<PAGE>
PERSONAL AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
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
June 24, 1998
-------------
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)
<PAGE>
PERSONAL AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
Item 5. Other Events.
On April 17, 1998, Western Bancorp ("Western") entered into an Agreement
and Plan of Merger, by and among Western, Santa Monica Bank and Bank of Los
Angeles ("BKLA"), pursuant to which Bank of Los Angeles will merge with and
into Santa Monica Bank, a wholly-owned subsidiary of Western.
In connection therewith, Western hereby files in each case as filed with
the Federal Deposit Insurance Corporation, (i) BKLA's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 as Exhibit 99.1 hereto; (ii)
BKLA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 as
Exhibit 99.2 hereto; and (iii) BKLA's Current Reports on Form 8-K, dated
April 30, 1998 and May 6, 1998 as Exhibits 99.3 and 99.4.
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 Vavrinek, Trine, Day & Co., LLP
99.1 BKLA's Annual Report on Form 10-K for the fiscal year ended December
31, 1997
99.2 BKLA's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998
99.3 BKLA's Current Report on Form 8-K, dated April 30, 1998
99.4 BKLA's Current Report on Form 8-K, dated May 6, 1998
</TABLE>
2
<PAGE>
PERSONAL AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
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: June 24, 1998
WESTERN BANCORP
By: /s/ Arnold C. Hahn
-------------------------------------
Name: Arnold C. Hahn
Title: Executive Vice President and
Chief Financial Officer
3
<PAGE>
PERSONAL AND CONFIDENTIAL
ATTORNEY WORK PRODUCT
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
23.1 Consent of Vavrinek, Trine, Day & Co., LLP
99.1 BKLA's Annual Report on Form 10-K for the fiscal year ended December
31, 1997
99.2 BKLA's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998
99.3 BKLA's Current Report on Form 8-K, dated April 30, 1998
99.4 BKLA's Current Report on Form 8-K, dated May 6, 1998
</TABLE>
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our Independent Auditor's Report dated
January 23, 1998 regarding the balance sheets of Bank of Los Angeles as of
December 31, 1997 and 1996, and the related statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997, in the Form 8-K filed by Western Bancorp with the
Securities and Exchange Commission, and incorporated by reference in their Form
S-4, and the reference to our firm as experts.
VAVRINEK, TRINE, DAY & CO., LLP
June 23, 1998
Rancho Cucamonga, California
<PAGE>
FORM 10K -- ANNUAL REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
FDIC CERTIFICATE NUMBER 23790
BANK OF LOS ANGELES
CALIFORNIA 95-3612029
8901 SANTA MONICA BOULEVARD
WEST HOLLYWOOD, CALIFORNIA 90069
310/843-1455
SECURITIES REGISTERED UNDER 12(b) OF THE ACT
NONE
SECURITIES REGISTERED UNDER 12(g) OF THE ACT
COMMON STOCK, NO PAR VALUE
PREFERRED STOCK, NO PAR VALUE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 10 is
not contained herein, and will not be contained, to the best of the Bank's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10K or any amendment of this Form 10K. [ ]
Indicate by check mark whether the Bank (1) has filed all reports required to be
filed by Section 13 of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Bank was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES X NO
---- ----
Aggregate market value of voting stock held by non-affiliates of the Bank of Los
Angeles as of February 28, 1998 was $54,478,602.
Number of shares outstanding of common stock as of February 28, 1998 was
4,761,836.
<PAGE>
PART I
ITEM 1 - BUSINESS
BUSINESS OF BANK OF LOS ANGELES
Bank of Los Angeles ("BKLA") was incorporated under the laws of the State
of California on May 8, 1981 and began operations pursuant to a charter issued
by the California Commissioner of Financial Institutions on May 6, 1982. BKLA
is a community bank in Los Angeles County in the State of California, in the
cities of West Hollywood, Beverly Hills, Encino, Glendale and Culver City. The
corporate office and one branch is located at 8901 Santa Monica Boulevard, West
Hollywood, California. Other branches are located at: 9601 Wilshire
Boulevard, Beverly Hills, California; 9944 Santa Monica Boulevard, Beverly
Hills, California; 16861 Ventura Boulevard, Encino, California; 701 North Brand
Boulevard, Glendale, California; and 5399 Sepulveda Boulevard, Culver City,
California.
BKLA serves primarily middle market and small businesses, professional and
business borrowers and associated individuals with commercial banking needs.
BKLA also provides services to individuals and organizations in the communities
in which its branches are located. BKLA's business involves accepting demand,
savings, time, money market and NOW deposits.
BKLA acquired two financial institutions in 1997, both of which were
accounted for as purchase transactions. On April 1, 1997, BKLA acquired
American West Bank ("AWB"), which had $67,291,000 in total assets and two branch
offices. On December 31, 1997, BKLA acquired Culver National Bank ("CNB"),
which had $56,944,000 in total assets and one branch. The results of operations
of AWB are included in those of BKLA subsequent to April 1, 1997. Due to the
effective date of the CNB acquisition, the results of operations of CNB are not
included with those of BKLA in the year ending December 31, 1997. The balance
sheets of BKLA at December 31, 1997 do include the assets and liabilities of
both AWB and CNB.
SUMMARY OF CAPITAL STOCK
The authorized capital stock for BKLA consists of 75,000,000 shares of
BKLA Common Stock, no par value per share, of which 4,751,685 shares were issued
and outstanding as of December 31, 1997, and 25,000,000 shares of preferred
stock, without par value per share (the "BKLA Preferred Stock"), none of which
are issued and outstanding. BKLA has issued and outstanding 657,845 warrants to
purchase BKLA Common Stock for $3.75 per share, which terminate on December 1,
1998. BKLA has issued and outstanding options to purchase BKLA Common Stock, of
which 127,200 are exercisable at $4.00 per share and 132,800 are exercisable at
$6.90 per share.
The descriptions of BKLA capital stock set forth below are subject in all
respects to the California Financial Code, the California Corporations Code and
BKLA's Articles of Incorporation.
BKLA COMMON STOCK
RIGHTS. Each holder of BKLA Common Stock is entitled to one vote for each
share owned by him or her on all matters submitted to a vote of BKLA's
Shareholders, provided that BKLA's Shareholders are entitled to cumulative
voting rights in the election of directors. In the event of any liquidation,
dissolution or winding up of BKLA, the holders of BKLA Common Stock are entitled
to share equally and ratably in any assets remaining after the payment of all
debts and liabilities. Holders of BKLA Common Stock have
<PAGE>
no preemptive or other subscription or conversion rights. BKLA Common Stock is
not subject to redemption.
DIVIDENDS. Pursuant to the California Financial Code, BKLA may only
declare cash dividends from the lesser of its retained earnings to BKLA's net
income for the last three years (reduced by dividends paid during such period),
or in the event that BKLA does not have retained earnings or net income for the
last three years, from BKLA's net income for the preceding fiscal year,
provided BKLA obtains the prior written approval of the Commissioner of
Financial Institutions ("Commissioner").
BKLA PREFERRED STOCK
The Board of Directors of BKLA has broad authority to designate, and
establish the terms of, one or more series of preferred stock without
shareholder approval. Among other matters, the Board of Directors is authorized
to establish voting powers, designations, preferences and relative,
participating, optional or other special rights of each such series and any
qualifications, limitations and restrictions thereon. Holders of preferred
stock will not be held individually responsible as such holdings for any
contracts or engagements of BKLA, and shall not be liable for assessments to
restore impairments in the capital of BKLA. Holders of preferred stock, when
and if issued, may become senior to holders of BKLA Common Stock as to dividend,
voting, liquidation, or other rights. The issuance of preferred stock,
therefore, could adversely affect the voting power of holders of BKLA Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of BKLA. BKLA has no present plans to issue any shares of preferred
stock.
BKLA WARRANTS
BKLA has issued and outstanding 657,845 Warrants to purchase one share of
BKLA Common Stock at $3.75 per share. These Warrants will expire on December 31,
1998.
The Exercise Price and the number of shares of BKLA Common Stock issuable
upon exercise of each Warrant will be appropriately adjusted in the event of
certain events, including stock splits, stock combinations and stock dividends
with respect to BKLA Common Stock.
If any reclassification of the BKLA Common Stock or capital reorganization
of BKLA or any consolidation or merger of BKLA with or into another corporation
or any sale, lease or transfer to any person of all or substantially all of the
assets of BKLA shall be effected in such a way that the holders of the BKLA
Common Stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for BKLA Common Stock, then, upon exercise of the
Warrants, the holder of each of the outstanding Warrants shall have the right to
receive the kind and amount of shares of stock or other securities and property
receivable upon such reorganization, reclassification, consolidation, merger,
sale, lease or transfer by a holder of the number of shares of BKLA Common Stock
that such Warrant holder would have been entitled to receive upon the exercise
of such Warrant had the Warrant(s) been exercised immediately prior thereto.
The Warrants do not confer upon the holder any voting rights or any other rights
as a shareholder of BKLA.
OPTIONS
3
<PAGE>
BKLA has a Stock Option Plan that provides for the issuance of 361,432
shares of BKLA Common Stock to all employees, employee directors and
non-employee directors. At December 31, 1997, BKLA had granted 298,741
options to purchase one share of BKLA Common Stock, of which 127,200 can be
exercised at $4.00, 168,300 can be exercised at $6.90 and 3,241 can be
exercised at $3.75 to $44.30. Shares granted are subject to vesting and
expire ten years after grant date. Refer to page F-18 for additional
information on the Stock Option Plan.
The Stock Option Plan terminates March 23, 1998. Options granted at that
date will remain outstanding subject to vesting and expiration limitations
placed on each granted stock. In the event BKLA is dissolved, liquidated or is
reorganized, merged or consolidated with one or more corporations, and as a
result, BKLA is not the surviving corporation, or any capital reorganization
results in which more than 50 percent of voting shares are exchanged, all
granted options become exercisable within 30 days of the event.
COMPETITION
The banking and financial services business in California generally, and in
BKLA's market area specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. BKLA competes for loans,
deposits and customers for financial services with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market funds, credit
unions, and other non-bank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
BKLA. In order to compete with the other financial services providers, BKLA
relies principally upon local promotional activities, personal relationships
established by officers, directors and employees with its customers, and
specialized services tailored to meet its customers' needs. In those instances
where BKLA is unable to accommodate a customer's needs, BKLA may arrange for
those services to be provided by its correspondents. BKLA has six offices
located in Los Angeles County. Neither the deposits nor loans of the offices of
BKLA exceed 1% of all financial services companies located in the county in
which BKLA operates.
SUPERVISION AND REGULATION
GENERAL. As a state-chartered bank whose deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to the maximum extent provided
by law, BKLA is subject to supervision, examination and regulation by the
California Department of Financial Institutions and by federal bank regulatory
agencies. BKLA's primary federal bank regulatory agency is the FDIC. The
regulations of these agencies govern most aspects of BKLA's business, including
capital adequacy ratios, reserves against deposits, restrictions on the rate of
interest which may be paid on some deposit instruments, limitations on the
nature and amount of loans which may be made, the location of branch offices,
borrowings, and dividends. Supervision, regulation and examination of BKLA by
the regulatory agencies are generally intended to protect depositors and are not
intended for the protection of BKLA's shareholders.
RECENT LEGISLATION AND REGULATORY CHANGES
GENERAL. From time to time legislation is proposed or enacted which has
the effect of increasing the cost of doing business and changing the competitive
balance between banks and other financial and non-financial institutions.
Various federal laws enacted over the past several years have provided, among
other things, for the maintenance of mandatory reserves with the Federal Reserve
Bank on deposits by depository
4
<PAGE>
institutions (state reserve requirements have been eliminated); the phasing-out
of the restrictions on the amount of interest which financial institutions may
pay on certain of their customers' accounts; and the authorization of various
types of new deposit accounts, such as NOW accounts, "Money Market Deposit"
accounts and "Super NOW" accounts, designed to be competitive with money market
mutual funds and other types of accounts and services offered by various
financial and non-financial institutions. The lending authority and permissible
activities of certain non-bank financial institutions such as savings and loan
associations and credit unions have been expanded, and federal regulators have
been given increased authority and means for providing financial assistance to
insured depository institutions and for effecting interstate and cross-industry
mergers and acquisitions of failing institutions. These laws have generally had
the effect of altering competitive relationships existing among financial
institutions, reducing the historical distinctions between the services offered
by banks, savings and loan associations and other financial institutions, and
increasing the cost of funds to banks and other depository institutions.
Other legislation has been proposed or is pending before the United States
Congress which would effect the financial institutions industry. Such
legislation includes wide-ranging proposals to further alter the structure,
regulation and competitive relationships of the nation's financial institutions,
to reorganize the federal regulatory structure of the financial institutions
industry, to subject banks to increased disclosure and reporting requirements,
and to expand the range of financial services which banks and bank holding
companies can provide. Other proposals which have been introduced or are being
discussed would equalize the relative powers of savings and loan holding
companies and bank holding companies, and authorize such holding companies to
engage in insurance underwriting and brokerage, real estate development and
brokerage, and certain securities activities, including underwriting and dealing
in United States Government securities and municipal securities, sponsoring and
managing investment companies and underwriting the securities thereof. It
cannot be predicted whether or in what form any of these proposals will be
adopted, or to what extent they will effect the various entities comprising the
financial institutions industry.
Certain of the potentially significant changes which have been enacted in
the past several years are discussed below.
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), enacted on September 29,
1994, repealed the McFadden Act of 1927, which required states to decide
whether national or state banks could enter their state, and, effective June
1, 1997, allows banks to open branches across state lines. The Riegle-Neal
Act also repealed the 1956 Douglas Amendment to the Bank Holding Company Act,
which placed the same requirements on bank holding companies. The repeal of
the Douglas Amendment made it possible for bank holding companies to buy
out-of-state banks in any state after September 29, 1995, which, after June
1, 1997, may now be converted into interstate branches.
The Riegle-Neal Act permitted interstate banking to begin effective
September 29, 1995. The amendment to the Bank Holding Company Act permits bank
holding companies to acquire banks in other states provided that the acquisition
does not result in the bank holding company controlling more than ten percent of
the deposits in the United States, or 30 percent of the deposits in the state in
which the bank to be acquired is located. However, the Riegle-Neal Act also
provides that states have the authority to waive the state concentration limit.
Individual states may also require that the bank being acquired be in existence
for up to five years before an out-of-state bank or bank holding company may
acquire it.
The Riegle-Neal Act provides that, since June 1, 1997, interstate branching
and merging of existing banks is permitted, provided that the banks are at least
adequately capitalized and demonstrate good
5
<PAGE>
management. Interstate mergers and branch acquisitions were permitted at an
earlier time if the state choose to enact a law allowing such activity. The
states were also authorized to enact laws to permit interstate banks to branch
de novo.
On September 28, 1995, the California Interstate Banking and Branching
Act of 1995 ("CIBBA") was enacted and signed into law. CIBBA authorized
out-of-state banks to enter California by the acquisition of or merger with a
California bank that has been in existence for at least 5 years, unless the
California bank is in danger of failing or in certain other emergency
situations. CIBBA allows a California state bank to have agency
relationships with affiliated and unaffiliated insured depository
institutions and allows a bank subsidiary of a bank holding company to act as
an agent to receive deposits, renew time deposits, service loans and receive
payments for a depository institution affiliate.
PROPOSED EXPANSION OF SECURITIES UNDERWRITING AUTHORITY. Various bills
have been introduced in the United States Congress which would expand, to a
lesser or greater degree and subject to various conditions and limitations, the
authority of bank holding companies to engage in the activity of underwriting
and dealing in securities. Some of these bills would authorize securities firms
(through the holding company structure) to own banks, which could result in
greater competition between banks and securities firms. No prediction can be
made as to whether any of these bills will be passed by the United States
Congress and enacted into law, what provisions such a bill might contain, or
what effect it might have on the Bank.
EXPANSION OF INVESTMENT OPPORTUNITIES FOR CALIFORNIA STATE-CHARTERED BANKS.
Legislation enacted by the State of California has substantially expanded the
authority of California state-chartered banks to invest in real estate,
corporate stock and other corporate securities. National banks are governed in
these areas by federal law, the provisions of which are more restrictive than
California law. However, provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991, discussed below, limits state-authorized
activities to that available to national banks.
FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989.
GENERAL. On August 9, 1989, the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA") was signed into law. This legislation
has resulted in major changes in the regulation of insured financial
institutions, including significant changes in the authority of government
agencies to regulate insured financial institutions.
Under FIRREA, the Federal Savings and Loan Insurance Corporation ("FSLIC")
and the Federal Home Loan Bank Board were abolished and the FDIC was authorized
to insure savings associations, including federal savings associations, state
chartered savings and loans and other corporations determined to be operated in
substantially the same manner as a savings association. FIRREA established two
deposit insurance funds to be administered by the FDIC. The money in these two
funds is separately maintained and not commingled. The FDIC Permanent Insurance
Fund was replaced by the Bank Insurance Fund (the "BIF") and the FSLIC deposit
insurance fund was replaced by the Savings Association Insurance Fund (the
"SAIF").
DEPOSIT INSURANCE ASSESSMENTS. Under FIRREA, the premium assessments made
on banks and savings associations for deposit insurance were initially
increased, with rates set separately for banks and savings associations, subject
to statutory restrictions. The Omnibus Budget Reconciliation Act of 1990,
designed to address the federal budget deficit, increased the insurance
assessment rates for members of the BIF and the SAIF over that provided by
FIRREA, and eliminated FIRREA's maximum reserve-ratio
6
<PAGE>
constraints on the BIF. The FDIC raised BIF premiums to .23CENTS per $100 in
insured deposits for 1993 from a base of .12CENTS in 1990.
Effective January 1, 1994, the FDIC implemented a risk-based assessment
system, under which an institution's premium assessment is based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution, the likely amount of such loss, and the revenue needs of the
deposit insurance fund. As long as BIF's reserve ratio is less than a specified
"designated reserve ratio," 1.25%, the total amount raised from BIF members by
the risk-based assessment system may not be less than the amount that would be
raised if the assessment rate for all BIF members were .23CENTS per $100 in
insured deposits. The FDIC determined that the designated reserve ratio was
achieved on May 31, 1995. Accordingly, on August 8, 1995, the FDIC issued final
regulations adopting an assessment rate schedule for BIF members of 4CENTS to
31CENTS per $100 in insured deposits that became effective June 1, 1995. On
November 14, 1995, the FDIC further reduced the BIF assessment rates by 4CENTS
so that effective January 1, 1996, the premiums ranged from zero to 27CENTS per
$100 in insured deposits, but in any event not less than $2,000 per year.
Under the risk-based assessment system, a BIF member institution such as
BKLA is categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by its primary federal regulator (in BKLA's case, the
FDIC). The three supervisory categories are: financially sound with only a few
minor weaknesses (Group A), demonstrates weaknesses that could result in
significant deterioration (Group B), and poses a substantial probability of loss
(Group C). The capital ratios used by the FDIC to define well-capitalized,
adequately capitalized and undercapitalized are the same as in the FDIC's prompt
corrective action regulations (discussed below). The BIF assessment rates since
January 1, 1996 are summarized below; assessment figures are expressed in terms
of cents per $100 in insured deposits.
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1996
<TABLE>
<CAPTION>
Supervisory Group
------------------------
Capital Group Group A Group B Group C
------------------------------ ---------- ----------- ----------
<S> <C> <C> <C>
Well Capitalized 0 3 17
Adequately Capitalized 3 10 24
Undercapitalized 10 24 27
</TABLE>
The Deposit Insurance Funds Act of 1996, signed into law on September
30, 1996, eliminated the minimum assessment, commencing with the fourth
quarter of 1996. In addition, after December 31, 1996, banks are required to
share in the payment of interest on Financing Corp. ("FICO") bonds.
Previously, the FICO debt was paid out of the SAIF assessment base. The
assessments imposed on insured depository institutions with respect to any
BIF-assessable deposit will be assessed at a rate equal to 1/5 of the rate of
the assessments imposed on insured depository institutions with respect to
any SAIF-assessable deposit. For the first quarter of 1997, the SAIF-FICO
assessment rate was 6.48CENTS per $100 in insured deposits. Accordingly, the
BIF-FICO assessment rate was 1.296CENTS per $100 in insured deposits. For
the second quarter of 1997, the SAIF-FICO assessment rate was 6.5CENTS per
$100 in insured deposits and the BIF-FICO assessment rate was 1.3CENTS per
$100 in insured deposits. Although the FICO assessment rates are annual
rates, they are subject to change quarterly. Since the FICO bonds do not
mature until the year 2019, it is conceivable that banks will continue to
share in the payment of the interest on the bonds until then.
7
<PAGE>
With certain limited exceptions, FIRREA prohibits a bank from changing its
status as an insured depository institution with the BIF to the SAIF and
prohibits a savings association from changing its status as an insured
depository institution with the SAIF to the BIF, without the prior approval of
the FDIC.
FDIC RECEIVERSHIPS. Pursuant to FIRREA, the FDIC may be appointed
conservator or receiver of any insured bank or savings association. In
addition, FIRREA authorized the FDIC to appoint itself as sole conservator or
receiver of any insured state bank or savings association for any, among others,
of the following reasons: (i) insolvency of such institution; (ii) substantial
dissipation of assets or earnings due to any violation of law or regulation or
any unsafe or unsound practice; (iii) an unsafe or unsound condition to transact
business, including substantially insufficient capital or otherwise; (iv) any
willful violation of a cease and desist order which has become final; (v) any
concealment of books, papers, records or assets of the institution; (vi) the
likelihood that the institution will not be able to meet the demands of its
depositors or pay its obligations in the normal course of business; (vii) the
incurrence or likely incurrence of losses by the institution that will deplete
all or substantially all of its capital with no reasonable prospect for the
replenishment of the capital without federal assistance; and (viii) any
violation of any law or regulation, or an unsafe or unsound practice or
condition which is likely to cause insolvency or substantial dissipation of
assets or earnings, or is likely to weaken the condition of the institution or
otherwise seriously prejudice the interest of its depositors.
As a receiver of any insured depository institution, the FDIC may liquidate
such institution in an orderly manner and make such other disposition of any
matter concerning such institution as the FDIC determines is in the best
interests of such institution, its depositors and the FDIC. Further, the FDIC
shall as the conservator or receiver, by operation of law, succeed to all
rights, titles, powers and privileges of the insured institution, and of any
stockholder, member, account holder, depositor, officer or director of such
institution with respect to the institution and the assets of the institution;
may take over the assets of and operate such institution with all the powers of
the members or shareholders, directors and the officers of the institution and
conduct all business of the institution; collect all obligations and money due
to the institution and preserve; and conserve the assets and property of such
institution.
ENFORCEMENT POWERS. Some of the most significant provisions of FIRREA were
the expansion of regulatory enforcement powers. FIRREA has given the federal
regulatory agencies broader and stronger enforcement authorities reaching a
wider range of persons and entities. Some of those provisions included those
which: (i) expanded the category of persons subject to enforcement under the
Federal Deposit Insurance Act; (ii) expanded the scope of cease and desist
orders and provided for the issuance of a temporary cease and desist orders;
(iii) provided for the suspension and removal of wrongdoers on an expanded basis
and on an industry-wide basis; (iv) prohibited the participation of persons
suspended or removed or convicted of a crime involving dishonesty or breach of
trust from serving in another insured institution; (v) required regulatory
approval of new directors and senior executive officers in certain cases; (vi)
provided protection from retaliation against "whistleblowers" and establishes
rewards for "whistleblowers" in certain enforcement actions resulting in the
recovery of money; (vii) required the regulators to publicize all final
enforcement orders; (viii) required each insured financial institution to
provide its independent auditor with its most recent Report of Condition ("Call
Report"); (ix) significantly increased the penalties for failure to file
accurate and timely Call Reports; and (x) provided for extensive increases in
the amounts and circumstances for assessment of civil money penalties, civil and
criminal forfeiture and other civil and criminal fines and penalties.
CRIME CONTROL ACT OF 1990. The Crime Control Act of 1990 further
strengthened the authority of federal regulators to enforce capital
requirements, increased civil and criminal penalties for financial fraud,
8
<PAGE>
and enacted provisions allowing the FDIC to regulate or prohibit certain forms
of golden parachute benefits and indemnification payments to officers and
directors of financial institutions.
RISK-BASED CAPITAL GUIDELINES.
The federal banking agencies have established risk-based capital
guidelines. The risk-based capital guidelines include both a new definition of
capital and a framework for calculating risk weighted assets by assigning
assets and off-balance sheet items to broad credit risk categories. A bank's
risk-based capital ratio is calculated by dividing its qualifying capital (the
numerator of the ratio) by its risk weighted assets (the denominator of the
ratio).
A bank's qualifying total capital consists of two types of capital
components: "core capital elements" (comprising Tier 1 capital) and
"supplementary capital elements" (comprising Tier 2 capital). The Tier 1
component of a bank's qualifying capital must represent at least 50% of
qualifying total capital and may consist of the following items that are defined
as core capital elements: (i) common stockholders' equity; (ii) qualifying
noncumulative perpetual preferred stock (including related surplus); and (iii)
minority interest in the equity accounts of consolidated subsidiaries. The Tier
2 component of a bank's qualifying total capital may consist of the following
items: (i) allowance for loan and lease losses (subject to limitations); (ii)
perpetual preferred stock and related surplus (subject to conditions); (iii)
hybrid capital instruments (as defined) and mandatory convertible debt
securities; and (iv) term subordinated debt and intermediate-term preferred
stock, including related surplus (subject to limitations).
Assets and credit equivalent amounts of off-balance sheet items are
assigned to one of several broad risk categories, according to the obligor, or,
if relevant, the guarantor or the nature of collateral. The aggregate dollar
value of the amount in each category is then multiplied by the risk weight
associated with that category. The resulting weighted values from each of the
risk categories are added together, and this sum is the bank's total risk
weighted assets that comprise the denominator of the risk-based capital ratio.
