pro forma................................................................................... 8,663 (1,988)
Net income (loss) per share and equivalent share
As reported................................................................................. 1.08 (0.27)
Pro forma................................................................................... 1.04 (0.30)
</TABLE>
The pro forma amounts shown above may not be representative of the effects
on reported net income for future periods.
At December 31, 1996, the number of options exercisable was 243,113.
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 covered 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 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--PENDING ACQUISITION OF SANTA MONICA BANK
On July 30, 1997, the Company and Santa Monica Bank ("SMB") entered into a
definitive agreement for the merger of SMB with a subsidiary of the Company,
subject to approval by the banking regulators and shareholders of both companies
(the "SMB Merger"). Upon the SMB Merger becoming effective, each share of common
stock, $3.00 par value, of SMB (the "SMB Common Stock") issued and outstanding
at the time (other than shares that have not been voted in favor of the approval
of the principal terms of the Merger and with respect to which dissenters'
rights have been perfected in accordance with the California General Corporation
Law) will be converted into the right to receive either (i) $28.00 in cash (the
"Cash Consideration") or (ii) 0.875 shares of Company Common Stock (the "Stock
Consideration"). Each holder of SMB Common Stock may elect to, and may, receive
the Cash Consideration and, if the number of holders of SMB Common Stock
electing to receive the Cash Consideration, is so great as to prevent a tax-free
reorganization, all the holders of SMB Common Stock shall receive the Cash
Consideration. If the value of shares of holders of SMB Common Stock electing to
receive the Cash Consideration is such as to permit a tax-free reorganization,
the remaining holders of SMB Common Stock shall receive the Stock Consideration
subject to the limitation that no more than 50% of the outstanding shares of SMB
Common Stock shall be converted into the right to receive Stock Consideration
and that in the event that holders of SMB Common Stock elect to receive Stock
Consideration in exchange for more than 50% of the
69
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--PENDING ACQUISITION OF SANTA MONICA BANK (CONTINUED)
outstanding shares of SMB Common Stock, the holders of SMB Common Stock electing
Stock Consideration shall receive both cash and stock, subject to the option of
the Company to increase the Stock Consideration.
The SMB Merger is expected to be accounted for using the purchase method of
accounting. At December 31, 1996, SMB had total assets, deposits, shareholders'
equity and number of shares of SMB Common Stock outstanding of $632 million,
$554 million, $73 million and 7.1 million, respectively; these amounts were not
audited in connection with the preparation of these financial statements. For
the year ended December 31, 1996, SMB reported net income and net income per
share of approximately $9.6 million and $1.36, respectively; these amounts were
not audited in connection with the preparation of these financial statements.
70
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired.
The Consolidated Financial Statements of SCB are incorporated herein by
reference to Exhibit 99.2 and Exhibit 99.3 to this Form 8-K.
(b) Pro forma financial information.
Pro forma financial information prepared in accordance with Article 11 of
Regulation S-X has been previously reported by the Company in Amendment No. 1 to
Registration Statement of Form S-4 filed September 10, 1997 (333-35271).
(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 with respect to SC Bancorp;
23.3 Consent of Deloitte & Touche LLP with respect to California
Commercial Bankshares;
23.4 Consent of Dayton & Associates;
27.1 Supplemental Financial Data Schedule;
99.1 Press Release of Western Bancorp, dated October 14, 1997;
99.2 Unaudited Consolidated Balance Sheets of SC Bancorp and its
subsidiary, Southern California Bank, as of June 30, 1997 and
December 31, 1996, and the related Consolidated Statements of
Operations, Shareholders' Equity and Cash Flows for the six month
periods ended June 30, 1997 and 1996; and
99.3 Audited Consolidated Balance Sheets of SC Bancorp and its
subsidiary, Southern California Bank, 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.
</TABLE>
71
<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: October 23, 1997 WESTERN BANCORP
By: /s/ ARNOLD C. HAHN
-----------------------------------------
Name: Arnold C. Hahn
Title: CHIEF FINANCIAL OFFICER
72
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Western Bancorp:
We consent to the use of our report, dated October 10, 1997, included
herein. Our report, dated October 10, 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
supplemental consolidated financial statements of Western Bancorp, is based on
the report of the other auditors; (ii) We did not audit the 1996 consolidated
financial statements of SC Bancorp. 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 SC Bancorp in the 1996 supplemental
consolidated financial statements of Western Bancorp, is based on the report of
the other auditors; (iii) 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; (iv) Separate consolidated financial statements of California
Commercial Bankshares also included in the 1995 and 1994 supplemental
consolidated financial statements were audited by other auditors; (v) Separate
consolidated financial statements of SC Bancorp also included in the 1995 and
1994 supplemental consolidated financial statements were audited by other
auditors; and (vi) 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
poolings-of-interests.
KPMG PEAT MARWICK LLP
Los Angeles, California
October 23, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report dated January 24, 1997 on the
consolidated balance sheets of SC Bancorp and subsidiary as of December 31, 1996
and 1995 and the related statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996, in Form
8-K of Western Bancorp (formerly Monarch Bancorp) dated October 23, 1997.
DELOITTE & TOUCHE LLP
Los Angeles, California
October 23, 1997
<PAGE>
EXHIBIT 23.3
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 subsidiaries 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), in Form 8-K of
Western Bancorp (formerly Monarch Bancorp) dated October 23, 1997.
DELOITTE & TOUCHE LLP
Los Angeles, California
October 23, 1997
<PAGE>
EXHIBIT 23.4
[Vavrinek, Trine, Day & Co. 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.
Vavrinek, Trine, Day & Co.
October 23, 1997
Laguna Hills, California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1994 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994 JUN-30-1997 JUN-30-1996
<CASH> 96,202 62,384 0 95,295 0
<INT-BEARING-DEPOSITS> 0 198 0 0 0
<FED-FUNDS-SOLD> 22,517 47,938 0 73,304 0
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 320,257 175,494 0 271,848 0
<INVESTMENTS-CARRYING> 7,270 6,661 0 6,902 0
<INVESTMENTS-MARKET> 7,245 6,693 0 6,902 0
<LOANS> 819,792 544,804 0 851,147 0
<ALLOWANCE> 15,757 13,130 0 15,345 0
<TOTAL-ASSETS> 1,338,913 866,385 0 1,367,665 0
<DEPOSITS> 1,177,014 774,057 0 1,207,714 0
<SHORT-TERM> 20,290 7,366 0 18,194 0
<LIABILITIES-OTHER> 12,562 7,334 0 10,115 0
<LONG-TERM> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 111,326 68,705 0 111,186 0
<OTHER-SE> 17,721 8,923 0 20,456 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,338,913 866,385 0 1,367,665 0
<INTEREST-LOAN> 58,374 49,014 40,196 38,605 26,434
<INTEREST-INVEST> 12,862 10,726 11,833 8,500 5,281
<INTEREST-OTHER> 3,001 2,889 1,050 1,653 1,380
<INTEREST-TOTAL> 74,237 62,629 53,079 48,758 33,095
<INTEREST-DEPOSIT> 21,382 19,167 12,937 13,735 9,325
<INTEREST-EXPENSE> 22,488 20,452 13,562 14,434 9,945
<INTEREST-INCOME-NET> 51,749 42,177 39,517 34,324 23,150
<LOAN-LOSSES> 1,018 8,564 3,510 1,400 335
<SECURITIES-GAINS> 281 (692) (24) 337 14
<EXPENSE-OTHER> 47,961 44,961 41,061 29,882 21,868
<INCOME-PRETAX> 12,645 (3,522) 3,393 8,256 6,307
<INCOME-PRE-EXTRAORDINARY> 8,989 (1,789) 1,713 3,445 3,742
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 8,989 (1,789) 1,713 3,445 3,742
<EPS-PRIMARY> 1.08 (0.27) 0.33 0.32 0.50
<EPS-DILUTED> 1.08 (0.27) 0.33 0.32 0.50
<YIELD-ACTUAL> 5.86 5.69 5.71 5.86 5.98
<LOANS-NON> 16,157 17,303 16,814 14,665 0
<LOANS-PAST> 193 0 1,213 422 0
<LOANS-TROUBLED> 7,057 4,696 11,286 0 0
<LOANS-PROBLEM> 0 0 0 0 0
<ALLOWANCE-OPEN> 13,130 12,115 19,077 15,757 0
<CHARGE-OFFS> 4,675 9,577 12,893 2,282 0
<RECOVERIES> 1,123 1,411 2,421 470 0
<ALLOWANCE-CLOSE> 15,757 13,130 12,115 15,345 0
<ALLOWANCE-DOMESTIC> 15,757 13,130 12,115 15,345 0
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0 0
</TABLE>
<PAGE>
EXHIBIT 99.1
WESTERN BANCORP
PRESS RELEASE
Western Bancorp (NASDAQ: WEBC)
4100 Newport Place, Suite 900
Newport Beach, California 92660
<TABLE>
<S> <C> <C>
Contacts: Matthew P. Wagner Arnold C. Hahn
Chief Financial
President Officer
Phone: 310/477-2401 714/863-2351
FAX: 310/231-0321 714/757-5845
</TABLE>
FOR IMMEDIATE RELEASE
WESTERN BANCORP ANNOUNCES THIRD-QUARTER EARNINGS
AND CLOSING OF SC BANCORP MERGER
October 14, 1997
Newport Beach, California... Western Bancorp ("Western") today announced
that its consolidated net income for the nine months ended September 30, 1997
was $3,514,000, or $0.48 per share. This compares with earnings of $2,665,000,
or $0.67 per share, for the nine months ended September 30, 1996. Without the
amortization of goodwill of $1,497,000 and after tax merger costs of $3,009,000
in 1997 and before an after tax gain on sale of loans of $399,000 in 1996, net
income for the nine month periods would have been $8,020,000 and $2,266,000 in
1997 and 1996, respectively, or $1.10 and $0.57 per share, respectively, a
growth of approximately 64%.
Western had a consolidated net income of $2,516,000, or $0.35 per share, for
the three months ended September 30, 1997. This compares with earnings of
$606,000, or $0.15 per share, for the three months ended September 30, 1996.
Without the amortization of goodwill of $499,000 in 1997 and before an after tax
loss on sale of loans of $203,000 in 1996, net income for the three month period
would have been $3,015,000 and $809,000 in 1997 and 1996, respectively, or $0.41
and $0.20 per share, respectively, a growth of over 100%.
Earnings for the first nine 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 nine 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
1.30% for the first nine months of 1997 versus 0.72% for the first nine months
of 1996. Return on average equity increased from 9.1% to 13.2% for the first
nine months of 1997 versus the first nine months of 1996. Before goodwill
amortization and merger costs, the efficiency ratio in the third quarter of 1997
was 58.3% versus 79.6% for the same period in 1996. The efficiency ratio for the
first nine months of 1997 versus 1996 declined to 61.4% from 77.6%.
