<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
August 28, 1997
Date of Report (Date of Earliest Event Reported)
------------------------
WESTERN BANCORP
(Exact Name of Registrant As Specified In Its Charter)
------------------------
CALIFORNIA
(State or Other Jurisdiction of Incorporation)
------------------------
0-13551 95-3863296
(Commission File Number) (IRS Employer Identification No.)
4100 NEWPORT PLACE, 9TH FLOOR
NEWPORT BEACH, CALIFORNIA 92660
(Address of Principal Executive Offices)(Zip Code)
(714) 863-2300
(Registrant's Telephone Number, including Area Code)
(Former Name or Former Address, If Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS.
On July 30, 1997, Western Bancorp ("Western") entered into an Agreement and
Plan of Merger, by and among Western, Western Bank and Santa Monica Bank,
pursuant to which Santa Monica Bank will merge with a subsidiary of Western. In
connection therewith, Western hereby files (i) the audited statements of
condition of Santa Monica Bank for the years ended December 31, 1996 and 1995
and the related statements of operations, changes in stockholders' equity and
cash flows for the years ended December 31, 1996, 1995 and 1994; (ii) the
Independent Auditors' Report and Report of Independent Public Accountants
therefor; and (iii) the unaudited statements of condition of Santa Monica Bank
as of June 30, 1997 and 1996 and the related statements of income, changes in
stockholders' equity and cash flows for the six months ended June 30, 1997 and
1996. A table of contents follows.
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------------------------------------------------------------------------------------------------------- -----
<S> <C>
Statements of Condition of Santa Monica Bank for years ended
December 31, 1996 and 1995................................................................................ 3
Statements of Operations of Santa Monica Bank for years ended
December 31, 1996, 1995 and 1994.......................................................................... 4
Statements of Changes in Stockholders' Equity of Santa Monica Bank
for years ended on December 31, 1996, 1995 and 1994....................................................... 5
Statements of Cash Flows of Santa Monica Bank for years ended December 31, 1996, 1995 and 1994............. 6
Notes to Financial Statements of Santa Monica Bank......................................................... 7
Independent Auditors' Report of Deloitte & Touche LLP...................................................... 23
Report of Independent Public Accountants by Arthur Andersen LLP............................................ 24
Unaudited Statements of Condition of Santa Monica Bank for six months ended
June 30, 1997 and 1996.................................................................................... 25
Unaudited Statements of Operations of Santa Monica Bank for six months ended
June 30, 1997 and 1996.................................................................................... 26
Unaudited Statements of Changes in Stockholders' Equity of Santa Monica Bank
for six months ended June 30, 1997 and 1996............................................................... 27
Unaudited Statements of Cash Flows of Santa Monica Bank for six months
ended June 30, 1997 and 1996.............................................................................. 28
Notes to Unaudited Financial Statements of Santa Monica Bank............................................... 29
</TABLE>
In addition, attached hereto as Exhibit 99.1 and incorporated herein by this
reference is Santa Monica Bank's Current Report on Form F-3, dated May 31, 1996,
concerning the change in certifying accountants which took place in May 1996,
including the exhibits attached thereto.
2
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................................... $ 57,535,025 $ 53,302,225
Federal funds sold............................................................... 43,000,000 37,000,000
-------------- --------------
Cash and cash equivalents.................................................... 100,535,025 90,302,225
Investment securities available for sale......................................... 141,139,066 134,599,247
Loans, net....................................................................... 365,899,546 358,194,122
Bank premises and equipment, net................................................. 10,340,943 10,988,497
Other real estate owned.......................................................... 8,606,042 18,557,903
Accrued interest receivable...................................................... 3,496,127 3,402,983
Deferred tax asset............................................................... 796,447 1,738,961
Other assets..................................................................... 748,294 1,079,480
-------------- --------------
Total assets................................................................. $ 631,561,490 $ 618,863,418
-------------- --------------
-------------- --------------
LIABILITIES
Noninterest-bearing deposits..................................................... $ 172,161,860 $ 168,871,973
Interest-bearing deposits........................................................ 381,821,146 381,406,215
-------------- --------------
Total deposits............................................................... 553,983,006 550,278,188
Mortgage indebtedness............................................................ 1,981,863 2,000,500
Other liabilities................................................................ 2,621,314 2,118,326
-------------- --------------
Total liabilities............................................................ 558,586,183 554,397,014
-------------- --------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Capital stock (authorized, 10,000,000 shares of $3 par value; issued and
outstanding, 7,077,332 shares for 1996 and 1995)............................... 21,231,996 21,231,996
Surplus.......................................................................... 2,982,631 2,982,631
Undivided profits................................................................ 48,211,600 39,656,939
Unrealized holding gains on securities, net of income taxes of $381,985 and
$413,361 for 1996 and 1995, respectively....................................... 549,080 594,838
-------------- --------------
Total stockholders' equity................................................... 72,975,307 64,466,404
-------------- --------------
Total liabilities and stockholders' equity................................... $ 631,561,490 $ 618,863,418
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements.
3
<PAGE>
SANTA MONICA BANK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.......................................... $ 35,379,344 $ 34,822,229 $ 32,951,635
Interest on investment securities:
Taxable........................................................... 6,205,111 6,433,313 5,114,727
Tax-exempt........................................................ 1,081,468 1,306,353 1,618,892
Other interest income............................................... 2,648,535 3,116,450 2,134,057
------------- ------------- -------------
Total interest income............................................. 45,314,458 45,678,345 41,819,311
------------- ------------- -------------
INTEREST EXPENSE
Interest on deposits................................................ 13,303,545 13,998,103 12,238,462
Interest on other liabilities....................................... 194,801 207,492 182,355
------------- ------------- -------------
Total interest expense............................................ 13,498,346 14,205,595 12,420,817
------------- ------------- -------------
Net interest income................................................. 31,816,112 31,472,750 29,398,494
Provision for loan losses........................................... -- 2,000,000 3,542,000
------------- ------------- -------------
Net interest income after provision for loan losses................. 31,816,112 29,472,750 25,856,494
------------- ------------- -------------
NONINTEREST INCOME
Trust department income............................................. 3,160,453 3,059,546 3,019,658
Service charges on deposit accounts................................. 3,163,595 3,400,439 3,485,810
Other service charges, commissions and fees......................... 480,342 532,647 552,867
Other income........................................................ 220,139 216,394 218,409
------------- ------------- -------------
Total noninterest income.......................................... 7,024,529 7,209,026 7,276,744
------------- ------------- -------------
NONINTEREST EXPENSE
Salaries............................................................ 11,127,108 11,913,286 12,302,962
Profit sharing and other employee benefits.......................... 2,873,703 2,505,479 2,918,817
Net occupancy expense of bank premises.............................. 2,479,239 2,560,152 2,707,455
Furniture and equipment expense..................................... 1,580,679 1,614,476 1,814,671
Loss (gain) on sale of OREO......................................... 78,545 (400,449) (254,492)
FDIC assessment..................................................... 350,966 723,897 1,833,634
Legal fees.......................................................... 1,288,871 1,437,698 1,396,253
OREO related expenses............................................... 1,392,346 3,355,083 5,161,283
Other operating expense............................................. 4,585,995 4,663,468 4,350,643
------------- ------------- -------------
Total noninterest expense......................................... 25,757,452 28,373,090 32,231,226
------------- ------------- -------------
Income before income taxes.......................................... 13,083,189 8,308,686 902,012
Applicable income tax expense....................................... 3,466,929 3,041,346 380,728
------------- ------------- -------------
Net income.......................................................... $ 9,616,260 $ 5,267,340 $ 521,284
------------- ------------- -------------
------------- ------------- -------------
Net income per share................................................ $ 1.36 $ .74 $ .07
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
4
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAINS ON
SECURITIES
CAPITAL UNDIVIDED NET OF
STOCK SURPLUS PROFITS INCOME TAXES TOTAL
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994............... $ 21,231,996 $ 2,982,631 $ 33,868,315 $1,307,649 $ 59,390,591
Net income............................. -- -- 521,284 -- 521,284
Net change in unrealized holding gains
on investment securities available
for sale, net of income taxes........ -- -- -- (902,245) (902,245)
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1994............. 21,231,996 2,982,631 34,389,599 405,404 59,009,630
Net income............................. -- -- 5,267,340 -- 5,267,340
Net change in unrealized holding gains
on investment securities available
for sale, net of income taxes........ -- -- -- 189,434 189,434
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1995............. 21,231,996 2,982,631 39,656,939 594,838 64,466,404
Net income............................. -- -- 9,616,260 -- 9,616,260
Cash dividends at $.15 per share....... -- -- (1,061,599) -- (1,061,599)
Net change in unrealized holding gains
on investment securities available
for sale, net of income taxes........ -- -- -- (45,758) (45,758)
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1996............. $ 21,231,996 $ 2,982,631 $ 48,211,600 $ 549,080 $ 72,975,307
------------- ------------ ------------- ------------ -------------
------------- ------------ ------------- ------------ -------------
</TABLE>
See notes to financial statements.