Risk weights for all off-balance sheet items are determined by a two-step
process. First, the "credit equivalent amount" of off-balance sheet items such
as letters of credit and recourse arrangements is determined, in most cases by
multiplying the off-balance sheet item by a credit conversion factor. Second,
the credit equivalent amount is treated like any balance sheet asset and
generally is assigned to the appropriate risk category according to the obligor,
or, if relevant, the guarantor or the nature of the collateral.
The supervisory standards set forth below specify minimum supervisory
ratios based primarily on broad risk considerations. The risk-based ratios do
not take explicit account of the quality of individual asset portfolios or the
range of other types of risks to which banks may be exposed, such as interest
rate, liquidity, market or operational risks. For this reason, banks are
generally expected to operate with capital positions above the minimum ratios.
All banks are required to meet a minimum ratio of qualifying total
capital to risk weighted assets of 8%, of which at least 4% should be in the
form of Tier 1 capital net of goodwill, and a minimum ratio of Tier 1 capital
to risk weighted assets of 4%. The maximum amount of supplementary capital
elements that qualifies as Tier 2 capital is limited to 100% of Tier 1
capital net of goodwill. In addition, the combined maximum amount of
subordinated debt and intermediate-term preferred stock that qualifies as
Tier 2 capital
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is limited to 50% of Tier 1 capital. The maximum amount of the allowance for
loan and lease losses that qualifies as Tier 2 capital is limited to 1.25% of
gross risk weighted assets. Allowance for loan and lease losses in excess of
this limit may, of course, be maintained, but would not be included in a
bank's risk-based capital calculation.
In addition to the risk-based guidelines, the federal banking agencies
require all banks to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a bank rated in the highest of
the five categories used by regulators to rate banks, the minimum leverage ratio
of Tier 1 capital to total assets is 3%. For all banks not rated in the highest
category, the minimum leverage ratio must be at least 4% to 5%. In addition to
these uniform risk-based capital guidelines and leverage ratios that apply
across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
In December, 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by the policy statement is the sum of: (a)
assets classified loss; (b) 50% of assets classified doubtful; (c) 15% of assets
classified substandard; and (d) estimated credit losses on other assets over the
upcoming twelve months.
The federal banking agencies have recently revised their risk-based
capital rules to take account of concentrations of credit and the risks of
non-traditional activities. Concentrations of credit refers to situations
where a lender has a relatively large proportion of loans involving one
borrower, industry, location, collateral or loan type. Non-traditional
activities are considered those that have not customarily been part of the
banking business but that start to be conducted as a result of developments
in, for example, technology or financial markets. The regulations require
institutions with high or inordinate levels of risk to operate with higher
minimum capital standards. The federal banking agencies also are authorized
to review an institution's management of concentrations of credit risk for
adequacy and consistency with safety and soundness standards regarding
internal controls, credit underwriting or other operational and managerial
areas.
Further, the banking agencies recently have adopted modifications to the
risk-based capital rules to include standards for interest rate risk exposures.
Interest rate risk is the exposure of a bank's current and future earnings and
equity capital arising from adverse movements in interest rates. While interest
rate risk is inherent in a bank's role as financial intermediary, it introduces
volatility to bank earnings and to the economic value of the bank. The banking
agencies have addressed this problem by implementing changes to the capital
standards to include a bank's exposure to declines in the economic value of its
capital due to changes in interest rates as a factor that the banking agencies
will consider in evaluating an institution's capital adequacy. Bank examiners
consider a bank's historical financial performance and its earnings exposure to
interest rate movements as well as qualitative factors such as the adequacy of a
bank's internal interest rate risk management. The federal banking agencies
recently considered adopting a uniform supervisory framework for all
institutions to measure and assess each bank's exposure to interest rate risk
and establish an explicit capital charge based on the assessed risk, but
ultimately elected not to adopt such a uniform framework. Even without such a
uniform framework, however, each bank's interest rate risk exposure is assessed
by its primary federal regulator on an individualized basis, and it may be
required by the regulator to hold additional capital for interest rate risk if
it has a significant exposure to interest rate risk or a weak interest rate risk
management process.
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Effective April 1, 1995, the federal banking agencies issued rules which
limit the amount of deferred tax assets that are allowable in computing a bank's
regulatory capital. The standard had been in effect on an interim basis since
March, 1993. Deferred tax assets that can be realized for taxes paid in prior
carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of: (i) the amount that can be realized within one year
of the quarter-end report date; or (ii) 10% of Tier 1 capital. The amount of
any deferred tax in excess of this limit would be excluded from Tier 1 capital,
total assets and regulatory capital calculations.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991.
GENERAL. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991. FDICIA recapitalized the
FDIC's Bank Insurance Fund, granted broad authorization to the FDIC to increase
deposit insurance premium assessments and to borrow from other sources, and
continued the expansion of regulatory enforcement powers, along with many other
significant changes.
PROMPT CORRECTIVE ACTION. FDICIA established five categories of bank
capitalization: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized" and mandated the establishment of a system of "prompt
corrective action" for institutions falling into the lower capital categories.
Under FDICIA, banks are prohibited from paying dividends or management fees to
controlling persons or entities if, after making the payment the bank would be
undercapitalized, that is, the bank fails to meet the required minimum level for
any relevant capital measure. Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit acceptable capital plans
guaranteed by its holding company, if any. Broad regulatory authority was
granted with respect to significantly undercapitalized banks, including forced
mergers, growth restrictions, ordering new elections for directors, forcing
divestiture by its holding company, if any, requiring management changes, and
prohibiting the payment of bonuses to senior management. Even more severe
restrictions are applicable to critically undercapitalized banks, those with
capital at or less than 2%, including the appointment of a receiver or
conservator after 90 days, even if the bank is still solvent.
The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, a bank shall be deemed to be: (i) "well capitalized" if it has a
total risk-based capital ratio of 10.0% or more, has a Tier 1 risk-based
capital ratio of 6.0% or more, has a leverage capital ratio of 5.0% or more
and is not subject to specified requirements to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it
has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and a leverage capital ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of "well
capitalized"; (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less
than 4.0%, or a leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0% or a leverage capital ratio that is less
than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%.
FDICIA and the implementing regulations also provide that a federal banking
agency may, after notice and an opportunity for a hearing, reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
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supervisory actions as if it were in the next lower category if the institution
is in an unsafe or unsound condition or engaging in an unsafe or unsound
practice. (The FDIC may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.)
OPERATIONAL STANDARDS. FDICIA also granted the regulatory agencies
authority to prescribe standards relating to internal controls, credit
underwriting, asset growth and compensation, among others, and required the
regulatory agencies to promulgate regulations prohibiting excessive compensation
or fees. Many regulations have been adopted by the regulatory agencies to
implement these provisions and subsequent legislation (the Riegal Community
Development Act, discussed below) gave the regulatory agencies the option of
prescribing the safety and soundness standards as guidelines rather than
regulations.
REGULATORY ACCOUNTING REPORTS. Each bank with $500 million or more in
assets is required to submit an annual report to the FDIC, as well as any other
federal banking agency with authority over the bank, and any appropriate state
banking agency. This report must contain a statement regarding management's
responsibilities for: (i) preparing financial statements; (ii) establishing and
maintaining adequate internal controls; and (iii) complying with applicable laws
and regulations. In addition to having an audited financial statement by an
independent accounting firm on an annual basis, the accounting firm must
determine and report as to whether the financial statements are presented fairly
and in accordance with generally accepted accounting principles and comply with
other requirements of the applicable federal banking authority. In addition,
the accountants must attest to and report to the regulators separately on
management's compliance with internal controls.
TRUTH IN SAVINGS. FDICIA further established a new truth in savings
scheme, providing for clear and uniform disclosure of terms and conditions on
which interest is paid and fees are assessed on deposits. The FRB's Regulation
DD, implementing the Truth in Savings Act, became effective June 21, 1993.
BROKERED DEPOSITS. Effective June 16, 1992, FDICIA placed restrictions on
the ability of banks to obtain brokered deposits or to solicit and pay interest
rates on deposits that are significantly higher than prevailing rates. FDICIA
provides that a bank may not accept, renew or roll over brokered deposits
unless: (i) it is "well capitalized"; or (ii) it is adequately capitalized and
receives a waiver from the FDIC permitting it to accept brokered deposits paying
an interest rate not in excess of 75 basis points over certain prevailing market
rates. FDIC regulations define brokered deposits to include any deposit
obtained, directly or indirectly, from any person engaged in the business of
placing deposits with, or selling interests in deposits of, an insured
depository institution, as well as any deposit obtained by a depository
institution that is not "well capitalized" for regulatory purposes by offering
rates significantly higher (generally more than 75 basis points) than the
prevailing interest rates offered by depository institutions in such
institution's normal market area. In addition to these restrictions on
acceptance of brokered deposits, FDICIA provides that no pass-through deposit
insurance will be provided to employee benefit plan deposits accepted by an
institution which is ineligible to accept brokered deposits under applicable law
and regulations.
LENDING. New regulations have been issued in the area of real estate
lending, prescribing standards for extensions of credit that are secured by real
property or made for the purpose of the construction of a building or other
improvement to real estate. In addition, the aggregate of all loans to
executive officers, directors and principal shareholders and related interests
may now not exceed 100% (200% in some circumstances) of the depository
institution's capital.
STATE AUTHORIZED ACTIVITIES. The new legislation also created
restrictions on activities authorized under state law. FDICIA generally
restricts activities through subsidiaries to those permissible for national
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banks, unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements, thereby effectively eliminating real
estate investment authorized under California law, and provided for a five-year
divestiture period for impermissible investments. Insurance activities were
also limited, except to the extent permissible for national banks.
RIEGLE COMMUNITY DEVELOPMENT AND REGULATORY IMPROVEMENT ACT OF 1994.
The Riegle Community Development and Regulatory Improvement Act of 1994
(the "1994 Act"), which has been viewed as the most important piece of banking
legislation since the enactment of FDICIA, was signed into law on September 23,
1994. In addition to providing funding for the establishment of a Community
Development Financial Institutions Fund (the "Fund"), which provides assistance
to new and existing community development lenders to help to meet the needs of
low- and moderate-income communities and groups, the 1994 Act mandated changes
to a wide range of banking regulations. These changes included modifications to
the publication requirements for Call Reports, less frequent regulatory
examination schedules for small institutions, small business and commercial real
estate loan securitization, amendments to the money laundering and currency
transaction reporting requirements of the Bank Secrecy Act, clarification of the
coverage of the Real Estate Settlement Procedures Act for business, commercial
and agricultural real estate secured transactions, amendments to the national
flood insurance program, and amendments to the Truth in Lending Act to provide
greater protection for consumers by reducing discrimination against the
disadvantaged.
The "Paperwork Reduction and Regulatory Improvement Act," Title III of the
1994 Act, required the federal banking agencies to consider the administrative
burdens that new regulations will impose before their adoption and requires a
transition period in order to provide adequate time for compliance. This Act
also requires the federal banking agencies to work together to establish uniform
regulations and guidelines as well as to work together to eliminate duplicative
or unnecessary requests for information in connection with applications or
notices. This act reduces the frequency of examinations for well-rated
institutions, simplifies the quarterly Call Reports and eliminated the
requirement that financial institutions publish their Call Reports in local
newspapers. This Act also established an internal regulatory appeal process and
independent ombudsman to provide a means for review of material supervisory
determinations. The Paperwork Reduction and Regulatory Improvement Act also
amended the Bank Holding Company Act and Securities Act of 1933 to simplify the
formation of bank holding companies.
Title IV of the 1994 Act amended the Bank Secrecy Act by reducing the
reporting requirements imposed on financial institutions for large currency
transactions, expanding the ability of financial institutions to provide
exemptions to the reporting requirements for businesses that regularly deal in
large amounts of currency, and providing for the delegation of civil money
penalty enforcement from the Treasury Department to the individual federal
banking agencies.
SAFETY AND SOUNDNESS STANDARDS.
In July, 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA and the
1994 Act. The guidelines set forth operational and managerial standards
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. Guidelines for asset quality and earnings
standards will be adopted in the future. The guidelines establish the safety
and soundness standards that the agencies will use to identify and address
problems at insured
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depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
The federal banking agencies issued regulations prescribing uniform
guidelines for real estate lending. The regulations require insured depository
institutions to adopt written policies establishing standards, consistent with
such guidelines, for extensions of credit secured by real estate. The policies
must address loan portfolio management, underwriting standards and loan to value
limits that do not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
CONSUMER PROTECTION LAWS AND REGULATIONS
The bank regulatory agencies are focusing greater attention on compliance
with consumer protection laws and their implementing regulations. Examination
and enforcement have become more intense in nature, and insured institutions
have been advised to monitor carefully compliance with various consumer
protection laws and their implementing regulations. BKLA is subject to many
federal consumer protection laws and their regulations including, but not
limited to, the Community Reinvestment Act (the "CRA"), the Truth in Lending Act
(the "TILA"), the Fair Housing Act (the "FH Act"), the Equal Credit Opportunity
Act (the "ECOA"), the Home Mortgage Disclosure Act ("HMDA"), and the Real Estate
Settlement Procedures Act ("RESPA").
The CRA, enacted into law in 1977, is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. The CRA specifically directs the federal
bank regulatory agencies, in examining insured depository institutions, to
assess their record of helping to meet the credit needs of their entire
community, including low- and moderate-income neighborhoods, consistent with
safe and sound banking practices. The CRA further requires the agencies to take
a financial institution's record of meeting its community credit needs into
account when evaluating applications for, among other things, domestic branches,
consummating mergers or acquisitions, or holding company formations.
The federal banking agencies have adopted regulations which measure a
bank's compliance with its CRA obligations on a performance-based evaluation
system. This system bases CRA ratings on an institution's actual lending
service and investment performance rather than the extent to which the
institution conducts needs assessments, documents community outreach or complies
with other procedural requirements. The FDIC has rated the Bank "satisfactory"
in complying with its CRA obligations. The ratings range from "outstanding" to
a low of "substantial noncompliance."
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The ECOA, enacted into law in 1974, prohibits discrimination in any credit
transaction, whether for consumer or business purposes, on the basis of race,
color, religion, national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance programs, or good faith
exercise of any rights under the Consumer Credit Protection Act. In March,
1994, the Federal Interagency Task Force on Fair Lending issued a policy
statement on discrimination in lending. The policy statement describes the
three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment and evidence of
disparate impact. This means that if a creditor's actions have had the effect
of discriminating, the creditor may be held liable -- even when there is no
intent to discriminate.
The FH Act, enacted into law in 1968, regulates may practices, including
making it unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap, or familial status. The FH Act is broadly written and has been
broadly interpreted by the courts. A number of lending practices have been
found to be, or may be considered, illegal under the FH Act, including some that
are not specifically mentioned in the FH Act itself. Among those practices that
have been found to be, or may be considered, illegal under the FH Act are:
declining a loan for the purposes of racial discrimination; making excessively
low appraisals of property based on racial considerations; pressuring,
discouraging, or denying applications for credit on a prohibited basis; using
excessively burdensome qualifications standards for the purpose or with the
effect of denying housing to minority applicants; imposing on minority loan
applicants more onerous interest rates or other terms, conditions or
requirements; and racial steering, or deliberately guiding potential purchasers
to or away from certain areas because of race.
The TILA, enacted into law in 1968, is designed to ensure that credit terms
are disclosed in a meaningful way so that consumers may compare credit terms
more readily and knowledgeably. As a result of the TILA, all creditors must
use the same credit terminology and expressions of rates, the annual percentage
rate, the finance charge, the amount financed, the total payments and the
payment schedule.
HMDA, enacted into law in 1975, grew out of public concern over credit
shortages in certain urban neighborhoods. One purpose of HMDA is to provide
public information that will help show whether financial institutions are
serving the housing credit needs of the neighborhoods and communities in which
they are located. HMDA also includes a "fair lending" aspect that requires the
collection and disclosure of data about applicant and borrower characteristics
as a way of identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes. HMDA requires institutions to report data
regarding applications for one-to-four family loans, home improvement loans, and
multifamily loans, as well as information concerning originations and purchases
of such types of loans. Federal bank regulators rely, in part, upon data
provided under HMDA to determine whether depository institutions engage in
discriminatory lending practices.
RESPA, enacted into law in 1974, requires lenders to provide borrowers with
disclosures regarding the nature and costs of real estate settlements. Also,
RESPA prohibits certain abusive practices, such as kickbacks, and places
limitations on the amount of escrow accounts.
Violations of these various consumer protection laws and regulations can
result in civil liability to the aggrieved party, regulatory enforcement
including civil money penalties, and even punitive damages.
CONCLUSION
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As a result of the recent federal and California legislation, there has
been a competitive impact on commercial banking in general and the business of
BKLA in particular. There has been a lessening of the historical distinction
between the services offered by banks, savings and loan associations, credit
unions, and other financial institutions, banks have experienced increased
competition for deposits and loans which may result in increases in their cost
of funds, and banks have experienced increased costs. Further, the federal
banking agencies have increased enforcement authority over banks and their
directors and officers.
Future legislation is also likely to impact BKLA's business. Consumer
legislation has been proposed in Congress which may require banks to offer
basic, low-cost, financial services to meet minimum consumer needs. Various
proposals to restructure the federal bank regulatory agencies are currently
pending in Congress, some of which include proposals to expand the ability of
banks to engage in previously prohibited businesses. Further, the regulatory
agencies have proposed and may propose a wide range of regulatory changes,
including the calculation of capital adequacy and limiting business dealings
with affiliates. These and other legislative and regulatory changes may have
the impact of increasing the cost of business or otherwise impacting the
earnings of financial institutions. However, the degree, timing and full extent
of the impact of these proposals cannot be predicted.
IMPACT OF MONETARY POLICIES. Banking is a business which depends on rate
differentials. In general, the difference between the interest rate paid by
BKLA on its deposits and its other borrowings and the interest rate earned by
BKLA on loans, securities and other interest-earning assets comprises the major
source of BKLA's earnings. These rates are highly sensitive to many factors
which are beyond the control of BKLA and, accordingly, the earnings and growth
of BKLA are subject to the influence of economic conditions generally, both
domestic and foreign, including inflation, recession, and unemployment; and also
to the influence of monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve Board. The Federal Reserve Board
implements national monetary policy, such as seeking to curb inflation and
combat recession, by its open-market dealings in United States government
securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements, by placing limitations upon
savings and time deposit interest rates, and through adjustments to the discount
rate applicable to borrowings by banks which are members of the Federal Reserve
System. The actions of the Federal Reserve Board in these areas influence the
growth of bank loans, investments, and deposits and also affect interest rates.
The nature and timing of any future changes in such policies and their impact on
BKLA cannot be predicted; however, depending on the degree to which BKLA's
interest-earning assets and interest-bearing liabilities are rate sensitive,
increases in rates have a temporary effect of increasing BKLA's net interest
margin, while decreases in interest rates have the opposite effect.
In addition, adverse economic conditions could make a higher provision for
loan losses prudent and could cause higher loan charge-offs, thus adversely
affecting BKLA's net income.
YEAR 2000 IMPACT
Many computer systems will not properly recognize date sensitive
information when the date changes to the year 2000. Computer systems that do
not properly recognize the year 2000 could generate erroneous data or cause the
system to fail. Those computer systems will have to be modified or replaced
prior to the year 2000 in order to remain functional.
During 1997, BKLA began the process of identifying and addressing the
issues surrounding the year 2000 and its impact on the bank's operations. That
process continued through 1997 during which BKLA conducted a comprehensive
review of its computer systems to identify applications that would be effected
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by the year 2000 issue and the bank developed an implementation plan to bring
the BKLA's systems into compliance prior to the year 2000. BKLA's compliance
program includes review of bank-wide computer processing systems as well as
review of third party vendors' interface systems and review of large corporate
borrowers' systems. During 1997, BKLA completed the assessment phase of its
program and anticipates, completion of the implementation and beginning the
validation of hardware and software upgrades, system replacements, vendor
certifications and other associated changes in 1998. BKLA anticipates final
implementation and validation will occur in early 1999, with final certification
of all internal systems by no later than the second half of 1999.
Simultaneously, BKLA will be evaluating the impact of year 2000 compliance on
large corporate customers as well as all third party vendors.
BKLA expects to implement successfully the systems and programming changes
necessary to address the year 2000 issue and does not believe that the costs of
such actions will have a material effect on it's results of operations or
financial condition. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, the implementation of such
changes, and BKLA's inability to implement such changes could have an adverse
effect on future results of operations. Similarly, there can be no assurance
that third party vendors' systems will be year 2000 compliant and, consequently,
BKLA could incur incremental costs to convert to other vendors.
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EMPLOYEES
At December 31, 1997, BKLA employed 128 persons. Management believes the
relations with its employees are good. BKLA is not a party to any collective
bargaining agreement.
INTELLECTUAL PROPERTY
BKLA holds no patents, trademarks, licenses (other than licenses required
to be obtained from appropriate bank regulatory agencies), franchises or
concessions which are of material importance to its business.
RESEARCH AND DEVELOPMENT
BKLA has not engaged in any material research activities relating to the
development of new services or the improvement of existing banking services
during the past two fiscal years. During that time, however, BKLA directors,
officers and employees have continually engaged in marketing activities,
including the evaluation and development of new services, in order to maintain
and improve BKLA's competitive position in its primary service area. The cost
of these activities cannot be calculated with any degree of certainty. BKLA has
no present plans to introduce a new product or line of business which would
require the investment of a material amount of BKLA's total assets.
ENVIRONMENTAL REGULATION
Compliance with federal, state, and local regulations regarding the
discharge of materials into the environment may have a substantial effect on the
level of capital expenditures, earnings, and competitive position of BKLA in the
event of lender liability or environmental lawsuits. Under Federal law,
liability for environmental damage and the cost of cleanup may be imposed upon
any person or entity who is an "owner" or "operator" of contaminated property.
State law provisions, which were modeled after Federal law, are substantially
similar. Congress established an exemption under Federal law for lenders from
"owner" and/or "operator" liability, which provided that the "owner" and/or
"operator" do not include "a person, who, without participating in the
management of a vessel or facility, holds indicia of ownership primarily to
protect his security interest in the vessel or facility." The wording of this
exemption was subject to conflicting interpretations among the Federal courts
and therefore generated uncertainty within the financial and lending
communities, particularly with regard to the extent which a secured creditor
could undertake activities to oversee the affairs of the borrower without
"participating in the management" of a facility. In order to resolve any
uncertainty, Congress enacted the Asset Conservation, Lender Liability and
Deposit Insurance Protection act, effective September 30, 1996, to clarify that
a lender is not considered to participate in the management of a facility unless
it (i) exercises decision making control over the borrower's environmental
compliance such that the lender has undertaken responsibility for the borrower's
hazardous substance handling of disposal practices, or (ii) exercises control at
a level comparable to a manager, such that the lender has assumed liability for
the overall management of the borrower's enterprise encompassing day-to-day
decision making regarding (a) environmental compliance, or (b) substantially all
of the operational (not financial) aspects of the borrower's enterprise other
than environmental compliance. California also enacted "lender liability"
legislation in 1996 which includes provisions similar to federal law.
BKLA's policy requires that all loans secured by commercial real estate be
evaluated for toxic risk. The evaluation ranges from in-house review of prior
uses of the property to environmental evaluations performed on a fee basis by
outside consultants.
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In the event BKLA was held liable as an owner or operator of a toxic
property, it could be responsible for the entire cost of environmental damage
and cleanup. Such an outcome could have a material adverse effect on BKLA's
financial condition depending upon the amount of liability assessed and the
amount of cleanup required.
As a result of the adoption of comprehensive federal, state and local
environmental regulations, the costs of doing business has substantially
increased for banks in general. The exact nature of these costs has not been
identified by BKLA, but they have had an impact on the operations and
profitability of BKLA over the past year.
ITEM 2 - PROPERTIES
BKLA's corporate office and West Hollywood branch is located at 8901 Santa
Monica Boulevard, West Hollywood, California on the corner of San Vicente
Boulevard. The building is highly visible from the street and centrally located.
The corporate office is upstairs and the branch is downstairs with frontal and
rear access and 6,932 square feet of interior space. The two story building has
off-street parking for customers and employees. Current monthly lease payments
are $15,000. The lease expires June 30, 2002 with three five year options to
extend.
The Beverly Hills branch office is located in the "golden triangle" at 9601
Wilshire Boulevard, Beverly Hills, California. The branch has 20,886 square
feet of which 12,628 is subleased to a major brokerage firm at $25,869 per month
until January 31, 2003. The terms of the lease call for monthly payments of
$20,962 up to June 30, 2007. Current common area expenses are $8,883, for total
monthly payments of $29,845, less rental income of $25,869, for net costs of
$3,976 for 8,258 square feet of retail space or $0.48 per square foot. BKLA has
two-ten year options of contractual payments of $24,106 up to June 30, 2017 and
$27,722 monthly payments up to June 30, 2027. The lease payments have been
capitalized. Cash of $2,000,000 paid to assume the lease is presented as an
intangible asset and has been amortized to net book value of $1,559,000.
The Beverly Hills West branch office is adjacent to Century City at 9944
Santa Monica Boulevard, Beverly Hills, California. This location has 18,124
square feet and is used both for branch and back office operations. Monthly
lease payments are $36,038, and the lease expires January 31, 1999.
The Encino branch office is located at 16861 Ventura Boulevard, Encino,
California. Ventura Boulevard is the main business street running through the
San Fernando Valley. The branch on the ground floor in a building with high
visibility on four sides. Contractual monthly lease payments are $23,120 to
February 28, 1999 and increase to $23,652, $24,195 and $24,751 on the
anniversary dates of February 28, 1999, 2000, and 2001, respectively.