On October 10, 1997, the shareholders of Western and SC Bancorp approved the
merger of SC Bancorp with and into Western. The transaction will be accounted
for as a pooling-of-interests. As a result of this merger, which closed on
October 10, 1997, approximately 3,555,000 shares of Western Bancorp Common Stock
will be issued to holders of common stock of SC Bancorp at the effective time of
the merger. On a pro forma basis, as of September 30, 1997, Western had
approximately $1.4 billion in assets in its three banking subsidiaries: Western
Bank, National Bank of Southern California and Southern California Bank. It is
the Company's intention to merge National Bank of Southern California into
1
<PAGE>
Southern California Bank during the fourth quarter of 1997. Pro forma results of
Western and SC Bancorp for the nine months and three months ended September 30,
1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net interest income................................................... $ 52,908 $ 35,046 $ 18,584 $ 11,896
Provision for loan and lease losses................................... 2,125 395 725 60
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES....... 50,783 34,651 17,859 11,836
Non interest income................................................... 7,702 7,322 2,488 1,962
Non interest expense.................................................. 42,935 32,491 13,053 10,623
--------- --------- --------- ---------
INCOME BEFORE TAXES................................................. 15,550 9,482 7,294 3,175
Income taxes.......................................................... 8,022 3,884 3,211 1,319
--------- --------- --------- ---------
NET INCOME.......................................................... $ 7,528 $ 5,598 $ 4,083 $ 1,856
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
On July 31, 1997, Western and Santa Monica Bank jointly announced that they
had signed a definitive agreement to merge, subject to approval by certain
banking regulators and the shareholders of both companies. Under the terms of
that agreement, each holder of Santa Monica common stock will have the right to
elect to receive, with certain limitations, either $28 per share in cash or .875
shares of Western common stock for each share of Santa Monica common stock. In
the event that shareholders owning more than 50% of Santa Monica common stock
elect the stock alternative, they will each receive their pro rata share of the
stock and cash available for distribution. Should fewer than 40% of the
outstanding shares elect to receive stock, then all shareholders, regardless of
their election, will receive $28 per share in cash at closing. Under the terms
of the definitive agreement, Santa Monica Bank and Western Bank, a wholly-owned
subsidiary of Western Bancorp, will merge to form a $1.1 billion bank operating
on the west side of Los Angeles. This merger will be accounted for as a
purchase.
Once the Santa Monica transaction closes, which is expected to take place in
the first quarter of 1998, and Western consolidates Southern California Bank and
National Bank of Southern California, Western Bancorp will have over $2 billion
in assets operating through its two banking subsidiaries: Southern California
Bank and Santa Monica Bank.
Mr. Hugh S. Smith, Jr., Chairman and CEO of Western Bancorp, stated "Western
Bancorp continues to make substantial progress on its goal of becoming one of
the top performing community banks in the country. There have been a long list
of accomplishments since we announced our second quarter results: 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, quarter after
quarter we are accomplishing significant operating improvements."
2
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1997(1) 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans.......................................... $ 35,509 $ 17,553 $ 12,663 $ 5,887
Interest on investment securities................................... 9,487 4,917 2,946 1,840
Interest on federal funds sold...................................... 1,516 1,735 580 527
--------- --------- --------- ---------
Total interest income............................................. 46,512 24,205 16,189 8,254
INTEREST EXPENSE:
Interest expense on deposits........................................ 11,751 6,122 4,047 2,158
Interest expense on other borrowings................................ 695 199 211 68
--------- --------- --------- ---------
Total interest expense............................................ 12,446 6,321 4,258 2,226
--------- --------- --------- ---------
NET INTEREST INCOME: 34,066 17,884 11,931 6,028
Less: provision for loan and lease losses........................... 1,125 865 375 60
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES......... 32,941 17,019 11,556 5,968
NON-INTEREST INCOME:
Service charges..................................................... 1,878 1,317 438 480
Escrow fees......................................................... 551 564 214 253
Gain (loss) on sale of loans........................................ -- 665 -- (338)
Securities gains.................................................... 342 -- -- --
Other income........................................................ 1,239 920 587 244
--------- --------- --------- ---------
Total non-interest income......................................... 4,010 3,466 1,239 639
NON-INTEREST EXPENSE:
Salaries and benefits............................................... 11,735 7,383 3,971 2,253
Occupancy, furniture and equipment.................................. 3,178 2,174 978 658
Advertising and business development................................ 695 566 248 171
Other real estate owned............................................. 310 (191) 257 61
Professional services............................................... 2,053 2,147 759 677
Telephone, postage, stationery and supplies......................... 1,124 800 339 284
Goodwill amortization............................................... 1,497 - 499 -
Data processing for company......................................... 1,013 460 347 200
Customer services cost.............................................. 858 434 305 166
Merger costs........................................................ 3,404 - - -
Other............................................................... 2,399 2,273 471 1,105
--------- --------- --------- ---------
Total non-interest expense........................................ 28,266 16,046 8,174 5,575
--------- --------- --------- ---------
Income before income taxes............................................ 8,685 4,439 4,621 1,032
Income taxes.......................................................... 5,171 1,774 2,105 426
Net income........................................................ $ 3,514 $ 2,665 $ 2,516 $ 606
PER SHARE INFORMATION:
Number of shares (weighted average)................................... 7,290.6 3,984.0 7,285.9 3,983.4
Income per share (dollars)............................................ $ 0.48 $ 0.67 $ 0.35 $ 0.15
Income per share before goodwill amortization and merger costs in 1997
and before gain (loss) on sale of loans in 1996 $ 1.10 $ 0.57 $ 0.41 $ 0.20
PROFITABILITY MEASURES:
Return on average assets.............................................. 0.55% 0.84% 1.18% 0.55%
Return on average assets before merger costs and goodwill amortization
in 1997 and before gain (loss) on sale of loans in 1996............. 1.30% 0.72% 1.47% 0.73%
Return on average equity.............................................. 5.8% 10.7% 12.3% 7.0%
Return on average equity before merger costs and goodwill amortization
in 1997 and before gain (loss) on sale of loans in 1996............. 13.2% 9.1% 14.7% 9.4%
</TABLE>
- - - ------------------------------
(1) Includes the operating results of Western Bank which was acquired on
September 30, 1996. Accordingly, Western Bank's operating results are not
included in the amounts for the 1996 periods.
3
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1997 1996
------------ ------------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks.............................................................. $ 73,194 $ 66,234
Federal funds sold................................................................... 44,000 18,717
------------ ------------
Total cash and cash equivalents.................................................. 117,194 84,951
Federal Reserve Bank and Federal Home Loan Bank stock................................ 3,367 3,234
Securities:
Securities held to maturity........................................................ 5,365 7,270
Securities available for sale...................................................... 172,080 245,724
------------ ------------
Total securities................................................................. 180,812 256,228
Net loans............................................................................ 512,532 459,373
Property, plant and equipment........................................................ 6,961 7,215
Other real estate owned.............................................................. 8,034 6,546
Goodwill............................................................................. 27,845 29,342
Other assets......................................................................... 13,745 19,245
------------ ------------
Total assets..................................................................... $ 867,123 $ 862,900
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits........................................................ $ 291,559 $ 296,951
Interest bearing deposits............................................................ 470,505 464,737
------------ ------------
Total deposits................................................................... 762,064 761,688
Borrowed funds....................................................................... 16,055 13,350
Accrued interest payable & other liabilities......................................... 7,795 8,734
------------ ------------
Total liabilities................................................................ 785,914 783,772
SHAREHOLDERS' EQUITY
Preferred stock...................................................................... -- --
Common stock......................................................................... 73,489 73,588
Retained earnings.................................................................... 7,485 5,528
Unrealized net gains on investments available for sale, net.......................... 235 12
------------ ------------
Total shareholders' equity....................................................... 81,209 79,128
------------ ------------
Total liabilities and Shareholders' equity....................................... $ 867,123 $ 862,900
------------ ------------
------------ ------------
Number of common shares outstanding.................................................. 7,077.8 7,027.9
Common shareholders' equity per share................................................ $ 11.47 $ 11.26
</TABLE>
4
<PAGE>
EXHIBIT 99.2
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks.............................................................. $ 37,639 $ 29,968
Federal funds sold................................................................... 27,804 3,800
------------ ------------
Cash and cash equivalents.......................................................... 65,443 33,768
------------ ------------
Securities available-for-sale, at fair value (Notes 1 and 2)......................... 73,465 74,533
Investment in Federal Home Loan Bank stock, at cost.................................. 1,495 1,450
Investment in Federal Reserve Bank stock, at cost.................................... 621 607
Loans (Notes 1 and 3)................................................................ 350,584 347,864
Less: Deferred fee income.......................................................... (638) (689)
Allowance for possible loan losses............................................ (5,062) (4,947)
------------ ------------
Loans, net......................................................................... 344,884 342,228
------------ ------------
Premises and equipment, net.......................................................... 7,017 7,740
Other real estate owned, net......................................................... 654 536
Accrued interest receivable.......................................................... 3,748 3,931
Other assets......................................................................... 10,567 11,220
------------ ------------
Total assets....................................................................... $ 507,894 $ 476,013
------------ ------------
------------ ------------
LIABILITIES
Deposits:
Noninterest-bearing................................................................ $ 137,616 $ 125,903
Interest-bearing................................................................... 308,629 289,423
------------ ------------
Total deposits..................................................................... 446,245 415,326
------------ ------------
Borrowed funds and other interest-bearing liabilities................................ 7,342 8,096
Accrued interest payable and other liabilities....................................... 2,522 2,672
------------ ------------
Total liabilities.................................................................. 456,109 426,094
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, no par or stated value:
10,000,000 shares authorized;
no shares issued or outstanding.................................................. -- --
Common stock, no par or stated value:
20,000,000 shares authorized;
7,498,365 and 7,486,375 shares issued
and outstanding at June 30, 1997 and
December 31, 1996, respectively.................................................. 37,807 37,738
Retained earnings.................................................................... 15,502 13,055
Dividends paid....................................................................... (749) --
Unrealized loss on available-for-sale securities,
net of taxes (Note 1).............................................................. (775) (874)
------------ ------------
Total Shareholders' Equity......................................................... 51,785 49,919
------------ ------------
Total Liabilities and Shareholders' Equity......................................... $ 507,894 $ 476,013
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans................................................. $ 7,997 $ 7,390 $ 15,759 $ 14,768
Interest on investment securities.......................................... 1,008 1,061 1,959 2,204
Interest on Federal funds sold............................................. 516 91 717 172
--------- --------- --------- ---------
Total interest income.................................................. 9,521 8,542 18,435 17,144
--------- --------- --------- ---------
Interest Expense
Interest on deposits:
Interest-bearing demand.................................................. 764 571 1,489 966
Savings.................................................................. 396 233 638 481
Time certificates of deposit............................................. 2,004 1,897 3,904 3,914
--------- --------- --------- ---------
Total interest on deposits............................................... 3,164 2,701 6,031 5,361
Other interest expense..................................................... 101 183 215 489
--------- --------- --------- ---------
Total interest expense................................................. 3,265 2,884 6,246 5,850
--------- --------- --------- ---------
Net interest income........................................................ 6,256 5,658 12,189 11,294
Provision for (recovery of) possible loan losses (Note 3).................. 300 (750) 650 (470)
--------- --------- --------- ---------
Net interest income after provision for possible loan losses............... 5,956 6,408 11,539 11,764
--------- --------- --------- ---------
Noninterest Income......................................................... 1,186 1,246 2,443 2,533
Noninterest Expense:
Salaries and benefits.................................................... 2,424 2,559 4,951 5,178