5
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CASH FLOWS
INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 9,616,260 $ 5,267,340 $ 521,284
--------------- --------------- ---------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Net (accretion) amortization of premium/discount on
investments.................................................. (828,703) (5,589,303) 113,023
Gain on sale of investment securities.......................... -- -- (12,000)
Provision for loan losses...................................... -- 2,000,000 3,542,000
Write-downs of OREO............................................ 736,154 2,327,804 2,904,948
Accretion of deferred loan fees and costs...................... (701,414) (481,667) (501,121)
Loss (gain) on sale of OREO/premises and equipment............. 128,164 (414,127) (254,492)
Depreciation................................................... 1,291,145 1,303,780 1,402,000
Increase in accrued interest receivable........................ (93,144) (474,228) (737,339)
Decrease (increase) in other assets............................ 331,642 1,571,393 (1,032,761)
(Decrease) increase in accrued interest payable................ (19,200) 54,533 (35,523)
Deferred tax provision......................................... 973,890 983,631 2,451,313
Decrease in current income tax receivable...................... -- 2,253,366 9,595,834
Increase (decrease) in other liabilities....................... 522,188 849,579 (641,305)
--------------- --------------- ---------------
Total adjustments............................................ 2,340,722 4,384,761 16,794,577
--------------- --------------- ---------------
Net cash provided by operating activities...................... 11,956,982 9,652,101 17,315,861
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities.............. 174,287,012 391,140,000 149,440,273
Proceeds from sale of investment securities.................... -- -- 19,983,300
Purchase of investment securities.............................. (180,075,681) (352,795,444) (212,733,912)
Net (increase) decrease in loans............................... (9,413,816) (18,495,396) 36,410,051
Proceeds from sale of OREO/premises and equipment.............. 11,280,216 18,166,804 18,744,505
Capitalization of costs on OREO................................ (335,030) (1,888,794) --
Loan origination fees received................................. 656,180 766,639 722,552
Purchases of Bank premises and equipment....................... (747,647) (613,301) (527,231)
--------------- --------------- ---------------
Net cash (used in) provided by investing activities.......... (4,348,766) 36,280,508 12,039,538
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings
accounts..................................................... 1,521,538 (45,307,113) (262,742)
Net increase (decrease) in time deposits....................... 2,183,282 (9,694,541) (19,330,908)
Repayments of notes payable.................................... (18,637) (15,316) (130,287)
Dividends paid................................................. (1,061,599) -- --
--------------- --------------- ---------------
Net cash provided by (used in) financing activities.......... 2,624,584 (55,016,970) (19,723,937)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents............. 10,232,800 (9,084,361) 9,631,462
Cash and cash equivalents, beginning of year..................... 90,302,225 99,386,586 89,755,124
--------------- --------------- ---------------
Cash and cash equivalents, end of year........................... $ 100,535,025 $ 90,302,225 $ 99,386,586
--------------- --------------- ---------------
--------------- --------------- ---------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Loans transferred to OREO...................................... $ 1,752,933 $ 7,857,718 $ 8,154,367
OREO transferred to bank premises.............................. -- -- 280,740
Unrealized depreciation on investment securities available for
sale......................................................... (77,553) (321,072) (1,529,228)
</TABLE>
See notes to financial statements.
6
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Santa Monica Bank (the "Bank") are
in accordance with generally accepted accounting principles and conform to
practices within the banking industry.
(A.) NATURE OF OPERATIONS: The Bank's primary operations are related to
traditional banking activities, including the acceptance of deposits, the
lending and investing of money, and trust department operations. The Bank's
customers consist of small to mid-sized businesses and individuals located in
western Los Angeles County. The Bank operates 7 branches with the headquarters
located in the city of Santa Monica.
(B.) CASH AND CASH EQUIVALENTS: For the purpose of presentation in the
statements of cash flows, cash and cash equivalents are defined as those amounts
included in the balance-sheet caption "cash and due from banks" and "federal
funds sold."
(C.) INVESTMENT SECURITIES: Investment securities available for sale are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of stockholders' equity. Accretion of
discounts and amortization of premiums are recognized as an adjustment to
interest income. Realized gains or losses upon disposition are recognized in
earnings based upon the specific identification method.
(D.) LOANS: Loans are carried at amounts advanced less payments collected,
deferred net loan origination fees, unearned income and the allowance for loan
losses. Interest on loans is computed by methods which generally result in level
rates of return on principal amounts outstanding. Interest is accrued daily as
earned except where reasonable doubt exists as to collectibility of the loan, in
which case the accrual of income is discontinued.
Interest accruals may be continued for loans that have become contractually
past due ninety days when such loans are well secured and in the process of
collection and accordingly, management has determined such loans to be fully
collectible as to both principal and interest. For this purpose, loans are
considered well secured if they are collateralized by property having a
realizable value in excess of the amount of principal and accrued interest
outstanding or are guaranteed by a financially capable party. Loans are
considered to be in the process of collection if collection of the loan is
proceeding in due course either through legal action or through other collection
efforts which management reasonably expects to result in repayment of the loan
or its restoration to a current status in the near future.
When a loan is placed on nonaccrual status, all interest previously accrued
but uncollected is reversed against current period operating results. Income on
such loans is then recognized only to the extent that cash is received and where
the ultimate collection of the carrying amount of the loan is probable, after
giving consideration to borrowers' current financial condition, historical
repayment performance and other factors. Accrual of interest is resumed only
when (i) principal and interest are brought fully current and (ii) such loans
are either considered, in management's judgment, to be fully collectible or
otherwise become well secured and in the process of collection. Generally, under
regulatory guidelines a sustained period of repayment performance for a minimum
of six months must be achieved for such loans to be returned to accrual status.
On January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosure". These statements prescribe the
recognition criteria for loan impairment and the measurement methods for certain
impaired loans and
7
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
loans whose terms are modified in troubled debt restructurings. SFAS No. 114
states that a loan is impaired when it is probable that a creditor will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. The Bank measures impairment by
discounting expected future cash flows at the loan's effective interest rate, or
by reference to an observable market price, or the fair value of the collateral
for a collateral dependent loan. The effective interest rate is the contractual
rate adjusted for any deferred loan fees, premiums or discounts that existed at
the time the loans were originated or acquired. The adoption of SFAS No. 114, as
amended, did not have a material effect on the Bank's financial statements.
Troubled debt restructurings are those loans for which the Bank has, for
reasons related to borrowers' financial difficulties, granted concessions to
borrowers (including reductions of either interest or principal) that it would
not otherwise consider, whether or not such loans are secured or guaranteed by
others. Subsequent to the adoption of SFAS No. 114, troubled debt restructurings
have been accounted for as impaired loans in accordance with the provisions of
that Statement. Prior to the adoption of SFAS No. 114, troubled debt
restructurings involving only a modification of terms were accounted for
prospectively from the time of restructuring and, accordingly, no gain or loss
was recorded at the time of such restructuring unless the recorded investment in
such loans exceeded the total future cash receipts specified by the new loan
terms.
Loan losses are charged to the allowance for loan losses and recoveries are
credited to the allowance. The annual provision for loan losses charged to
operating expense and added to the allowance is determined based upon the
measurement of impairment for specifically identified impaired loans under the
provisions of SFAS No. 114, as well as economic conditions, volume, growth, past
losses and collection experience, risk characteristics of the portfolio and such
other factors which, in management's judgment, deserve current recognition.
These estimates are inherently uncertain and depend on the outcome of future
events. Regulatory authorities have in recent years required substantial
increases in the allowance for loan losses, in many cases, in recognition of the
inherent risk in the existing economic environment. Although management believes
that the level of the allowance is adequate to absorb losses inherent in the
loan portfolio, additional declines in the local economy or rising interest
rates may result in increasing losses that cannot reasonably be predicted at
this time.
Loan origination fees, net of associated costs, are deferred and recognized
over the life of the loan as an adjustment of the loan yield using the effective
interest method. Total unearned fees on loans as of December 31, 1996 and 1995
amounted to $1,357,658 and $1,402,199, respectively.
(E.) OTHER REAL ESTATE OWNED ("OREO") includes real property acquired in
full or partial satisfaction of loans through foreclosure, including direct
foreclosure or deed in lieu of foreclosure. Such loans are excluded from OREO
until the Bank has taken possession of the collateral. Prior to the adoption of
SFAS No. 114, loans collateralized by real property were considered in-substance
foreclosed, and thus included in OREO, when the borrower had little or no equity
in the collateral and had effectively abandoned control of the property or had
no economic interest to continue involvement in the property. Subsequent to
adoption of SFAS No. 114, such loans are excluded from OREO until the Bank has
taken possession of the collateral.