The Glendale office is located at 701 North Brand Boulevard, Glendale,
California. The branch occupies 3,184 square feet. Monthly lease payments are
$6,527, and the lease expires June 30, 2002.
The Culver City branch office is located at 5399 Sepulveda Boulevard,
Culver City, California and contains approximately 6,160 square feet of interior
space. The building is located at the corners of Sepulveda and Sawtelle
Boulevards. The branch has parking for both customers and employees. The lease
expires October 31, 1999. Monthly lease payments are $14,969. Certain areas of
the branch have been identified by the landlord as having material containing
asbestos. The materials have been rated as in good condition.
19
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
BKLA is not party to any material pending or threatened legal proceedings,
other than ordinary routine litigation incidental to its business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to report.
20
<PAGE>
PART II
ITEM 5 - MARKET FOR BKLA'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Effective July 29, 1996, BKLA's Common Stock began trading on the Nasdaq
National Stock Market under the symbol "BKLA".
Prior to July 29, 1996 BKLA stock was traded on a very limited basis on the
over-the-counter market through various brokerage firms under the symbol "BKLA".
The current market makers for BKLA's stock are GBS Financial Corporation,
Herzog, Lleine, Gedold, Inc., Hoefer & Arnett, Incorporated, Wedbush Morgan
Securities, Inc. and Black & Company, Inc. The source of the data in the
following table is Burford Capital for the quarter ended March 31, 1996 and the
quarter ended June 30, 1996; and Nasdaq for the quarters ended September 30,
1996 through December 31, 1997.
MARKET FOR BKLA'S COMMON STOCK
<TABLE>
<CAPTION>
SALES PRICE
- ------------------------------------ ----------------------- ---------
QUARTER ENDED, HIGH LOW VOLUME
- ------------------------------------ --------- ---------- ---------
<S> <C> <C> <C>
March 31, 1996 $ 6.00 $ 4.00 53,200
June 30, 1996 $ 6.75 $ 5.75 56,000
September 30, 1996 $ 6.63 $ 5.75 98,627
December 31, 1996 $ 6.75 $ 5.75 82,482
March 31, 1997 $ 8.38 $ 6.38 114,758
June 30, 1997 $ 8.00 $ 6.63 263,667
September 30, 1997 $ 12.00 $ 7.50 403,674
December 31, 1997 $ 15.63 $ 10.75 871,656
</TABLE>
BKLA has not declared any cash dividends during its existence. At January
15, 1998, there were approximately 1,785 shareholders of record.
21
<PAGE>
ITEM 6 - BKLA SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data should be read in conjunction with
BKLA's financial statements and related notes and with "BANK OF LOS ANGELES --
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" included elsewhere and incorporated by reference herein. The
selected balance sheets at December 31, 1997 and 1996, and statement of
operations data presented below as for the years ended December 31, 1997, 1996,
and 1995 are derived from the financial statements of BKLA included elsewhere
herein, which financial statements of BKLA have been audited by Vavrinek, Trine,
Day & Co., LLP, independent accountants. The selected balance sheets at
December 31, 1995, 1994 and 1993 and statements of operations data for the years
ended December 31, 1994 and 1993 presented are derived from the financial
statements of BKLA not included elsewhere herein. The financial information
included below and elsewhere herein prior to October 1, 1995 are consolidated
financial statements of BKLA and BKLA Bancorp of which BKLA was the sole
subsidiary until October 23, 1995, at which time BKLA Bancorp merged with and
into Bank of Los Angeles.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
------------ ----------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Operational Data
Interest income $ 14,854 $ 10,561 $ 6,819 $ 5,794 $ 7,092
Interest expense 3,931 3,087 1,852 1,758 2,262
Net interest income 10,923 7,474 4,967 4,036 4,830
Provision (credit) for credit losses 410 750 (311) --- 1,953
Non-interest income 1,388 1,037 878 923 1,725
Non-interest expense 8,542 6,760 5,510 6,171 6,915
Income tax credit (372) --- --- --- ---
Net income (loss) $ 3,731 $ 1,001 $ 646 $(1,212) $ (2,313)
Net income (loss) per common share $ 1.16 $ 0.46 $ 0.63 $ (4.85) $ (9.25)
Net income (loss) per share , diluted $ 1.00 $ 0.40 $ 0.51 $ (4.85) $ (9.25)
Financial Condition Data
Total assets $ 272,033 $ 130,705 $129,745 $80,507 $ 98,992
Total deposits 238,012 115,596 114,850 74,471 91,388
Total loans 142,633 72,266 66,021 38,114 50,760
Allowance for credit losses 2,819 1,682 2,358 1,633 2,478
Total shareholders' equity 31,054 12,632 11,991 3,817 5,502
Capital lease obligation 1,849 1,842 1,836 1,830 1,827
Cash dividends declared per common stock --- --- --- --- ---
Book value per common share $ 6.54 $ 5.75 $ 5.46 $ 15.25 $ 22.00
Asset Quality
Non-accrual loans $ 4,265 $ 2,794 $ 1,418 $ 838 $ 3,619
Classified loans 8,904 4,319 5,251 4,594 12,438
22
<PAGE>
At or For the Year Ended December 31,
-------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Financial Ratios:
Net income (loss) to average total shareholders' equity 21.1% 8.1% 8.7% (26.0)% (32.3)%
Net yield on average earning assets 9.1% 9.1% 9.1% 7.2% 7.1%
Non-interest expense to average assets 4.7% 5.3% 6.6% 6.9% 6.9%
Allowance for credit losses to total loans 2.0% 2.3% 3.6% 4.3% 4.9%
Net charge-offs to average total loans 1.1% 2.1% 0.2% 2.0% 3.5%
Non-accruing loans and real estate owned to total
loans and real estate owned 4.0% 4.6% 2.9% 2.2% 9.0%
Non-accruing loans to total loans 3.0% 3.9% 2.1% 2.2% 9.0%
Allowance for credit losses to non-accruing loans 66.1% 60.2% 166.3% 194.9% 54.4%
Non-accruing loans and real estate owned to
shareholders' equity and allowance for credit losses 16.9% 23.3% 13.5% 153.4% 57.0%
Shareholders' equity to total assets 11.4% 9.7% 9.2% 4.7% 5.6%
Tier 1 capital to total average assets (1) 8.9% 7.8% 7.1% 3.0% 3.6%
Tier 1 capital to total risk weighted assets 13.3% 12.1% 11.9% 6.0% 6.5%
Total capital to total risk weighted assets 14.6% 13.4% 13.1% 7.3% 7.8%
</TABLE>
- --------------------------
(1) Total assets at December 31, 1997 were used as a number more indicative
of the capital ratio for BKLA, due to Culver National Bank merger at December
31, 1997.
23
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF BANK OF LOS ANGELES
LIQUIDITY. Federal funds sold and investments in debt securities are the
primary sources from which BKLA meets its liquidity needs. Cash and due from
banks is used to maintain balances required by the Federal Reserve Bank and to
honor presentation of checks. Federal funds sold, investments, cash and due from
banks, less securities pledged, represent BKLA's net liquid assets. Net liquid
assets were $109,137,000 and $48,285,000 at December 31, 1997, and 1996,
respectively. One measure of liquidity is net liquid assets to total deposits,
which was 45.9% and 41.8% at December 31, 1997 and 1996, respectively. Another
measure of liquidity is the ratio of loans to deposits, which was 59.9% and
61.1% at December 31, 1997 and 1996, respectively.
At December 31, 1997, securities available-for-sale were $12,295,000 and
securities held-to-maturity were $48,138,000. Held-to-maturity securities
include $8,000,000 transferred from available-for-sale. Held-to-maturity
securities by their definition cannot be sold. As such, the source of liquidity
from these securities is from either maturities and return of principal or the
availability of borrowing based on the pledge of these securities.
CAPITAL RESOURCES. On March 31, 1995, BKLA received a capital infusion of
$3,440,000, net of costs, for 946,352 shares of BKLA common stock and 473,176
warrants. On November 30, 1995 as a result of a rights offering to all
shareholders of record at October 25, 1995, 651,325 shares of BKLA common stock
and 217,160 warrants were issued for proceeds of $2,086,000, net of costs. Each
warrant issued in both the capital infusion and rights offering entitled the
holder to purchase one share of BKLA common stock for $3.75 and will expired
December 1, 1998.
Subsequent to the capital infusion, BKLA has acquired three financial
institutions through the issuance of shares of BKLA common stock in exchange for
common stock shares of the acquired institutions. On November 15, 1995, BKLA
acquired World Trade Bank ("WTB") for 346,325 shares of BKLA common stock valued
at $1,385,000, net of costs. On April 1, 1997, BKLA acquired American West Bank
("AWB") for 1,367,493 shares of BKLA common stock valued at $5,926,000, net of
costs. On December 31, 1997 BKLA acquired Culver National Bank ("CNB") for
1,155,326 shares of BKLA common stock valued at $8,466,000, net of costs.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
In the year 1997, BKLA acquired two financial institutions, both of which
were accounted for as purchase transactions. On April 1, 1997, BKLA acquired AWB
which had $67,291,000 in total assets and two branch offices. On December 31,
1997, BKLA acquired CNB which had $56,944,000 in total assets and one branch
office. The results of operations of AWB are included with those of BKLA
subsequent to April 1, 1997. Due to the effective date of the CNB acquisition,
the results of operations of CNB are not included with those of BKLA in the year
ending December 31, 1997. The balance sheets of BKLA at December 31, 1997 do
include the assets and liabilities of both AWB and CNB. As a result, total
assets at December 31, 1997 were $272,033,000, an increase of $141,328,000 or
108%, compared to $130,705,000 at December 31, 1996.
Factors considered by management in the acquisitions were; increased
operational efficiencies from a larger asset base, opportunities to decrease
non-interest expense and the opportunity to increase net interest income through
increased earning assets. Net interest income before provision for loan losses
for the year ended December 31, 1997 was $10,923,000, an increase of $3,449,000
or 46% compared to year ended December 31, 1996. Net interest income before
provision for loan losses for the year ended December 31, 1997 was derived from
total interest income of $14,854,000 less total interest expense of $3,931,000.
Total interest income includes interest and fee income on loans and
interest income from investments and federal funds sold. Interest income and fee
income on loans for the year ended December 31, 1997 was $11,229,000, an
increase of $3,527,000 or 46%, compared to $7,702,000 for the year ended
December 31, 1996. The increase is due primarily from growth in loans
receivable. Total loans receivable at December 31, 1997 were $142,633,000, an
increase of $70,367,000 or 97%, compared to $72,266,000 at December 31, 1996.
Loans receivable on an average balance for the year 1997 were $101,433,000, an
increase of $32,387,000 or 46%, compared to an average for the year 1996 of
$69,046,000. The increase of average loans for the year 1997 is due primarily to
loans acquired from AWB on April 1, 1997, which subsequent to that date
contributed interest on loans receivable for the year ended December 31, 1997.
Loans acquired from CNB were on December 31, 1997 and did not contribute to loan
receivable interest income for the year ended December 31, 1997. The average
rate of interest earned on loans receivable was 11.1% and 11.2% for the years
ended December 31, 1997 and 1996, respectively.
24
<PAGE>
Interest income on investment securities was $2,731,000 for the year
ended December 31, 1997, an increase of $723,000 or 36%, compared to
$2,008,000 for the year ended December 31, 1996. Total investment securities,
both available-for-sale and held-to-maturity, were $60,433,000 and
$22,126,000 at December 31, 1997 and 1996, respectively. Investment
securities on an average balance were $46,036,000 for the year 1997, an
increase of $15,987,000 or 53% compared to an average balance of $30,049,000
for the year 1996. Interest earned on investment securities increased
primarily due to the acquisition of securities from AWB on April 1, 1997.
This increase was partially offset by decrease in the rate of interest
earned on investment securities. The average rate of interest earned on
investment securities was 5.9% and 6.7% for the years ended December 31, 1997
and 1996, respectively.
Interest income on federal funds sold for the year ended December 31, 1997
was $893,000, an increase of $54,000 or 6%, compared to $839,000 for the year
ended December 31, 1996. Federal funds sold were $29,555,000 and $22,000,000 at
December 31, 1997 and 1996, respectively. Federal funds sold on an average
balance were $16,246,000 and $16,152,000 for the years ended December 31, 1997
and 1996, respectively. The averge rate of interest earned on Federal Funds sold
was 5.5% and 5.2% for the years ended December 31, 1997 and 1996, respectively.
Total interest expense was $3,931,000 for the year ended December 31, 1997,
an increase of $844,00 or 27%, compared to $3,087,000 for the year ended
December 31, 1996. Total interest expense includes interest expense on deposits
and interest expense on an obligation from a capital lease.
Interest expense on deposits was $3,673,000 for the year ended December 31,
1997, an increase of $843,000 or 30%, compared to $2,830,000 for the year ended
December 31, 1996. Total interest bearing deposits were $152,790,000 at
December 31, 1997, an increase of $77,322,000 or 102%, compared to $75,468,000
at December 31, 1996. Interest bearing deposit balances on an average for the
year 1997 were $100,950,000, an increase of $24,381,000 or 32%, compared to an
average of $76,569,000 for the year 1996. The average rate paid on interest
bearing deposits was 3.6% and 3.7% for the years ended December 31, 1997 and
1996, respectively.
Interest expense on the capital lease obligation was $258,000 and $257,000
for the years ended December 31, 1997 and 1996, respectively. The capital lease
obligation was $1,846,000 and $1,839,000 at December 31, 1997 and 1996,
respectively. The interest rate paid on the capital lease obligation was 14.0%
for the years ended December 31, 1997 and 1996.
Net interest income after provision for credit losses was $10,513,000, an
increase of $ 3,789,000 or 56%, compared to $6,724,000 for the year ended
December 31, 1996. The provision for credit losses was $410,000 for the year
ended December 31, 1997, a decrease of $340,000 or 45%, compared to $750,000 for
the year ended December 31, 1996.
Non-interest income for the year ended December 31, 1997 was $1,388,000
an increase of $351,000 or 34% compared to $1,037,000 for the year ended
December 31, 1997. Non-interest income is derived primarily fees and charges
on demand deposit accounts and merchant discount income. The increase is due
primarily to the addition of two branches and their associated deposits from
the AWB acquisition. CNB deposits were acquired on December 31, 1997 and did
not contribute to fees and charges on demand accounts. Demand deposit were
$85,222,000 at December 31, 1997, an increase of $45,094,000 or 112%,
compared to $40,128,000 at December 31, 1996. Demand deposits on an average
for the year 1997 were $59,590,000, an increase of $24,964,000 or 72%.
Included in non-interest income is gain or loss on sale of assets. No gains
or loss on sale of assets was incurred in the year ended December 31, 1997.
Loss on sale of securities of $5,000 was realized in the year ended December
31, 1996.
Total non-interest expense for the year ended December 31, 1997 was
$8,542,000, an increase of $1,782,000 or 26%, compared to the year ended
December 31, 1996. Total non-interest expense includes employee compensation,
occupancy, professional services, goodwill, amortization, core deposit
amortization and other. Expenses for employee compensation for the year ended
December 31, 1997 were $4,802,000, an increase of $1,394,000 or 41% compared to
$3,408,000 for the year ended December 31, 1996. The increase was due primarily
to the addition of staff from the AWB acquisition and severance packages to
personnel laid off as a result of the acquisition. Occupancy expense was
$1,778,000 for the year ended December 31, 1997, an increase of $472,000 or 36%
compared to $1,306,000 for the year ended December 31, 1996. The increase in
occupancy expense was due primarily to rental payments on the two branches
acquired from AWB. Expenses for professional services were $382,000 for the year
ended December 31, 1997, a decrease of $90,000 or 19% compared to $472,000 for
the year ended December 31, 1996. Goodwill and core deposit amortization was
$246,000 and $250,000 for the years ended December 31, 1997 and 1996,
respectively. Other expense was $1,334,000 for the year ended December 31, 1997,
an increase of $10,000 compared to $1,324,000 for the year ended December 31,
1996.
The utilization of federal income tax operating losses of prior years
resulted in a net credit of income tax expense of $372,000 for the year ended
1997 and no provision for income tax expense for the year ended December 31,
1996. In 1997, use of operating losses of prior years allowed $3,200,000 income
to be recognized without a provision for federal income taxes. Operating losses
carried forward from prior years
25
<PAGE>
was applied for 1998, recognizing the benefit as a tax credit of $463,000 in
1997. This tax credit was partially offset by a provision to state income tax of
$91,000.
Net income for the year ended December 31, 1997 was $3,731,000, an increase
of $2,730,000 or 273%, compared to $1,001,000 for the year ended December 31,
1996. Earnings per common share were $1.16 for the year 1997, an increase of
$0.70 or 154% compared to $0.46 for the year 1996. Earnings per common share
assuming dilution were $1.00, an increase of $0.60 or 147%, compared to $0.40
for the year 1996. Return on average equity was 21.1% and 8.1% for the years
ended December 31, 1997 and 1996, respectively. Return on average assets was
2.1% and 0.8% for the years ended December 31, 1997 and 1996, respectively.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995
On October 23, 1995, BKLA merged with its parent corporation BKLA Bancorp
("Bancorp"), eliminating the bank holding company. The merger resulted in one
share of BKLA's common stock issued for every five shares of Bancorp stock. All
share amounts have been adjusted to reflect the one-for-five reverse stock
split.
Purchase accounting was used for the World Trade Bank acquisition on
November 15, 1995. Income and expense items attributable to the former World
Trade Bank branch are included in the statements of income from November 15,
1995, but are excluded prior to that date. As a result, increases in income and
expense line items on the results of operations for the year ended December 31,
1996 compared to the year ended December 31, 1995 are primarily due to the
acquisition of World Trade Bank.
BKLA's net income for the year 1996 was $1,001,000 compared to net income
for the year 1995 or $646,000, an increase of $355,000 or 55%. Earnings per
common share, assuming dilution, was $0.40 per share for the year ended December
31, 1996 compared to $0.51 for the year ended December 31, 1995.
Earnings per common share was $0.46 and 0.63 for the years ended December 31,
1996 and 1995, respectively.
Total interest income for the year ended December 31, 1996 was $10,561,000,
compared to $6,819,000 for the year ended December 31, 1995, an increase of
$3,742,000 or 55%. The average yield on interest earning assets was 9.1% for
the years 1996 and 1995. The increase in interest income for 1996 compared to
1995 was due to an increase in volume of interest earning assets. The average
yield on loans in 1996 was 11.2% compared to 11.6% in 1995. This decrease, and
the 25 basis point decline on February 1, 1996 in BKLA's reference rate, to
which the majority of BKLA's loans are referenced, is primarily due to interest
foregone on loans delinquent 90 days or more. The average yield rate on
investments increased to 6.7% in 1996 compared to 5.7% in 1995. The increase is
primarily due to longer maturities in the available for sale security portfolio
for the year 1996 compared to the year 1995.
Total interest expense for the year ended December 31, 1996 was $3,087,000,
compared to $1,852,000 for the year ended December 31, 1995, an increase of
$1,235,000 or 67%. The average rate paid on interest bearing liabilities for
the years ended December 31, 1996 and 1995 was 3.9% and 3.6%, respectively. The
increase in interest expense for 1996 compared to 1995 was $1,085,000 due to
volume and $203,000 due to rates.
Net interest income for the year ended December 31, 1996 was $7,474,000,
compared to $4,967,000 for the year ended December 31, 1995, an increase of
$2,507,000 or 50%.
Provision for credit losses for the year ended December 31, 1996 was
$750,000. This was a $1,061,000 increase compared to the year ended December
31, 1995. This increase was primarily due to loans delinquent 30 to 89 days
of $4,118,000, of which $3,115,000 were acquired with the World Trade Bank
merger. Additionally, one borrower, with two loans totalling $1,793,000,
secured by commercial real estate and performing at December 31, 1995, became
delinquent more than 90 days during the year 1996. Together these two events
required a provision for credit losses of $520,000 in the third quarter of
1996. At December 31, 1996, loans delinquent 30 to 89 days totalled
$679,000, and non-accrual loans totalled $2,794,000.
Service charges and fees for the year ended December 31, 1996 were
$1,042,000, an increase of $236,000 or 29% compared to $806,000 for the year
ended December 31, 1995. The increase is primarily due to charges for
non-sufficient funds and services on demand deposit accounts.
Employee compensation and benefits for the year ended December 31, 1996 was
$3,408,000, an increase of $610,000, or 22%, compared to $2,798,000 for the year
ended December 31, 1995. At December 31, 1996, BKLA had 69 employees and at
December 31, 1995, 76 employees.
26
<PAGE>
Furniture and equipment expense for the year ended December 31, 1996 was
$337,000, an increase of $26,000 or 8% compared to $311,000 for the year ended
December 31, 1995. BKLA completed the installation of a data processing system
upgrade in 1996, incurring additional depreciation expense.
Professional services for the year ended December 31, 1996 were $472,000, a
decrease of $75,000 or 14%, compared to $547,000 for the year ended December 31,
1995. The decrease is due to a reduction in legal fees. BKLA's legal fees are
primarily the result of collection efforts by BKLA on loans receivable.
Other expense was $1,574,000 for the year ended December 31, 1996, an increase
of $350,000 or 29% compared to $1,224,000 for the year ended December 31, 1995.
27
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIALS
The following table shows BKLA's average balances of assets, liabilities
and stockholders' equity; the amount of interest income or interest expense and
the average yield or rate for each category of interest earning assets and
interest bearing liabilities, the net interest spread and net interest yield for
the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
1997
-------------------------------------------------
Average Interest Average
(DOLLARS IN THOUSANDS) Balance (2) Earned/Paid Yield/Rate
--------------- --------------- ---------------
<S> <C> <C> <C>
Assets
Interest earning assets
Federal funds sold $ 16,246 $ 893 5.5%
Deposits with financial institutions 14 1 7.1%
Securities 46,036 2,731 5.9%
Loans (3) (4) 101,433 11,229 11.1%
--------------- ---------------
Total interest earning assets 163,729 14,854 9.1%
Non-earning assets
Cash and due from bank 12,095
Other assets 8,141
Allowance for credit losses (2,039)
---------------
Total assets $ 181,926
---------------
---------------
Liabilities and Shareholders' Equity
Interest bearing liabilities
Demand, interest bearing $ 20,751 $ 395 1.9%
Money market 40,798 1,500 3.7%
Savings (including IRA's) 9,014 234 2.6%
Time certificates of deposit 30,387 1,544 5.1%
--------------- ---------------
Total interest bearing deposits 100,950 3,673 3.6%
Capital lease obligation 1,846 258 14.0%
Securities sold under agreement to repurchase --- --- ---
--------------- ---------------
Total interest bearing liabilities 102,796 3,931 3.8%
--------------- ---------------
Demand deposits, non-interest bearing 59,590
Other liabilities 1,854
Shareholders' equity 17,686
---------------
Total liabilities and shareholders' equity $ 181,926
---------------
---------------
Net interest margin spread $ 10,923 5.3%
Net interest income earned as a percentage
of average earning assets 6.7%
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1996
---------------------------------------------
Average Balance Interest Average
(DOLLARS IN THOUSANDS) Balance (1) Earned/Paid Yield/Rate
--------------- ------------- -------------
<S> <C> <C> <C>
Assets
Interest earning assets
Federal funds sold $ 16,152 $ 839 5.2%
Deposits with financial institutions 197 12 6.1%
Securities 30,049 2,008 6.7%
Loans (3) (4) 69,046 7,702 11.2%
--------------- -------------
Total interest earning assets 115,444 10,561 9.1%
Non-earning assets
Cash and due from bank 6,662
Other assets 6,611
Allowance for credit losses (2,048)
---------------
Total assets $ 126,669
---------------
---------------
Liabilities and Shareholders' Equity
Interest bearing liabilities
Demand, interest bearing $ 13,345 $ 219 1.6%
Money market 29,468 1,069 3.6%
Savings (including IRA's) 7,687 212 2.8%
Time certificates of deposit 26,069 1,330 5.1%
--------------- -------------
Total interest bearing deposits 76,569 2,830 3.7%
Capital lease obligation 1,839 257 14.0%
Securities sold under agreement to repurchase 1 --- 5.3%
--------------- -------------
Total interest bearing liabilities 78,409 3,087 3.9%
--------------- -------------
Demand deposits, non-interest bearing 34,626
Other liabilities 1,322
Shareholders' equity 12,312
---------------
Total liabilities and shareholders' equity $ 126,669
---------------
---------------
Net interest margin spread $ 7,474 5.2%
Net interest income earned as a percentage
of average earning assets 6.5%
</TABLE>
The following table presents for the periods indicated, a summary of the
changes in interest earned and interest paid resulting form changes in asset and
liabilities volumes and changes in rates. The change in interest due to both
rate and volume has been allocated due to volume and rate in proportion to the
relationship of absolute dollar amounts of change in each.
- ------------------------
(2) Average balances are derived from the average of the average balance of
each month in the year presented.
(3) Includes loan fee income of $562,000 and $329,000 for the years ended
December 31, 1997 and 1996, respectively. Interest foregone on
non-accrual loans is not included.
(4) Average balance on loans outstanding include all loans on non-accrual.