Net occupancy, furniture and equipment................................... 873 1,078 1,720 2,188
Other operating expense.................................................. 1,614 2,436 3,119 4,031
--------- --------- --------- ---------
Total noninterest expense.............................................. 4,911 6,073 9,790 11,397
--------- --------- --------- ---------
Income before provision for income taxes................................... 2,231 1,581 4,192 2,900
Provision for income taxes................................................. 929 661 1,745 1,217
--------- --------- --------- ---------
Net Income............................................................. $ 1,302 $ 920 $ 2,447 $ 1,683
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of shares outstanding.............................. 7,495 7,475 7,491 7,474
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share......................................................... $ 0.17 $ 0.12 $ 0.33 $ 0.23
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................. $ 2,447 $ 1,683
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) possible loan losses.......................................... 650 (470)
Provision for loss on OREO................................................................ -- 369
Gain on sale of available-for-sale investment securities.................................. -- (14)
Net amortization of premiums on investment securities..................................... 372 467
Loss on sale of OREO...................................................................... -- 16
Gain on sale of loans..................................................................... (78) --
Net (decrease) increase in deferred fees and unearned income on loans..................... (51) 31
Depreciation and amortization............................................................. 800 951
(Gain) loss on sale of fixed assets....................................................... (4) 24
Decrease in accrued interest receivable and other assets.................................. 763 697
(Decrease) increase in accrued interest payable and other liabilities..................... (150) 1,323
--------- ---------
Net cash provided by operating activities............................................... 4,749 5,077
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale investment securities.............................. -- 8,549
Proceeds from maturities of available-for-sale investment securities........................ 8,867 4,005
Purchase of available-for-sale investment securities........................................ (8,000) --
Purchase of FHLB and FRB stock.............................................................. (58) (202)
Proceeds from sale of loans................................................................. 1,299 --
Loans funded, net of payments received...................................................... (4,507) (6,749)
Proceeds from sale of OREO.................................................................. -- 567
Proceeds from sale of fixed assets and other assets......................................... 4 197
Purchase of fixed assets.................................................................... (77) (138)
--------- ---------
Net cash (used in) provided by investing activities..................................... (2,472) 6,229
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options..................................................... 69 23
Dividends paid.............................................................................. (749) --
Increase (decrease) in noninterest-bearing deposits......................................... 11,713 (8,871)
Increase in interest-bearing deposits....................................................... 19,206 3,662
(Decrease) increase in other borrowings..................................................... (841) 3,307
--------- ---------
Net cash provided by (used in) financing activities..................................... 29,398 (1,879)
--------- ---------
Increase in cash and cash equivalents......................................................... 31,675 9,427
Cash and cash equivalents, beginning of period................................................ 33,768 29,088
--------- ---------
Cash and cash equivalents, end of period...................................................... $ 65,443 $ 38,515
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Unrealized loss on investment securities available-for-sale, net of tax..................... $ 99 $ 797
Transfers of loans to other real estate owned............................................... 31 699
Assumption of senior liens on other real estate owned....................................... 87 28
Asset sales offset to restructuring reserve................................................. -- 91
Close out of capital lease accounts......................................................... -- 118
--------- ---------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, EXCEPT FOR INFORMATION AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1996)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
SC Bancorp, a California bank holding company (the "Company"), and its
subsidiary, Southern California Bank, a California state-chartered bank (the
"Bank"), operate 14 branches in Southern California. The Company's primary
source of revenue is providing loans to customers who are predominantly small
and mid-sized businesses. The accounting and reporting policies of the Company
conform to generally accepted accounting principles and general practices within
the banking industry. See the notes to SC Bancorp's consolidated financial
statements contained in the Company's Annual Report on Form 10-K.
The interim period financial statements are unaudited. It is the opinion of
Company management that all adjustments consisting of normal, recurring accruals
necessary for a fair presentation of the results of operations have been
reflected therein. Results for the period ending June 30, 1997, are not
necessarily indicative of results that may be expected for any other interim
periods or for the year as a whole.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and the Bank. All material intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
SECURITIES
At June 30, 1997, the Company's available-for-sale portfolio had a net
unrealized loss of $1.3 million. The tax-effected reduction to shareholders'
equity at June 30, 1997, was $775,000. In January 1995, the FDIC issued a final
rule excluding unrealized holding gains and losses on available-for-sale debt
securities from the calculation of Tier 1 capital.
STOCK OF FEDERAL HOME LOAN BANK OF SAN FRANCISCO
As a member of the Federal Home Loan Bank of San Francisco ("FHLB"), the
Bank is required to own common stock in the FHLB based upon a percentage of one
of the following balances: residential mortgage loans, total assets, or the
outstanding balance of FHLB advances, whichever is greater.
STOCK OF FEDERAL RESERVE BANK OF SAN FRANCISCO
As a member of the Federal Reserve System, the Bank is required to own
common stock in the Federal Reserve Bank of San Francisco ("FRB") based upon a
percentage of capital and surplus at the time of initial membership.
4
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, EXCEPT FOR INFORMATION AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1996)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
All loans on nonaccrual are considered to be impaired; however, not all
impaired loans are on nonaccrual status. Impaired loans on accrual status must
meet the following criteria: all payments must be current and the loan
underwriting must support the debt service requirements. Factors that contribute
to a performing loan being classified as impaired include: a below market
interest rate, delinquent taxes and debts to other lenders that cannot be
serviced out of existing cash flow.
STOCK-BASED COMPENSATION
The Company maintains a stock option plan for the benefit of its executives.
In 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
which encourages, but does not require, companies to record compensation expense
for stock-based employee compensation at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation expense for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. There were no stock option
grants during the period ended June 30, 1997.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities, and is applied
prospectively to financial statements for fiscal years beginning after December
31, 1996. In 1996, the FASB also issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," which defers for one year
the effective date of certain provisions within SFAS No. 125. The adoption of
SFAS No. 125 and SFAS No. 127 effective January 1, 1997 did not have a material
impact on the Company's operations or financial condition.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
The Statement replaces the presentation of primary EPS with basic EPS, and
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. The Statement is
effective for financial statements issued for periods ending after December 15,
1997, and requires restatement of all prior-period EPS data presented. Basic EPS
as calculated under SFAS No. 128 for prior periods would not change from that
previously reported.
5
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, EXCEPT FOR INFORMATION AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1996)
NOTE 2--INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities as of
June 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury securities and obligations of U.S. government
agencies......................................................... $ 35,664 $ 29 $ (182) $ 35,511
Mortgage-backed securities........................................ 39,123 -- (1,169) 37,954
Total........................................................... $ 74,787 $ 29 $ (1,351) $ 73,465
----------- --- ----------- -----------
----------- --- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury securities and obligations of U.S. government
agencies......................................................... $ 32,967 $ -- $ (285) $ 32,682
Mortgage-backed securities........................................ 43,060 -- (1,209) 41,851
----------- --- ----------- -----------
Total........................................................... $ 76,027 $ -- $ (1,494) $ 74,533
----------- --- ----------- -----------
----------- --- ----------- -----------
</TABLE>
Investment securities with a carrying value of $14.0 million and $15.5
million were pledged to secure public deposits and as collateral for other
borrowings at June 30, 1997 and December 31, 1996, respectively.
The amortized cost and estimated fair value of debt securities at June 30,
1997 by contractual maturities are shown in the following table. Expected
maturities will differ from contractual maturities, particularly with respect to
mortgage-backed securities, because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURING IN
-----------------------------------------------------------------------
OVER ONE YEAR OVER FIVE YEARS
ONE YEAR THROUGH FIVE THROUGH TEN OVER TEN
JUNE 30, 1997 OR LESS YEARS YEARS YEARS TOTAL
--------- ---------------- ---------------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available-for-sale, amortized cost...... $ 14,664 $ 54,584 $ 5,539 $ -- $ 74,787
Available-for-sale, estimated fair
value.................................. $ 14,653 $ 53,424 $ 5,388 $ -- $ 73,465
</TABLE>
There were no sales of investment securities during the first six months of
1997. Proceeds from the sales of available-for-sale investment securities during
the same period in 1996 were $8.5 million. A gross gain of $14,000 was realized
on sales of investment securities in 1996.
6
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, EXCEPT FOR INFORMATION AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1996)
NOTE 3--LOANS
Loans by category are summarized below:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 PERCENT 1996 PERCENT
---------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.......................................................... $ 168,670 48.11% $ 160,633 46.17%
Real estate, construction........................................... 6,899 1.97% 8,544 2.46%
Real estate, mortgage............................................... 108,250 30.88% 105,123 30.22%
Consumer............................................................ 66,765 19.04% 73,564 21.15%
---------- --------- ------------ ---------
Gross loans....................................................... 350,584 100.00% 347,864 100.00%
---------- --------- ------------ ---------
Deferred fee income............................................... (638) (689)
Allowance for possible loan losses................................ (5,062) (4,947)
---------- ------------
Loans, net...................................................... $ 344,884 $ 342,228
---------- ------------
---------- ------------
</TABLE>
No industry constitutes a concentration in the Company's loan portfolio.
7
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, EXCEPT FOR INFORMATION AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1996)
NOTE 3--LOANS (CONTINUED)
The following table summarizes the balances and changes in the allowance for
possible loan losses for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED DECEMBER SIX MONTHS ENDED
JUNE 30, 1997 31, 1996 JUNE 30, 1996
---------------- ----------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average balance of gross loans outstanding....................... $ 344,440 $ 321,843 $ 315,024
-------- ----------- --------
-------- ----------- --------
Gross loan balance at end of period.............................. $ 350,584 $ 347,864 $ 322,953
-------- ----------- --------
-------- ----------- --------
Allowance at beginning of period................................. $ 4,947 $ 5,734 $ 5,734
Charge-offs:
Commercial..................................................... 617 422 79
Real estate.................................................... -- 279 138
Consumer....................................................... 29 168 122
-------- ----------- --------
Total charge-offs............................................ 646 869 339
Recoveries:
Commercial..................................................... 99 477 362
Real estate.................................................... -- 21 5
Consumer....................................................... 12 54 35
-------- ----------- --------
Total recoveries............................................. 111 552 402
Net charge-offs (recoveries)..................................... 535 317 (63)
Provision (recovery) charged (credited) to operations............ 650 (470) (470)
Allowance on purchased loans..................................... -- -- --
-------- ----------- --------
Allowance at end of period....................................... $ 5,062 $ 4,947 $ 5,327
-------- ----------- --------
-------- ----------- --------
<CAPTION>
DECEMBER
JUNE 30, 1997 31, 1996 JUNE 30, 1996
---------------- ----------- ----------------
<S> <C> <C> <C>
Ratio of allowance for loan losses to loans outstanding at
end of period................................................... 1.44% 1.42% 1.65%
Ratio of allowance for loan losses to nonaccrual loans at
end of period................................................... 69.43% 173.84% 778.60%
Ratio of annualized net charge-offs to average loans............. 0.31% 0.10% (0.04%)
</TABLE>
Loans on nonaccrual status were $7.3 million and $684,000, respectively at
June 30, 1997 and 1996. Interest income that would have been collected on these
loans had they performed in accordance with their original terms was
approximately $365,000 and $96,000, for the six months ended June 30, 1997 and
1996, respectively. The Company's average recorded investment in impaired loans
for the six months ended June 30, 1997 was $8.9 million. The Company's allowance
for possible loan losses at June 30, 1997 includes $1.8 million related to
impaired loans. Interest income recognized on impaired loans during the first
six months of 1997 and 1996 was $167,000 and $180,000, of which $167,000 and
$164,000, respectively, was collected in cash.