OREO is classified as held for sale and recorded at the property's estimated
fair value at the time of foreclosure less selling cost, which becomes its cost.
Subsequent declines in the property's fair value, taking into consideration
management's intended plans for disposition, less estimated costs to sell, are
reflected in
8
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OREO related expenses in the periods in which they become known. Costs of
holding OREO are reflected in OREO related expenses as incurred. Gains and
losses on sales of OREO are recognized in conformity with standards governing
accounting for sales of real estate, including criteria relating to the nature
of the property sold and the terms of the sale. Valuation estimates for OREO are
inherently uncertain. Although management believes it has adequately provided
for existing losses, further declines in real estate values could result in
additional losses being recorded in future periods.
(F.) PREMISES AND EQUIPMENT: Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation is charged to
operating expense over the estimated useful lives of the assets (buildings: 15
to 45 years; equipment: 3 to 30 years). Depreciation on buildings and equipment
is computed by use of the straight-line method. Leasehold improvements are
amortized by use of the straight-line method over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
Expenditures for remodelings and improvements are capitalized, and maintenance
and repairs are charged to expense as incurred.
(G.) FINANCIAL INSTRUMENTS: The Bank does not enter into any derivative
transaction, as defined by SFAS No. 119, other than standby letters of credits
and commitments to extend credit.
OTHER OFF-BALANCE-SHEET INSTRUMENTS. In the ordinary course of business the
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commercial letters of credit, and standby letters
of credit. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.
(H.) FAIR VALUES OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used by the Bank in estimating fair values of financial
instruments as disclosed herein:
CASH AND SHORT-TERM INSTRUMENTS. The carrying amounts of cash and
short-term instruments approximate their fair value.
AVAILABLE-FOR-SALE SECURITIES. Fair values for securities, excluding
restricted equity securities, are based on quoted market prices. The carrying
values of restricted equity securities approximate fair values.
LOANS RECEIVABLE. For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
Fair values for commercial real estate and commercial loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
DEPOSIT LIABILITIES. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
MORTGAGE INDEBTEDNESS. The fair value of the Bank's mortgage indebtedness
is estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
9
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCRUED INTEREST. The carrying amounts of accrued interest approximate
their fair values.
OFF-BALANCE-SHEET INSTRUMENTS. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standings.
(I.) INCOME TAXES: Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income.
(J.) EMPLOYEE RETIREMENT PLANS: The Bank records expense for contributions
to employee retirement plans during the years for which such contributions are
declared.
(K.) CAPITAL STOCK AND INCOME PER SHARE: Income per share is computed on
the basis of the weighted average number of common shares and equivalents
outstanding.
(L.) TRUST FEES: Trust fees are recorded on the accrual basis.
(M.) POSTRETIREMENT BENEFITS: Expense is provided for postretirement
benefits other than pensions during the years in which the employee's service is
rendered, based upon an estimate of the expected cost of providing such
benefits.
(N.) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. AVERAGE FEDERAL RESERVE BALANCES
The average cash reserve balances required to be maintained at the Federal
Reserve Bank under the Federal Reserve Act and Regulation D were approximately
$14.9 million and $13.6 million for the years ended December 31, 1996 and 1995,
respectively.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale with total amortized cost of
$29,323,453 as of December 31, 1996 and $32,600,650 as of December 31, 1995 were
pledged to secure trust funds and public deposits and for other purposes
required or permitted by law.
10
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)
The total amortized cost and aggregate fair values of investment securities
available for sale at December 31, 1996 were:
<TABLE>
<CAPTION>
GROSS GROSS
TOTAL UNREALIZED UNREALIZED
TYPE AND MATURITY GROUPING AMORTIZED COST GAIN LOSS FAIR VALUE
- ------------------------------------------------------ -------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
U.S. treasury securities:
Due within one year................................. $ 60,006,723 $ 185,465 $ -- $ 60,192,188
After one but within five years..................... 29,975,306 207,507 -- 30,182,813
U.S. government agency securities:
Due within one year................................. 36,317,079 -- 45,741 36,271,338
-------------- ------------ ----------- --------------
Total............................................. 126,299,108 392,972 45,741 126,646,339
-------------- ------------ ----------- --------------
Obligations of states and political subdivisions:
Due within one year............................... 5,176,198 88,737 -- 5,264,935
After one but within five years................... 8,733,114 494,678 -- 9,227,792
-------------- ------------ ----------- --------------
Total............................................. 13,909,312 583,415 -- 14,492,727
-------------- ------------ ----------- --------------
Total investment securities available
for sale........................................ $ 140,208,420 $ 976,387 $ 45,741 $ 141,139,066
-------------- ------------ ----------- --------------
-------------- ------------ ----------- --------------
</TABLE>
The Bank had a security gain of $7,200 in 1996.
The total amortized cost and aggregate fair values of investment securities
available for sale at December 31, 1995 were:
<TABLE>
<CAPTION>
GROSS GROSS
TOTAL UNREALIZED UNREALIZED
TYPE AND MATURITY GROUPING AMORTIZED COST GAIN LOSS FAIR VALUE
- ------------------------------------------------------ -------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
U.S. treasury securities:
Due within one year................................. $ 80,043,830 $ 40,570 $ -- $ 80,084,400
U.S. government agency securities:
Due within one year................................. 36,632,664 -- 29,057 36,603,607
-------------- ------------ ----------- --------------
Total............................................. 116,676,494 40,570 29,057 116,688,007
-------------- ------------ ----------- --------------
Obligations of states and political subdivisions:
Due within one year............................... 2,517,871 41,056 -- 2,558,927
After one but within five years................... 14,396,683 955,630 -- 15,352,313
-------------- ------------ ----------- --------------
Total............................................. 16,914,554 996,686 -- 17,911,240
-------------- ------------ ----------- --------------
Total investment securities available
for sale........................................ $ 133,591,048 $ 1,037,256 $ 29,057 $ 134,599,247
-------------- ------------ ----------- --------------
-------------- ------------ ----------- --------------
</TABLE>
4. LOANS
The Bank has limited its lending activity to its immediate service area,
resulting in a natural concentration of loans secured primarily by real estate
in western Los Angeles County. As a result, the
11
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LOANS (CONTINUED)
performance of the Bank's loan portfolio will be impacted by trends in the local
economy, to the extent such trends influence borrowers' repayment ability.
Classification of loans at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Real estate loans:
Conventional loans............................................................. $ 225,409,589 $ 229,253,833
Interim construction loans..................................................... 16,679,165 10,851,109
Commercial and industrial loans.................................................. 95,773,016 96,450,108
Loans to individuals for household, family and other consumer expenditures....... 36,148,612 31,822,528
All other loans (including overdrafts)........................................... 983,327 936,607
-------------- --------------
Gross loans...................................................................... 374,993,709 369,314,185
Less: unearned income............................................................ 139,147 87,739
allowance for possible loan losses........................................... 8,955,096 11,032,324
-------------- --------------
Total loans, net............................................................. $ 365,899,466 $ 358,194,122
-------------- --------------
-------------- --------------
</TABLE>
The following is a summary of the transactions in the allowance for loan
losses for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year........................................ $ 11,032,324 $ 14,897,660 $ 28,145,467
Recoveries credited to allowance.................................. 1,906,637 1,971,741 1,526,686
Losses charged to allowance....................................... (3,983,865) (7,837,077) (18,316,493)
------------- ------------- -------------
Net chargeoffs...................................................... (2,077,228) (5,865,336) (16,789,807)
Provision for loan losses charged to expense........................ -- 2,000,000 3,542,000
------------- ------------- -------------
Balance at end of year.............................................. $ 8,955,096 $ 11,032,324 $ 14,897,660
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The allowance for loan losses is an estimate involving both subjective and
objective factors and its measurement is inherently uncertain, pending the
outcome of certain events. Management's determination of the adequacy of the
allowance is based upon the measurement of impairment for specifically
identified impaired loans under the provisions of SFAS No. 114, as well as an
evaluation of economic conditions, growth, volume, past losses and collection
experience, risk characteristics of the portfolio and other factors which, in
management's judgment, deserve current recognition. Although management believes
the level of the allowance as of December 31, 1996 is adequate to absorb losses
inherent in the loan portfolio, additional deterioration in the economy of the
Bank's lending area or rising interest rates could result in levels of loan
losses that could not be predicted at that date.