28
<PAGE>
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increases (Decreases) Increases (Decreases)
Due to Change In Due to Change In
-------------------------------------- -----------------------------------
Net Net
(DOLLARS IN THOUSANDS) Volume Rate Change Volume Rate Change
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Federal funds sold $ 5 $ 49 $ 54 $ 428 $ (23) $ 405
Deposits with financial institutions (13) 2 (11) 10 --- 10
Securities available for sale 932 (209) 723 221 212 433
Loans 3,595 (68) 3,527 3,059 (165) 2,894
-------- -------- -------- -------- -------- --------
Total interest earning assets 4,519 (226) 4,293 3,718 24 3,742
Liabilities and Shareholders' Equity
Interest bearing liabilities
Demand, interest bearing 131 45 176 54 29 83
Money market 402 29 431 552 131 683
Savings (including IRA's) 37 (15) 22 (43) (28) (71)
Time certificates of deposit 214 --- 214 522 71 593
-------- -------- -------- -------- -------- --------
Total interest bearing deposits 784 59 843 1,085 203 1,288
Capital lease obligation 1 --- 1 --- (2) (2)
Securities sold under agreement to repurchase --- --- --- (51) --- (51)
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities 785 59 844 1,034 201 1,235
-------- -------- -------- -------- -------- --------
Net change in net interest income $ 3,734 $ (285) $ 3,449 $ 2,684 $ (177) $ 2,507
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
29
<PAGE>
INVESTMENT PORTFOLIO
The amortized cost and estimated fair values of investment
securities as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Estimated Gross Unrealized
Amortized Fair -----------------------
(DOLLARS IN THOUSANDS) Cost Value Losses Gains
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
Mortgage backed securities $ 11,480 $ 11,432 $ 48 $ ---
Common stock 863 863 --- ---
------------ ------------ --------- ---------
12,343 12,295 48 ---
------------ ------------ --------- ---------
Securities held to maturity
Debt of the U.S. Treasury, U.S. Government
agencies and corporations 42,928 43,043 --- 115
Mortgage backed debt 5,210 5,204 6 ---
------------ ------------ --------- ---------
48,138 48,247 6 115
------------ ------------ --------- ---------
$ 60,481 $ 60,542 $ 54 $ 115
------------ ------------ --------- ---------
------------ ------------ --------- ---------
</TABLE>
The amortized cost and estimated fair values of investment securities as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Estimated Gross Unrealized
Amortized Fair -----------------------
(DOLLARS IN THOUSANDS) Cost Value Losses Gains
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
Securities of U.S. Government agencies and corporations $ 10,994 $ 11,010 $ 1 $ 17
Mortgage backed securities 10,852 10,616 236 ---
SBA securities 500 500 --- ---
------------ ------------ --------- ---------
$ 22,346 $ 22,126 $ 237 $ 17
------------ ------------ --------- ---------
------------ ------------ --------- ---------
</TABLE>
30
<PAGE>
The maturity distribution of investment securities at December 31, 1997
is as follows:
<TABLE>
<CAPTION>
Available for Sale
---------------------------------------------
Amortized Estimated Weighted
(DOLLARS IN THOUSANDS) Cost Fair Value Average
------------- ------------- -------------
<S> <C> <C> <C>
Securities available for sale
Mortgage backed debt $ 11,479 $ 11,432 5.6%
Securities held to maturity
Debt of the U. S. Treasury, agencies
& corporations
Less than three months 12,000 12,006 5.8%
Three months through one year 14,476 14,511 5.9%
One year through two years 16,452 16,526 6.1%
Greater than two years --- --- ---
Mortgage backed debt 5,211 5,204 6.3%
------------- -------------
48,139 48,247
------------- -------------
Total $ 59,618 $ 59,679 5.9%
------------- -------------
------------- -------------
</TABLE>
The basis on which cost was determined in computing realized gains and
losses on sale of securities available for sale over the years 1996 and 1995
were the specific identification method. Information relating to sales of
securities available for sale and investment securities is as follows for the
periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Proceeds from sale of securities available for sale $ 1,303 $ 6,487 $ 6,398
Gross realized losses $ --- $ 17 $ 46
Gross realized gains $ --- $ 12 $ ---
</TABLE>
Certain securities were pledged as collateral for public funds and for
other purposes as required or permitted by law. These securities had carrying
values of $3,497,000 and $3,980,000 at December 31, 1997 and 1996, respectively,
and estimated fair values of $3,487,000 and $3,946,000 at December 31, 1997 and
1996, respectively.
31
<PAGE>
LOAN PORTFOLIO
The following table presents loans by collateral and the percentage of each
category of collateral to total loans.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Amount Percentage Amount Percentage Amount Percentage
----------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial loans $ 45,199 31.6% $ 17,967 24.7% $ 20,679 32.1%
Real estate loans
Single family 8,979 6.3% 8,328 11.5% 8,123 12.2%
Multi-family 9,694 6.8% 3,672 5.1% 3,612 5.5%
Construction 9,336 6.5% 5,002 6.9% 2,851 4.3%
Commercial 53,847 37.7% 29,414 40.4% 25,257 38.1%
----------- ----------- -----------
Total real estate loans 81,856 57.3% 46,416 63.9% 39,843 60.2%
----------- ----------- -----------
Consumer loans 15,302 10.7% 8,323 11.4% 5,690 8.6%
Other 552 0.4% --- ---
Total loans 142,909 100.0% 72,706 100.0% 66,212 100.0%
Less deferred loan income (276) (440) (191)
Less allowance for
loan losses (2,819) (1,682) (2,358)
----------- ----------- -----------
Net loans $ 139,814 $ 70,584 $ 63,663
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
December 31, 1994 December 31, 1993
--------------------------------------------------
(DOLLARS IN THOUSANDS) Amount Percentage Amount Percentage
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial loans $ 10,165 26.6% $ 14,461 28.4%
Real estate loans
Single family 2,510 6.6% 5,774 11.3%
Multi-family 270 0.7% 899 1.8%
Construction --- --- --- ---
Commercial 20,457 53.5% 23,820 46.8%
----------- -----------
Total real estate loans 23,237 60.8% 30,493 59.9%
----------- -----------
Consumer loans 4,848 12.7% 5,976 11.7%
Other --- --- --- ---
Total loans 38,250 100.0% 50,930 100.0%
Less deferred loan income (136) (170)
Less allowance for
loan losses (1,633) (2,478)
----------- -----------
Net loans $ 36,481 $ 48,282
----------- -----------
----------- -----------
</TABLE>
32
<PAGE>
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES AT DECEMBER
31, 1997
The schedule of maturities and sensitivities of loans to change in interest
rates at December 31, 1997 is presented below.
<TABLE>
<CAPTION>
After One
(DOLLARS IN THOUSANDS) One Year Through After
Year or Less Five Years Five Years Non-Accrual Total
-------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Variable rate or repricing $ 99,051 $ 6,376 $ --- $ --- $ 105,427
Fixed rate 6,016 20,050 7,151 --- 33,217
Loans on non-accrual --- --- --- 4,265 4,265
-------------- -------------- ------------ ------------- -------------
$ 105,067 $ 26,426 $ 7,151 $ 4,265 $ 142,909
-------------- -------------- ------------ ------------- -------------
-------------- -------------- ------------ ------------- -------------
</TABLE>
LOAN PORTFOLIO RISK ELEMENTS
The following table presents loans accruing which are contractually
past due by 90 days and loans on non-accrual.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
-------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Loans accruing past due 90 days $ 172 $ --- $ --- $ --- $ ---
Non-accrual 4,265 2,794 1,418 838 3,619
-------------- -------------- ------------ ------------- -------------
Total $ 4,437 $ 2,794 $ 1,418 $ 838 $ 3,619
-------------- -------------- ------------ ------------- -------------
-------------- -------------- ------------ ------------- -------------
</TABLE>
BKLA's policy is any loan on which interest or principal is past due and
unpaid for a period of 90 or more days will automatically be placed on
non-accrual status. BKLA will not accrue interest, amortize deferred net
loan fees or costs, or accrete discount on any asset (1) which is maintained
on a cash basis because of deterioration in the financial condition of the
borrower, (2) for which payment in full of principal or interest is not
expected, or (3) upon which principal or interest has been in default for a
period of 90 days or more unless the asset is both well secured and in the
process of collection.
The following table presents loans outstanding at the end of the period,
average loans outstanding for the year, the beginning of the year allowance
for credit losses, loan charge-offs, recoveries, amount of provision charged
to operations, end of the year allowance for credit losses, ratio of net
charge-offs to average loans and allowance for credit losses as a percentage
of loans outstanding as of the end of the period for the periods indicated.
33
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
--------------- ------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of period $ 142,909 $ 72,706 $ 66,212 $ 38,250 $ 50,930
Average loans outstanding $ 101,433 $ 69,046 $ 41,563 $ 42,939 $ 64,315
Allowance for credit losses at beginning of
period $ 1,682 $ 2,358 $ 1,633 $ 2,478 $ 2,789
Charge-offs
Commercial (1,085) (1,133) (318) (907) (1,800)
Real estate (595) (451) (32) (257) (1,195)
Consumer (29) (45) (57) (137) (246)
--------------- ------------ ------------ --------------- ---------------
Total charge-offs (1,709) (1,629) (407) (1,301) (3,241)
Recoveries
Commercial 432 173 147 380 606
Real estate 103 --- 130 44 247
Consumer 19 30 34 32 124
--------------- ------------ ------------ --------------- ---------------
Total recoveries 554 203 311 456 977
--------------- ------------ ------------ --------------- ---------------
Net loans charged-off (1,155) (1,426) (96) (845) (2,264)
Provision (credit) for credit losses 410 750 (311) --- 1,953
Addition due to acquisitions 1,882 --- 1,132 --- ---
--------------- ------------ ------------ --------------- ---------------
Allowance for credit losses as of end of period $ 2,819 $ 1,682 $ 2,358 $ 1,633 $ 2,478
--------------- ------------ ------------ --------------- ---------------
--------------- ------------ ------------ --------------- ---------------
Ratio of net charge-offs to average
loans outstanding 1.1% 2.1% 0.2% 2.0% 3.5%
--------------- ------------ ------------ --------------- ---------------
--------------- ------------ ------------ --------------- ---------------
Ratio of allowance for credit losses to loans
outstanding at end of period 2.0% 2.3% 3.6% 4.3% 4.9%
--------------- ------------ ------------ --------------- ---------------
--------------- ------------ ------------ --------------- ---------------
</TABLE>
Loan characteristics of loan pools by purpose or origination, such as
credit cards, loans secured by real estate, and small business loans are
identified and allocated a portion of required allowance for credit losses.
BKLA also allocates the allowance for credit loss based upon assignment of
individuals loans to either various degrees of status designated as
follows: pass, in which credit risk is evaluated as nominal; special,
loans which have been identified for their potential weakness even though
none has yet materialized; and identified loans in which credit weakness
has been identified from range of substandard to doubtful and impaired.
Non-accrual loans are the substantial amount of loans classified as
impaired. At December 31, 1997, BKLA had $4,490,000 loans categorized as
impaired. BKLA considers a loan impaired when management anticipates that
all principal and interest payments will not be received as contractually
agreed upon when the loan was originated. Three of these loans, totaling
$1,603,000, have been brought current as of December 31, 1997, but remain
on non-accrual status. The portion of the allowance for credit losses that
has been allocated to non-accrual loans at December 31, 1997 was $688,000.
34
<PAGE>
DEPOSITS
The following table presents information for average deposits and the
average rate paid on those deposits for each of the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------
1997 1996
------------------- --------------------
Amount Rate Amount Rate
----------- ------ ------------ ------
<S> <C> <C> <C> <C>
Demand, non-interest bearing $ 59,590 0.0% $ 35,626 0.0%
Demand, interest bearing 20,751 1.9% 13,345 1.6%
Money market 40,798 3.7% 29,468 3.6%
Savings (including IRA's) 9,014 2.6% 7,687 2.8%
Time certificates of deposit 30,387 5.1% 26,069 5.1%
----------- -----------
Total deposits $ 160,540 $ 112,195
----------- -----------
----------- -----------
</TABLE>
DEPOSIT MATURITIES AND REPRICING
The following table presents the maturity distribution of time
certificates of deposit in categories of over $100,000 as of December 31, 1997,
in thousands.
<TABLE>
<CAPTION>
<S> <C> <C>
Three months or less $ 13,394
Three to six months 8,056
Six to twelve months 2,681
Over twelve months 6,036
-------------
Total $ 30,167
-------------
-------------
</TABLE>
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Return on average assets 2.1% 0.8% 0.7%
Return on average
shareholders' equity 21.1% 8.1% 8.7%
Average equity to average
assets 9.7% 8.7% 8.9%
</TABLE>
SHORT-TERM BORROWINGS
BKLA did not incur significant short-term borrowings in the years 1997 and
1996.
35
<PAGE>
PART III
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None to report.
ITEM 10 - DIRECTORS AND PRINCIPAL OFFICERS OF BKLA
<TABLE>
<CAPTION>
Year First Elected
Principal Occupation or Employment or Appointed a
Name and Title Age for the Past Five Years Director or Officer Years Served
- ----------------------------- ------- ---------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C>
Adriana M. Boeka 46 Board member since 1996; Principal of Manex 1996 2
Vice Chairman Group, a business and management consulting
corporation from 1995 to present. Senior
Vice President at Union Bank of California
prior to1995. As principal of Manex Group,
M. J. Burford 60 Chairman of the Board from April, 1995 to 1995 3
Chairman of the Board present; Chief Executive Officer of BKLA
of Directors from April, 1995 to April, 1997; Chairman
of the Board of Investors Banking
Corporation since February, 1993; former
Chairman/CEO, and currently a Board member,
of First Security Bank of Oregon, from May,
1992 to present; Chairman of the Board of
Colonial Bank, Grants Pass, Oregon.
Mary Anne Chalker 67 Board member of BKLA since inception in 1981 17
Director 1981; insurance broker; President of LFC
Insurance Brokers & Agents, Inc.
Roy Doumani 61 Board member since 1996; former Chairman of 1996 2
Director the Board of World Trade Bank, N. A.
John J. Feldman 65 President and Chief Executive Officer of 1997 1
President and BKLA since April, 1997; member of Board;
Chief Executive Officer Former President and Chief Executive
and Director Officer of American West Bank
Rickey M. Gelb 51 Board member since April, 1997; General 1997 1
Director partner of Gelb Enterprises (real estate
development).
John R. Newhouse 42 Board member since January, 1998; former 1998 ---
Senior Vice President President and Chief Executive Officer of
and Director Culver National Bank; Senior Vice
President/Business Development of Bank of
Los Angeles since January, 1998.
James V. Reimann 57 Board member of BKLA since 1995; President 1995 3
Director of Reimann Associates, a real estate
development and sales company since
December, 1987; Director of R. B. Rubber
since 1995.
Melvin F. Shaw 61 Board member since April, 1997; President 1997 1
Director and Chief Executive Officer of USCB, Inc.,
a collection agency.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Year First Elected
Principal Occupation or Employment or Appointed a
Name and Title Age for the Past Five Years Director or Officer Years Served
- ----------------------------- ------- ---------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C>
Burton N. Sterman 64 Board member since April, 1997; Certified 1997 1
Director Public Accountant, Brown & Sterman,
Accountancy Corporation.
Robert Jacobsen 42 Executive Vice President and Chief Credit 1992 7
Executive Vice President Officer from April, 1997; Senior Vice
and Chief Credit Officer President/Chief Credit Officer from 1995 to
1997; Vice President and Loan Administrator
from 1992 to 1995.
Wendy R. Moskal 46 Executive Vice President and Chief 1997 1
Executive Vice President Operating Officer since April, 1997; former
and Chief Operating Executive Vice President and Chief
Officer Operating Officer of American West Bank
</TABLE>
Certain Significant Employees
None to report.
Compliance with Section 16(a) of the Exchange Act
BKLA does not know of any beneficial owners of more than ten percent of any
class of equity securities who have failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act during the year ended December 31,
1997.
44
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION TABLE
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------- ---------------------------------- -----------------------------
Restricted Securities
Stock Underlyng LTP All Other
Year Salary Bonus Other Award(s) ($) Options Payouts Compensation (5)
------- ----------- -------- -------- ------------- ------------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
M. J. Burford 1997 $ 110,000 $ 441 $ --- $ --- $ --- $ --- $ 2,199
1996 145,000 441 --- --- 75,000 --- 3,088
1995 108,000 --- --- --- --- --- 795
Adriana M. Boeka 1997 19,602 435 29,200 --- --- --- ---
(6)(7)
John J. Feldman 1997 138,750 406 --- --- 75,000 --- 2,775
Robert Jacobsen 1997 96,622 406 --- --- --- --- 1,932
1996 82,072 406 --- --- 20,000 --- 1,733
Wendy R. Moskal 1997 74,806 2,000 --- --- 20,000 --- 1,496
</TABLE>
- ---------------------------
(5) Employer contributions for 401K retirement plans.
(6) Amount represents $6,200 in fees paid for attending meetings of the
Board of Directors.
(7) Amount represents $23,000 in fees paid for consulting services as an
outside director.
45
<PAGE>
Aggregated Options/SAR Exercised in the Year Ended December 31, 1997
and December 31, 1997 Options/SAR Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-The-
Shares Unexercised Options/SARs at Money Options/SARS at
Acquired on December 31, 1997 (#) December 31, 1997 ($)(1)
Name Exercise (#) Value Realized ($) ------------------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------- ----------------------------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
M. J. Burford --- --- 18,750 56,250 $ 185,156 $ 555,469
Adriana M. Boeka --- --- 1,500 4,500 $ 14,813 $ 44,438
John J. Feldman --- --- --- 75,000 $ --- $ 523,125
Robert Jacobsen --- --- 1,250 18,750 $ 12,344 $ 141,656
Wendy R. Moskal --- --- --- 20,000 $ --- $ 139,500
Gary Nudell --- --- --- 10,000 $ --- $ 69,750
</TABLE>
- ---------------------------
(1) Value is difference between the fair market value of the securities
underlying the options and the exercise price of the options at
December 31, 1997.
46
<PAGE>
Options Granted in the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Percentage of Total Grant Date
Number of Securities Options Granted to Exercise Present
Name Underlying Options Employees Price Expiration Date Value (1)
- -------------------- -------------------- --------------------- ------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
John J. Feldman 75,000 45% $6.90 May 20, 2007 $ 276,000
Robert Jacobsen 15,000 9% $6.90 May 20, 2007 $ 55,200
Wendy R. Moskal 20,000 12% $6.90 May 20, 2007 $ 73,600
Gary Nudell 10,000 6% $6.90 May 20, 2007 $ 36,800
</TABLE>
- ---------------------------
(1) Value of stock option was determined at date of grant using the
Black-Scholes model.
47
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS
The following table sets forth, at December 31, 1997, the number and
percentage of shares of BKLA Common Stock beneficially owned by each of BKLA's
directors and the named executive officers.
<TABLE>
<CAPTION>
Common Stock Beneficially Owned
----------------------------------------
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership Class
----------------------------------------------- ---------------------- --------------
<S> <C> <C> <C>
Adriana M. Boeka, Vice Chairman Stock 39,175 1.2%
Bank of Los Angeles Warrants 17,365
8901 Santa Monica Blvd. Options 1,500
West Hollywood, California 90069 -------
Total 58,040
M. J. Burford, Chairman Stock 155,033 5.1%
Bank of Los Angeles Warrants 73,756
8901 Santa Monica Blvd. Options 18,750
West Hollywood, California 90069 -------
Total 247,539
Mary Anne Chalker, Director Stock 15,106 Less than 1%
LFC Insurance Agents & Brokers Warrants 500
113 North San Vicente Blvd. Options 2,640
Beverly Hills, California 90211 -------
Total 18,246
Roy Doumani, Director Stock 94,313 2.0%
4 Yawl Warrants ---
Venice, California 90292 Options 1,500
-------
Total 95,813
John J. Feldman, President/CEO/Director Stock 81,750 1.7%
Bank of Los Angeles Warrants ---
8901 Santa Monica Blvd. Options ---
West Hollywood, California 90069 -------
Total 81,750
Rickey M. Gelb, Director Stock 72,800 1.5%
Gelb Enterprises Warrants ---
17547 Ventura Blvd., Suite 201 Options
Encino, California 91316 -------
Total 72,800
John R. Newhouse, Senior Vice President/Director Stock 13,212 Less than 1%
Bank of Los Angeles Warrants ---
5399 Sepulveda Blvd. Options ---
Culver City, California 90230 -------
Total 13,212
James V. Reimann, Director Stock 97,239 3.0%
Reimann Associates Warrants 42,967
5605 Inland Shores Way North Options 1,500
Keizer, Oregon 97307 -------
Total 141,706
Melvin F. Shaw. Director Stock 76,745 1.6%
United States Credit Bureau Warrants ---
1440 North Harbor, #515 Options ---
Fullerton, California 92635 -------
Total 76,745
Burton S. Sterman, Director Stock 72,950 1.5%
Brown & Sterman Warrants ---
16861 Ventura Blvd., Suite 202 Options ---
Encino, California 91436 -------
Total 72,950
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Common Stock Beneficially Owned
----------------------------------------
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership Class
----------------------------------------------- ---------------------- --------------
<S> <C> <C> <C>
Robert Jacobsen, EVP/Chief Credit Officer Stock 1,250 Less than 1%
Bank of Los Angeles Warrants 100
8901 Santa Monica Blvd. Options ---
West Hollywood, California 90069 -------
Total 1,350
Wendy R. Moskal, EVP/Chief Operating Officer Stock 7,000 Less than 1%
Bank of Los Angeles Warrants ---
8901 Santa Monica Blvd. Options ---
West Hollywood, California 90069 -------
Total 7,000
Directors and Named Executive Officers Stock 726,573 18.1%
Warrants 134,688
Options 25,890
-------
Total 887,151
</TABLE>
49
<PAGE>
SECURITY OWNERSHIP OF BENEFICIAL OWNERS
Management of BKLA knows of no person who owns more than five percent (5%)
of the outstanding shares of BKLA Common Stock, except as listed below.
The following table sets forth, at December 31, 1997, the number and
percentages of shares of BKLA Common Stock of beneficial owners.
<TABLE>
<CAPTION>
Common Stock Beneficially Owned
---------------------------------------
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent of
Class
-------------------------------------------- ----------------------- ------------
<S> <C> <C> <C>
M. J. Burford, Chairman/CEO Stock 155,033 5.1%
Bank of Los Angeles Warrants 73,756
8901 Santa Monica Blvd. Options 18,750
West Hollywood, California 90069 -------
Total 247,539
John J. Tennant (1) Stock 188,720 5.6%
Post Office Box 1658 Warrants 84,440
Portland, Oregon 97207 Options ---
-------
Total 273,160
Joseph Tennant (1) Stock 93,255 2.8%
Post Office Box 1658 Warrants 41,695
Portland, Oregon 97207 Options ---
-------
Total 134,950
</TABLE>
- ----------------------------
(1) John J. Tennant and Joseph Tennant are brothers.
50
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None to report.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM F-3
EXHIBITS ATTACHED TO PRIOR FILINGS
1.1 Articles of Incorporation
2.1 Stock Option Plan (1)
3.1 Beverly Hills Branch Lease
REPORTS ON FORM F-8K INCORPORATED BY REFERENCE
Resignation of Bank's Director - December, 1997
Acquisition or Disposition of Assets - October, 1996
Acquisition of Assets - December, 1997
FORMAT F-9 FINANCIAL STATEMENTS
Balance Sheet. Refer to Financial Statements Balance Sheets,
Statement of Income. Refer to Financial Statements of Operations,
Statement of Change in Equity Capital. Refer to Financial Statements
Statement of Change in Equity Capital,
Schedule I - Securities. Refer to Financial Statements, Note C,
Schedule II - Loans to Officers, Directors, Principal Security Holders,
and any Associate of the Foregoing Persons. Refer to Financial
Statements, Note F,
Schedule III - Loans and Lease Financing Receivables. Refer to Financial
Statements, Note D,
Schedule IV - Bank Premises and Equipment. Refer to Financial
Statements, Note G,
Schedule V - Investments in, Income from Dividends, and Equity in
earnings or losses of subsidiaries and associated companies. Report
is not applicable.
Schedule VI - Allowance for possible credit losses. Refer to Financial
Statements, Note E,
- ----------------------------
(1) Filed as exhibits attached on Form 10K at December 31, 1995, and
incorporated herein by reference.
51
<PAGE>
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, BKLA has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BANK OF LOS ANGELES
By Date:
----------------------------------------------- -----------------
M. J. Burford
Chairman of the Board/Chief Executive Officer
By Date:
----------------------------------------------- -----------------
Mark W. Bidwell
Vice President/Controller
By Date:
----------------------------------------------- -----------------
Adriana M. Boeka
Vice Chairman of the Board
By Date:
----------------------------------------------- -----------------
Mary Anne Chalker
Director
By Date:
----------------------------------------------- -----------------
Roy Doumani
Director
By Date:
----------------------------------------------- -----------------
John J. Feldman
President/Chief Executive Officer
By Date:
----------------------------------------------- -----------------
Rickey M. Gelb
Director
By Date:
----------------------------------------------- -----------------
John R. Newhouse
Director
By Date:
----------------------------------------------- -----------------
James V. Reimann
Director
By Date:
----------------------------------------------- -----------------
Melvin F. Shaw
Director
By Date:
----------------------------------------------- -----------------
Burton S. Sterman
Director
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20006
FORM 8K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
May 6, 1998
(Date of Report) (Date of Earliest Event)
BANK OF LOS ANGELES
(Exact Name of Registrant as Specified in its Charter)
California
(State or Other Jurisdiction of Incorporation)
(310) 843-1455
(Registrant's Telephone Number, Including Area Code)
23790 95-3612029
(FDIC Certificate Number) (IRS Employer Identification No.)
8901 Santa Monica Boulevard
West Hollywood, California 90069
(Address of Principal Executive Offices) (Zip Code)
<PAGE>
Item 5. Other Events.
On May 6, 1998, Bank of Los Angeles ("BKLA") announced that its Chairman of the
Board, Maurice (Morry) J. Burford, passed away in the early morning hours of May
6, 1998. It was also announced that the Board of Directors appointed Adriana M.
Boeka, then current Vice Chairman, Chairman of the Board of Directors. A copy
of the press releases issued by BKLA in connection with the announcement are
attached hereto as Exhibit 99.1 and Exhibit 99.2 and are incorporated herein by
reference in their entirety.