8
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, EXCEPT FOR INFORMATION AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1996)
NOTE 4--COMMITMENTS AND CONTINGENCIES
CREDIT EXTENSION
In the normal course of business, there are various outstanding commitments
to extend credit which are not reflected in the accompanying consolidated
financial statements. The Company does not anticipate losses as a result of
these transactions. However, the commitments are a component of the estimate of
the allowance for possible loan losses. Commercial and standby letters of credit
totaled approximately $5.8 million and $4.1 million at June 30, 1997 and
December 31, 1996, respectively. In addition, the Company had unfunded loan
commitments of $126.5 million and $110.5 million at June 30, 1997 and December
31, 1996, respectively. All of the commitments outstanding at June 30, 1997 and
December 31, 1996 represent unfunded loans which bear a floating interest rate.
The Company uses the same credit policies in making commitments and
conditional obligations as it does in extending loan facilities to customers.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
INTEREST RATE SWAPS
The Company entered into two interest rate swap agreements to reduce the
impact of changes in interest rates on its floating-rate loan portfolio. At June
30, 1997, the Company had outstanding one interest rate swap agreement with a
commercial bank having a total notional principal amount of $50 million (Swap
#1). The second interest rate swap agreement was with a securities broker having
a notional principal amount of $25 million (Swap #2). Swap #2 matured in January
1997. The agreements were intended to reduce the Company's exposure to declines
in prime lending rates by artificially converting $75 million of the Company's
prime-based loans to fixed rates for the duration of the agreements. Swap #1 was
entered into in September 1993. The terms of the agreement require the Company
to pay interest quarterly based on three-month LIBOR and to receive interest
semi-annually at a fixed rate of 4.865%. The agreement matures in September
1998.
The Company accrues monthly interest income and expense on the swaps, the
net of which is included in income on loans. Net interest expense of $187,000
and $271,000 related to the swap agreements is included in interest income for
the six months ended June 30, 1997 and 1996, respectively. The Company is
required to pledge collateral on the swaps. A U.S. Agency note having a fair
value of approximately $3.6 million was pledged as collateral for the
outstanding agreement as of June 30, 1997. The Company is exposed to credit loss
in the event of nonperformance by the counterparty to the remaining agreement.
However, the Company does not anticipate nonperformance by the counterparty.
9
<PAGE>
EXHIBIT 99.3
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
SC Bancorp:
We have audited the accompanying consolidated balance sheets of SC Bancorp
and its subsidiary 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. 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 audit to obtain
reasonable assurance about whether the financial statements are free of
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of SC Bancorp and its subsidiary
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
January 24, 1997
1
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 2).......................................................... $ 29,968 $ 29,088
Federal funds sold........................................................................ 3,800 --
---------- ----------
Cash and cash equivalents............................................................... 33,768 29,088
---------- ----------
Securities available-for-sale, at fair value (Note 3)..................................... 74,533 92,825
Investment in Federal Home Loan Bank stock, at cost....................................... 1,450 1,205
Investment in Federal Reserve Bank stock, at cost......................................... 607 --
Loans (Notes 4 and 16).................................................................... 347,864 316,841
Less: Deferred fee income............................................................... (689) (531)
Allowance for possible loan losses.................................................. (4,947) (5,734)
---------- ----------
Loans, net.............................................................................. 342,228 310,576
---------- ----------
Premises and equipment, net (Note 5)...................................................... 7,740 9,734
Other real estate owned, net (Note 6)..................................................... 536 2,073
Accrued interest receivable............................................................... 3,931 4,297
Other assets.............................................................................. 11,220 11,981
---------- ----------
Total Assets.......................................................................... $ 476,013 $ 461,779
---------- ----------
---------- ----------
LIABILITIES
Deposits: (Note 7)
Interest-bearing........................................................................ $ 289,423 $ 276,433
Noninterest-bearing..................................................................... 125,903 130,378
---------- ----------
Total deposits........................................................................ 415,326 406,811
---------- ----------
Borrowed funds and other interest-bearing liabilities (Note 8)............................ 8,096 6,407
Accrued interest payable and other liabilities............................................ 2,672 3,049
---------- ----------
Total Liabilities..................................................................... 426,094 416,267
---------- ----------
Commitments and contingencies (Note 11)................................................... -- --
SHAREHOLDERS' EQUITY (NOTES 10 AND 15)
Preferred stock, no par or stated value: 10,000,000 shares authorized; no shares issued or
outstanding............................................................................. -- --
Common stock, no par or stated value: 20,000,000 shares authorized; 7,486,375 shares
issued and outstanding at December 31, 1996, and 7,471,505 shares issued and outstanding
at December 31, 1995.................................................................... 37,738 37,658
Retained earnings......................................................................... 13,055 8,600
Unrealized loss on available-for-sale securities, net of taxes............................ (874) (746)
---------- ----------
Total Shareholders' Equity............................................................ 49,919 45,512
---------- ----------
Total Liabilities and Shareholders' Equity............................................ $ 476,013 $ 461,779
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans........................................................... $ 30,145 $ 25,960 $ 18,971
Interest on investment securities.................................................... 4,256 6,299 7,166
Interest on Federal funds sold....................................................... 566 1,137 283
--------- --------- ---------
Total interest income............................................................ 34,967 33,396 26,420
--------- --------- ---------
Interest Expense
Interest on deposits:
Interest-bearing demand............................................................ 2,457 1,451 1,363
Savings............................................................................ 932 1,150 1,564
Time certificates of deposit....................................................... 7,701 8,397 3,029
--------- --------- ---------
Total interest on deposits......................................................... 11,090 10,998 5,956
--------- --------- ---------
Other interest expense............................................................... 637 1,017 323
--------- --------- ---------
Total interest expense........................................................... 11,727 12,015 6,279
--------- --------- ---------
Net interest income.................................................................. 23,240 21,381 20,141
(Recovery of) provision for possible loan losses (Note 4)............................ (470) 1,539 (850)
--------- --------- ---------
Net interest income after provision for possible loan losses......................... 23,710 19,842 20,991
--------- --------- ---------
Noninterest income:
Service charges on deposit accounts................................................ 1,406 1,727 1,754
Other fees and charges............................................................. 2,769 2,542 2,637
Merchant bankcard income........................................................... 523 518 1,249
Net gain (loss) on sales of available-for-sale investment securities............... 14 (620) 17
Other (loss) gain on sale of assets, net........................................... (28) 58 624
Other income....................................................................... 482 788 402
--------- --------- ---------
Total noninterest income........................................................... 5,166 5,013 6,683
--------- --------- ---------
Noninterest expense:
Salaries and employee benefits..................................................... 10,147 10,405 9,518
Net occupancy, furniture and equipment............................................. 4,056 5,127 4,678
Professional and legal fees........................................................ 1,676 1,288 1,476
Other real estate owned............................................................ 439 219 1,832
Postage and delivery............................................................... 624 586 543
Goodwill amortization.............................................................. 505 821 211
Advertising and promotion.......................................................... 472 530 426
Merchant bankcard.................................................................. 424 475 1,013
Telecommunications................................................................. 351 481 352
Software........................................................................... 340 395 214
Office supplies.................................................................... 305 391 402
Data processing.................................................................... 291 253 235
FDIC assessment and other insurance................................................ 273 857 1,442
Other operating expense............................................................ 1,325 1,465 1,493
--------- --------- ---------
Total noninterest expense.......................................................... 21,228 23,293 23,835
--------- --------- ---------
Income before provision for income taxes............................................. 7,648 1,562 3,839
Provision for income taxes........................................................... 3,193 693 1,134
--------- --------- ---------
Net Income....................................................................... $ 4,455 $ 869 $ 2,705
--------- --------- ---------
--------- --------- ---------
Weighted average number of shares outstanding........................................ 7,476 7,469 5,507
--------- --------- ---------
--------- --------- ---------
Earnings per share................................................................... $ 0.60 $ 0.12 $ 0.49
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS AND SHARES OUTSTANDING IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED (LOSS)/
GAIN ON
AVAILABLE-FOR- SALE
COMMON STOCK RETAINED SECURITIES,
SHARES AMOUNT EARNINGS NET OF TAX TOTAL
----------- --------- --------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994........................ 3,469 $ 23,436 $ 5,026 $ -- $ 28,462
Common stock issued........................... 4,000 14,207 14,207
Unrealized loss on available-for-sale
securities.................................. (3,530) (3,530)
Net income.................................... 2,705 2,705
----- --------- --------- ------- ---------
Balance, December 31, 1994...................... 7,469 37,643 7,731 (3,530) 41,844
Common stock issued........................... 3 15 15
Unrealized gain on available-for-sale
securities.................................. 2,784 2,784
Net income.................................... 869 869
----- --------- --------- ------- ---------
Balance, December 31, 1995...................... 7,472 37,658 8,600 (746) 45,512
Common stock issued........................... 14 80 80
Unrealized loss on available-for-sale
securities.................................. (128) (128)
Net income.................................... 4,455 4,455
----- --------- --------- ------- ---------
Balance, December 31, 1996...................... 7,486 $ 37,738 $ 13,055 $ (874) $ 49,919
----- --------- --------- ------- ---------
----- --------- --------- ------- ---------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income........................................................................ $ 4,455 $ 869 $ 2,705
Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery of) provision for possible loan losses................................ (470) 1,539 (850)
Provision for loss on other real estate owned................................... 428 128 1,182
Gain on sale of other real estate owned......................................... (85) (130) (5)
(Gain) loss on sale of available-for-sale investment securities................. (14) 620 (17)
Net amortization of premiums on investment securities........................... 907 2,165 1,695
Gain on sale of loans........................................................... -- (145) (215)
Net amortization of deferred fees and unearned income on loans.................. 158 29 24
Depreciation and amortization................................................... 2,311 2,876 2,106
Loss (gain) on sale of fixed assets and other assets............................ 28 (1) (409)
Provision (benefit) for deferred income taxes................................... 1,371 (541) 1,492
Increase in accrued interest receivable and other assets........................ (659) (404) (16)
(Decrease) increase in accrued interest payable and other liabilities........... (417) (198) 645
--------- --------- ---------
Net cash provided by operating activities................................... 8,013 6,807 8,337
--------- --------- ---------
Cash flows from investing activities
Proceeds from sale of available-for-sale investment securities.................... 8,549 26,860 5,245
Proceeds from maturities of available-for-sale investment securities.............. 8,632 6,000 10,295
Proceeds from maturities of held-to-maturity investment securities................ -- 7,530 --
Purchase of investment securities available-for-sale, FHLB and FRB stock.......... (856) (1,206) (4,946)
Proceeds from sale of loans....................................................... -- 2,084 --
Purchase of IOBC loans............................................................ -- (71,576) --
Purchase of other loans........................................................... (5,185) (26,432) --
Loans funded, net of payments received............................................ (26,854) (15,823) (3,283)
Proceeds from sale of premises and equipment and other assets..................... 199 1 932
Purchase of premises and equipment................................................ (245) (1,535) (2,576)
Proceeds from sale of other real estate owned..................................... 1,791 5,689 2,704
--------- --------- ---------
Net cash (used in) provided by investing activities......................... (13,969) (68,408) 8,371
--------- --------- ---------
Cash flows from financing activities
Proceeds from Rights Offering..................................................... -- -- 14,207
Proceeds from exercise of stock options........................................... 80 15 --
Purchase of IOBC interest-bearing deposits........................................ -- 14,965 --
Purchase of IOBC noninterest-bearing deposits..................................... -- 19,762 --
Increase (decrease) in interest-bearing deposits.................................. 12,990 68,998 (15,105)
Decrease in noninterest-bearing deposits.......................................... (4,475) (36,853) (13,344)
Increase (decrease) in other borrowings........................................... 2,041 (7,316) 5,088
--------- --------- ---------
Net cash provided by (used in) financing activities......................... 10,636 59,571 (9,154)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.................................... 4,680 (2,030) 7,554
Cash and cash equivalents, beginning of period...................................... 29,088 31,118 23,564
--------- --------- ---------
Cash and cash equivalents, end of period............................................ $ 33,768 $ 29,088 $ 31,118
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of noncash investing and financing activities
Unrealized loss (gain) on investment securities available-for-sale, net of tax.... $ 128 $ (2,784) $ 3,530
Transfer of loans to other real estate owned...................................... 699 1,821 3,585
Assumption of senior liens on other real estate owned............................. -- 102 --
Transfer of held-to-maturity securities to available-for-sale..................... -- 51,991 --
Close out of capital lease accounts............................................... 118 -- --
Asset sales offset to restructuring reserve....................................... 88 -- --
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SC Bancorp, a bank holding company (the "Company"), and its subsidiary,
Southern California Bank, a California state-chartered bank (the "Bank"),
operate 14 branches in Southern California. The Company's primary source of
revenue is providing loans to customers, who are predominantly small and mid-
sized businesses. The accounting and reporting policies of the Company conform
to generally accepted accounting principles and general practices within the
banking industry. The following are descriptions of the more significant of
these policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and the Bank. All material intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For cash flow reporting purposes, cash, amounts due from banks, and
short-term investments with maturities of less than three months are considered
cash and cash equivalents.