12
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LOANS (CONTINUED)
Past due and non-accrual loans as of December 31 are as follows:
<TABLE>
<CAPTION>
PAST DUE OVER 90 DAYS
AND STILL ACCRUING
INTEREST NON-ACCRUAL
-------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
A) Commercial and industrial loans...................... $ -- $ -- $ 1,224,217 $ 3,444,082
B) Consumer loans....................................... -- -- 2,814,244 2,273,743
C) Real estate and construction loans................... -- -- 1,590,668 4,705,320
------------ ------------ ------------ -------------
Total............................................... $ -- $ -- $ 5,629,129 $ 10,423,145
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
The total non-accrual loan balance above includes restructured loans of
$1,443,682 and $2,183,874 at December 31, 1996 and 1995, respectively. During
1996 and 1995 income recognized on non-accruals was $0 and $0, respectively.
Interest income that would have been recorded under the original terms of
such loans was $590,749, $754,216 and $2,650,951 for the years ended December
31, 1996, 1995 and 1994, respectively.
The Bank reviews for impairment all loans which are 90 days or more
delinquent and not currently accruing interest. As permitted under SFAS No. 114,
impairment recognition need not be applied during a period of delay in payment
if the creditor expects to collect all amounts due, including principal and
interest, for the period of delay. As of December 31, 1996 the Bank had
classified $6,483,603 in loans as impaired. No specific allowance was
established for these loans under the provisions of SFAS No. 114. Generally,
this is due to identified losses on such loans having been charged off under
regulatory guidelines, or because sufficient collateral exists to provide for
recovery of the recorded loan amount. The average balance of impaired loans
during the year ended December 31, 1996 was $5,203,036 and interest income
recognized on such loans during such year was $230,784.
TRANSACTIONS INVOLVING DIRECTORS AND SHAREHOLDERS:
In the ordinary course of business, the Bank has granted loans to certain
directors, executive officers and the businesses with which they are associated.
All such loans and commitments to loan were made under the terms that are
consistent with the Bank's normal lending policies.
The following is an analysis of all activity of all such loans for the year
ending December 31 as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Outstanding balance, beginning of year.......................... $ 8,227,900 $ 8,889,457
Credit granted, including renewals.............................. -- 809,760
Repayments...................................................... (5,726,021) (1,471,317)
------------- -------------
Outstanding balance, end of year................................ $ 2,501,879 $ 8,227,900
------------- -------------
------------- -------------
</TABLE>
13
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. OTHER REAL ESTATE OWNED
A summary of the components of OREO at December 31, 1996 and 1995 is
presented below.
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Foreclosed assets................................................ $ 8,606,042 $ 18,557,903
------------ -------------
Total OREO................................................... $ 8,606,042 $ 18,557,903
------------ -------------
------------ -------------
</TABLE>
6. BANK PREMISES AND EQUIPMENT
The following is a summary of the major categories of bank premises and
equipment:
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND BOOK
COST AMORTIZATION VALUE
------------- ---------------- -------------
<S> <C> <C> <C>
December 31, 1996
Premises, including land of $4,911,000....... $ 10,366,414 $ 3,450,957 $ 6,915,457
Equipment.................................... 9,590,814 7,757,022 1,833,792
Leasehold improvements....................... 5,792,595 4,200,901 1,591,694
------------- ---------------- -------------
Total.................................... $ 25,749,823 $ 15,408,880 $ 10,340,943
------------- ---------------- -------------
------------- ---------------- -------------
December 31, 1995
Premises, including land of $4,850,000....... $ 10,560,304 $ 3,506,974 $ 7,053,330
Equipment.................................... 9,410,320 7,273,017 2,137,303
Leasehold improvements....................... 5,691,182 3,893,318 1,797,864
------------- ---------------- -------------
Total.................................... $ 25,661,806 $ 14,673,309 $ 10,988,497
------------- ---------------- -------------
------------- ---------------- -------------
</TABLE>
Depreciation included in operating expenses was $1,291,145 in 1996,
$1,303,780 in 1995 and $1,402,000 in 1994. Included in operating expenses are
net rental payments for bank premises and equipment of $1,261,449 in 1996,
$1,300,404 in 1995 and $1,331,892 in 1994.
The future minimum rental commitments, primarily representing noncancelable
operating leases for premises, were as follows at December 31, 1996:
<TABLE>
<CAPTION>
MINIMUM
RENTAL
PERIOD COMMITMENTS
- ------------------------------------------------------------------------------- -------------
<S> <C>
1997........................................................................... $ 1,125,756
1998........................................................................... 1,125,756
1999........................................................................... 1,125,756
2000........................................................................... 920,669
2001........................................................................... 825,417
Thereafter..................................................................... 1,667,744
-------------
Total...................................................................... $ 6,791,098
-------------
-------------
</TABLE>
Certain of these leases contain renewal or purchase options, escalation
clauses, related guarantees and obligations assumed which are immaterial.
14
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEPOSITS
Interest expense for the years ended December 31, 1996, 1995 and 1994
relating to interest-bearing deposits is set forth as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Demand, interest-bearing........................ $ 1,125,869 $ 1,303,998 $ 1,361,871
Money market and savings........................ 9,273,846 9,889,963 8,297,028
Time certificates of deposit:
Under $100,000................................ 1,838,113 1,776,939 1,414,480
$100,000 and over............................. 1,065,717 1,027,203 1,165,083
------------- ------------- -------------
Interest expense on deposits................ $ 13,303,545 $ 13,998,103 $ 12,238,462
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Bank made interest payments of $13,514,230, $14,205,595 and $12,420,817
during the years ended December 31, 1996, 1995 and 1994, respectively.
8. INCOME TAXES
The Bank made tax payments of $2,236,498 and $1,770,800 during the years
ended December 31, 1996 and 1995, respectively. The Bank received refunds of $0,
$2,660,977 and $12,015,613 in 1996, 1995 and 1994, respectively.
The components for the three years ended December 31, 1996 of income tax
expense (benefit) were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Current provision (benefit)
Federal.......................................... $ 2,478,832 $ 2,027,901 $ (2,071,385)
State............................................ 14,207 29,814 800
------------ ------------ -------------
2,493,039 2,057,715 (2,070,585)
------------ ------------ -------------
Deferred provision (benefit)
Federal.......................................... 99,327 194,912 2,248,049
State............................................ 874,563 788,719 203,264
------------ ------------ -------------
973,890 983,631 2,451,313
------------ ------------ -------------
Total.......................................... $ 3,466,929 $ 3,041,346 $ 380,728
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
15
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
COMPONENTS OF NET DEFERRED TAX ASSET FOR THE YEARS ENDED DECEMBER 31:
<TABLE>
<CAPTION>
1996 1995
TAX EFFECT TAX EFFECT
------------- -------------
<S> <C> <C>
Deferred tax liabilities
Depreciation.................................................. $ 65,303 $ 205,872
California franchise tax...................................... -- 28,598
Unrealized gains on securities................................ 381,985 413,361
Prepaids...................................................... 245,911 356,342
------------- -------------
Gross deferred liability.................................... 693,199 1,004,173
------------- -------------
Deferred tax assets
Bad debt and loan loss deductions............................. (1,559,225) (4,011,095)
Reserve for post-employment................................... (498,150) (398,569)
OREO charge-offs.............................................. (1,429,415) (1,931,955)
CA franchise tax.............................................. (293,497) --
AMT credit.................................................... (18,043) (293,578)
State NOL..................................................... (284,862) (357,008)
Other......................................................... (26,486) (172,969)
------------- -------------
Gross deferred asset............................................ (4,109,678) (7,165,174)
Valuation allowance............................................. 2,620,032 4,422,040
------------- -------------
Net deferred tax asset...................................... $ (796,447) $ (1,738,961)
------------- -------------
------------- -------------
</TABLE>
Valuation allowances were established to the extent uncertainty exists as to
the recoverability of the deferred tax asset as of December 31, 1996 and 1995.
During 1996 and 1995, the valuation allowance was reversed by approximately $1.8
million due to management's reassessment of the ultimate realizability of the
deferred tax asset.
A reconciliation of the Statutory Federal Income Tax Rate with the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
PERCENT OF PERCENT OF PERCENT OF
PRETAX INCOME PRETAX INCOME PRETAX LOSS
--------------- --------------- ---------------
<S> <C> <C> <C>
Tax expense at statutory rate:..................................... 35.00% 35.00% 35.00%
Tax-exempt interest................................................ (2.72) (4.97) (62.77)
State taxes, net of federal benefit................................ 7.40 6.50 5.93
Executive life insurance........................................... 0.22 0.26 (7.30)
Valuation allowance................................................ (12.16) (1.25) 71.14
Other permanent items.............................................. (1.24) 1.06 0.21
------ ------ ------
Total.......................................................... 26.50% 36.60% 42.21%
------ ------ ------
------ ------ ------
</TABLE>
As of December 31, 1996, the Bank has a net operating loss carryforward for
state income tax purposes of $4,913,603 of which $1,979,801 expires in 1998,
with the remainder expiring in 1999.