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:
Exhibit 99.1 Press Release of BKLA, dated May 6, 1998
Exhibit 99.2 Press Release of BKLA, dated May 12, 1998
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: May 13, 1998
BANK OF LOS ANGELES
---------------------------------
Adriana M. Boeka
Chairman of the Board
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
Exhibit 99.1 Press Release of BKLA, dated May 6, 1998
Exhibit 99.2 Press Release of BKLA, dated May 12, 1998
<PAGE>
FORM 10-Q
Quarterly Report Under Section 13 of the Securities Exchange Act of 1934
FOR THE QUARTER ENDED MARCH 31, 1998
FDIC Certificate Number 23790
BANK OF LOS ANGELES
State of Incorporation: California
IRS Employer ID No. 95-3612029
8901 Santa Monica Boulevard
West Hollywood, California 90069
310-843-1474
Securities registered under 12(b) of the Act
None
Securities Registered under 12(g) of the Act
Common Stock, no par value
Preferred stock, no par value
Indicate by check mark whether the bank (1) has filed all reports required to be
filed by Section 13 of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Bank was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
------ -------
Number of shares outstanding of no par value common stock as of March 31, 1998
are 4,762,100.
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
-------
<S> <C>
Item 1. Financial statements
Balance sheets. . . . . . . . . . . . . . . . . . . . 3
Statements of income. . . . . . . . . . . . . . . . . 4
Statements of comprehensive income. . . . . . . . . . 5
Statements of changes in shareholders' equity . . . . 6
Statements of cash flows. . . . . . . . . . . . . . . 7
Notes to financial statements . . . . . . . . . . . . 9
Summary of Quarterly Financial Data . . . . . . . . . 10
Item 2. Management's Discussion and Analysis
Results of operations . . . . . . . . . . . . . . . . 11
Capital adequacy. . . . . . . . . . . . . . . . . . . 16
Liquidity . . . . . . . . . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION
Signatures. . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<PAGE>
PART I, ITEM 1 - FINANCIAL INFORMATION, FINANCIAL STATEMENTS
Bank of Los Angeles
Balance Sheets
<TABLE>
<CAPTION>
At At
March 31, December 31,
1998 1997
----------- -------------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,746 $ 20,521
Federal funds sold 14,600 29,555
---------- ---------
Total cash and cash equivalents 37,346 50,076
Interest bearing deposits with banks 883 2,125
Securities available for sale 874 12,295
Securities held to maturity (market value of $78,557 at
March 31, 1998 and at $48,247 at December 31, 1997) 78,508 48,138
Loans receivable 146,303 142,633
Less allowance for credit losses (2,688) (2,819)
---------- ---------
Loans, net 143,615 139,814
Accrued interest receivable 1,431 1,556
Premises and equipment, net 2,568 2,650
Real estate owned 1,545 1,475
Other assets 11,391 13,904
---------- ---------
Total assets $ 278,161 $ 272,033
---------- ---------
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing $ 90,786 $ 85,222
Interest bearing
Time certificates of deposit of $100,000 or more 30,412 30,167
Other 115,522 122,623
---------- ---------
Total deposits 236,720 238,012
Capital lease obligation 1,851 1,849
Borrowing from Federal Home Loan Bank 5,906 ---
Accrued interest payable and other liabilities 1,585 1,118
---------- ---------
Total liabilities 246,062 240,979
---------- ---------
Shareholders' equity
Preferred stock; 25,000,000 shares; no shares
issued and outstanding --- ---
Common stock, no par value; authorized, 75,000,000
shares: issued and outstanding; 4,762,100 common
shares at March 31, 1998, 4,751,685 common
shares at December 31, 1997. 30,688 30,630
Retained earnings 1,411 472
Net unrealized holding loss on securities available for sale --- (48)
---------- ---------
Total shareholders' equity 32,099 31,054
---------- ---------
Total liabilities and shareholders' equity $ 278,161 $ 272,033
---------- ---------
---------- ---------
</TABLE>
3
<PAGE>
Bank of Los Angeles
Statements of Income
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------
1998 1997
----------- ----------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (unaudited)
<S> <C> <C>
Interest income
Loans receivable $ 3,763 $ 1,895
Securities 885 401
Federal funds sold 444 239
Deposits with financial institutions 24 --
----------- ----------
Total interest income 5,116 2,535
Interest expense
Deposit accounts 1,351 676
Capital lease obligation 64 65
Federal Home Loan Bank advances 36 --
----------- ----------
Total interest expense 1,451 741
----------- ----------
Net interest income before provision for credit
losses 3,665 1,794
Provision for credit losses --- 85
----------- ----------
Net interest income after provision for credit
losses 3,665 1,709
----------- ----------
Service charges and fees 473 261
Gain on sale of securities 14 --
----------- ----------
Total non-interest income 487 261
Non-interest expense
Employee compensation and benefits 1,433 850
Occupancy 524 323
Professional services 147 117
Goodwill amortization 122 30
Other 456 257
----------- ----------
Total non-interest expense 2,682 1,577
----------- ----------
Income before income tax expense 1,470 393
Income tax expense 531 --
----------- ----------
Net income $ 939 $ 393
----------- ----------
----------- ----------
Earnings per common share $ 0.20 $ 0.18
----------- ----------
----------- ----------
Earnings per common share -- assuming dilution $ 0.17 $ 0.15
----------- ----------
----------- ----------
Weighted average common shares 4,758,602 2,195,075
----------- ----------
----------- ----------
Weighted average common shares -- diluted 5,402,677 2,575,563
----------- ----------
----------- ----------
</TABLE>
4
<PAGE>
Bank of Los Angeles
Statements of Comprehensive Income
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------
1998 1997
----------- ----------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (unaudited)
<S> <C> <C>
Net income $ 939 $ 393
Unrealized losses on securities
Unrealized gains (losses) arising during period;
$48,000 gain for the three months ended March 31,
1998, adjusted for taxes, $180,000 loss for the
three months ended March 31, 1997, has not been
adjusted for taxes. 28 (180)
Less reclassification adjustment for gains included in
net income, gain of $14,000 adjusted for taxes. (8) --
----------- ----------
Comprehensive income $ 959 $ 213
----------- ----------
----------- ----------
Comprehensive income per common share $ 0.20 $ 0.10
----------- ----------
Comprehensive income per common share -- assuming
dilution $ 0.18 $ 0.08
----------- ----------
----------- ----------
Weighted average common shares 4,758,602 2,195,075
----------- ----------
----------- ----------
Weighted average common shares -- diluted 5,402,677 2,575,563
----------- ----------
----------- ----------
</TABLE>
5
<PAGE>
Bank of Los Angeles
Statement of Changes in Shareholders' Equity
For the Three Months ended March 31, 1998 and
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Retained Other Total
-------------------------- Earnings/ Comprehensive Shareholders'
(DOLLARS IN THOUSANDS) Shares Amount (Deficit) Income Equity
--------- ------------- ---------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 2,195,075 $ 16,111 $ (3,259) $ (220) $ 12,632
Issuance of common stock
April 1, 1997, net cost of
$213 1,367,493 5,926 -- -- 5,926
Issuance of common stock
December 31, 1997, net cost
of $247 1,155,326 8,466 -- -- 8,466
Stock options exercised 1,300 5 -- -- 5
Warrants exercised 32,491 122 -- -- 122
Net change in unrealized loss
on securities available for sale -- -- -- 172 172
Net income -- -- 3,731 -- 2,041
--------- ------------- ---------------- ------------------ -------------
Balance, December 31, 1997 4,751,685 30,630 472 (48) 31,054
Stock options exercised (unaudited) 7,250 47 -- -- 46
Warrants exercised (unaudited) 3,165 11 -- -- 3
Net income (unaudited) -- -- 939 --
Net change in unrealized loss
on securities available for sale
(unaudited) -- -- -- 48 48
--------- ------------- ---------------- ------------------ -------------
Balance, March 31, 1998 (unaudited) 4,762,100 $ 30,688 $ 1,411 $ -- $ 32,099
--------- ------------- ---------------- ------------------ -------------
--------- ------------- ---------------- ------------------ -------------
</TABLE>
6
<PAGE>
Bank of Los Angeles
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 4,937 $ 2,449
Fees and commissions received 473 261
Interest paid (1,290) (750)
Cash paid to suppliers and employees (2,878) (1,688)
Taxes paid (18) --
---------- ----------
Net cash provided by operating activities 1,224 272
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and pay downs of securities 1,216 5,496
available for sale
Proceeds from maturities and pay downs of securities 12,353 --
held to maturity
Proceeds from sales of securities available for sale 10,267 --
Proceeds from maturities of interest bearing deposits 1,242 --
with banks
Purchases of securities available for sale -- (10,014)
Purchases of securities held to maturity (42,723) --
Net decrease (increase) decrease in loans receivable (2,974) 1,552
Proceeds from the sale of fixed assets -- 2
Acquisition of premises and equipment (76) (26)
---------- ----------
Net cash provided (used) by investing activities (20,695) (2,990)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of capital stock 58 --
Net increase (decrease) in deposits, gross of rejected 1,150 (3,787)
debits
Increase in borrowing from Federal Home Loan Bank 5,531 --
Principle payments under capital lease obligation 2 --
---------- ----------
Net cash provided (used) in financing activities 6,741 (3,787)
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,730) (6,505)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 50,076 30,139
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 37,346 $ 23,634
---------- ----------
---------- ----------
</TABLE>
7
<PAGE>
Bank of Los Angeles
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
1998 1997
---------- ----------
(dollars in thousands) (unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income $ 939 $ 393
Adjustments for non-cash items:
Depreciation, amortization and accretion 222 138
Provisions (credit) for credit losses -- 85
Gain on sale of securities available for sale (14) --
Deferred salary for loan originations (173) --
(Decrease) increase in deferred loan income (54) (45)
Decrease (increase) in accrued interest receivable (125) (41)
Increase in accrued income taxes 513 --
Decrease (increase) in other assets (58) (173)
(Decrease) increase in interest payable and other liabilities (26) (85)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,224 $ 272
---------- ----------
Supplemental disclosure of non-cash transactions:
Change in unrealized gain (loss) on securities available for sale $ 48 $ (180)
---------- ----------
---------- ----------
Transfer of real estate owned from loans receivable 70 --
---------- ----------
---------- ----------
Transfer of bargain lease from fixed assets to other assets -- 1,559
---------- ----------
---------- ----------
</TABLE>
8
<PAGE>
Bank of Los Angeles
Notes to Financial Statements
Acquisitions of American West Bank and Culver National Bank
On April 1, 1997, BKLA acquired American West Bank ("AWB"), which had
$67,291,000 in total assets and two branch offices. On December 31, 1997,
BKLA acquired Culver National Bank ("CNB"), which had $56,944,000 in total
assets and one branch office. The acquisitions of both AWB and CNB were
accounted for as purchases. The results of operations for AWB and CNB are
included in the statement of income for the quarter ended March 31, 1998, but
are excluded in the statement of income for the quarter ended March 31, 1997.
The assets and liabilities of AWB and CNB are included in the balance sheets
at March 31, 1998 and December 31, 1997.
Adoption of Recently Issued Accounting Pronouncement
In June, 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. This statement divides comprehensive income into net
income and other comprehensive income. For BKLA, the primary component
included in other comprehensive income was unrealized gains and losses on
certain investments in debt and equity securities. BKLA has adopted the two
statement approach and reports the statement of income and the statement of
comprehensive income separately.
Subsequent event
On April 17, 1998, BKLA entered into a definitive agreement to be purchased
by Western Bancorp ("Western") in which each share of BKLA stock will be
exchanged for 0.4224 shares of Western stock. The acquisition is anticipated
to be accounted for by pooling of interests and is expected to close in the
third quarter of 1998. At March 31, 1998, Western had $2.1 billion in assets.
BKLA will be merged into Western's subsidiary, Santa Monica Bank, which
operates branches in Santa Monica, Malibu, Marina Del Rey, Beverly Hills,
Century City, Westwood and Encino.
9
<PAGE>
Bank of Los Angeles
Summary of Quarterly Financial Data
<TABLE>
<CAPTION>
First By Quarter for the Year 1997
Quarter ---------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA AND RATIOS) 1998 Fourth Third Second First
---- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
RECAP OF EARNINGS
Interest income $ 5,116 $ 4,231 $ 3,972 $ 4,116 $ 2,535
Interest expense 1,451 1,104 1,081 1,005 741
Net interest income before provision for credit losses 3,665 3,127 2,891 3,111 1,794
Provision for credit losses -- -- -- 325 85
Non-interest income 487 367 392 368 261
Non-interest expense 2,682 2,176 2,277 2,512 1,577
Net income before taxes 1,470 1,318 1,006 642 393
Income tax provision (credit) 531 (372) -- -- --
Net income $ 939 $ 1,690 $ 1,006 $ 642 $ 393
PER COMMON SHARE
Earnings $ 0.20 $ 0.47 $ 0.28 $ 0.18 $ 0.18
Earnings -- diluted $ 0.17 $ 0.40 $ 0.24 $ 0.16 $ 0.15
Book value $ 6.74 $ 6.54 $ 5.80 $ 5.50 $ 5.85
Common stock security price, symbol BKLA
High $ 14.19 $ 15.63 $ 12.50 $ 8.00 $ 8.38
Low $ 11.03 $ 10.75 $ 7.50 $ 6.63 $ 6.38
SHARES OUTSTANDING
Common shares outstanding 4,762,100 4,751,685 3,568,756 3,563,343 2,195,075
Common shares weighted by issue date 4,758,602 3,582,558 3,563,434 3,548,893 2,195,075
Effect of dilutive securities 644,075 611,505 569,229 404,109 380,488
Common shares -- diluted 5,402,677 4,194,063 4,132,663 3,953,002 2,575,563
BALANCE SHEET DATA, END OF PERIOD
Total assets $ 278,161 $ 272,033 $ 203,867 $ 193,276 $ 127,048
Total deposits 236,720 238,012 180,351 171,308 111,809
Total loans 146,303 142,633 112,770 111,046 70,825
Non-accrual loans and real estate owned 5,032 5,740 3,535 1,877 3,317
Allowance for credit losses 2,688 2,819 2,044 1,829 1,833
Total shareholders' equity $ 32,099 $ 31,054 $ 20,696 $ 19,591 $ 12,845
BALANCE SHEET DATA, PERIOD AVERAGES
Total assets $ 271,367 $ 205,072 $ 198,063 $ 195,128 $ 129,441
Earning assets 236,786 184,128 178,345 175,867 116,154
Total loans 143,151 113,494 110,488 109,271 72,114
Total deposits 235,979 180,924 173,999 173,260 112,063
Total shareholders' equity $ 31,577 $ 21,642 $ 20,144 $ 16,218 $ 12,739
FINANCIAL RATIOS
Return on average assets 1.4% 3.3% 2.0% 1.3% 1.2%
Return on average common equity 11.9% 31.2% 20.0% 15.8% 12.3%
Efficiency ratio 59.9% 57.9% 65.2% 77.0% 77.0%
Allowance for credit losses to total loans 1.8% 2.0% 1.8% 1.6% 2.6%
Non-accrual loans and real estate owned to allowance for
credit losses 187.2% 203.6% 172.9% 102.6% 181.0%
Net loans charged off (recovered) to average total loans 0.1% 0.1% -0.2% 1.3% -0.1%
Non-accrual loans and real estate owned to total assets 1.8% 2.1% 1.7% 1.0% 2.6%
</TABLE>
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
10
<PAGE>
Results of Operations
Net income and income tax expense
In 1997, BKLA acquired AWB and CNB, increasing total asset size from
$130,705,000 at December 31, 1996 to $272,033,000 at December 31, 1997, an
increase of $141,328,000 or 108%. Both acquisitions were accounted for as
purchases. The results of operations for AWB and CNB are included in the
statement of income for the quarter ended March 31, 1998, but are excluded in
the statement of income for the quarter ended March 31, 1997.
Net income for the quarter ended March 31, 1998 was $939,000, an
increase of $546,000 or 138% compared to $393,000 net income for the quarter
ended March 31, 1997. Earnings per common share were $0.20 and $0.18 for the
quarter ended March 31, 1998 and 1997, respectively. Earnings per common
share, assuming dilution were $0.17 and $0.15 for the quarter ended March 31,
1998 and 1997, respectively.
Income before taxes for the quarter ended March 31, 1998 was $1,470,000,
an increase of $1,077,000 or 274% compared to $393,000 for the same quarter
of 1997. In 1997 In the quarter ended March 31, 1998, BKLA recognized income
tax expense at statutory effective pretax income rates of 34% for Federal and
7.5% for State, adjusted for excluded purchase accounting income and expense.
An income tax benefit of $82,000 was recognized from net operating loss
carry forwards available in 1999 as proscribed by SFAS No. 109 "Accounting
for Income Taxes". Income tax expense, net of benefit, recognized in the
quarter ended March 31, 1998 was $531,000. No income tax expense or benefit
was recognized in the same quarter of 1997 due to the availability of net
operating loss carry forwards from prior years.
Net interest income before provision for credit losses
Net interest income before provision for credit losses was $3,665,000
and $1,794,000 for the quarters ended March 31, 1998 and 1997, respectively.
The net interest margin spread was 4.9% and 5.0% for the quarters ended March
31, 1998 and 1997, respectively. Net interest income earned as a percentage
of average earning assets was 6.3% for both quarters ended March 31, 1998 and
1997.
Net interest income is derived from total interest income less total
interest expense. Total interest income was $5,116,000 and $2,535,000 for the
quarters ended March 31, 1998 and 1997, an increase of $2,581,000 or 102%.
Increased interest income is due to larger volume of interest earning assets
from the AWB and CNB acquisitions. The average balance of interest earnings
assets was $236,786,000 for the quarter ended March 31, 1998, an increase of
$120,632,000 or 103%, compared to $116,154,000 for the quarter ended March
31, 1997. The average rate earned on interest earning assets was 8.8% and
8.9% for the quarters ended March 31, 1998 and 1997, respectively.
Total interest expense was $1,451,000 and $741,000 for the quarters
ended March 31, 1998 and 1997, respectively. Increased interest expense is
due to larger volume in interest paying liabilities from the AWB and CNB
acquisitions. The average balance of interest paying liabilities was
$150,112,000 for the quarter ended March 31, 1998, an increase of $74,384,000
or 98%, compared to $75,728,000 for the quarter ended March 31, 1997. The
rate paid on interest bearing liabilities was 3.8% and 3.9% for the quarter
ended March 31, 1998 and 1997, respectively.
The following table presents BKLA's average balances of assets,
liabilities and shareholders' equity; the amount of interest income or
interest expense and the average yield or rate for each category of interest
earning
11
<PAGE>
assets and interest bearing liabilities, the net interest spread and net
interest yield for the periods indicated.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------------------------------------
1998 1997
Average Average
Average Interest Yield/ Interest Average Yield/
Balance2 Earned/Paid Rate1 Balance Earned/Paid Rate1
-------- ----------- ------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets:
- ------
Interest earning assets:
Federal funds sold $ 33,476 $ 444 5.4% $ 18,410 $ 239 5.3%
Deposits with financial institutions 1,611 24 6.0% -- -- --
Securities 58,548 885 6.1% 25,630 401 6.3%
Loans(3) 143,151 3,763 10.7% 72,114 1,895 10.7%
--------- ------ ----- -------- ------ -----
Total interest earning assets 236,786 5,116 8.8% 116,154 2,535 8.9%
Non-earning assets:
Cash and due from banks 18,037 7,927
Other assets 19527 7,143
Allowance for credit losses (2,983) (1,783)
--------- --------
Total assets $ 271,367 $129,441
--------- --------
--------- --------
Liabilities and Shareholders' Equity:
- -------------------------------------
Interest bearing liabilities:
Demand, interest bearing $ 30,074 $ 143 1.9% $ 15,122 $ 68 1.8%
Money market 52,478 449 3.5% 30,913 282 3.7%
Savings (including IRAs) 13,998 88 2.5% 7,459 49 2.7%
Time certificates of deposits 53,562 671 5.1% 22,234 277 5.1%
--------- ------ ----- -------- ------ -----
Total interest bearing deposits 150,112 1,351 3.6% 75,728 676 3.6%
Capital lease obligation 1,851 64 14.0% 1,843 65 14.3%
Advances from Federal Home Loan Bank 2,275 36 6.4% -- -- --
--------- ------ ----- -------- ------ -----
Total interest bearing liabilities 154,238 1,451 3.8% 77,571 741 3.9%
--------- ------ ----- -------- ------ -----
Demand deposits, non-interest bearing 81,741 38,252
Other liabilities 3,811 880
Shareholders' equity 31,577 12,739
--------- --------
Total liabilities and shareholders' equity $ 271,367 $129,441
--------- --------
--------- --------
Net interest margin spread $3,665 4.9% $1,794 5.0%
Net interest income earned as a percentage of
average earning assets 6.3% 6.3%
----- -----
----- -----
</TABLE>
Non-interest income and expense
-----
1 Average yield or rate is annualized.
2 Average balances are derived from the average balance of each month in
the quarter presented.
3 Interest income on loans includes loan fees, but excludes interest
foregone on non-accrual loans.
12
<PAGE>
Service charges and fees were $473,000 for the three months ended March
31, 1998, an increase of $212,000 or 81%, compared to $261,000 for the three
months ended March 31, 997. Service charges and fees were primarily for
demand deposits of businesses and individuals and credit card processing for
merchants.
Employee compensation and benefits were $1,433,000 for the three months
ended March 31, 1998, an increase of $583,000 or 69%, compared to $850,000
for the three months ended March 31, 1997. The increase is due to staffing
three additional branches acquired in 1997. Employee compensation and
benefits for the three months ended March 31, 1998 include a $174,000 credit
for deferred loan origination costs, compared to a $2,000 credit for the same
three months of 1997. The increase is from larger loan origination volume and
change in cost recognition of successful loan origination efforts in
application of SFAS No. 91, "Accounting for Non-refundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." Deferred loan origination cost are amortized as a reduction of yield
on loans in future reporting periods.
Occupancy expense consisted of branch lease payments, leasehold
improvement, furniture and equipment depreciation, utilities and maintenance
and was $524,000 for the three months ended March 31, 1998, an increase of
$201,000 or 62%, compared to $323,000 for the three months ended March 31,
1997. The increase is due to three additional branches acquired in 1997.
Professional services were $147,000 for the three months ended March 31,
1998, an increase of $30,000 or 26%, compared to $117,000 for the three
months ended March 31, 1997. The increase was in legal and auditing costs.
Goodwill amortization was $122,000 for the three months ended March 31, 1998,
an increase of $92,000 compared to $30,000 for the three months ended March
31, 1997. The increased goodwill amortization expense is from the acquisition
of CNB.
Other expense was $456,000 for the three months ended March 31, 1998, an
increase of $199,000, or 219% compared to $257,000 for the three months ended
March 31, 1997. The table below presents types of expenses included in other
expenses.
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Promotional $ 59 $ 43
Office supplies 54 29
Postage 44 12
Telephone 32 20
Liability and deposit insurance 60 36
Messenger and armored car 63 27
Other 144 90
---------- ---------
$ 456 $ 257
---------- ---------
---------- ---------
</TABLE>
Comprehensive income
BKLA has adopted the two statement approach and reports the statement of
income and the statement of comprehensive income separately. Comprehensive
income for the three months ended March 31, 1998 was $959,000 an increase of
$746,000 or 350%, compared to $213,000 for the three months ended March 31,
1997. Comprehensive income per common share was $0.20 and $0.10 for the
three months ended March 31, 1998 and 1997, respectively. Comprehensive
income per common share, assuming dilution, was $0.18 and $0.08 for the three
months ended March 31, 1998, and 1997, respectively. For BKLA, the difference
between net income and comprehensive income was the change in unrealized
gains or losses on securities available for sale.
Comprehensive income compared to net income, was increased by $28,000
for unrealized gains on securities available for sale, net of taxes for the
three months ended March 31, 1998. The gain was adjusted for
13
<PAGE>
gains on sales of securities available for sale net of tax of $8,000 included
in net income. Comprehensive income compared to net income was reduced by
$180,000 for unrealized loss on available for sale securities for the three
months ended March 31, 1997. The unrealized loss was not adjusted for tax
expense, as no income tax expense was recognized for the three months ended
March 31, 1997.
Investment securities
BKLA' investment securities are in bills and notes of the United States
Government, direct obligation bonds of Agencies and Corporations of the United
States, and mortgage backed obligations issued by Agencies and Corporations of
the United States. In the first quarter of 1998, BKLA sold its debt securities
classified as available for sale. The following table presents securities at
amortized cost and fair value.
<TABLE>
<CAPTION>
At March, 31, 1998 At December 31, 1997
------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Securities held to maturity
Debt of the U.S. Treasury and
U.S. Government Agencies $ 60,926 $ 61,019 $ 42,928 $ 43,043
Mortgage backed securities 17,582 17,538 5,211 5,204
-------- -------- -------- --------
78,508 78,557 48,139 48,247
Securities available for sale
Mortgage backed securities --- --- 11,480 11,432
Common stock 874 874 863 863
-------- -------- -------- --------
874 874 12,343 12,295
-------- -------- -------- --------
$ 79,382 $ 79,431 $ 60,482 $ 60,542
-------- -------- -------- --------
-------- -------- -------- --------
Unrealized gains and losses
Gains 105 --
Losses 21 48
-------- --------
$ 84 ($ 48)
-------- --------
-------- --------
</TABLE>
The following table presents sales of securities and realized gain and
losses from the sale of securities available for sale.
<TABLE>
<CAPTION>
For the Quarter For the Year
Ended March 31, Ended
----------------- December
1998 1997 31, 1997
-------- ------ ----------
<S> <C> <C> <C>
Proceeds from sales of securities $ 10,267 $ -- $ 1,303
Gross realized gains and losses
Gains $ 73 $ -- $ --
Losses (59) -- --
-------- ------ ----------
$ 14 $ -- $ --
-------- ------ ----------
-------- ------ ----------
</TABLE>
The following table presents maturities of investment securities at March
31, 1998.