SECURITIES
The Company's securities portfolio includes U.S. Treasury and U.S. federal
agency securities, most of which are mortgage-backed securities. The Company has
classified its investment securities as available-for-sale; the Company has no
trading account assets.
Securities are classified as available-for-sale when the Company intends to
hold the securities for an indefinite period of time but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
demands, regulatory capital considerations, and other similar factors.
Securities classified as available-for-sale are reported at their fair values.
Unrealized holding gains and losses on securities available-for-sale are
reported, net of tax, as a separate component of shareholders' equity. Realized
gains and losses from the sales of available-for-sale securities are reported
separately in the consolidated statements of operations using the specific
identification method.
In January 1995, the FDIC issued a final rule excluding unrealized holding
gains and losses on available-for-sale debt securities from the calculation of
Tier 1 capital. At December 31, 1996 and 1995, the Company's available-for-sale
portfolio had a net unrealized loss of $1.5 million and $1.3 million,
respectively. The tax-effected reduction to shareholders' equity at December 31,
1996 and 1995 was $874,000 and $746,000, respectively.
6
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities are classified as held-to-maturity when the Company has both the
intent and ability to hold the securities to maturity on a long-term basis.
Securities held-to-maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts to maturity or, in the case of
mortgage-backed securities, over the estimated lives of the securities.
In December 1995, the Company reclassified its entire held-to-maturity
investment portfolio to the available-for-sale category under a special one-time
exemption authorized by the Financial Accounting Standards Board ("FASB") that
allowed companies to reclassify their investment securities portfolio
categories. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, held-to-maturity investment securities were transferred to
available-for-sale at their fair market values. The net result of the transfer
was an aggregate unrealized net loss of $910,000 at December 31, 1995.
STOCK OF FEDERAL HOME LOAN BANK OF SAN FRANCISCO
As a member of the Federal Home Loan Bank of San Francisco ("FHLB"), the
Bank is required to own common stock in the FHLB based upon a percentage of one
of the following balances: residential mortgage loans, total assets, or the
outstanding balance of FHLB advances, whichever is greater.
STOCK OF FEDERAL RESERVE BANK OF SAN FRANCISCO
As a member of the Federal Reserve System, the Bank is required to own
common stock in the Federal Reserve Bank of San Francisco ("FRB") based upon a
percentage of capital and surplus at the time of initial membership.
LOANS-ALLOWANCE FOR POSSIBLE LOAN LOSSES AND INCOME RECOGNITION
A certain degree of risk is inherent in the extension of credit. Credit
losses arise primarily from the loan portfolio, but may also be derived from
other credit-related sources, including commitments to extend credit,
guarantees, and standby letters of credit. Actual credit losses and other
charges, net of recoveries, are deducted from the allowance for possible loan
losses. Other charges to the allowance primarily include amounts related to loan
foreclosures at the time of transfer to other real estate owned. A provision for
possible loan losses, which is a charge against earnings, is added to the
allowance based on management's assessment of certain factors including, but not
necessarily limited to, estimated losses from loans and other credit
arrangements; general economic conditions; deterioration in pledged collateral;
historical loss experience; and trends in portfolio volume, maturity,
composition, delinquencies, and nonaccruals.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures-An Amendment of FASB Statement No. 114,"
effective January 1, 1995. Statement No. 114 prescribes that a loan is impaired
when it is probable that the creditor will be unable to collect all contractual
principal and interest payments under the terms of the loan agreement. Loans are
evaluated for impairment on an individual basis with the exception of consumer
loans, which are aggregated and evaluated collectively. This statement generally
requires impaired loans to be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or as an
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company has determined that
the combined effect of adoption of SFAS No. 114 and No. 118 was immaterial to
the
7
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consolidated financial statements due to the Company's pre-existing methodology
for calculating its allowance for possible loan losses, which was based on the
value of the underlying collateral of "impaired" loans, as defined by SFAS No.
114.
All loans on nonaccrual are considered to be impaired; however, not all
impaired loans are on nonaccrual status. Impaired loans on accrual status must
meet the following criteria: all payments must be current and the loan
underwriting must support the debt service requirements. Factors that contribute
to a performing loan being classified as impaired include: a below market
interest rate, delinquent taxes and debts to other lenders that cannot be
serviced out of existing cash flow.
Nonaccrual loans are those which are past due 90 days as to either principal
or interest, or earlier when payment in full of principal or interest is not
expected. When a loan is placed on nonaccrual status, interest accrued but not
received is reversed against interest income. Thereafter, interest income is no
longer recognized and the full amount of all payments received, whether
principal or interest, are applied to the principal balance of the loan. A
nonaccrual loan may be restored to an accrual status when principal and interest
payments are current, and full payment of principal and interest is expected.
Loans are generally carried at the principal amount outstanding, net of
unearned discounts and deferred fees. Purchased loans are generally carried at
the principal amount outstanding, net of any unearned discounts or premiums.
Interest on loans, other than installment loans, is calculated using the simple
interest method. Interest income on discounted loans is generally recognized
over the estimated lives of the loans based on methods that approximate the
interest method. Net deferred loan origination fees are amortized to interest
income over the contractual lives of the related loans using the interest
method.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization computed on a straight-line basis over the estimated useful lives
of the assets or the lease terms. Sublease rental income is reported in
noninterest expense. Net gains and losses on disposal or retirement of premises
and equipment are reported in net gains and losses on sales of assets.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is recorded at the lower of cost or fair
value less estimated costs of disposal at the time of foreclosure. Initial
losses on properties acquired through foreclosure are treated as credit losses
at the time of transfer to OREO. Routine holding costs, net of any income and
net gains and losses on disposal, are reported in the consolidated statements of
operations as noninterest expense. Allowances for OREO losses are recorded for
any subsequent declines in fair values.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the estimated fair
value of identifiable net assets acquired. The Company amortizes goodwill over
its estimated useful life, not to exceed 15 years.
Core deposit intangibles are amortized using the straight-line method based
on the estimated runoff of the related deposits. Other identifiable intangible
assets are amortized using the interest method or on a
8
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
straight-line basis over their estimated periods of benefit. Goodwill and
identifiable intangible assets are reported as part of other assets.
INCOME TAXES
The Company files a consolidated Federal income tax return and a combined
California state franchise tax return. Deferred income taxes, which are reported
with other assets, result from the recognition of income and expense items in
different periods for tax and financial reporting purposes.
SFAS No. 109, "Accounting for Income Taxes," requires an asset and liability
approach for determining the amount of income taxes for financial reporting. A
current or deferred tax liability or asset is measured based on the amount of
taxes calculated at the current effective tax rates or refundable currently or
in future years. If it is more likely than not that any portion of a deferred
tax asset will not be realized, the statement requires a valuation allowance to
be recorded.
EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average
number of shares and common stock equivalents outstanding during the year. The
weighted average number of shares used for calculating earnings per share was
7,476,000, 7,469,000 and 5,507,000 for 1996, 1995 and 1994, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This Statement requires that long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, or
disposed of, be reviewed for impairment based on the fair value of the assets.
Furthermore, this statement requires that certain long-lived assets and
identifiable intangibles to be disposed of, be reported at the lower of carrying
amount or fair value less estimated disposal costs.
The Company has determined that the impact of this Statement on its
operations and financial position is not material for the year ended December
31, 1996.
STOCK-BASED COMPENSATION
The Company maintains a stock option plan for the benefit of its executives.
In 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
which encourages, but does not require companies to record compensation expense
for stock-based employee compensation at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation expense for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. The pro forma effects on net
income if the Company had adopted the fair value accounting provisions of SFAS
No. 123 are disclosed in Note 10.
9
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities, and is applied
prospectively to financial statements for fiscal years beginning after December
31, 1996. In 1996, the FASB also issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," which defers for one year
the effective date of certain provisions within SFAS No. 125. The Company does
not believe that the impact on its operations and financial position will be
material upon adoption of SFAS 125 or SFAS No. 127.
INTEREST RATE SWAP AGREEMENTS
The Company has entered into two interest rate swap agreements in the
management of its interest rate exposure. Revenue or expense associated with
these agreements, which are intended to convert the interest-rate
characteristics of interest-bearing assets, are accounted for on a settlement
accounting basis and are recognized as an adjustment to interest income, based
on the interest rates currently in effect for such contracts.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to
the current year presentation.
NOTE 2 -- RESTRICTIONS ON CASH AND DUE FROM BANKS
Withdrawal and usage restrictions exist on a portion of the funds of the
Company, the majority of which arise from the requirements of the Federal
Reserve Board to maintain a certain average balance. Such restricted funds
amounted to approximately $1.4 million and $3.0 million at December 31, 1996 and
1995, respectively. These funds are included in Cash and Due from Banks in the
accompanying consolidated balance sheets.