16
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank's commitments under standby letters of credit amounted to
$2,226,243 on December 31, 1996 and $1,291,293 on December 31, 1995.
At December 31, 1996 and 1995, the Bank had outstanding undisbursed loan
commitments of $44,016,458 and $68,355,000, respectively. The Bank considers
these commitments in its determination of the adequacy of the allowance for loan
losses.
The Bank faces legal claims in the ordinary conduct of its business which,
in the opinion of counsel and the judgment of management, will not materially
affect its financial position or results of operations.
10. COMMON STOCK
California banking law places the following restrictions on the availability
of surplus and undivided profits for dividend purposes: "A bank may not make
distribution to its shareholders in excess of the lesser of (1) retained
earnings or (2) net income for its last three fiscal years, less the amount of
any such distributions made by the bank to the shareholders of the bank during
such period." Therefore, the Bank could not pay dividends during the three years
ending December 31, 1996, unless approved by the State Banking Department. The
Bank applied and received approval for cash dividends during 1996.
The Bank had an incentive stock option plan which expired on January 15,
1993 and provided options to purchase 440,698 shares as of January 15, 1993 of
the Bank's common stock.
Options were granted at prices at least equal to the fair market value at
the time of the grant and were exercisable over periods of up to ten years.
The following is a summary of the transactions under the stock option plan:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of period............... 19,905 $ 21.12-$32.50 24,705 $ 6.84-$32.50
Expired................................................ (3,681) -- (4,800) --
----------- --------------- ----------- ---------------
Options outstanding, end of period..................... 16,224 $ 21.12-$32.50 19,905 $ 21.12-$32.50
----------- --------------- ----------- ---------------
----------- --------------- ----------- ---------------
</TABLE>
11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Bank using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Bank could realize in a current market exchange.
The use of different market
17
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents....................................... $ 100,535 $ 100,535 $ 90,302 $ 90,302
Investment securities available for sale........................ 141,139 141,139 134,599 134,599
Loans........................................................... 365,899 368,289 358,194 367,303
Accrued interest receivable..................................... 3,496 3,496 3,403 3,403
Off-balance-sheet instruments................................... 2,226 2,226 1,291 1,291
Liabilities:
Noninterest-bearing deposits.................................... $ 172,162 $ 172,162 $ 168,872 $ 168,872
Interest-bearing deposits....................................... 381,821 381,667 381,406 381,533
Mortgage indebtedness........................................... 1,982 1,982 2,001 2,001
</TABLE>
The fair value of investment securities available for sale is based on
quoted market prices, dealer quotes, and prices obtained from independent
pricing services. The fair value of loans, time deposits, other financial
instruments, commitments, and guarantees is estimated based on present values
using applicable risk-adjusted spreads to the U.S. Treasury curve to approximate
current entry-value interest rates applicable to each category of such financial
instruments.
No adjustment was made to the entry-value interest rates for changes in
credit of performing commercial loans for which there are no known credit
concerns. Management segregates loans in appropriate risk categories. Management
believes that the risk factor embedded in the entry-value interest rates along
with the general reserves applicable to the performing commercial loan portfolio
for which there are no known credit concerns result in a fair valuation of such
loans on an entry-value basis. The fair value of nonperforming loans with a
recorded book value of approximately $6 million and $10 million in 1996 and 1995
were not estimated because it is not practicable to reasonably assess the credit
adjustment that would be applied in the marketplace for such loans. Demand
deposits are shown at their face value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996 and 1995. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
18
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Bank provides post-retirement health care benefits to eligible retirees
as follows:
Employees hired before January 1, 1992 are eligible for retiree medical and
dental benefits when they reach age 65 or at age 62 with 15 years of service.
Employees hired during calendar year 1992 are eligible for retiree medical
and dental benefits when they reach age 62 with at least 15 years of service.
Employees hired on or after January 1, 1993 are not eligible for retirement
benefits.
A person with a title of Director for 5 years immediately before the date of
retirement will automatically qualify for benefits regardless of the person's
age at retirement.
The health care benefits for retirees and eligible dependents are the same
as for active employees and subject to the same limitations and exclusions. The
maximum monthly employer contribution for single retirees is $300 and retirees
with dependents is $600.
The cost of such benefits, which are primarily health care, is recognized in
the financial statements throughout an employee's active working career. The
cumulative effect of the adoption of this accounting method in 1993 of
$2,624,885 is being amortized over 20 years.
The periodic expenses for post-retirement benefits using a discount factor
of 7% for both 1996 and 1995 includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
HEALTH HEALTH HEALTH
CARE PLAN CARE PLAN CARE PLAN
---------- ---------- ----------
<S> <C> <C> <C>
Service cost............................................. $ 81,000 $ 96,400 $ 119,100
Interest cost............................................ 168,000 190,000 183,400
Amortization of transition obligation.................... 131,244 131,244 131,244
Amortization of unrecognized gains....................... (56,244) (47,700) (1,500)
---------- ---------- ----------
Total expense........................................ $ 324,000 $ 369,944 $ 432,244
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
19
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The actuarial and recorded liabilities for post-retirement benefits were as
follows:
<TABLE>
<CAPTION>
1996 1995
HEALTH CARE HEALTH CARE
PLAN PLAN
------------ ------------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees............................................................................ $ 1,863,912 $ 1,359,000
Fully eligible active plan participants............................................. 273,245 604,000
Other active plan participants...................................................... 788,025 853,000
------------ ------------
Accumulated post-retirement benefit obligation........................................ $ 2,925,182 $ 2,816,000
------------ ------------
------------ ------------
Funded status......................................................................... $ 2,925,182 $ 2,816,000
Unrecognized cumulative gains......................................................... 284,658 365,515
Unrecognized transition obligation.................................................... (2,100,000) (2,231,153)
------------ ------------
Accrued post-retirement benefit cost.................................................. $ 1,109,840 $ 950,362
------------ ------------
------------ ------------
</TABLE>
EMPLOYEE RETIREMENT PLANS
The Bank maintains a funded non-contributory profit sharing retirement plan
for all eligible employees with one year of continuous service. As of the last
day of a Plan year, the Board of Directors may in its sole discretion determine
whether the Bank shall make a contribution to the Plan. The extent of an
employee's participation is determined by length of service and salary level.
The Bank made a profit sharing contribution of $232,232 in 1996. No
contributions were made to the retirement plan in the years 1995 and 1994.
On September 1, 1995, the Bank introduced a 401(K) plan to its employees
meeting the eligibility requirements set forth above. Based on the provisions
set forth in the plan, employees can contribute up to 15% of their salaries for
a maximum contribution of $9,250. As of January 1, 1996, this amount was
increased to $9,500. Furthermore, the Board of Directors reserves the right to
approve matching of contributions based on its sole discretion. The Bank's
matching 401(K) plan contributions were made in 1996 amounting to $157,768.
13. REGULATORY EXAMINATIONS AND REGULATORY AGREEMENTS
All Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 1996, that
the Bank meets all capital adequacy requirements to which it is subject.
20
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY EXAMINATIONS AND REGULATORY AGREEMENTS (CONTINUED)
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. No conditions or events
have occurred since this notification that management believes will change the
institution's classification. The Bank's actual capital amounts and ratios are
also presented in the table.