14
<PAGE>
<TABLE>
<CAPTION>
Weighted
Amortized Average
Cost Yield
--------- --------
<S> <C> <C>
Securities held to maturity
Debt of the U.S. Treasury and U.S. Government Agencies
Less than three months $ 26,809 5.6%
Three months through one year 23,610 5.8%
One year through three years 10,507 6.0%
Over three years -- --
--------
60,926 5.7%
Mortgage backed securities
Less than three months 862 6.4%
Three months through one year -- --
One year through three years 16,598 6.0%
Over three years 122 6.8%
--------
17,582 6.1%
--------
$ 78,508 5.8%
--------
--------
</TABLE>
Non-performing assets
The following table presents, in thousands, classified assets, loans on
non-accrual and real estate owned.
<TABLE>
<CAPTION>
At March 31, At December 31,
1998 1997
------------ ------------
<S> <C> <C>
Classified assets $ 7,934 $ 8,904
Non-accrual loans 3,487 4,265
Real estate owned 1,545 1,475
------------ ------------
$12,966 $14,644
------------ ------------
------------ ------------
</TABLE>
Allowance for loan losses
The allowance for credit losses is established through provisions for
credit losses charged against income. Loans deemed to be uncollectible are
charged against the allowance for credit losses, and subsequent recoveries, if
any, are credited to the allowance. The allowance for credit losses is
maintained at a level believed adequate by management to absorb estimated
probable credit losses. Management's periodic evaluation of the adequacy of the
allowance is based on BKLA's past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, composition of the loan
portfolio, current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires estimates, including the
amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
Impaired loans at March 31, 1998 were $4,263,000, of which $625,000 was
estimated as the amount impaired by measuring either the present value of
expected future cash flows discounted at the loan's contracted interest rate
or the fair value of the collateral, if the loan was collateral dependent.
Impaired loans at December 31, 1997 were $4,490,000 of which $689,000 was
estimated as the amount impaired. The amount measured to be impaired is a
component of the allowance for credit losses.
15
<PAGE>
Management's evaluation of the loan portfolio at March 31, 1998
estimated that the allowance for credit losses was adequate at $2,067,000
when the actual balance was $2,688,000. As a result, no provision for loan
losses was made for the three months ended March 31, 1998. Management's
evaluation of the loan portfolio at December 31, 1997 estimated that an
adequate allowance for credit losses was $2,412,000 when the balance was
$2,819,000. Activity in the allowance for credit losses is presented in the
following table.
<TABLE>
<CAPTION>
For the Quarter For the Year
Ended Ended
March 31, December 31,
(DOLLARS IN THOUSANDS) 1998 1997
--------------- ------------
<S> <C> <C>
Loans receivable $ 146,525 $ 142,633
Average loans $ 143,151 $ 101,433
Allowance for credit losses at beginning of $ 2,819 $ 1,682
period
Provision for credit losses -- 410
Addition due to acquisitions -- 1,882
Charge-offs (225) (1,709)
Recoveries 94 554
--------- ---------
Net charge-offs (131) (1,155)
--------- ---------
Allowance for credit losses at end of period $ 2,688 $ 2,819
--------- ---------
--------- ---------
Recoveries to total charge-offs 41.8% 32.4%
Net charge-offs to average loans 0.1% 1.1%
Allowance for credit losses to loans receivable 1.8% 2.0%
</TABLE>
Capital Resources
BKLA is subject to regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by regulators that could range from restrictions on
activities to dissolution. Measures established by regulators to ensure
capital adequacy require BKLA to maintain minimum amounts and ratios of total
capital to risk-weighted assets, tier 1 capital to risk-weighted assets and
tier 1 capital to average assets. Those amounts are presented in the table
below. At March 31, 1998, management believed that BKLA met all capital
adequacy requirements.
<TABLE>
<CAPTION>
Capital Needed to be:
----------------------------------------------------------------------------
Actual Capital Adequate Well Capitalized
----------------------- -------------------- ------------------------
(DOLLARS IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998
Total capital to risk-weighted assets 27,073 14.8% 14,610 8.0% 18,262 10.0%
Tier 1 capital to risk-weighted assets 24,785 13.6% 7,305 4.0% 10,957 6.0%
Tier 1 capital to average assets 24,785 9.4% 10,562 4.0% 13,203 5.0%
As of December 31, 1997
Total capital to risk-weighted assets 25,885 14.6% 14,216 8.0% 17,770 10.0%
Tier 1 capital to risk-weighted assets 23,654 13.3% 7,108 4.0% 10,662 6.0%
Tier 1 capital to average assets 23,654 8.9% 10,583 4.0% 13,229 5.0%
</TABLE>
16
<PAGE>
Liquidity
BKLA's liquid assets are cash and due from banks, federal funds sold, and
securities held to maturity. Cash and due from banks are cash, the funds
maintained to meet BKLA's reserve requirements to the Federal Reserve Bank of
San Francisco, and deposits from customers for which BKLA has presented to other
financial institutions for credit. BKLA uses its federal funds sold balance to
meet immediate liquidity needs due to deposit fluctuations. BKLA manages its
securities held to maturity to fund loan growth and seasonal fluctuations in
deposits. BKLA's net liquid assets, volatile liabilities, and liquidity ratios
are presented in the table below.
<TABLE>
<CAPTION>
At At
March 31, December
1998 31, 1997
--------- --------
<S> <C> <C>
NET LIQUID ASSETS
Liquid assets
Cash and due from banks, demand $ 22,746 $ 20,521
Time balances with depository institutions 883 2,125
Federal funds sold 14,600 29,555
Securities available for sale and held to maturity 79,382 60,433
--------- ---------
Total 117,611 112,634
Less securities pledged at book value 7,449 3,497
--------- ---------
Adjusted liquid assets 110,162 109,137
--------- ---------
Less federal funds purchased -- --
--------- ---------
Net liquid assets $ 110,162 $109,137
--------- ---------
--------- ---------
Rate dependent liabilities
Time deposits greater than $100,000 $ 30,412 $ 30,167
--------- ---------
Total $ 30,412 $30,167
--------- ---------
--------- ---------
Ratios and trends:
Net liquid assets to total deposits and FHLB advances 45.5% 45.9%
Net liquid assets to rate dependent deposits 362.2% 361.8%
Temporary investments to rate dependent liabilities 222.4% 199.5%
Core deposits are total deposits 2 87.2% 87.3%
Net loans to total assets 52.6% 52.4%
Brokered deposits to total deposits -- --
Net loans to deposits 61.8% 59.9%
</TABLE>
- ------------------------
1 Temporary investments are the total of time deposits with depository
institutions, federal funds sold and investment securities with less than one
year maturity.
2 Core deposits to total deposits less time deposits greater than $100,000.
17
<PAGE>
PART II -- OTHER INFORMATION
Signatures
Under the requirements of the Securities Exchange Act of 1934, BKLA has
duly caused this report to be signed on its behalf by the undersigned duly
authorized officers.
Bank of Los Angeles
- --------------------------------------------------------------- ------------
John J. Feldman, President and Chief Executive Officer Date
- --------------------------------------------------------------- ------------
Mark Bidwell, Vice President Controller Date
18
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20006
FORM 8K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
April 30, 1998
BANK OF LOS ANGELES
8901 Santa Monica Boulevard
West Hollywood, California 90069
(310) 843-1455
23790 95-3612029
(FDIC Certificate Number) (IRS Employer Identification No.)
<PAGE>
Item 5. Other Events.
On April 17, 1998, Bank of Los Angeles ("BKLA") announced the signing of a
Merger Agreement with Western Bancorp ("Western"), a copy of which is
attached hereto as Exhibit 99.2. A copy of the joint press release issued by
Western and BKLA in connection with the announcement is attached hereto as
Exhibit 99.1 and is incorporated by reference in its entirety.
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:
Exhibit 99.1 Press Release of BKLA and Western Bancorp, dated
April 17, 1998
Exhibit 99.2 Agreement and Plan of Merger, dated as of April 16,
1998, by and among Western Bancorp, Santa Monica Bank
and Bank of Los Angeles
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: April 30, 1998
BANK OF LOS ANGELES
---------------------------------------
Adriana M. Boeka
Vice Chairman
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
Exhibit 99.1 Press Release of BKLA and Western Bancorp, dated
April 17, 1998
Exhibit 99.2 Agreement and Plan of Merger, dated as of April 16, 1998, by
and among Western Bancorp, Santa Monica Bank and Bank of
Los Angeles
<PAGE>
[logo]
Western Bancorp
- ------------------------------------------------------------------------------
PRESS RELEASE
- ------------------------------------------------------------------------------
Western Bancorp (NASDAQ: WEBC) Bank of Los Angeles (NASDAQ:BKLA)
4100 Newport Place, Suite 900 8901 Santa Monica Blvd.
Newport Beach, California 92660 West Hollywood, CA 90069-4901
Contacts: Matthew P. Wagner John J. Feldman
President & President &
Chief Executive Officer Chief Executive Officer
Phone: 310/477-2401 310/843-1460
FAX: 310/231-0321 310/843/1498
FOR IMMEDIATE RELEASE
WESTERN BANCORP ANNOUNCES ACQUISITION OF BANK OF LOS ANGELES
April 17, 1998
Newport Beach, California . . . Western Bancorp ("Western") today announced
it has signed a definitive agreement to purchase the Bank of Los Angeles.
Shareholders of Bank of Los Angeles will receive 0.4224 shares of Western
Bancorp stock for each share of Bank of Los Angeles stock. The acquisition
will use pooling-of-interests accounting and is expected to close in the
third quarter of the year. Bank of Los Angeles has completed its due
diligence. Western's due diligence will be completed by April 29.
Western has $2.1 billion in assets. Through its subsidiary, Santa Monica
Bank, Western operates in Santa Monica, Malibu, Marina del Rey, Beverly
Hills, Century City, Westwood and Encino. Santa Monica Bank has approximately
$1.2 billion in assets. Bank of Los Angeles has $275 million in assets with
branches in West Hollywood, Beverly Hills, Culver City, Encino and Glendale.
Bank of Los Angeles will be merged into Santa Monica Bank.
Matthew P. Wagner, President and Chief Executive of Western stated "This
acquisition will allow Santa Monica Bank, with almost $1.5 billion in assets
post acquisition, to enhance its presence in Beverly Hills and Encino and to
expand its market area into Culver City, West Hollywood and Glendale.
Shareholders of both companies will benefit from the efficiencies to be
obtained through this consolidation. We expect this acquisition to be
accretive to earnings in 1999."
<PAGE>
According to John J. Feldman, President and Chief Executive Officer of Bank
of Los Angeles, "Customers of Bank of Los Angeles will be able to enjoy the
benefits of an enhanced product line that a larger company can provide while
enjoying the high level of customer service and responsiveness that comes
along with the community banking philosophy that is the cornerstone of both
Bank of Los Angeles and Santa Monica Bank. It is a win-win situation for
both companies."
Western serves its clients in Southern California through its two banking
subsidiaries: Southern California Bank and Santa Monica Bank. Southern
California Bank serves southern Los Angeles, Orange and San Diego Counties
with sixteen branches and with its specialized escrow services and asset
based lending. Santa Monica Bank serves its clients in Santa Monica, Beverly
Hills, Malibu, Marina del Rey, Encino and West Los Angeles with thirteen
branches and its specialized trust and investment management services.
FORWARD-LOOKING STATEMENTS
This press release includes forward-looking statements that involve inherent
risks and uncertainties. Western Bancorp cautions readers that a number of
important factors could cause actual results to differ materially from those
in the forward-looking statements. These factors include economic conditions
and competition in the geographic and business areas in which Western Bancorp
and its subsidiaries operate, inflation, fluctuations in interest rates,
legislation and governmental regulation and the progress of integrating Santa
Monica Bank, Western Bank and Southern California Bank.
<PAGE>
==============================================================================
AGREEMENT AND PLAN OF MERGER
dated as of April 16, 1998
by and among
Western Bancorp
Santa Monica Bank
and
Bank of Los Angeles
==============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECITALS
ARTICLE I
Certain Definitions
1.01 CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
The Merger
2.01 THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.02 EFFECTIVE DATE AND EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . 7
ARTICLE III
Consideration; Exchange Procedures
3.01 MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.02 RIGHTS AS SHAREHOLDERS; STOCK TRANSFERS . . . . . . . . . . . . . . . . 8
3.03 FRACTIONAL SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.04 EXCHANGE PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.05 ANTI-DILUTION PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . 10
3.06 OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.07 WARRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE IV
Actions Pending Acquisition
4.01 FOREBEARANCES OF BKLA . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.02 FOREBEARANCES OF WESTERN. . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE V
Representations and Warranties
5.01 DISCLOSURE SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.02 STANDARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.03 REPRESENTATIONS AND WARRANTIES OF BKLA. . . . . . . . . . . . . . . . . 15
5.04 REPRESENTATIONS AND WARRANTIES OF WESTERN . . . . . . . . . . . . . . . 24
ARTICLE VI
Covenants
6.01 REASONABLE BEST EFFORTS . . . . . . . . . . . . . . . . . . . . . . . . 28
6.02 SHAREHOLDER APPROVAL. . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.03 REGISTRATION STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 28
6.04 PRESS RELEASES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.05 ACCESS; INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.06 ACQUISITION PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.07 AFFILIATE AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.08 TAKEOVER LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.09 CERTAIN POLICIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.10 NASDAQ LISTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.11 REGULATORY APPLICATIONS . . . . . . . . . . . . . . . . . . . . . . . . 31
6.12 INDEMNIFICATION; DIRECTOR AND OFFICERS' INSURANCE . . . . . . . . . . . 32
6.13 BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.14 ACCOUNTANTS' LETTERS. . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.15 NOTIFICATION OF CERTAIN MATTERS . . . . . . . . . . . . . . . . . . . . 34
6.16 SHAREHOLDER AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE VII
Conditions to Consummation of the Merger
7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. . . . . . . 34
7.02 CONDITIONS TO OBLIGATION OF BKLA. . . . . . . . . . . . . . . . . . . . 35
-ii-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
7.03 CONDITIONS TO OBLIGATION OF WESTERN . . . . . . . . . . . . . . . . . . 36
ARTICLE VIII
Termination
8.01 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.02 EFFECT OF TERMINATION AND ABANDONMENT . . . . . . . . . . . . . . . . . 38
8.03 TERMINATION FEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE IX
Miscellaneous
9.01 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.02 WAIVER; AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.03 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.04 GOVERNING LAW; WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . 40
9.05 EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.06 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.07 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. . . . . . . . . . . 41
9.08 INTERPRETATION; EFFECT. . . . . . . . . . . . . . . . . . . . . . . . . 41
EXHIBIT A Form of Affiliate Agreement
EXHIBIT B Form of Shareholder's Agreement
-iii-
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of April 16, 1998 (this
"AGREEMENT"), by and among Bank of Los Angeles ("BKLA"), Western Bancorp
("Western") and Santa Monica Bank.
RECITALS
A. BKLA. BKLA is a California corporation, having its principal
place of business in West Hollywood, California.
B. WESTERN. Western is a California corporation, having its
principal place of business in Newport Beach, California.
C. SANTA MONICA BANK. Santa Monica Bank is a California
corporation having its principal place of business in Santa Monica,
California.
D. STOCK OPTION AGREEMENT. Concurrently herewith, BKLA and
Western are entering into a stock option agreement (the "STOCK OPTION
AGREEMENT"), to be dated the date hereof, whereby BKLA will grant to Western
the option to purchase up to 19.9% of the outstanding shares of the BKLA
Common Stock upon the occurrence of certain events.
E. INTENTIONS OF THE PARTIES. It is the intention of the parties
to this Agreement that the business combination contemplated hereby be
accounted for under the "pooling-of-interests" accounting method and be
treated as a "reorganization" under Section 368 of the Internal Revenue Code
of 1986 as amended (the "CODE").
F. BOARD ACTION. The respective Boards of Directors of each of
Western and BKLA have determined that it is in the best interests of their
respective companies and their stockholders to consummate the strategic
business combination transaction provided for herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein, the
parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.01 CERTAIN DEFINITIONS. The following terms are used in
this Agreement with the meanings set forth below:
<PAGE>
"ACQUISITION PROPOSAL" means any tender or exchange offer, proposal
for a merger, consolidation or other business combination involving BKLA or
any of its Subsidiaries or any proposal or offer to acquire in any manner a
substantial equity interest in, or a substantial portion of the assets or
deposits of, BKLA or any of its Subsidiaries, other than the transactions
contemplated by this Agreement.
"AFFILIATE AGREEMENTS" has the meaning set forth in Section 6.07(b).
"AGREEMENT" means this Agreement, as amended or modified from time to
time in accordance with Section 9.02.
"BENEFIT PLANS" has the meaning set forth in Section 5.03(m).
"BKLA" has the meaning set forth in the preamble to this Agreement.
"BKLA AFFILIATE" has the meaning set forth in Section 6.07(a).
"BKLA ARTICLES" means the Articles of Incorporation of BKLA.
"BKLA BOARD" means the Board of Directors of BKLA.
"BKLA BY-LAWS" means the By-laws of BKLA.
"BKLA Common Stock" means the common stock, no par value per share,
of BKLA.
"BKLA MEETING" has the meaning set forth in Section 6.02.
"BKLA STOCK OPTION" has the meaning set forth in Section 3.06.
"BKLA STOCK PLAN" means BKLA's 1988 Stock Option Plan (as amended).
"BKLA WARRANT" has the meaning set forth in Section 3.07.
"BKLA WARRANT AGREEMENT" has the meaning set forth in Section 3.07.
"BUSINESS COMBINATION" has the meaning set forth in Section 3.05.
"CGCL" means the California General Corporation law.
"CALIFORNIA SECRETARY" means the California Secretary of State.
-2-
<PAGE>
"CODE" has the meaning set forth in the recitals.
"COMMISSIONER" means the California Commissioner of Financial
Institutions.
"COSTS" has the meaning set forth in Section 6.12(a).
"DISCLOSURE SCHEDULE" has the meaning set forth in Section 5.01.
"EFFECTIVE DATE" means the date on which the Effective Time occurs,
as provided for in Section 2.02.
"EFFECTIVE TIME" means the effective time of the Merger, as provided
for in Section 2.02.
"EMPLOYEES" has the meaning set forth in Section 5.03(m).
"ENVIRONMENTAL LAW" has the meaning set forth in Section 5.03(o).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" has the meaning set forth in Section 5.03(m).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"EXCHANGE AGENT" has the meaning set forth in Section 3.04.
"EXCHANGE FUND" has the meaning set forth in Section 3.04.
"EXCHANGE RATIO" has the meaning set forth in Section 3.01(a).
"FDIC" means the Federal Deposit Insurance Corporation.
"FEDERAL RESERVE" means the Board of Governors of the Federal Reserve
System.
"GOVERNMENTAL AUTHORITY" means any court, administrative agency or
commission or other federal, state or local governmental authority or
instrumentality, or any Regulatory Authority.
"HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.03(o).
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"INDEMNIFIED PARTY" has the meaning set forth in Section 6.12(a).
"INSURANCE POLICY" has the meaning set forth in Section 5.03(s).
"LIENS" means any charge, mortgage, pledge, security interest,
restriction, claim, lien or encumbrance.
"LOAN PROPERTY" has the meaning set forth in Subsection 5.03(o).
"MATERIAL ADVERSE EFFECT" means, with respect to Western or BKLA, any
effect that (i) is material and adverse to the financial position, results
of operations or business of Western and its Subsidiaries taken as a whole
or BKLA and its Subsidiaries taken as a whole, respectively, or (ii) would
materially impair the ability of either Western or BKLA to perform its
obligations under this Agreement or otherwise materially threaten or
materially impede the consummation of the Merger and the other transactions
contemplated by this Agreement; PROVIDED, HOWEVER, that Material Adverse
Effect shall not be deemed to include the impact of (a) changes in banking
and similar laws of general applicability or interpretations thereof by
courts or governmental authorities, (b) changes in generally accepted
accounting principles or regulatory accounting requirements applicable to
banks and their holding companies generally and (c) any modifications or
changes to valuation policies and practices in connection with the Merger
or restructuring charges taken in connection with the Merger, in each case
in accordance with generally accepted accounting principles.
"MAXIMUM AMOUNT" has the meaning set forth in Section 6.12(c).
"MERGER" has the meaning set forth in Section 2.01.
"MERGER CONSIDERATION" has the meaning set forth in Section 2.01.
"MULTIEMPLOYER PLANS" has the meaning set forth in Section 5.03(m).
"NASDAQ" means The Nasdaq Stock Market, Inc.'s National Market.
"NEW CERTIFICATE" has the meaning set forth in Section 3.04.
"OLD CERTIFICATE" has the meaning set forth in Section 3.04.
"PERSON" means any individual, bank, corporation, partnership,
association, joint-stock company, business trust or unincorporated
organization.
"PENSION PLAN" has the meaning set forth in Section 5.03(m).
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"PLANS" has the meaning set forth in Section 5.03(m).
"PREVIOUSLY DISCLOSED" by a party shall mean information set forth in
its Disclosure Schedule.
"PROXY STATEMENT" has the meaning set forth in Section 6.03.
"REGISTRATION STATEMENT" has the meaning set forth in Section 6.03.
"REGULATORY AUTHORITY" has the meaning set forth in Section 5.03(i).
"REGULATORY DOCUMENTS" means documents filed with the SEC or the
FDIC, as applicable, of the types referred to in Section 5.03(g) and
Section 5.04(f).
"REPLACEMENT WARRANT" has the meaning set forth in Section 3.07.
"REPRESENTATIVES" means, with respect to any Person, such Person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"RIGHTS" means, with respect to any Person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any person
any right to subscribe for or acquire, or any options, calls or commitments
relating to, or any stock appreciation right or other instrument the value
of which is determined in whole or in part by reference to the market price
or value of, shares of capital stock of such Person.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
rules and regulations thereunder.
"SHAREHOLDER AGREEMENTS" has the meaning set forth in Section 6.16.
"STOCK OPTION AGREEMENT" has the meaning set forth in the Recitals.
"SUBSIDIARY" AND "SIGNIFICANT SUBSIDIARY" have the meanings ascribed
to them in Rule 1-02 of Regulation S-X of the SEC.
"SURVIVING CORPORATION" has the meaning set forth in Section 2.01.
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"TAKEOVER LAWS" means any "moratorium", "control share", "fair
price", "affiliate transaction", "business combination" or other
antitakeover laws and regulations of the state of California.
"TAX" AND "TAXES" means all federal, state, local or foreign taxes,
charges, fees, levies or other assessments, however denominated, including,
without limitation, all net income, gross income, gains, gross receipts,
sales, use, ad valorem, goods and services, capital, production, transfer,
franchise, windfall profits, license, withholding, payroll, employment,
disability, employer health, excise, estimated, severance, stamp,
occupation, property, environmental, unemployment or other taxes, custom
duties, fees, assessments or charges of any kind whatsoever, together with
any interest and any penalties, additions to tax or additional amounts
imposed by any taxing authority whether arising before, on or after the
Effective Date.
"TAX RETURNS" means any return, amended return or other report
(including elections, declarations, disclosures, schedules, estimates and
information returns) required to be filed with respect to any Tax.
"TREASURY STOCK" shall mean shares of BKLA Common Stock held by any
of BKLA's Subsidiaries or by Western or any of its Subsidiaries, in each
case other than in a fiduciary (including custodial or agency) capacity or
as a result of debts previously contracted in good faith.
"WESTERN" has the meaning set forth in the preamble to this
Agreement.
"WESTERN BOARD" means the Board of Directors of Western.
"WESTERN COMMON STOCK" means the common stock, no par value per
share, of Western.
"WESTERN PREFERRED STOCK" means the preferred, no par or stated value
per share, of Western.
ARTICLE II
THE MERGER
2.01 THE MERGER. (a) At the Effective Time, BKLA shall merge with and
into Santa Monica Bank (the "MERGER"), the separate corporate existence of
BKLA shall cease and Santa Monica Bank shall survive and continue to exist as
a California corporation (Santa Monica Bank, as the surviving corporation in
the Merger, sometimes being referred to herein as the
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"SURVIVING CORPORATION"). Western may at any time prior to the Effective Time
change the method of effecting the combination with BKLA (including, without
limitation, the provisions of this Article II) if and to the extent it deems
such change to be necessary, appropriate or desirable; PROVIDED, HOWEVER,
that no such change shall (i) alter or change the amount or kind of
consideration to be issued to holders of BKLA Common Stock as provided for in
this Agreement (the "MERGER CONSIDERATION"), (ii) cause the transaction to be
treated as anything other than a tax-free reorganization to the shareholders
of BKLA or (iii) materially impede or delay consummation of the transactions
contemplated by this Agreement.
(b) Subject to the satisfaction or waiver of the conditions set
forth in Article VII, the Merger shall become effective upon the occurrence
of the filing in the office of the California Secretary of an agreement of
merger in accordance with the CGCL or such later date and time as may be set
forth in such agreement. The Merger shall have the effects prescribed in the
CGCL.
(c) ARTICLES OF INCORPORATION AND BY-LAWS. The articles of
incorporation and by-laws of Santa Monica Bank immediately after the Merger
shall be those of Santa Monica Bank as in effect immediately prior to the
Effective Time.
(d) DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The
directors and officers of Santa Monica Bank immediately after the Merger
shall be the directors and officers of Santa Monica Bank immediately prior to
the Effective Time, until such time as their successors shall be duly elected
and qualified.
(e) DIRECTORS AND OFFICERS OF WESTERN. The directors and officers
of Western immediately after the Merger shall be the directors and officers
of Western immediately prior to the Effective Time, until such time as their
successors shall be duly elected and qualified. Notwithstanding the
foregoing, at the Effective Time a director of BKLA's election to be mutually
agreed upon prior to the date of the initial filing of any application with a
Regulatory Authority shall be appointed to the board of directors of Western.