10
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 3 -- INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities as of
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury securities and obligations of U.S. government
agencies......................................................... $ 32,967 $ -- $ (285) $ 32,682
Mortgage-backed securities........................................ 43,060 -- (1,209) 41,851
----------- ----- ----------- -----------
Total........................................................... $ 76,027 $ -- $ (1,494) $ 74,533
----------- ----- ----------- -----------
----------- ----- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury securities and obligations of U.S. government
agencies......................................................... $ 42,036 $ -- $ (363) $ 41,673
Mortgage-backed securities........................................ 52,062 -- (910) 51,152
----------- ----- ----------- -----------
Total........................................................... $ 94,098 $ -- $ (1,273) $ 92,825
----------- ----- ----------- -----------
----------- ----- ----------- -----------
</TABLE>
Investment securities with a carrying value of $15.5 million and $18.6
million were pledged to secure public deposits and as collateral for other
borrowings at December 31, 1996 and 1995, respectively.
The amortized cost and estimated fair value of debt securities at December
31, 1996 by contractual maturities are shown in the following table. Expected
maturities will differ from contractual maturities, particularly with respect to
mortgage-backed securities, because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURING IN
-----------------------------------------------------------------------
OVER ONE YEAR OVER FIVE YEARS
ONE YEAR THROUGH FIVE THROUGH TEN OVER TEN
DECEMBER 31, 1996 OR LESS YEARS YEARS YEARS TOTAL
--------- ---------------- ---------------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available-for-sale, amortized cost...... $ 28,141 $ 47,807 $ -- $ 79 $ 76,027
Available-for-sale, estimated fair
value.................................. $ 28,087 $ 46,367 $ -- $ 79 $ 74,533
</TABLE>
Proceeds from sales of investments in securities during 1996, 1995 and 1994
were $8.5 million, $26.9 million and $5.2 million, respectively. Gross gains of
$14,000 and $17,000 were realized on those sales in 1996 and 1994, respectively.
Gross losses of $620,000 were realized on the sales in 1995. No gross gains were
realized from sales in 1995, and no gross losses were realized from sales in
1996 and 1994.
11
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 -- LOANS
Loans outstanding at December 31, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 % 1995 %
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial............................................................ $ 160,633 46.17% $ 147,230 46.47%
Real estate, construction............................................. 8,544 2.46% 4,416 1.39%
Real estate, mortgage................................................. 105,123 30.22% 107,662 33.98%
Consumer.............................................................. 73,564 21.15% 57,533 18.16%
---------- --------- ---------- ---------
Gross loans......................................................... 347,864 100.00% 316,841 100.00%
---------- ----------
---------- ----------
Deferred fee income................................................. (689) (531)
Allowance for possible loan losses.................................. (4,947) (5,734)
---------- ----------
Loans, net.......................................................... $ 342,228 $ 310,576
---------- ----------
---------- ----------
</TABLE>
No industry constitutes a concentration in the Bank's loan portfolio.
The Bank commonly accepts real estate as abundance of collateral in
extending credits for commercial purposes. Real estate mortgage loans generally
comprise medium-term loans secured by first or second deeds of trust on real
estate located in the State of California. Real estate values in California have
generally stabilized in the Bank's market area. Management believes that the
level of the allowance for possible loan losses as of December 31, 1996, is
adequate to absorb losses inherent in the loan portfolio.
12
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 -- LOANS (CONTINUED)
The changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average balance of gross loans outstanding................................... $ 321,843 $ 261,631 $ 203,507
---------- ---------- ----------
---------- ---------- ----------
Gross loan balance at December 31,........................................... $ 347,864 $ 316,841 $ 207,688
---------- ---------- ----------
---------- ---------- ----------
Allowance at January 1,...................................................... $ 5,734 $ 5,318 $ 10,800
Charge-offs:
Commercial................................................................. 422 834 2,004
Real estate................................................................ 279 1,227 3,453
Consumer................................................................... 168 587 362
---------- ---------- ----------
Total charge-offs........................................................ 869 2,648 5,819
Recoveries:
Commercial................................................................. 477 587 915
Real estate................................................................ 21 129 215
Consumer................................................................... 54 192 57
---------- ---------- ----------
Total recoveries......................................................... 552 908 1,187
Net charge-offs.............................................................. 317 1,740 4,632
(Recovery) provision (credited) charged to expense........................... (470) 1,539 (850)
Allowance on purchased loans................................................. -- 617 --
---------- ---------- ----------
Allowance at December 31,.................................................... $ 4,947 $ 5,734 $ 5,318
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
13
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4 -- LOANS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Ratio of allowance for loan losses to loans outstanding at December
31,............................................................... 1.42% 1.81% 2.56%
Ratio of allowance for loan losses to nonaccrual loans at December
31,............................................................... 173.84% 414.01% 329.88%
Ratio of net charge-offs to average loans........................... 0.10% 0.67% 2.28%
</TABLE>
At December 31, 1996 and 1995, the Bank had classified $7.1 million and $1.5
million, respectively, of its loans as impaired with specific reserves of $1.6
million and $143,000, respectively, as determined in accordance with SFAS No.
114, as amended by SFAS No. 118. The average recorded investment in impaired
loans during the years ended December 31, 1996 and 1995, was approximately $5.3
million and $3.2 million, respectively. Interest income recognized on impaired
loans during 1996 and 1995 was $359,000 and $260,000, of which $342,000 and
$260,000, respectively, was collected in cash.
NOTE 5 -- PREMISES AND EQUIPMENT
The following schedule sets forth the cost and accumulated depreciation and
amortization of premises and equipment at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(DOLLARS IN THOUSANDS) 1996 1995
- - - ---------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Land.............................................................................. $ 2,122 $ 2,122
Buildings and improvements:
Owned........................................................................... 5,092 3,688
Capital leases.................................................................. -- 401
Furniture, fixtures, and equipment.............................................. 7,132 11,810
Leasehold improvements............................................................ 3,146 5,598
--------- ---------
Total............................................................................. 17,492 23,619
Less: accumulated depreciation and
amortization.................................................................. (9,752) (13,885)
--------- ---------
Premises and equipment, net....................................................... $ 7,740 $ 9,734
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was approximately $1.8 million, $2.1 million, and $1.9
million for the years ended December 31, 1996, 1995 and 1994. The Bank's former
head office facility was sold in 1994, which resulted in a gain of $414,000.
14
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 6 -- OTHER REAL ESTATE OWNED
The components of other real estate owned (OREO) at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(DOLLARS IN THOUSANDS) 1996 1995
- - - ---------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Other real estate owned -- foreclosure............................................ $ 625 $ 4,243
Less: allowance for losses and selling expenses................................... (89) (2,170)
--------- ---------
Other real estate owned -- net.................................................... $ 536 $ 2,073
--------- ---------
--------- ---------
</TABLE>
The changes in the allowance for OREO losses and selling expenses for the
years ended December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(DOLLARS IN THOUSANDS) 1996 1995
- - - ---------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Balance, January 1................................................................ $ 2,170 $ 2,761
Provisions charged to expense..................................................... 428 128
Sales............................................................................. (2,509) (719)
--------- ---------
Balance, December 31.............................................................. $ 89 $ 2,170
--------- ---------
--------- ---------
</TABLE>
NOTE 7 -- DEPOSITS
Time certificates of deposit in denominations of $100,000 or more totaled
$64.0 million and $46.4 million as of December 31, 1996 and 1995, respectively.
Interest paid on deposit accounts totaled $11.2 million, $10.7 million, and $6.2
million in 1996, 1995 and 1994, respectively.
NOTE 8 -- BORROWED FUNDS AND OTHER INTEREST-BEARING LIABILITIES
Borrowed funds and other interest-bearing liabilities at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(DOLLARS IN THOUSANDS) 1996 1995
- - - ---------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Federal funds purchased........................................................... $ 1,852 $ --
Treasury, tax and loan (TT&L)..................................................... 5,088 4,883
Deferred compensation............................................................. 1,156 1,165
Capital lease obligations......................................................... -- 257
Other............................................................................. -- 102
--------- ---------
$ 8,096 $ 6,407
--------- ---------
--------- ---------
</TABLE>
TT&L balances fluctuate based on the amounts deposited by customers and the
amounts called for payment by the Federal Reserve Bank. The Bank's limit on its
TT&L at the Federal Reserve Bank is $6.0 million. Any amounts in excess of this
limit will generally be automatically withdrawn by the Federal Reserve Bank the
following day.
Interest paid on borrowed funds and other interest-bearing liabilities
totaled $623,000, $548,000 and $294,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
15
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................................................ $ 1,564 $ 1,045 $ (360)
State.............................................................................. 258 189 2
--------- --------- ---------
Total current.................................................................... 1,822 1,234 (358)
--------- --------- ---------
Deferred:
Federal............................................................................ 758 (320) 1,811
State.............................................................................. 613 (221) (319)
--------- --------- ---------
Total deferred................................................................... 1,371 (541) 1,492
--------- --------- ---------
Total provision.................................................................. $ 3,193 $ 693 $ 1,134
--------- --------- ---------
--------- --------- ---------
</TABLE>
The federal income tax provision for the years ended December 31, 1996, 1995
and 1994 differs from the statutory corporate rate of 35% as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Rate reconciliation
Tax benefit at statutory rate.................... $ 2,676 35.00% $ 547 35.00% $ 1,305 35.00%
Tax-exempt municipal interest.................... (7) -0.09% (7) -0.48% (8) -0.21%
State franchise tax, net of federal benefit...... 575 7.51% 125 7.98% (211) -5.66%
Officer life insurance........................... (40) -0.53% (167) -10.71% (11) -0.29%
Goodwill......................................... 40 0.52% 196 12.53% 54 1.45%
Other............................................ (51) -0.66% (1) 0.02% 5 0.13%
--------- --------- --------- --------- --------- ---------
$ 3,193 41.75% $ 693 44.34% $ 1,134 30.42%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
Federal income and California state franchise taxes paid totaled $3.4
million, $865,000 and $152,000 in 1996, 1995 and 1994, respectively.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
16
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 -- INCOME TAXES (CONTINUED)
purposes, and (b) operating loss and tax credit carryforwards. The components of
the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
Bad debt reserve............................................................................. $ -- $ 1,347
Deferred compensation........................................................................ 953 955
Effect of state taxes on federal liability................................................... 85 --
Unrealized loss on securities................................................................ 619 528
Depreciation................................................................................. 514 582
Other........................................................................................ 562 709
--------- ---------
Gross deferred tax asset....................................................................... 2,733 4,121
--------- ---------
Deferred Tax Liabilities
Bad debt reserve............................................................................. (137) --
Deductible prepaid expense................................................................... (301) (301)
Effect of state taxes on federal liability................................................... -- (209)
Other........................................................................................ (84) (121)
--------- ---------
Gross deferred tax liability................................................................... (522) (631)
--------- ---------
Total deferred tax asset....................................................................... $ 2,211 $ 3,490
Valuation allowance............................................................................ -- --
--------- ---------
Net deferred tax asset......................................................................... $ 2,211 $ 3,490
--------- ---------
--------- ---------
</TABLE>
No valuation allowance was required under SFAS No. 109 for federal or state
purposes as of December 31, 1996 or 1995, because management expects deferred
tax assets to be fully realized as an offset against future taxable income
exclusive of reversing temporary differences and carryforwards, reversing
temporary differences (which create net future tax liabilities), or through loss
carrybacks.