<TABLE>
<CAPTION>
WELL CAPITALIZED
REQUIREMENTS UNDER
PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------------- ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk-Weighted Assets)........... $ 77,350,227 19.84% $ 31,191,000 8.00% $ 38,989,000 10.00%
Tier 1 Capital
(to Risk-Weighted Assets)........... 72,426,227 18.58 15,595,000 4.00 23,393,000 6.00
Tier 1 Capital
(to Adjusted Assets)................ 72,426,227 11.41 25,380,000 4.00 31,725,000 5.00
As of December 31, 1995:
Total Capital
(to Risk-Weighted Assets)........... $ 68,854,000 17.54% $ 31,408,000 8.00% $ 39,260,000 10.00%
Tier 1 Capital
(to Risk-Weighted Assets)........... 63,871,000 16.27 15,704,000 4.00 23,556,000 6.00
Tier 1 Capital
(to Adjusted Assets)................ 63,871,000 10.27 24,755,000 4.00 30,943,000 5.00
</TABLE>
21
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total interest income................ $ 11,121,442 $ 10,981,626 $ 11,392,554 $ 11,818,836 $ 45,314,458
Total interest expense............... 3,471,854 3,252,482 3,338,921 3,435,089 13,498,346
------------- ------------- ------------- ------------- -------------
Net interest income.................. 7,649,588 7,729,144 8,053,633 8,383,747 31,816,112
Provision for loan losses............ -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Net interest income after provision
for loan losses.................... 7,649,588 7,729,144 8,053,633 8,383,747 31,816,112
Total other operating income......... 1,717,114 1,700,398 1,684,112 1,922,905 7,024,529
Total other operating expense........ 6,876,962 6,599,328 6,060,095 6,221,067 25,757,452
------------- ------------- ------------- ------------- -------------
Income before income taxes........... 2,489,740 2,830,214 3,677,650 4,085,585 13,083,189
Applicable income taxes.............. 519,252 694,416 1,033,184 1,220,077 3,466,929
------------- ------------- ------------- ------------- -------------
Net income........................... $ 1,970,488 $ 2,135,798 $ 2,644,466 $ 2,865,508 $ 9,616,260
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per share................. $ .28 $ .30 $ .37 $ .41 $ 1.36
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
Total interest income................ $ 11,192,019 $ 11,567,279 $ 11,425,359 $ 11,493,688 $ 45,678,345
Total interest expense............... 3,446,885 3,574,124 3,553,984 3,630,602 14,205,595
------------- ------------- ------------- ------------- -------------
Net interest income.................. 7,745,134 7,993,155 7,871,375 7,863,086 31,472,750
Provision for loan losses............ 600,000 800,000 600,000 -- 2,000,000
------------- ------------- ------------- ------------- -------------
Net interest income after provision
for loan losses.................... 7,145,134 7,193,155 7,271,375 7,863,086 29,472,750
Total other operating income......... 1,788,247 1,709,846 1,807,421 1,903,512 7,209,026
Total other operating expense........ 8,073,279 7,031,396 6,781,320 6,487,095 28,373,090
------------- ------------- ------------- ------------- -------------
Income before income taxes........... 860,102 1,871,605 2,297,476 3,279,503 8,308,686
Applicable income taxes.............. 236,944 701,703 847,160 1,255,539 3,041,346
------------- ------------- ------------- ------------- -------------
Net income........................... $ 623,158 $ 1,169,902 $ 1,450,316 $ 2,023,964 $ 5,267,340
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per share................. $ .09 $ .16 $ .20 $ .29 $ .74
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Santa Monica Bank
We have audited the statement of condition of Santa Monica Bank (the "Bank")
as of December 31, 1995 and the related statements of operations, changes in
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Santa Monica Bank as of December 31, 1995,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
[SIG]
Deloitte & Touche LLP
Los Angeles, California
January 19, 1996
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Santa Monica Bank
We have audited the statement of condition of Santa Monica Bank as of
December 31, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements, referred to above, present fairly,
in all material respects, the financial position of Santa Monica Bank as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
[SIG]
Arthur Andersen LLP
Los Angeles, California
January 21, 1997
24
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CONDITION--(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and Due from Banks.......................................................... $ 50,009,899 $ 58,581,888
Federal funds sold............................................................... 76,000,000 38,000,000
-------------- --------------
Cash and cash equivalents........................................................ 126,009,899 96,581,888
Investment securities available for sale......................................... 141,238,821 120,882,551
Loans............................................................................ 390,376,037 373,381,715
Less: unearned income.......................................................... 133,073 97,517
allowance for possible loan losses......................................... 7,991,762 9,964,156
-------------- --------------
Loans, net................................................................... 382,251,202 363,320,042
Bank premises and equipment, net................................................. 10,357,806 10,798,142
Other real estate owned.......................................................... 5,686,649 12,964,666
Accrued interest receivable...................................................... 3,820,702 3,643,110
Other assets..................................................................... 3,208,835 2,211,186
-------------- --------------
Total assets................................................................... $ 672,573,914 $ 610,401,585
-------------- --------------
-------------- --------------
LIABILITIES
Noninterest-bearing deposits..................................................... $ 178,906,630 $ 166,530,194
Interest-bearing deposits........................................................ 411,878,042 372,243,739
-------------- --------------
Total deposits................................................................. 590,784,672 538,773,933
Mortgage indebtedness............................................................ 1,971,991 1,991,452
Other liabilities................................................................ 2,554,254 1,652,182
-------------- --------------
Total liabilities.............................................................. 595,310,917 542,417,567
-------------- --------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Capital stock (authorized, 10,000,000 shares of $3 par value, issued and
outstanding, 7,077,332 shares for 1997 and 1996)............................... 21,231,996 21,231,996
Surplus.......................................................................... 2,982,631 2,982,631
Undivided profits................................................................ 52,601,312 43,409,359
Unrealized holding gains on securities, net of income taxes of $310,667 and
$250,192 for 1997 and 1996, respectively....................................... 447,058 360,032
-------------- --------------
Total stockholders' equity..................................................... 77,262,997 67,984,018
-------------- --------------
Total liabilities and stockholders' equity..................................... $ 672,573,914 $ 610,401,585
-------------- --------------
-------------- --------------
</TABLE>
See notes to unaudited financial statements.
25
<PAGE>
SANTA MONICA BANK
STATEMENTS OF OPERATIONS--(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.......................... $ 9,277,913 $ 8,771,166 $ 18,106,348 $ 17,556,946
Interest on Investment securities:
Taxable........................................... 1,869,215 1,445,146 3,580,519 2,894,089
Tax-exempt........................................ 208,045 269,374 449,277 557,437
Other interest income............................... 612,891 495,940 1,679,896 1,094,596
------------- ------------- ------------- -------------
Total interest income............................. 11,968,064 10,981,626 23,816,040 22,103,068
------------- ------------- ------------- -------------
INTEREST EXPENSE
Interest on deposits................................ 3,576,307 3,203,865 6,897,974 6,626,425
Interest on other liabilities....................... 49,332 48,617 97,600 97,911
------------- ------------- ------------- -------------
Total interest expense............................ 3,625,639 3,252,482 6,995,574 6,724,336
------------- ------------- ------------- -------------
Net interest income................................. 8,542,425 7,729,144 16,820,466 15,378,732
------------- ------------- ------------- -------------
Provision for loan losses........................... -- -- -- --
Net interest income after provision for loan
losses............................................ 8,542,425 7,729,144 16,820,466 15,378,732
------------- ------------- ------------- -------------
NONINTEREST INCOME
Trust department income............................. 836,540 710,529 1,611,556 1,443,960
Service charges on deposit accounts................. 800,333 797,570 1,569,941 1,606,202
Other service charges, commission and fees.......... 110,402 132,448 233,879 251,917
Other income........................................ 61,005 59,851 118,437 115,433
------------- ------------- ------------- -------------
Total noninterest income.......................... 1,808,280 1,700,398 3,533,813 3,417,512
------------- ------------- ------------- -------------
NONINTEREST EXPENSE
Salaries............................................ 2,835,615 2,761,382 5,591,472 5,466,133
Profit sharing and other employee benefits.......... 688,926 702,160 1,472,572 1,480,822
Net occupancy expense of bank premises.............. 621,215 620,650 1,250,528 1,244,815
Furniture and equipment expense..................... 410,882 395,226 817,852 785,607
FDIC assessment..................................... 17,100 18,471 73,194 258,471
Legal fees.......................................... 441,062 364,197 757,064 724,929
(Gain) loss on sale or OREO......................... (521,758) (55,907) (524,913) 76,889
OREO related expenses............................... (48,116) 602,291 7,101 1,123,076
Other operating expense............................. 1,203,078 1,190,858 2,241,304 2,315,548
------------- ------------- ------------- -------------
Total noninterest expense......................... 5,648,004 6,599,328 11,686,174 13,476,290
------------- ------------- ------------- -------------
Income before income taxes.......................... 4,702,701 2,830,214 8,668,105 5,319,954
Applicable income tax expense....................... 1,652,130 694,416 3,004,474 1,213,668
------------- ------------- ------------- -------------
Net income.......................................... $ 3,050,571 $ 2,135,798 $ 5,663,631 $ 4,106,286
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income per share................................ $ 0.43 $ 0.30 $ 0.80 $ 0.58
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See notes to unaudited financial statements.