2.02 EFFECTIVE DATE AND EFFECTIVE TIME. On such date as
Western selects (and promptly provides notice thereof to BKLA), which shall
be within ten days after the last to occur of the expiration of all
applicable waiting periods in connection with approvals of governmental
authorities and the receipt of all approvals of governmental authorities and
all conditions to the consummation of the Merger are satisfied or waived (or,
at the election of Western, on the last business day of the month in which
such tenth day occurs or, if such tenth day occurs on one of the last five
business days of such month, on the last business day of the succeeding
month), or on such earlier or later date as may be agreed in writing by the
parties, an agreement of merger shall be executed in accordance with all
appropriate legal requirements and shall be filed as required by law, and the
Merger provided for herein shall become effective upon such filing or on such
date as may be specified in such agreement of merger. The date of such filing
or such
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later effective date is herein called the "EFFECTIVE DATE." The
"EFFECTIVE TIME" of the Merger shall be the time of such filing or as set
forth in such agreement of merger.
ARTICLE III
CONSIDERATION; EXCHANGE PROCEDURES
3.01 MERGER CONSIDERATION. Subject to the provisions of this
Agreement, at the Effective Time, automatically by virtue of the Merger and
without any action on the part of any Person:
(a) OUTSTANDING BKLA COMMON STOCK. Each share, excluding Treasury
Stock, of BKLA Common Stock issued and outstanding immediately prior to the
Effective Time shall become and be converted into 0.4224 of a share of
Western Common Stock (the "EXCHANGE RATIO"). The Exchange Ratio shall be
subject to adjustment as set forth in Section 3.05.
(b) OUTSTANDING WESTERN COMMON STOCK. Each share of Western
Common Stock and each share of Santa Monica Bank Common Stock, in each case
as issued and outstanding immediately prior to the Effective Time, shall
remain issued and outstanding and unaffected by the Merger.
(c) TREASURY SHARES. Each share of BKLA Common Stock held as
Treasury Stock immediately prior to the Effective Time shall be canceled and
retired at the Effective Time and no consideration shall be issued in
exchange therefor.
(d) DISSENTING SHAREHOLDERS. Any shares of BKLA Common Stock held
by persons who have satisfied the requirements of Chapter 13 of the
California General Corporation Law ("Chapter 13"), and have not effectively
withdrawn or lost their dissenters' rights under Section 1309 of the
California General Corporation Law, shall not be converted pursuant to
Section 3.01(a), but the holders thereof shall be entitled only to such
consideration determined pursuant to Chapter 13.
3.02 RIGHTS AS SHAREHOLDERS; STOCK TRANSFERS. At the
Effective Time, holders of BKLA Common Stock shall cease to be, and shall
have no rights as, shareholders of BKLA (except as provided for in Section
3.01(d)), other than to receive any dividend or other distribution with
respect to such BKLA Common Stock with a record date occurring prior to the
Effective Time and the consideration provided under this Article III. After
the Effective Time, there shall be no transfers on the stock transfer books
of BKLA or the Surviving Corporation of shares of BKLA Common Stock.
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3.03 FRACTIONAL SHARES. Notwithstanding any other provision
hereof, no fractional shares of Western Common Stock and no certificates or
scrip therefor, or other evidence of ownership thereof, will be issued in the
Merger; instead, Western shall pay to each holder of BKLA Common Stock who
would otherwise be entitled to a fractional share of Western Common Stock
(after taking into account all Old Certificates delivered by such holder) an
amount in cash (without interest) determined by multiplying such fraction by
the average of the closing prices of Western Common Stock, as reported on
NASDAQ (as reported in THE WALL STREET JOURNAL or, if not reported therein,
in another authoritative source), for the five NASDAQ trading days
immediately preceding the Effective Date.
3.04 EXCHANGE PROCEDURES. (a) At or prior to the Effective
Time, Western shall deposit, or shall cause to be deposited, with U.S. Stock
Transfer or with such other unaffiliated exchange agent as Western shall
reasonably elect (in such capacity, the "EXCHANGE AGENT"), for the benefit of
the holders of certificates formerly representing shares of BKLA Common Stock
("OLD CERTIFICATES"), for exchange in accordance with this Article III,
certificates representing the shares of Western Common Stock ("NEW
CERTIFICATES") and an estimated amount of cash (such cash and New
Certificates, together with any dividends or distributions with a record date
occurring after the Effective Date with respect to the New Certificates
(without any interest on any such cash, dividends or distributions), being
hereinafter referred to as the "EXCHANGE FUND") to be paid pursuant to this
Article III in exchange for outstanding shares of BKLA Common Stock.
(b) As soon as practicable, but no later than five (5) business
days after the Effective Date, Western shall send or cause to be sent to each
former holder of record of shares of BKLA Common Stock immediately prior to
the Effective Time transmittal materials for use in exchanging such
stockholder's Old Certificates for the consideration set forth in this
Article III. Western shall cause the New Certificates into which shares of a
shareholder's BKLA Common Stock are converted on the Effective Date and/or
any check in respect of any fractional share interests or dividends or
distributions which such person shall be entitled to receive to be delivered
to such shareholder upon delivery to the Exchange Agent of Old Certificates
representing such shares of BKLA Common Stock (or an affidavit of lost
certificate and, if required by the Exchange Agent, indemnity reasonably
satisfactory to Western and the Exchange Agent, if any of such certificates
are lost, stolen or destroyed) owned by such shareholder. No interest will
be paid on any such cash to be paid in lieu of fractional share interests or
in respect of dividends or distributions which any such person shall be
entitled to receive pursuant to this Article III upon such delivery. In the
event of a transfer of ownership of any shares of BKLA Common Stock not
registered in the transfer records of BKLA, the exchange described in this
Section 3.04(b) may nonetheless be effected and a check for the cash to be
paid in lieu of fractional shares may be issued to the transferee if the Old
Certificate representing such BKLA Common Stock is presented to the Exchange
Agent, accompanied by documents sufficient, in the discretion of Western and
the Exchange Agent, (i) to evidence and effect such transfer but for the
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provisions of Section 3.02 hereof and (ii) to evidence that all applicable
stock transfer taxes have been paid.
(c) If Old Certificates are not surrendered or the consideration
therefor is not claimed prior to the date on which such consideration would
otherwise escheat to or become the property of any governmental unit or
agency, the unclaimed consideration shall, to the extent permitted by
abandoned property and any other applicable law, become the property of the
Surviving Corporation (and to the extent not in its possession shall be paid
over to the Surviving Corporation), free and clear of all claims or interest
of any person previously entitled to such claims. Notwithstanding the
foregoing, neither the Exchange Agent nor any party hereto shall be liable to
any former holder of BKLA Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(d) At the election of Western, no dividends or other
distributions with respect to Western Common Stock with a record date
occurring after the Effective Time shall be paid to the holder of any
unsurrendered Old Certificate representing shares of BKLA Common Stock
converted in the Merger into the right to receive shares of such Western
Common Stock until the holder thereof shall be entitled to receive New
Certificates in exchange therefor in accordance with the procedures set forth
in this Section 3.04, and no such shares of BKLA Common Stock shall be
eligible to vote until the holder of Old Certificates is entitled to receive
New Certificates in accordance with the procedures set forth in this Section
3.04. After becoming so entitled in accordance with this Section 3.04, the
record holder thereof also shall be entitled to receive any such dividends or
other distributions, without any interest thereon, which theretofore had
become payable with respect to shares of Western Common Stock such holder had
the right to receive upon surrender of the Old Certificate.
(e) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of BKLA for six months after the Effective Time shall be
returned by the Exchange Agent to Western at the election of Western. Any
shareholders of BKLA who have not theretofore complied with this Article III
shall thereafter look only to Western for payment of the shares of Western
Common Stock, cash in lieu of any fractional shares and unpaid dividends and
distributions on Western Common Stock deliverable in respect of each share of
BKLA Common Stock such shareholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon.
3.05 ANTI-DILUTION PROVISIONS. In the event Western changes
(or establishes a record date for changing) the number of shares of Western
Common Stock issued and outstanding prior to the Effective Date as a result
of a stock split, stock dividend, recapitalization or similar transaction
with respect to the outstanding Western Common Stock and the record date
therefor shall be prior to the Effective Date, the Exchange Ratio shall be
proportionately adjusted. If, between the date hereof and the Effective Time,
Western shall consolidate with or into any other corporation (a "BUSINESS
COMBINATION") and the terms thereof shall provide that
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Western Common Stock shall be converted into or exchanged for the shares of
any other corporation or entity, then provision shall be made as part of the
terms of such Business Combination so that (i) shareholders of BKLA who would
be entitled to receive shares of Western Common Stock pursuant to this
Agreement shall be entitled to receive, in lieu of each share of Western
Common Stock issuable to such shareholders as provided herein, the same kind
and amount of securities or assets as shall be distributable upon such
Business Combination with respect to one share of Western Common Stock.
3.06 OPTIONS. All outstanding options to purchase shares of
BKLA Common Stock under the BKLA Stock Plan (each, a "BKLA STOCK OPTION")
shall be governed by Section 10 of such BKLA Stock Plan, and no other
provision for BKLA Stock Options shall be made hereunder.
3.07 WARRANTS. At the Effective Time, each outstanding
warrant to purchase shares of BKLA Common Stock under the BKLA Warrant
Agreement (each, a "BKLA WARRANT"), shall be converted into a warrant to
acquire, on the same terms and conditions as were applicable under such BKLA
Warrant Agreement, the number of shares of Western Common Stock equal to (a)
the number of shares of BKLA Common Stock subject to the BKLA Warrant,
multiplied by (b) the Exchange Ratio (such product rounded down to the
nearest whole number) (a "REPLACEMENT WARRANT"), at an exercise price per
share (rounded up to the nearest whole cent) equal to (y) the aggregate
exercise price for the shares of BKLA Common Stock which were purchasable
pursuant to such BKLA Warrant divided by (z) the number of full shares of
Western Common Stock subject to such Replacement Warrant in accordance with
the foregoing. At or prior to the Effective Time, BKLA shall take all
action, if any, necessary with respect to the BKLA Warrant Agreement to
permit the replacement of the outstanding BKLA Warrants by Western pursuant
to this Section 3.07. At the Effective Time, Western shall assume the BKLA
Warrant Agreement; PROVIDED, that such assumption shall be only in respect of
the Replacement Warrants and that Western shall have no obligation with
respect to any awards under the BKLA Warrant Agreement other than the
Replacement Warrants and shall have no obligation to make any additional
grants or awards under such assumed BKLA Warrant Agreement.
ARTICLE IV
ACTIONS PENDING ACQUISITION
4.01 FOREBEARANCES OF BKLA. From the date hereof until the
Effective Time, except as expressly contemplated by this Agreement, without
the prior written consent of Western, BKLA will not, and will cause each of
its Subsidiaries not to:
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(a) ORDINARY COURSE. Conduct the business of BKLA and its
Subsidiaries other than in the ordinary and usual course or fail to use
reasonable best efforts to preserve intact their business organizations and
assets and maintain their rights, franchises and existing relations with
customers, suppliers, employees and business associates, take any action that
would adversely affect or delay the ability of BKLA, Western or any of their
Subsidiaries to perform any of their obligations on a timely basis under this
Agreement, or take any action that is reasonably likely to have a Material
Adverse Effect on BKLA or its Subsidiaries, taken as a whole.
(b) CAPITAL STOCK. Other than pursuant to Rights Previously
Disclosed and outstanding on the date hereof, (i) issue, sell or otherwise
permit to become outstanding, or authorize the creation of, any additional
shares of BKLA Common Stock or any Rights or issue any shares of preferred
stock, (ii) enter into any agreement with respect to the foregoing or (iii)
permit any additional shares of BKLA Common Stock to become subject to new
grants of employee or director stock options, other Rights or similar
stock-based employee rights.
(c) DIVIDENDS, ETC. (a) Make, declare, pay or set aside for
payment any dividend on or in respect of, or declare or make any distribution
on any shares of BKLA Common Stock or (b) directly or indirectly adjust,
split, combine, redeem, reclassify, purchase or otherwise acquire, any shares
of its capital stock.
(d) COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Enter into or amend
or renew any employment, consulting, severance or similar agreements or
arrangements with any director, officer or employee of BKLA or its
Subsidiaries, or grant any salary or wage increase or increase any employee
benefit (including incentive or bonus payments), except (i) for normal
individual increases in compensation to employees in the ordinary course of
business consistent with past practice, (ii) for other changes that are
required by applicable law, (iii) to satisfy Previously Disclosed contractual
obligations existing as of the date hereof or (iv) for grants of awards to
newly hired employees consistent with past practice.
(e) BENEFIT PLANS. Enter into, establish, adopt or amend (except
(i) as may be required by applicable law or (ii) to satisfy Previously
Disclosed contractual obligations existing as of the date hereof) any
pension, retirement, stock option, stock purchase, savings, profit sharing,
deferred compensation, consulting, bonus, group insurance or other employee
benefit, incentive or welfare contract, plan or arrangement, or any trust
agreement (or similar arrangement) related thereto, in respect of any
director, officer or employee of BKLA or its Subsidiaries, or take any action
to accelerate the vesting or exercisability of stock options, restricted
stock or other compensation or benefits payable thereunder.
(f) DISPOSITIONS. Except as Previously Disclosed, sell, transfer,
mortgage, encumber or otherwise dispose of or discontinue any of its assets,
deposits, business or properties
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except in the ordinary course of business and in a transaction that is not
material to it and its Subsidiaries taken as a whole.
(g) ACQUISITIONS. Except as Previously Disclosed, acquire (other
than by way of foreclosures or acquisitions of control in a bona fide
fiduciary capacity or in satisfaction of debts previously contracted in good
faith, in each case in the ordinary and usual course of business consistent
with past practice) all or any portion of, the assets, business, deposits or
properties of any other entity except in the ordinary course of business
consistent with past practice and in a transaction that is not material to
the BKLA and its Subsidiaries, taken as a whole.
(h) CAPITAL EXPENDITURES. Except as Previously Disclosed, make
any capital expenditures other than capital expenditures in the ordinary
course of business consistent with past practice in amounts not exceeding
$10,000 individually or $50,000 in the aggregate.
(i) GOVERNING DOCUMENTS. Amend the BKLA Articles, BKLA By-Laws or
the articles of incorporation or by-laws (or similar governing documents) of
any of BKLA's Subsidiaries.
(j) ACCOUNTING METHODS. Implement or adopt any change in its
accounting principles, practices or methods, other than as may be required by
generally accepted accounting principles.
(k) CONTRACTS. Except in the ordinary course of business
consistent with past practice, enter into or terminate any material contract
(as defined in Section 5.03(k)) or amend or modify in any material respect
any of its existing material contracts.
(l) CLAIMS. Except in the ordinary course of business consistent
with past practice, settle any claim, action or proceeding, except for any
claim, action or proceeding involving solely money damages in an amount,
individually or in the aggregate for all such settlements, that is not
material to BKLA and its Subsidiaries, taken as a whole.
(m) ADVERSE ACTIONS. (a) Take any action which BKLA either knows
or reasonably should know that such action would, or would be reasonably
likely to, prevent or impede the Merger from qualifying (i) for "pooling of
interests" accounting treatment or (ii) as a reorganization within the
meaning of Section 368 of the Code; or (b) knowingly take any action that is
intended or is reasonably likely to result in (i) any of its representations
and warranties set forth in this Agreement being or becoming untrue in any
material respect at any time at or prior to the Effective Time, (ii) any of
the conditions to the Merger set forth in Article VII not being satisfied or
(iii) a violation of any provision of this Agreement except, in each case, as
may be required by applicable law or regulation.
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(n) RISK MANAGEMENT. Except as required by applicable law or
regulation, (i) implement or adopt any material change in its interest rate
and other risk management policies, procedures or practices; (ii) fail to
follow its existing policies or practices with respect to managing its
exposure to interest rate and other risk; or (iii) fail to use commercially
reasonable means to avoid any material increase in its aggregate exposure to
interest rate risk.
(o) INDEBTEDNESS. Incur any indebtedness for borrowed money other
than in the ordinary course of business consistent with past practice.
(p) LOANS. Make any loan, loan commitment or renewal or extension
thereof to any person which would, when aggregated with all outstanding
loans, commitments for loans or renewals or extensions thereof made by BKLA
to such person and any affiliate or immediate family member of such person,
exceed $500,000 without submitting loan package information to the chief
credit officer of Western for review with a right of comment at least one
full business day prior to taking such action.
(q) COMMITMENTS. Agree or commit to do any of the foregoing.
4.02 FOREBEARANCES OF WESTERN. From the date hereof until the
Effective Time, except as expressly contemplated by this Agreement, without
the prior written consent of BKLA, Western will not, and will cause each of
its Subsidiaries not to:
(a) ORDINARY COURSE. Take any action that would adversely affect
or delay the ability of BKLA or Western to perform any of their obligations
on a timely basis under this Agreement, or take any action that is reasonably
likely to have a Material Adverse Effect on Western or its Subsidiaries,
taken as a whole.
(b) ADVERSE ACTIONS. (i) Take any action which Western either
knows or reasonably should know that such action would, or would be
reasonably likely to, prevent or impede the Merger from qualifying (A) for
"pooling of interests" accounting treatment or (B) as a reorganization within
the meaning of Section 368 of the Code; or (ii) knowingly take any action
that is intended or is reasonably likely to result in (A) any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect at any time at or prior to the Effective Time,
(B) any of the conditions to the Merger set forth in Article VII not being
satisfied or (C) a violation of any provision of this Agreement except, in
each case, as may be required by applicable law or regulation.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01 DISCLOSURE SCHEDULES. On or prior to the date hereof,
each of BKLA and Western has delivered to the other a schedule (a "DISCLOSURE
SCHEDULE") setting forth, among other things, items the disclosure of which
is necessary or appropriate either in response to an express disclosure
requirement contained in a provision hereof, or items which are an exception
to one or more representations or warranties contained in Section 5.03 or
Section 5.04; PROVIDED, that (a) no such item is required to be set forth in
a Disclosure Schedule as an exception to a representation or warranty if its
absence would not be reasonably likely to result in the related
representation or warranty being deemed untrue or incorrect under the
standard established by Section 5.02, and (b) the mere inclusion of an item
in a Disclosure Schedule as an exception to a representation or warranty
shall not be deemed an admission by a party that such item represents a
material exception or fact, event or circumstance or that such item is
reasonably likely to result in a Material Adverse Effect.
5.02 STANDARD. No representation or warranty of BKLA, Western
or Santa Monica Bank contained in Section 5.03 or 5.04 shall be deemed untrue
or incorrect, and no party hereto shall be deemed to have breached a
representation or warranty, as a consequence of the existence of any fact,
event or circumstance unless such fact, circumstance or event, individually
or taken together with all other facts, events or circumstances inconsistent
with any representation or warranty contained in Section 5.03 or 5.04 has had
or is reasonably likely to have a Material Adverse Effect on the party making
such representation or warranty.
5.03 REPRESENTATIONS AND WARRANTIES OF BKLA. Subject to
Sections 5.01 and 5.02 and except as Previously Disclosed in its Disclosure
Schedule corresponding to the relevant paragraph below, BKLA hereby
represents and warrants to Western:
(a) ORGANIZATION, STANDING AND AUTHORITY. BKLA is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California. BKLA is duly qualified to do business and is in good
standing in the State of California and any foreign jurisdictions where its
ownership or leasing of property or assets or the conduct of its business
requires it to be so qualified. BKLA is duly licensed by the Commissioner as
a commercial bank and its deposits are insured by the FDIC through the Bank
Insurance Fund in the manner and to the fullest extent provided by law.
(b) BKLA CAPITAL STOCK. As of the date hereof, the authorized
capital stock of BKLA consists solely of (i) 75,000,000 shares of BKLA Common
Stock, of which no more than 4,762,100 shares were outstanding as of the date
hereof and (ii) 25,000,000 shares of preferred stock, of which no shares were
outstanding as of the date hereof. As of the date hereof, no shares of BKLA
Common Stock were held in treasury by BKLA or otherwise owned by
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BKLA or its Subsidiaries. The outstanding shares of BKLA Common Stock have
been duly authorized and are validly issued and outstanding, fully paid and
nonassessable, and subject to no preemptive rights (and were not issued in
violation of any preemptive rights). As of the date hereof, there are no
shares of BKLA Common Stock authorized and reserved for issuance, BKLA does
not have any Rights issued or outstanding with respect to BKLA Common Stock,
and BKLA does not have any commitment to authorize, issue or sell any BKLA
Common Stock or Rights, except pursuant to this Agreement, any BKLA Stock
Option, the BKLA Stock Plan, any BKLA Warrant and the BKLA Warrant Agreement.
The number of shares of BKLA Common Stock which are issuable and reserved
for issuance upon exercise of BKLA Stock Options as of the date hereof are
Previously Disclosed in BKLA's Disclosure Schedule. The number of shares of
BKLA Common Stock which are issuable and reserved for issuance upon exercise
of BKLA Warrants as of the date hereof are Previously Disclosed in BKLA's
Disclosure Schedule.
(c) SUBSIDIARIES. (i)(A) BKLA has Previously Disclosed a list of all of
its Subsidiaries together with the jurisdiction of organization of each such
Subsidiary, (B) BKLA owns, directly or indirectly, all the issued and
outstanding equity securities of each of its Subsidiaries, (C) no equity
securities of any of its Subsidiaries are or may become required to be issued
(other than to it or its wholly-owned Subsidiaries) by reason of any Right or
otherwise, (D) there are no contracts, commitments, understandings or
arrangements by which any of such Subsidiaries is or may be bound to sell or
otherwise transfer any equity securities of any such Subsidiaries (other than
to it or its wholly-owned Subsidiaries), (E) there are no contracts,
commitments, understandings, or arrangements relating to its rights to vote
or to dispose of such securities and (F) all the equity securities of each
Subsidiary held by BKLA or its Subsidiaries are fully paid and nonassessable
and are owned by BKLA or its Subsidiaries free and clear of any Liens.
(ii) BKLA does not own beneficially, directly or indirectly,
any equity securities or similar interests of any Person, or any interest in
a partnership or joint venture of any kind, other than its Subsidiaries.
(iii) Each of BKLA's Subsidiaries has been duly organized and
is validly existing in good standing under the laws of the jurisdiction of
its organization, and is duly qualified to do business and in good standing
in the jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified.
(d) CORPORATE POWER. BKLA and each of its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and BKLA has the
corporate power and authority to execute, deliver and perform its obligations
under this Agreement and the Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby.
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(e) CORPORATE AUTHORITY. Subject in the case of this Agreement to
receipt of the requisite approval of the principal terms of the agreement of
merger set forth in this Agreement by the holders of a majority of the
outstanding shares of BKLA Common Stock entitled to vote thereon (which is
the only shareholder vote required thereon), this Agreement, the Stock Option
Agreement and the transactions contemplated hereby and thereby have been
authorized by all necessary corporate action of BKLA and the BKLA Board on or
prior to the date hereof. This Agreement is a valid and legally binding
obligation of BKLA, enforceable in accordance with its terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles). The BKLA Board has received the written opinion of Wedbush
Morgan Securities to the effect that as of the date hereof the consideration
to be received by the holders of BKLA Common Stock in the Merger is fair to
the holders of BKLA Common Stock from a financial point of view.
(f) REGULATORY APPROVALS; NO DEFAULTS. (i) No consents or
approvals of, or filings or registrations with, any Governmental Authority or
with any third party are required to be made or obtained by BKLA or any of
its Subsidiaries in connection with the execution, delivery or performance by
BKLA of this Agreement, the Stock Option Agreement, the BKLA Warrant
Agreement, or to consummate the Merger except for (A) filings of applications
or notices with the Commissioner, the FDIC and the Federal Reserve, as
required, (B) filings with the SEC and state securities authorities and the
approval of this Agreement by the shareholders of BKLA, (C) the filing of an
agreement of merger with the California Secretary pursuant to the CGCL and
with the Commissioner pursuant to the California Financial Code. As of the
date hereof, BKLA is not aware of any reason why the approvals set forth in
Section 7.01(b) will not be received without the imposition of a condition,
restriction or requirement of the type described in Section 7.01(b).
(ii) Subject to receipt of the approvals referred to in the
preceding paragraph, and the expiration of related waiting periods, and
required filings under federal and state securities laws, the execution,
delivery and performance of this Agreement and the Stock Option Agreement and
the consummation of the transactions contemplated hereby and thereby do not
and will not (A) constitute a breach or violation of, or a default under, or
give rise to any Lien, any acceleration of remedies or any right of
termination under, any law, rule or regulation or any judgment, decree,
order, governmental permit or license, or agreement, indenture or instrument
of BKLA or of any of its Subsidiaries or to which BKLA or any of its
Subsidiaries or properties is subject or bound, (B) constitute a breach or
violation of, or a default under, the BKLA Articles or the BKLA By-Laws, or
(C) require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license, agreement, indenture
or instrument.
(g) FINANCIAL REPORTS AND REGULATORY DOCUMENTS. (i) BKLA's (or its
predecessors') Annual Reports on Form 10-K for the fiscal years ended
December 31, 1995,
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1996 and 1997, and all other reports, registration statements, definitive
proxy statements or information statements filed or to be filed by it or any
of its Subsidiaries subsequent to December 31, 1995 under the Securities Act,
or under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act or under the
securities regulations of the FDIC, in the form filed or to be filed
(collectively, BKLA's "REGULATORY DOCUMENTS") with the FDIC as of the date
filed, (A) complied or will comply in all material respects as to form with
the applicable requirements under the Securities Act, the Exchange Act or the
securities regulations of the FDIC, as the case may be, and (B) did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and each of the balance sheets contained in or
incorporated by reference into any such Regulatory Document (including the
related notes and schedules thereto) fairly presents, or will fairly present,
the financial position of BKLA and its Subsidiaries as of its date, and each
of the statements of income and changes in shareholders' equity and cash
flows or equivalent statements in such Regulatory Documents (including any
related notes and schedules thereto) fairly presents, or will fairly present,
the results of operations, changes in shareholders' equity and cash flows, as
the case may be, of BKLA and its Subsidiaries for the periods to which they
relate, in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except in each
case as may be noted therein, subject to normal year-end audit adjustments in
the case of unaudited statements.