NOTE 10 -- SHAREHOLDERS' EQUITY
COMMON STOCK
During the second quarter of 1994, the Company successfully completed a
rights offering which resulted in the issuance of an additional 4.0 million
shares of common stock at $4.00 per share. Net proceeds of $14.2 million were
realized on this offering after issuance costs of approximately $1.8 million.
On January 23, 1997, the Company declared a $0.05 per share cash dividend to
be paid to shareholders of record at the close of business on February 6, 1997.
The dividend will be paid on February 20, 1997.
STOCK OPTIONS
The Company's stock option plan (the "Plan") provides for the granting of
options to directors and full-time salaried officers and management level
employees to purchase shares of the Company's common
17
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 10 -- SHAREHOLDERS' EQUITY (CONTINUED)
stock at option prices per share at a price equal to the fair market value of
the common stock on the date that each option is granted. Options granted
pursuant to the Plan are intended to qualify as Incentive Stock Options within
the meaning of Section 422A of the Internal Revenue Code of 1986, or Non-
Qualified Stock Options ("NQSO") as determined upon the grant of each option.
The options outstanding at December 31, 1996 are all NQSOs. Options granted
under the Plan have a maximum life of ten years. The options become exercisable
in installments of 20% beginning on the date of grant and 20% upon each
anniversary date of the original grant. The total shares available under the
Company's stock option plan are 650,000.
The following table summarizes the activity relating to the Company's stock
options for the years indicated.
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- --------------------------
NO. OF WEIGHTED-AVG. NO. OF WEIGHTED-AVG. NO. OF WEIGHTED-AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1.............. 472,100 $ 6.81 379,650 $ 6.54 235,250 $ 7.59
Options granted................. 138,250 6.93 174,750 5.00 152,200 4.99
Options exercised (14,870) 5.40 (3,000) 4.88 -- --
Options expired................. (36,540) 6.15 (79,300) 6.46 (7,800) 8.20
--------- ----- --------- ----- --------- -----
Balance, December 31............ 558,940 $ 6.23 472,100 $ 6.81 379,650 $ 6.54
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Weighted-average grant date fair
value of options granted during
the year....................... $ 4.37 $ 3.12 $ 3.18
</TABLE>
The fair market value of options granted during 1996 and 1995 was estimated
using the Black-Scholes option-pricing model. The following assumptions were
incorporated into the valuation calculation: an option contract life of 10
years, a stock price volatility of 39.71% based on daily market prices for the
preceding five year period, the stock pays no dividends and a risk-free interest
rate equivalent to the 10-year Treasury rate on the date of each grant. The
weighted-average risk-free rate for options granted during 1996 is 6.87%.
The table below provides the range of exercise prices, weighted-average
exercise prices and weighted-average remaining contractual lives for options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVG. --------------------------
NUMBER REMAINING WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- - - ------------------ ----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$4.50 to $5.19 259,350 8.1 years $ 5.03 125,060 $ 5.02
$6.00 to $7.63 274,340 7.6 years 6.91 150,592 6.89
$10.10 to $11.87 25,250 3.3 years 11.30 25,250 11.30
----------- --------------- ------ ----------- ------
$4.50 to $11.87 558,940 7.6 years $ 6.23 300,902 $ 6.48
----------- --------------- ------ ----------- ------
----------- --------------- ------ ----------- ------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized
18
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 10 -- SHAREHOLDERS' EQUITY (CONTINUED)
for its stock option plan. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for awards under
the plan consistent with the method of SFAS No. 123, the Company's net income
and earnings per share for the years ended 1996 and 1995 would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net Income to Common Shareholders
As reported................................................................................... $ 4,455 $ 869
Pro forma..................................................................................... $ 4,400 $ 834
Net Income per common and common share equivalent
As reported................................................................................... $ 0.60 $ 0.12
Pro forma..................................................................................... $ 0.59 $ 0.11
</TABLE>
CREDIT EXTENSION
In the normal course of business, there are various outstanding commitments
to extend credit which are not reflected in the accompanying consolidated
financial statements. The Company does not anticipate losses as a result of
these transactions. However, the commitments are a component of the estimate of
the allowance for possible loan losses. Commercial and standby letters of credit
totaled approximately $4.1 million and $4.3 million at December 31, 1996 and
1995, respectively. In addition, the Company had unfunded loan commitments of
$110.5 million and $85.0 million at December 31, 1996 and 1995, respectively.
All of the commitments outstanding at December 31, 1996 represent unfunded loans
which bear a floating interest rate.
The Company uses the same credit policies in making commitments and
conditional obligations as it does in extending loan facilities to customers.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
INTEREST RATE SWAPS
The Company has entered into two interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate loan portfolio and does
not use them for trading purposes. At December 31, 1996, the Company had
outstanding one interest rate swap agreement with a commercial bank having a
total notional principal amount of $50 million (Swap #1), and one interest rate
swap agreement with a broker dealer having a notional principal amount of $25
million (Swap #2). The agreements were intended to reduce the Company's exposure
to declines in prime lending rates by artificially converting $75 million of the
Company's prime-based loans to fixed rates for the duration of the agreements.
Swap #1 was entered into in September 1993. The terms of the first agreement
require the Company to pay interest quarterly based on three-month LIBOR and to
receive interest semi-annually at a fixed rate of 4.865%. The agreement matures
in September 1998.
19
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Swap #2 was entered into in January 1994. The terms of the second agreement
require the Company to pay interest quarterly based on three-month LIBOR in
arrears, and to receive interest semi-annually at a fixed rate of 5.04% through
the January 1997 maturity date. The Company accrues monthly interest income and
expense on the swaps, the net of which is included in interest income on loans.
For the years ended December 31, 1996, 1995, and 1994, net interest income or
(expense) of ($563,000), ($929,000), and $141,000 from the swap agreements is
included in interest income on loans in the consolidated statements of
operations. The Company is required to pledge collateral on the transactions.
U.S. Agency notes having a fair value of approximately $5.2 million were pledged
as collateral for the agreements as of December 31, 1996. The Company is exposed
to credit loss in the event of nonperformance by the counterparties to the
agreements. However, the Company does not anticipate nonperformance by the
counterparties. The following table summarizes the characteristics of the swap
agreements as of December 31, 1996:
<TABLE>
<CAPTION>
INTEREST
NOTIONAL INTEREST RATE RATE UNREALIZED ESTIMATED MATURITY
(DOLLARS IN THOUSANDS) AMOUNT PAID RECEIVED LOSS FAIR VALUE DATE
- - - ---------------------- --------- --------------- ------------ ----------- ----------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Swap #1............... $ 50,000 3-mo LIBOR 4.865% $ 899 $ (899) September 14, 1998
Swap #2............... $ 25,000 3-mo LIBOR 5.04% $ 1 $ (1) January 7, 1997
(in arrears)
</TABLE>
LEASE COMMITMENTS
The Company leases parcels of land and buildings under operating leases,
which require the Company to pay all normal property taxes, insurance, and
maintenance. The Company had no capital leases at December 31, 1996. At December
31, 1995, the Company had one building lease with an amortized cost of $123,000
recorded as a capital lease and included in premises and equipment in the
accompanying consolidated balance sheets. The capital lease was terminated
during the first quarter of 1996. The costs associated with terminating the
lease are included in the accompanying consolidated statement of operations for
1995. Net rent expense for the years ended 1996, 1995 and 1994 was approximately
$800,000, $1.2 million and $900,000, respectively.
Future minimum payments required under noncancellable leases with initial or
remaining terms of one year or more are as follows as of December 31, 1996:
(Dollars in thousands)
<TABLE>
<CAPTION>
OPERATING
YEARS ENDING DECEMBER 31, LEASES
- - - --------------------------------------------------------------------------------------------- -----------
<S> <C>
1997......................................................................................... $ 783
1998......................................................................................... 792
1999......................................................................................... 933
2000......................................................................................... 938
2001......................................................................................... 951
Thereafter................................................................................... 6,161
-----------
Total minimum payments....................................................................... $ 10,558
-----------
-----------
</TABLE>
The payments shown above for operating leases take into consideration only
one lease option that the Company intends to exercise. The Company has options
to extend several of its other operating leases.
20
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
However, because it is uncertain whether or not these other options will be
exercised, payments for those option periods have been excluded.
BORROWING ARRANGEMENTS
In the event that the Company experiences a temporary liquidity shortage, it
has available other sources of liquidity, including reverse repurchase
arrangements to borrow cash for short to intermediate periods of time using the
Company's available-for-sale investment securities as collateral, Federal funds
lines of credit that allow the Company to temporarily borrow an aggregate of up
to $30.0 million from three commercial banks, and short-term borrowing lines of
credit at the Federal Reserve Bank and Federal Home Loan Bank. Federal funds
arrangements with correspondent banks are subject to the terms of the individual
arrangements and may be terminated at the discretion of the correspondent bank.
LITIGATION
The Company is a party to routine litigation involving various aspects of
its business. In the opinion of management, none of the pending litigation at
December 31, 1996 would have a material adverse impact on the consolidated
financial condition or operations of the Company.
NOTE 12 -- EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan that covers substantially all full-time
employees. It permits voluntary contributions by employees, a portion of which
is matched by the Company. The plan may acquire Company shares on the open
market as part of the Company's matching contribution. The Company's expenses
relating to its contributions to the 401(k) plan were $129,000, $139,000, and
$108,000 in 1996, 1995 and 1994, respectively.
The Company has established deferred compensation plans which permit certain
directors and management employees to defer portions of their compensation and
earn interest at a predetermined amount above a specified interest rate index on
the deferred amounts. Interest expense incurred on deferred balances was
approximately $177,000, $648,000 and $174,000 in 1996, 1995 and 1994,
respectively. The deferred compensation liability at December 31, 1996 and 1995
was approximately $2.1 million, of which $1.2 million represented principal and
was classified with other interest-bearing liabilities in the accompanying
consolidated balance sheets. Approximately $948,000 and $946,000 represented
accrued interest payable at December 31, 1996 and 1995, respectively, and was
classified as accrued interest payable on other liabilities in the accompanying
consolidated balance sheets. In conjunction with the plans, the Company has
purchased life insurance policies on the participants with the Company as
beneficiary. The cash surrender values of the life insurance policies were
included in other assets in the accompanying consolidated balance sheets
totaling approximately $3.5 million and $3.0 million at December 31, 1996 and
1995, respectively.