26
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY--(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAINS ON
SECURITIES
UNDIVIDED NET OF
CAPITAL STOCK SURPLUS PROFITS INCOME TAXES TOTAL
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995................. $ 21,231,996 $ 2,982,631 $ 39,656,939 $ 594,838 $ 64,466,404
Net income................................. -- -- 4,106,286 -- 4,106,286
Cash dividends at $.05 per share........... -- -- (353,866) -- (353,866)
Net change in unrealized holding gains
(losses) on investment securities
available for sale, net of income
taxes.................................... -- -- -- (234,806) (234,806)
------------- ------------ ------------- ------------ -------------
Balance, June 30, 1996..................... $ 21,231,996 $ 2,982,631 $ 43,409,359 $ 360,032 $ 67,984,018
------------- ------------ ------------- ------------ -------------
------------- ------------ ------------- ------------ -------------
Balance, December 31, 1996................. $ 21,231,996 $ 2,982,631 $ 48,211,600 $ 549,080 $ 72,975,307
Net income................................. -- -- 5,663,631 -- 5,663,631
Cash dividends at $.10 per share........... -- -- (1,273,919) -- (1,273,919)
Net change in unrealized holding gains
(losses) on investment securities
available for sale, net of income
taxes.................................... -- -- -- (102,022) (102,022)
------------- ------------ ------------- ------------ -------------
Balance, June 30, 1997..................... $ 21,231,996 $ 2,982,631 $ 52,601,312 $ 447,058 $ 77,262,997
------------- ------------ ------------- ------------ -------------
------------- ------------ ------------- ------------ -------------
</TABLE>
See notes to unaudited financial statements.
27
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CASH FLOWS--(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 5,663,631 $ 4,106,286
Adjustments to reconcile net income to net cash provided by operating
activities:
Net accretion of discount on investments..................................... (653,917) (637,112)
Accretion of deferred loan fees and costs.................................... (483,203) (356,960)
Depreciation................................................................. 336,165 517,631
Increase in accrued interest receivable...................................... (635,319) (240,412)
Decrease in other assets..................................................... 236,673 591,838
Decrease in accrued interest payable......................................... (9,554) (37,947)
Decrease in current income tax receivable.................................... 442,668 570,256
Increase in other liabilities................................................ 272,716 466,145
--------------- ---------------
Total adjustments.......................................................... (493,771) 873,439
--------------- ---------------
Net cash provided by operating activities.................................. 5,169,860 4,979,725
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities.................................. 158,115,000 129,974,494
Purchase of investment securities............................................ (158,868,672) (116,655,772)
Net increase in loans........................................................ (16,351,656) (5,125,920)
Loan origination fees received............................................... 560,209 410,460
Proceeds from sale of other real estate owned................................ 2,919,393 5,593,417
Purchase of Bank premises and equipment...................................... (1,597,011) (1,037,619)
--------------- ---------------
Net cash provided by (used in) investing activities...................... (15,222,737) 13,159,060
--------------- ---------------
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits
and savings accounts....................................................... 29,345,303 (12,462,005)
Net increase (decrease) in time deposits..................................... 7,456,362 957,750
Dividends paid............................................................... (1,273,919) (354,867)
--------------- ---------------
Net cash provided by (used in) financing activities...................... 35,527,746 (11,859,122)
Net increase in cash and cash equivalents...................................... 25,474,874 6,279,663
Cash and cash equivalents, beginning of period................................. 100,535,025 90,302,225
--------------- ---------------
Cash and cash equivalents, end of period....................................... $ 126,009,899 $ 96,581,888
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to unaudited financial statements.
28
<PAGE>
SANTA MONICA BANK
NOTE 1: MANAGEMENT'S ASSERTION
In the opinion of management, the accompanying unaudited financial statement
of Santa Monica Bank, includes all adjustments necessary to present fairly its
financial position as of June 30, 1997 and 1996, its results of operations and
its cash flows for the six months then ended.
NOTE 2: INCOME TAXES FOR PERIOD ENDED 6-30-97 AND 6-30-96.
Total tax and expense amounted to $3,004,474 in 1997 and $1,213,668 in 1996
(effective rates of 34.6% and 22.8%, respectively) a total less than the amount
of $3,033,837 in 1997 and $1,808,784 in 1996 computed by the U.S. Federal Income
tax rate of 35% in 1997, 34% in 1996 to income before tax. The reasons for these
differences are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -------------------------
% OF % OF
PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME
------------ --------- ------------- ----------
<S> <C> <C> <C> <C>
Tax expense at statutory rate.................................. $ 3,033,837 35% $1,808,784 34%
Increase (reduction) in taxes resulting from:
Tax exempt interest............................................ (140,238) (1.6) (165,764) (3.1)
State franchise taxes, net of federal income taxes benefits.... 630,875 7.3 190,131 3.6
Other net...................................................... -- -- 517 --
Reduction in valuation allowance............................... (520,000) (6.1) (620,000) (11.7)
------------ --------- ------------- ----------
Total........................................................ $ 3,004,474 34.6% $1,213,668 22.8%
------------ --------- ------------- ----------
------------ --------- ------------- ----------
</TABLE>
NOTE 3: NEW ACCOUNTING PRONOUNCEMENT
In March of 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 Earnings Per Share
(EPS) which changes among other things the method of computing earnings per
share as follows:
Replacement of primary EPS with basic EPS. Basic EPS is computed by dividing
reported earnings available to common stockholders by weighted average shares
outstanding. Use of the average share price for the period when applying the
treasury stock method in computing diluted EPS.
Statement 128 is effective for financial statements ending after December
15, 1997. Early adoption is prohibited. Because of the limited number of options
outstanding, management does not believe the adoption of SFAS No. 128 will have
a material effect on the financial position or results of operations of the
Bank.
NOTE 4: CASH DIVIDENDS DECLARED
On April 30, 1997, the Board of Directors declared a cash dividend of $.10
per share, to be paid on May 30, 1997 to stockholders of record May 15, 1997.
NOTE 5: LETTERS OF CREDIT
Standby letters of credit total $1,904,299 at June 30, 1997, $1,106,793 at
June 30, 1996.
NOTE 6: LEGAL PROCEEDINGS
The Bank is continually faced with legal proceedings in the ordinary conduct
of its business, which in the option of the counsel and the judgement of
management will not materially affect its financial position.
29
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
The following exhibits are filed with this Current Report on Form 8-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedules
99.1 Santa Monica Bank's Current Report on Form F-3, dated May 31, 1997
</TABLE>
30
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunder duly authorized.
Dated: August 28, 1997
<TABLE>
<S> <C> <C>
WESTERN BANCORP
By: /s/ ARNOLD C. HAHN
-----------------------------------------
Arnold C. Hahn
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedules
99.1 Santa Monica Bank's Current Report on Form F-3, dated May 31, 1997
</TABLE>
32
<PAGE>
EXHIBIT 23.1
[ARTHUR ANDERSEN LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
Report of Independent Public Accountants dated January 21, 1997 on the financial
statements of Santa Monica Bank (the Bank) as of and for the year ended December
31, 1996 in this Form 8-K of Western Bancorp. It should be noted that we have
not audited any financial statements of the Bank subsequent to December 31, 1996
or performed any audit procedures subsequent to the date of our report.
[SIG]
Los Angeles, California
August 27, 1997
<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> 57,535 53,202 0 50,009
58,582
<INT-BEARING-DEPOSITS> 0 0 0 0
0
<FED-FUNDS-SOLD> 43,000 37,000 0 76,000
38,000
<TRADING-ASSETS> 0 0 0 0
0
<INVESTMENTS-HELD-FOR-SALE> 141,139 134,599 0 141,239
120,883
<INVESTMENTS-CARRYING> 0 0 0 0
0
<INVESTMENTS-MARKET> 0 0 0 0
0
<LOANS> 365,900 358,914 0 382,251
363,320
<ALLOWANCE> 8,955 11,032 0 7,992
9,964
<TOTAL-ASSETS> 631,561 618,863 0 672,574
610,402
<DEPOSITS> 553,983 550,278 0 590,785
538,774
<SHORT-TERM> 0 0 0 0
0
<LIABILITIES-OTHER> 2,621 2,518 0 2,554
1,652
<LONG-TERM> 1,982 2,000 0 1,972
1,991
0 0 0 0
0
0 0 0 0
0
<COMMON> 21,232 21,232 0 21,232
21,232
<OTHER-SE> 51,743 43,234 0 56,031
46,752
<TOTAL-LIABILITIES-AND-EQUITY> 631,561 618,863 0 672,574
610,402
<INTEREST-LOAN> 35,379 34,822 32,952 18,106
17,557
<INTEREST-INVEST> 7,287 7,740 6,734 4,030
3,452
<INTEREST-OTHER> 2,649 3,116 2,134 1,670
1,095
<INTEREST-TOTAL> 45,314 45,678 41,819 23,816
22,103
<INTEREST-DEPOSIT> 13,304 13,998 12,238 6,898
6,626
<INTEREST-EXPENSE> 13,498 14,206 12,421 6,996
6,724
<INTEREST-INCOME-NET> 31,816 31,473 29,398 16,820
15,379
<LOAN-LOSSES> 0 2,000 3,502 0
0
<SECURITIES-GAINS> 0 0 12 0
0
<EXPENSE-OTHER> 25,757 28,373 32,231 11,686
13,476
<INCOME-PRETAX> 13,083 8,309 902 8,668
5,320
<INCOME-PRE-EXTRAORDINARY> 13,083 8,309 902 8,668
5,320
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 9,616 5,267 521 5,664
4,106
<EPS-PRIMARY> 1.36 .74 .07 .80
.58
<EPS-DILUTED> 0 0 0 0
0
<YIELD-ACTUAL> 6.12 6.02 6.04 6.12
6.02
<LOANS-NON> 5,629 10,423 26,520 0
0
<LOANS-PAST> 0 0 5,054 0
0
<LOANS-TROUBLED> 1,444 2,184 4,056 0
0
<LOANS-PROBLEM> 0 0 0 0
0
<ALLOWANCE-OPEN> 11,032 14,898 28,145 11,032
14,898
<CHARGE-OFFS> 3,984 7,838 18,316 0
0
<RECOVERIES> 1,907 1,972 1,527 0
0
<ALLOWANCE-CLOSE> 8,955 11,032 14,898 7,992
9,964
<ALLOWANCE-DOMESTIC> 8,955 11,032 14,898 7,992
9,964
<ALLOWANCE-FOREIGN> 0 0 0 0
0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
0
</TABLE>
<PAGE>
EXHIBIT 99.1
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
FORM F-3
CURRENT REPORT
UNDER SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE MONTH OF MAY 1996
SANTA MONICA BANK
INCORPORATED IN THE STATE OF CALIFORNIA ON FEB. 3/1997
IRS EMPLOYER IDENTIFICATION NO. 95-1191910
1251 FOURTH STREET
SANTA MONICA, CALIFORNIA 90401
TELEPHONE NO. 310/394-9611
Page 1 of 3
<PAGE>
SANTA MONICA BANK
ITEM 10. CHANGES IN BANK'S CERTIFYING ACCOUNTANTS.
(a) On May 22, 1996 The Board of Directors of Santa Monica Bank (Bank) retained
Arthur Andersen LLP as the Bank's principal independent public accountant to
audit its financial statements for year ending December 31, 1996.
(b) There were no disagreements with the previous accountant, Deloitte & Touche
LLP, in connection with the audits of the last two fiscal years on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, that would have caused them to
make reference in connection with their report. Please refer to Exhibit B
dated June 4, 1996, for supplemental information regarding this matter.
(c) Deloitte & Touche LLP's reports on the financial statements of the Bank for
the past two fiscal years contained no adverse opinions or disclaimer of
opinions or qualifications.
(d) Exhibit A:
Letter from former accountant Deloitte & Touche LLP, addressed to the FDIC.
(e) The decision to change accountants was approved by the Audit Committee of
the Board and ratified by the Bank's Board of Directors on May 22, 1996.
Page 2 of 3
<PAGE>
SANTA MONICA BANK
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<S> <C> <C>
By: /s/ AUBREY L. AUSTIN
-----------------------------------------
Aubrey L. Austin
Date: May 31, 1996 PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ DARIO O. QUIROGA
-----------------------------------------
Dario O. Quiroga
Date: May 31, 1996 SVP/CASHIER/CHIEF FINANCIAL OFFICER
By: /s/ PABLO M. ERCILLA
-----------------------------------------
Pablo M. Ercilla
Date: May 31, 1996 VP/PRINCIPAL ACCOUNTING OFFICER
</TABLE>
Page 3 of 3
<PAGE>
EXHIBIT A
[LETTERHEAD OF DELOITTE & TOUCHE]
June 4, 1996
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Dear Sirs/Madams:
We have read the comments in Item 10 of Form F-3 of Santa Monica Bank (the
"Bank") for the month of May, 1996 and hereby provide the following response
thereto:
- We agree with the statement made in paragraph (c).
- We have no basis to agree or disagree with the statements made in
paragraphs (a) or (e).
- We do not agree with the statement made in paragraph (b). In connection
with our audit of the Bank's 1995 financial statements we had a
disagreement with the Bank's management regarding its identification and
disclosure of impaired loans under Statement of Financial Accounting
Standards No. 114 "Accounting by Creditors for Impairment of a Loan."
Specifically, the Bank's Senior Credit Administrator, who also has
responsibility for accounting and disclosure matters relating to the
allowance for credit losses and loan impairment matters, represented to us
that the Bank had no impaired loans as of December 31, 1995 and that he
intended to disclose such representation in the Bank's 1995 financial
statements. We asserted that, based upon our analysis and knowledge of the
loan portfolio, we could not issue our opinion on the Bank's financial
statements with such disclosure in the Bank's financial statements. The
matter was ultimately resolved when management produced a listing of
impaired loans and included the required disclosures in the Bank's
financial statements. We verbally communicated this disagreement to the
Bank's audit committee on March 19, 1996.
Yours truly,
[SIG]
<TABLE>
<S> <C> <C>
cc: Mr. George J. Masa Mr. Conrad Hewitt
Regional Director of Bank
Supervision Superintendent of Banks
Federal Deposit Insurance
Corporation State Banking Department
25 Ecker Street, Suite 2300 111 Pine Street, Suite 1100
San Francisco, California
San Francisco, California 94105 94111-5613
Mr. Aubrey L. Austin
President and Chief Executive
Officer
Santa Monica Bank
Santa Monica, California 90406
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EXHIBIT B
[LETTERHEAD OF SANTA MONICA BANK]
June 4, 1996
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429
Dear Sirs/Madames:
This Exhibit is written as a supplement to our Form F-3, CURRENT REPORT, Under
Section 13 of the Securities Exchange Act of 1934 For the Month of May 1996.
In Form F-3, management indicated in Item 10(b) that there were no disagreements
with the previous accountants, Deloitte & Touche LLP, in connection with their
audit of the last two fiscal years on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, that
would have caused Deloitte & Touche to make reference in connection with their
report.
We have become aware that Deloitte & Touche intends to comment in their letter
to you dated June 4, 1996, that, in their opinion, they do not agree with the
Bank's statement regarding this matter. We respectfully do not agree with their
conclusion and wish to present the Bank's position for you.
During 1995, the Bank's Senior Credit Administrator had various discussions with
Deloitte & Touche regarding the Bank's implementation of Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan"
(FAS 114). At the completion of these discussions, there existed a difference of
opinion regarding certain elements of implementing the provisions of FAS 114.
Management then conducted discussions with various other financial institutions
located within California of similar size and nature of operations to Santa
Monica Bank. Management reached the decision, based in part on these discussions
with peer institutions, and with active involvement of Dario Quiroga, the Bank's
Chief Financial Officer, to fully implement the accounting and disclosure
provisions of FAS 114. As the Chief Financial Officer of Santa Monica Bank,
Dario Quiroga has the ultimate responsibility for all matters dealing with
financial accounting and disclosure matters, including FAS 114.
The Bank's information and related financial statement disclosures regarding FAS
114 was then fully reviewed by Deloitte & Touche LLP. Deloitte & Touche rendered
their opinion on the 1995 financial statements of Santa Monica Bank without
making any reference to an exception to accounting principles or practices,
financial statement disclosure or audit scope or procedures.
* * * *
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[LETTERHEAD OF SANTA MONICA BANK]
May 31, 1996
Federal Deposit Insurance Corporation
25 Ecker Street, Suite 2300
San Francisco, CA 94105
Re: Engagement of Independent Public Accountant
Gentlemen:
This letter is to comply with the notification requirements set forth in
Paragraph 363.4(d), Notice of Engagement or Change of Accountants, of Part
363--Annual Independent Audits and Reporting Requirements, Chapter III, Title 12
of the Code of Federal Regulations.
On May 22, 1996, the Board of Directors of Santa Monica Bank retained Arthur
Andersen LLP (Andersen) as their independent public accountants for the purpose
of rendering certain professional services to this Institution. Those services
include an audit, in accordance with generally accepted auditing standards, of
Santa Monica Bank's financial statements as of and for the year ending December
31, 1996, an examination of management's assertion about the effectiveness of
the Institution's internal control structure over financial reporting as of
December 31, 1996, and the performance of certain procedures set forth in
Schedule A to Appendix A to Part 363 to test the Institution's compliance with
FDIC-designated laws and regulations.
The Audit Committee of the Board of Directors of Santa Monica Bank has reviewed
and satisfied themselves that Andersen has met the requirements set forth in
Guidelines 13, 14 and 15 and has previously complied with the requirements of
Guideline 16 as set forth in Appendix A to Part 363.
Very truly yours,
SANTA MONICA BANK
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By: /s/ AUBREY L. AUSTIN
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Aubrey L. Austin
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
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Enclosures
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Federal Deposit Insurance
cc: Corp. State Banking Department Deloitte & Touche LLP
Attn: Superintendent of
550 17th Street, N.W. Banks 1000 Wilshire Blvd.
300 So. Spring St., Ste.
Washington, D.C. 20429 15513 Los Angeles, CA 90017
Los Angeles, CA 90013
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