21
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 13 -- PARENT COMPANY ONLY INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Cash..................................................................................... $ 2,041 $ 2,305
Other assets............................................................................. 296 95
Investment in Southern California Bank................................................... 47,721 43,113
--------- ---------
Total Assets........................................................................... $ 50,058 $ 45,513
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities................................................................................ $ 139 $ 1
Shareholders' Equity:
Common stock............................................................................. 37,738 37,658
Retained earnings........................................................................ 13,055 8,600
Unrealized loss on available-for-sale securities, net of tax............................. (874) (746)
--------- ---------
Total Shareholders' Equity............................................................. 49,919 45,512
--------- ---------
Total Liabilities and Shareholders' Equity............................................. $ 50,058 $ 45,513
--------- ---------
--------- ---------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Interest income.................................................................... $ 63 $ 108 $ 93
Dividend income from subsidiary.................................................... -- -- 163
--------- --------- ---------
Total income..................................................................... 63 108 256
--------- --------- ---------
EXPENSE
Management fees.................................................................... 90 66 24
Other professional fees............................................................ 328 281 26
Other expenses..................................................................... 129 -- 91
--------- --------- ---------
Total expense.................................................................... 547 347 141
--------- --------- ---------
(Loss) income before income taxes and equity in undistributed earnings
of subsidiary....................................................................... (484) (239) 115
(Benefit) provision for income taxes................................................. (201) (99) --
Equity in undistributed earnings of subsidiary....................................... 4,738 1,009 2,590
--------- --------- ---------
NET INCOME........................................................................... $ 4,455 $ 869 $ 2,705
--------- --------- ---------
--------- --------- ---------
</TABLE>
22
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 13 -- PARENT COMPANY ONLY INFORMATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income........................................................................ $ 4,455 $ 869 $ 2,705
Adjustments to reconcile net income to net cash used in operating activities:
(Increase) decrease in other assets............................................. (199) 43 (43)
Undistributed earnings of subsidiary............................................ (4,738) (1,009) (2,753)
Increase (decrease) in other liabilities........................................ 138 (94) --
--------- --------- ---------
Net cash used in operating activities........................................... (344) (191) (91)
--------- --------- ---------
Cash Flows from Investing Activities:
Dividends received from subsidiary.............................................. -- -- 163
Additional investment in subsidiary............................................. -- (5,000) (6,810)
--------- --------- ---------
Net cash used in investing activities........................................... -- (5,000) (6,647)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock.......................................... 80 15 14,207
--------- --------- ---------
Net cash provided by financing activities....................................... 80 15 14,207
--------- --------- ---------
Net (decrease) increase in cash................................................... (264) (5,176) 7,469
Cash, January 1................................................................... 2,305 7,481 12
--------- --------- ---------
Cash, December 31................................................................. $ 2,041 $ 2,305 $ 7,481
--------- --------- ---------
--------- --------- ---------
</TABLE>
23
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 14 -- CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996 QUARTER ENDED
------------------------------------------
31-DEC 30-SEP 30-JUN 31-MAR
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Interest income...................................................... $ 8,983 $ 8,840 $ 8,542 $ 8,602
Interest expense..................................................... 2,905 2,972 2,884 2,966
--------- --------- --------- ---------
Net interest income................................................ 6,078 5,868 5,658 5,636
--------- --------- --------- ---------
(Recovery of) provision for possible loan losses..................... -- -- (750) 280
Net gains on sales of securities..................................... -- -- -- 14
Noninterest income................................................... 1,310 1,323 1,246 1,273
Noninterest expense.................................................. 4,783 5,048 6,073 5,324
--------- --------- --------- ---------
Income before income taxes......................................... 2,605 2,143 1,581 1,319
--------- --------- --------- ---------
Provision for income taxes........................................... 1,083 893 661 556
--------- --------- --------- ---------
Net income......................................................... $ 1,522 $ 1,250 $ 920 $ 763
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share............................................... $ 0.20 $ 0.17 $ 0.12 $ 0.10
--------- --------- --------- ---------
--------- --------- --------- ---------
Stock Data
Common stock price range: (1)
High............................................................... 9 7/8 7 7 1/8 6 3/4
Low................................................................ 7 6 3/16 6 3/8 6 1/16
</TABLE>
24
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 14 -- CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1995 QUARTER ENDED
----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
- - - ---------------------------------------------------------------- ------------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Interest income................................................. $ 8,819 $ 8,796 $ 8,544 $ 7,237
Interest expense................................................ 2,875 3,107 3,076 2,957
------ ------------- --------- -----------
Net interest income......................................... 5,944 5,689 5,468 4,280
------ ------------- --------- -----------
Provision for possible loan losses.............................. 314 900 200 124
Net losses on sales of securities............................... -- (620) -- --
Noninterest income.............................................. 1,281 1,379 1,337 1,636
Noninterest expense............................................. 5,202 6,833 5,997 5,262
------ ------------- --------- -----------
Income (loss) before income taxes........................... 1,709 (1,285) 608 530
------ ------------- --------- -----------
Provision for income taxes (benefits)........................... 707 (377) 178 185
------ ------------- --------- -----------
Net income (loss)........................................... $ 1,002 $ (908) $ 430 $ 345
------ ------------- --------- -----------
------ ------------- --------- -----------
Net income (loss) per share................................. $ 0.13 $ (0.12) $ 0.06 $ 0.05
------ ------------- --------- -----------
------ ------------- --------- -----------
STOCK DATA
Common stock price range: (1)
High.......................................................... 6 1/8 6 5/8 5 1/4 5 1/4
Low........................................................... 5 7/16 4 3/4 4 5/8 4 5/16
</TABLE>
- - - ------------------------
(1) The common stock is listed on the American Stock Exchange ('AMEX') under the
symbol, 'SCK'. The preceding table sets forth the high and low closing
prices on a per share basis for the common stock as reported by the AMEX for
the periods indicated.
NOTE 15 -- REGULATORY MATTERS
The Company became a member of the Federal Reserve System effective July 1,
1996. The Company's primary regulator is now the Federal Reserve Board.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by the regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject. As of December
31, 1995, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well-capitalized under the regulatory
25
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 15 -- REGULATORY MATTERS (CONTINUED)
framework for prompt corrective action. As of December 31, 1996, the Bank
continued to meet the requirements to be categorized as well-capitalized,
maintaining total risk-based, Tier I risk-based and Tier I leverage ratios as
set forth in the following table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- -----------------------
FOR CAPITAL FOR CAPITAL
ACTUAL PROMPT PROMPT
-------------------- CORRECTIVE CORRECTIVE
DOLLARS IN THOUSANDS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- - - --------------------------------------------- --------- --------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (1).......................... $ 49,917 11.86% $ 33,676 8.00% $ 42,095 10.00%
Tier 1 Capital (1)......................... $ 44,970 10.68% $ 16,838 4.00% $ 25,257 6.00%
Leverage Capital (2)....................... $ 44,970 9.51% $ 18,908 4.00% $ 23,635 5.00%
As of December 31, 1995:
Total Capital (1).......................... $ 44,634 11.39% $ 31,342 8.00% $ 39,170 10.00%
Tier 1 Capital (1)......................... $ 39,727 10.14% $ 15,671 4.00% $ 23,502 6.00%
Leverage Capital (2)....................... $ 39,727 8.59% $ 18,493 4.00% $ 23,115 5.00%
</TABLE>
- - - ------------------------
(1) Ratio of Total and Tier 1 capital to risk-weighted assets.
(2) Ratio of Tier 1 capital to average assets.
NOTE 16 -- TRANSACTIONS WITH DIRECTORS & OFFICERS
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with its directors, principal
officers, their immediate families, and affiliated companies in which they are
principal shareholders. Any such transactions are on the same terms, including
interest rates and collateral requirements, as those prevailing at the time for
comparable transactions with others. These related parties were indebted to the
Company for loans totaling approximately $2.0 million, $2.0 million, and $2.5
million as of December 31, 1996, 1995, and 1994, respectively. New loans granted
in 1996 and 1995 were $490,000 and $714,000, respectively; repayments were
$581,000, $1.1 million, respectively.
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the
Company's financial instruments. However, there are inherent weaknesses in any
estimation technique. Therefore, for substantially all financial instruments
except marketable securities with quoted market prices, the fair value estimates
presented herein are not necessarily indicative of the amounts the Company could
have realized in sales transactions at either December 31, 1996 or 1995. The
estimated fair value amounts for 1996 and 1995 have been measured as of their
respective year ends, and have not been reevaluated or updated for purposes of
these consolidated financial statements subsequent to those respective dates. As
such, the estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at each
year end.
26
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following information should not be interpreted as an estimate of the
fair value of the entire company since a fair value calculation is only required
for a limited portion of the Company's assets.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents........................................ $ 33,768 $ 33,768 $ 29,088 $ 29,088
Investments:
Securities available-for-sale.................................. 74,533 74,533 92,825 92,825
Investment in Federal Home Loan Bank stock, at cost............ 1,450 1,450 1,205 1,205
Investment in Federal Reserve Bank stock, at cost.............. 607 607 -- --
Loans, net (excludes nonaccrual loans):
Commercial..................................................... 159,118 160,112 146,609 147,595
Real estate, construction...................................... 8,429 8,469 4,416 4,451
Real estate, mortgage.......................................... 103,289 104,565 107,048 109,379
Consumer....................................................... 73,493 73,995 57,383 58,427
Less: Allowance for possible loan losses....................... 4,947 4,947 5,734 5,734
Accrued interest receivable...................................... 3,931 3,931 4,297 4,297
---------- ---------- ---------- ----------
Total financial assets......................................... $ 453,671 $ 456,483 $ 437,137 $ 441,533
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FINANCIAL LIABILITIES:
Deposits:
Deposits payable on demand..................................... $ 270,093 $ 270,093 $ 260,679 $ 260,679
Deposits with fixed maturities................................. 145,233 145,347 146,132 146,663
Short-term borrowings............................................ 6,940 6,940 4,883 4,883
---------- ---------- ---------- ----------
Total financial liabilities.................................... $ 422,266 $ 422,380 $ 411,694 $ 412,225
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swap agreements in a net payable position........ $ -- $ (900) $ -- $ --
</TABLE>
This disclosure of fair value amounts does not include the fair values of
any intangible assets, such as core deposit intangibles, or loan servicing
rights.
The carrying values of certain financial instruments approximated their fair
values. These financial instruments include cash and due from banks,
interest-bearing deposits in banks, Federal funds sold and purchased, customers'
acceptance liability, accrued interest receivable, demand deposits, other
short-term borrowings, acceptances outstanding, and other liabilities that are
considered financial instruments. Carrying values were assumed to approximate
fair values for these financial instruments because they are short term in
nature and their recorded amounts approximate fair values or are receivable or
payable on demand.
27
<PAGE>
SC BANCORP AND ITS SUBSIDIARY, SOUTHERN CALIFORNIA BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value amounts of investment securities were based on quoted market
prices.
For purposes of these fair value calculations, the aggregate fair value of
the loan portfolio, excluding nonaccrual loans, was adjusted by a related
portion of the allowance for possible loan losses. That portion of the allowance
for possible loan losses primarily represents the credit risk associated with
loans that reprice within relatively short time frames. The fair values of loans
that do not reprice within relatively short time frames were calculated using
discounted cash flow models based on the maturities of the loans. The discount
rates, which were based on market interest rates for similar types of loans,
incorporated adjustments for credit risk. The fair values of nonaccrual loans
with recorded book values of $2.8 million and $1.4 million at December 31, 1996
and 1995, respectively, were not estimated because it was not practical to
reasonably estimate the amount or timing of future cash flows for such loans.
The fair market values of the interest rate swap agreements are based on quoted
market prices.
For deposits with defined maturities, the fair values were calculated using
discounted cash flow models based on market interest rates for different product
types and maturity dates for which the deposits were held.
The fair value of loan commitments is not material to the financial
statements taken as a whole.
28