(ii) Since December 31, 1997, BKLA and its Subsidiaries have
not incurred any liability other than in the ordinary course of business
consistent with past practice.
(iii) Since December 31, 1997, (A) BKLA and its Subsidiaries
have conducted their respective businesses in the ordinary and usual course
consistent with past practice (excluding the incurrence of expenses related
to this Agreement and the transactions contemplated hereby) and (B) no event
has occurred or circumstance arisen that, individually or taken together with
all other facts, circumstances and events (described in any paragraph of this
Section 5.03 or otherwise), is reasonably likely to have a Material Adverse
Effect with respect to BKLA.
(h) LITIGATION. No litigation, claim or other proceeding before
any court or governmental agency is pending against BKLA or any of its
Subsidiaries and, to BKLA's knowledge, no such litigation, claim or other
proceeding has been threatened and there are no facts which could reasonably
give rise to such litigation, claim or other proceeding.
(i) REGULATORY MATTERS. (i) Neither BKLA nor any of its
Subsidiaries or any of their properties is a party to or is subject to any
order, decree, agreement, memorandum of understanding or similar arrangement
with, or a commitment letter or similar submission to, or extraordinary
supervisory letter from, any federal or state governmental agency or
authority charged with the supervision or regulation of financial
institutions or issuers of securities or
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engaged in the insurance of deposits (including, without limitation, the
Commissioner and the FDIC) or the supervision or regulation of it or any of
its Subsidiaries (collectively, the "REGULATORY AUTHORITIES").
(ii) Neither BKLA nor any of its Subsidiaries has been advised
by, nor has any knowledge of facts which could give rise to an advisory
notice by, any Regulatory Authority that such Regulatory Authority is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, decree, agreement, memorandum of
understanding, commitment letter, supervisory letter or similar submission.
(j) COMPLIANCE WITH LAWS. BKLA and each of its Subsidiaries:
(i) is in compliance with all applicable federal, state,
local and foreign statutes, laws, regulations, ordinances, rules, judgments,
orders or decrees applicable thereto or to the employees conducting such
businesses, including, without limitation, the Equal Credit Opportunity Act,
the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage
Disclosure Act and all other applicable fair lending laws and other laws
relating to discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders
and approvals of, and has made all filings, applications and registrations
with, all Governmental Authorities that are required in order to permit them
to own or lease their properties and to conduct their businesses as presently
conducted; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to BKLA's knowledge, no
suspension or cancellation of any of them is threatened; and
(iii) has received, since December 31, 1996, no
notification or communication from any Governmental Authority (A) asserting
that BKLA or any of its Subsidiaries is not in compliance with any of the
statutes, regulations or ordinances which such Governmental Authority
enforces or (B) threatening to revoke any license, franchise, permit or
governmental authorization (nor, to BKLA's knowledge, do any grounds for any
of the foregoing exist).
(k) MATERIAL CONTRACTS; DEFAULTS. Except for those agreements and
other documents filed as exhibits to its Regulatory Documents, neither it nor
any of its Subsidiaries is a party to, bound by or subject to any agreement,
contract, arrangement, commitment or understanding (whether written or oral)
(i) that is a "material contract" within the meaning of Item 601(b)(10) of
the SEC's Regulation S-K or (ii) that materially restricts the conduct of
business by it or any of its Subsidiaries. Neither BKLA nor any of its
Subsidiaries is in default under any contract, agreement, commitment,
arrangement, lease, insurance policy or other instrument to which it is a
party, by which its respective assets, business, or operations may be bound
or affected, or under which it or its respective assets, business, or
operations receives
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benefits, and there has not occurred any event that, with the lapse of time
or the giving of notice or both, would constitute such a default.
(l) NO BROKERS. No action has been taken by BKLA that would give
rise to any valid claim against any party hereto for a brokerage commission,
finder's fee or other like payment with respect to the transactions
contemplated by this Agreement, excluding Previously Disclosed fees to be
paid to Wedbush Morgan Securities and GBS Financial.
(m) EMPLOYEE BENEFIT PLANS.
(i) All benefit and compensation plans, contracts, policies
or arrangements covering current employees or former employees of BKLA and
its subsidiaries (the "EMPLOYEES") and current or former directors of BKLA,
including, but not limited to, "employee benefit plans" within the meaning of
Section 3(3) of ERISA, and deferred compensation, stock option, stock
purchase, stock appreciation rights, stock based, incentive and bonus plans
(the "BENEFIT PLANS"), are Previously Disclosed in the Disclosure Schedule.
True and complete copies of all Benefit Plans, including, but not limited to,
any trust instruments and insurance contracts forming a part of any Benefit
Plans, and all amendments thereto have been provided or made available to
BKLA.
(ii) All employee benefit plans, other than "multiemployer
plans" within the meaning of Section 3(37) of ERISA, covering Employees (the
"PLANS"), to the extent subject to ERISA, are in substantial compliance with
ERISA. BKLA is not a party to any "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA ("PENSION PLAN") and which is intended to be
qualified under Section 401(a) of the Code. There is no material pending or
threatened litigation relating to the Plans. Neither BKLA nor any of its
Subsidiaries has engaged in a transaction with respect to any Plan that,
assuming the taxable period of such transaction expired as of the date
hereof, could subject BKLA or any Subsidiary to a tax or penalty imposed by
either Section 4975 of the Code or Section 502(i) of ERISA in an amount which
would be material.
(iii) No liability under Subtitle C or D of Title IV of ERISA
has been or is expected to be incurred by BKLA or any of its Subsidiaries
with respect to any ongoing, frozen or terminated "single-employer plan",
within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which is
considered one employer with BKLA under Section 4001 of ERISA or Section 414
of the Code (an "ERISA AFFILIATE"). Neither BKLA, any of its Subsidiaries
nor an ERISA Affiliate has contributed to a "multiemployer plan", within the
meaning of Section 3(37) of ERISA, at any time on or after September 26,
1980. No notice of a "reportable event," within the meaning of Section 4043
of ERISA for which the 30-day reporting requirement has not been waived, has
been required to be filed for any Pension Plan or by any ERISA Affiliate
within the 12-month
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period ending on the date hereof or will be required to be filed in
connection with the transactions contemplated by this Plan.
(iv) All contributions required to be made under the terms of
any Plan have been timely made or have been reflected on the consolidated
financial statements of BKLA included in the Regulatory Documents. Neither
any Pension Plan nor any single-employer plan of an ERISA Affiliate has an
"accumulated funding deficiency" (whether or not waived) within the meaning
of Section 412 of the Code or Section 302 of ERISA and no ERISA Affiliate has
an outstanding funding waiver. Neither BKLA nor any of its Subsidiaries has
provided, or is required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of
the Code.
(v) Under each Pension Plan which is a single-employer plan,
as of the last day of the most recent plan year ended prior to the date
hereof, the actuarially determined present value of all "benefit
liabilities," within the meaning of Section 4001(a)(16) of ERISA (as
determined on the basis of the actuarial assumptions contained in the Plan's
most recent actuarial valuation), did not exceed the then current value of
the assets of such Plan, and there has been no material change in the
financial condition of such Plan since the last day of the most recent plan
year.
(vi) Neither BKLA nor any of its Subsidiaries has any
obligations for retiree health and life benefits under any Benefit Plan.
BKLA or its Subsidiaries may amend or terminate any such Benefit Plan at any
time without incurring any liability thereunder.
(vii) The consummation of the transactions contemplated by
this Agreement will not (A) entitle any employees of BKLA or any of its
Subsidiaries to severance pay, (B) accelerate the time of payment or vesting
or trigger any payment of compensation or benefits under, increase the amount
payable or trigger any other material obligation pursuant to, any of the
Benefit Plans or (C) result in any breach or violation of, or a default
under, any of the Benefit Plans. Without limiting the foregoing, as a result
of the consummation of the transactions contemplated by this Agreement, none
of Western, BKLA, or any of its Subsidiaries will be obligated to make a
payment to an individual that would be a "parachute payment" to a
"disqualified individual" as those terms are defined in Section 280G of the
Code, without regard to whether such payment is reasonable compensation for
personal services performed or to be performed in the future.
(n) LABOR MATTERS. Neither BKLA nor any of its Subsidiaries is a
party to or is bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization,
nor is BKLA or any of its Subsidiaries the subject of a proceeding asserting
that it or any such Subsidiary has committed an unfair labor practice (within
the meaning of the National Labor Relations Act) or seeking to compel BKLA or
any such Subsidiary to bargain with any labor organization as to wages or
conditions of employment, nor
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is there any strike or other labor dispute involving it or any of its
Subsidiaries pending or, to BKLA's knowledge, threatened, nor is BKLA aware
of any activity involving its or any of its Subsidiaries' employees seeking
to certify a collective bargaining unit or engaging in other organizational
activity.
(o) ENVIRONMENTAL MATTERS.
(i) BKLA and each of its Subsidiaries has complied at all
times with applicable Environmental Laws; (ii) no real property (including
buildings or other structures) currently or formerly owned or operated by
BKLA or any of its Subsidiaries, or any property in which BKLA or any of its
Subsidiaries has held a security interest, lien or a fiduciary or management
role ("LOAN PROPERTY"), has been contaminated with, or has had any release
of, any Hazardous Substance; (iii) neither BKLA nor any of its Subsidiaries
could be deemed the owner or operator of any Loan Property under any
Environmental Law which such Loan Property has been contaminated with, or has
had any release of, any Hazardous Substance; (iv) neither BKLA nor any of its
Subsidiaries is subject to liability for any Hazardous Substance disposal or
contamination on any third party property; (v) neither BKLA nor any of its
Subsidiaries has received any notice, demand letter, claim or request for
information alleging any violation of, or liability under, any Environmental
Law; (vi) neither BKLA nor any of its Subsidiaries is subject to any order,
decree, injunction or other agreement with any Governmental Authority or any
third party relating to any Environmental Law; (vii) to the best of BKLA's
knowledge, there are no circumstances or conditions (including the presence
of asbestos, underground storage tanks, lead products, polychlorinated
biphenyls, prior manufacturing operations, dry-cleaning, or automotive
services) involving BKLA or any of its Subsidiaries, any currently or
formerly owned or operated property, or any Loan Property, that could
reasonably be expected to result in any claims, liability or investigations
against BKLA or any of its Subsidiaries, result in any restrictions on the
ownership, use, or transfer of any property pursuant to any Environmental
Law, or adversely affect the value of any Loan Property, and (viii) BKLA has
delivered to Western copies of all environmental reports, studies, sampling
data, correspondence, filings and other environmental information in its
possession or reasonably available to it relating to BKLA, any Subsidiary of
BKLA, any currently or formerly owned or operated property or any Loan
Property.
As used herein, the term "ENVIRONMENTAL LAW" means any federal,
state or local law, regulation, order, decree, permit, authorization,
opinion, common law or agency requirement relating to: (A) the protection or
restoration of the environment, health, safety, or natural resources, (B) the
handling, use, presence, disposal, release or threatened release of any
Hazardous Substance or (C) noise, odor, wetlands, indoor air, pollution,
contamination or any injury or threat of injury to persons or property in
connection with any Hazardous Substance and the term "HAZARDOUS SUBSTANCE"
means any substance in any concentration that is: (A) listed, classified or
regulated pursuant to any Environmental Law; (B) any petroleum product or
by-product, asbestos-containing material, lead-containing paint or plumbing,
polychlorinated
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biphenyls, radioactive materials or radon; or (C) any other substance which
is or may be the subject of regulatory action by any Governmental Authority
in connection with any Environmental Law.
(p) TAX MATTERS. (i) (A) All Tax Returns that are required to be
filed (taking into account any extensions of time within which to file) by or
with respect to BKLA and its Subsidiaries have been duly filed, (B) all Taxes
shown to be due on the Tax Returns referred to in clause (A) have been paid
in full, (C) the Tax Returns referred to in clause (A) have been examined by
the Internal Revenue Service or the appropriate Tax authority or the period
for assessment of the Taxes in respect of which such Tax Returns were
required to be filed has expired, (D) all deficiencies asserted or
assessments made as a result of such examinations have been paid in full, (E)
no issues that have been raised by the relevant taxing authority in
connection with the examination of any of the Tax Returns referred to in
clause (A) are currently pending, and (F) no waivers of statutes of
limitation have been given by or requested with respect to any Taxes of BKLA
or its Subsidiaries. BKLA has made available to Western true and correct
copies of the United States federal income Tax Returns filed by BKLA and its
Subsidiaries for each of the three most recent fiscal years ended on or
before December 31, 1996. Neither BKLA nor any of its Subsidiaries has any
liability with respect to income, franchise or similar Taxes that accrued on
or before the end of the most recent period covered by BKLA's Regulatory
Documents filed prior to the date hereof in excess of the amounts accrued
with respect thereto that are reflected in the financial statements included
in BKLA's Regulatory Documents filed on or prior to the date hereof. Neither
BKLA nor any of its Subsidiaries is a party to any Tax allocation or sharing
agreement, is or has been a member of an affiliated group filing consolidated
or combined Tax returns (other than a group the common parent of which is or
was BKLA) or otherwise has any liability for the Taxes of any person (other
than BKLA and its Subsidiaries). As of the date hereof, neither BKLA nor any
of its Subsidiaries has any reason to believe that any conditions exist that
might prevent or impede the Merger from qualifying as a reorganization within
the meaning of Section 368 of the Code.
(ii) No Tax is required to be withheld pursuant to Section 1445
of the Code as a result of the transfer contemplated by this Agreement.
(q) RISK MANAGEMENT INSTRUMENTS. All interest rate swaps, caps,
floors, option agreements, futures and forward contracts and other similar
risk management arrangements, whether entered into for BKLA's own account, or
for the account of one or more of BKLA's Subsidiaries or their customers (all
of which are listed on BKLA's Disclosure Schedule), if any, were entered into
in accordance with prudent business practices and all applicable laws,
rules, regulations and regulatory policies and with counter parties believed
to be financially responsible; and each of them constitutes the valid and
legally binding obligation of BKLA or one of its Subsidiaries, enforceable in
accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors'
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rights or by general equity principles), and are in full force and effect.
Neither BKLA nor its Subsidiaries, nor to BKLA's knowledge, any other party
thereto, is in breach of any of its obligations under any such agreement or
arrangement.
(r) BOOKS AND RECORDS. The books and records of BKLA and its
Subsidiaries have been fully, properly and accurately maintained in all
material respects, and there are no material inaccuracies or discrepancies of
any kind contained or reflected therein, and they fairly present the
financial position of BKLA and its Subsidiaries.
(s) INSURANCE. BKLA has Previously Disclosed all of the insurance
policies, binders, or bonds maintained by BKLA or its Subsidiaries
("INSURANCE POLICIES"). BKLA and its Subsidiaries are insured with reputable
insurers against such risks and in such amounts as the management of BKLA
reasonably has determined to be prudent in accordance with industry
practices. All the Insurance Policies are in full force and effect; BKLA and
its Subsidiaries are not in material default thereunder; and all claims
thereunder have been filed in due and timely fashion.
(t) ACCOUNTING TREATMENT. As of the date hereof, BKLA is not
aware of any reason with respect to it why the Merger will fail to qualify
for "pooling of interests" accounting treatment.
5.04 REPRESENTATIONS AND WARRANTIES OF WESTERN. Subject to
Sections 5.01 and 5.02 and except as Previously Disclosed in its Disclosure
Schedule corresponding to the relevant paragraph below, Western hereby
represents and warrants to BKLA:
(a) ORGANIZATION, STANDING AND AUTHORITY. Each of Western and
Santa Monica Bank is duly organized, validly existing and in good standing
under the laws of the State of California. Each of Western and Santa Monica
Bank is duly qualified to do business and is in good standing in the states
of the United States and foreign jurisdictions where its ownership or leasing
of property or assets or the conduct of its business requires it to be so
qualified. Western and Santa Monica Bank have in effect all federal, state,
local, and foreign governmental authorizations necessary for them to own or
lease their respective properties and assets and to carry on their respective
business as it is now conducted.
(b) WESTERN CAPITAL STOCK. As of the date hereof, the authorized
capital stock of Western consists solely of 100,000,000 shares of Western
Common Stock, of which no more than 15,693,000 shares were outstanding as of
the date hereof and 5,000,000 shares of Western Preferred Stock, of which no
shares were outstanding as of the date hereof.
(c) SANTA MONICA BANK CAPITAL STOCK. As of the date hereof, the
authorized capital stock of Santa Monica Bank consists solely of 50,000,000
shares of Santa Monica Bank common stock, of which one share was outstanding
as of the date hereof.
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(d) CORPORATE POWER. Western and each of its Significant
Subsidiaries has the corporate power and authority to carry on its business
as it is now being conducted and to own all its properties and assets; and
each of Western and Santa Monica Bank has the corporate power and authority
to execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby.
(e) CORPORATE AUTHORITY. This Agreement and the transactions
contemplated hereby have been authorized by all necessary corporate action of
each of Western and Santa Monica Bank and their respective board of
directors. This Agreement is a valid and legally binding agreement of each of
Western and Santa Monica Bank, as the case may be, enforceable in accordance
with its terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors'
rights or by general equity principles).
(f) REGULATORY APPROVALS; NO DEFAULTS. (i) No consents or
approvals of, or filings or registrations with, any court, administrative
agency or commission or other governmental authority or instrumentality or
with any third party are required to be made or obtained by Western or any of
its Subsidiaries in connection with the execution, delivery or performance by
either Western or Santa Monica Bank of this Agreement or to consummate the
Merger except for (A) the filing of applications and notices, as applicable,
with federal and state banking Governmental Authorities; (B) approval of the
listing on the NASDAQ of Western Common Stock to be issued in the Merger; (C)
the filing and declaration of effectiveness of the Registration Statement;
(D) the filing of an agreement of merger with the California Secretary
pursuant to the CGCL; (E) filing of an agreement of merger with the
Commissioner pursuant to the California Financial Code; (F) such filings as
are required to be made or approvals as are required to be obtained under the
securities or "Blue Sky" laws of various states in connection with the
issuance of Western Common Stock in the Merger; and (G) receipt of the
approvals set forth in Section 7.01(b). As of the date hereof, Western is
not aware of any reason why the approvals set forth in Section 7.01(b) will
not be received without the imposition of a condition, restriction or
requirement of the type described in Section 7.01(b).
(ii) Subject to receipt of the regulatory approvals referred
to in the preceding paragraph and expiration of the related waiting periods,
and required filings under federal and state securities laws, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not (A) constitute a breach
or violation of, or a default under, or give rise to any Lien, any
acceleration of remedies or any right of termination under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of Western or of any of its Subsidiaries
or to which Western or any of its Subsidiaries or properties is subject or
bound, (B) constitute a breach or violation of, or a default under, the
articles of incorporation or by-laws (or similar governing documents) of
Western or any of its Significant Subsidiaries, or (C) require
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any consent or approval under any such law, rule, regulation, judgment,
decree, order, governmental permit or license, agreement, indenture or
instrument.
(g) FINANCIAL REPORTS AND REGULATORY DOCUMENTS; MATERIAL ADVERSE
EFFECT. (i) Western's Regulatory Documents, as of the date filed, (A)
complied or will comply in all material respects as to form with the
applicable requirements under the Securities Act or the Exchange Act, as the
case may be, and (B) did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and each of the
balance sheets contained in or incorporated by reference into any such
Regulatory Document (including the related notes and schedules thereto)
fairly presents, or will fairly present, the financial position of Western
and its Subsidiaries as of its date, and each of the statements of income and
changes in shareholders' equity and cash flows or equivalent statements in
such Regulatory Documents (including any related notes and schedules thereto)
fairly presents, or will fairly present, the results of operations, changes
in shareholders' equity and cash flows, as the case may be, of Western and
its Subsidiaries for the periods to which they relate, in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except in each case as may be noted therein,
subject to normal year-end audit adjustments in the case of unaudited
statements.
(ii) Since December 31, 1997, no event has occurred or
circumstance arisen that, individually or taken together with all other
facts, circumstances and events (described in any paragraph of this Section
5.04 or otherwise), is reasonably likely to have a Material Adverse Effect
with respect to it.
(h) NO BROKERS. No action has been taken by Western that would
give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the
transactions contemplated by this Agreement, excluding a Previously Disclosed
fee payable to Belle Plaine Partners, Inc.
(i) ACCOUNTING TREATMENT; TAX MATTERS. As of the date hereof,
Western is aware of no reason with respect to it why the Merger will fail to
qualify for "pooling of interests" accounting treatment. As of the date
hereof, neither Western nor any of its Subsidiaries has any reason to believe
that any conditions exist that might prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368 of the Code.
(j) REGULATORY MATTERS. (i) Neither Western nor any of its
Significant Subsidiaries or any of its properties is a party to or is subject
to any order, decree, agreement, memorandum of understanding or similar
arrangement with, or a commitment letter or similar submission to, or
extraordinary supervisory letter from, any Regulatory Authorities.
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(ii) Neither Western nor any of its Significant Subsidiaries has
been advised by, nor has any knowledge of facts which could give rise to an
advisory notice by, any Regulatory Authority that such Regulatory Authority
is contemplating issuing or requesting (or is considering the appropriateness
of issuing or requesting) any such order, decree, agreement, memorandum of
understanding, commitment letter, supervisory letter or similar submission.
(k) COMPLIANCE WITH LAWS. Each of Western and its Significant
Subsidiaries:
(i) is in compliance with all applicable federal, state, local
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders
or decrees applicable thereto or to the employees conducting such businesses,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act
and all other applicable fair lending laws and other laws relating to
discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations with,
all Governmental Authorities that are required in order to permit them to own
or lease their properties and to conduct their businesses as presently
conducted; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to Western's knowledge, no
suspension or cancellation of any of them is threatened; and
(iii) has received, since December 31, 1996, no notification
or communication from any Governmental Authority (A) asserting that Western
or any of its Significant Subsidiaries is not in compliance with any of the
statutes, regulations or ordinances which such Governmental Authority
enforces or (B) threatening to revoke any license, franchise, permit or
governmental authorization (nor, to Western's knowledge, do any grounds for
any of the foregoing exist).
(l) BOOKS AND RECORDS. The books and records of each of Western
and its Significant Subsidiaries have been fully, properly and accurately
maintained in all material respects, and there are no material inaccuracies
or discrepancies of any kind contained or reflected therein, and they fairly
present the financial position of Western and its Significant Subsidiaries.
(m) ENVIRONMENTAL MATTERS.
(i) Each of Western and its Significant Subsidiaries has
complied at all times with applicable Environmental Laws; (ii) no real
property (including buildings or other structures) currently or formerly
owned or operated by Western or its Significant Subsidiaries, or any Loan
Property, has been contaminated with, or has had any release of, any
Hazardous Substance; (iii) neither Western nor any of its Significant
Subsidiaries could be deemed the
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owner or operator of any Loan Property under any Environmental Law which such
Loan Property has been contaminated with, or has had any release of, any
Hazardous Substance; (iv) neither Western nor any of its Significant
Subsidiaries is subject to liability for any Hazardous Substance disposal or
contamination on any third party property; (v) neither Western nor any of its
Significant Subsidiaries has received any notice, demand letter, claim or
request for information alleging any violation of, or liability under, any
Environmental Law; (vi) neither Western nor any of its Significant
Subsidiaries is subject to any order, decree, injunction or other agreement
with any Governmental Authority or any third party relating to any
Environmental Law; (vii) to the best of Western's knowledge, there are no
circumstances or conditions (including the presence of asbestos, underground
storage tanks, lead products, polychlorinated biphenyls, prior manufacturing
operations, dry-cleaning, or automotive services) involving Western or its
Significant Subsidiaries, any currently or formerly owned or operated
property, or any Loan Property, that could reasonably be expected to result
in any claims, liability or investigations against Western or its Significant
Subsidiaries, result in any restrictions on the ownership, use, or transfer
of any property pursuant to any Environmental Law, or adversely affect the
value of any Loan Property, and (viii) each of Western and its Significant
Subsidiaries has made available to BKLA copies of all environmental reports,
studies, sampling data, correspondence, filings and other environmental
information in its possession or reasonably available to it, if any, relating
to each of Western and its Significant Subsidiaries, any currently or
formerly owned or operated property or any Loan Property.
ARTICLE VI
COVENANTS
6.01 REASONABLE BEST EFFORTS. Subject to the terms and
conditions of this Agreement, each of BKLA, Western and Santa Monica Bank
agrees to use its reasonable best efforts in good faith to take, or cause to
be taken, all actions, and to do, or cause to be done, all things necessary,
proper or desirable, or advisable under applicable laws, so as to permit
consummation of the Merger as promptly as practicable and otherwise to enable
consummation of the transactions contemplated hereby and shall cooperate
fully with the other party hereto to that end.
6.02 SHAREHOLDER APPROVAL. BKLA agrees to take, in accordance
with applicable law and the BKLA Articles and the BKLA By-Laws, all action
necessary to convene an appropriate meeting of its shareholders to consider
and vote upon the approval and adoption of this Agreement and any other
matters required to be approved by BKLA's shareholders for consummation of
the Merger (including any adjournment or postponement, the "BKLA MEETING"),
in each case as promptly as practicable after the Registration Statement is
declared effective. Except to the extent legally required for the discharge
by the BKLA Board of its fiduciary duties as advised by counsel to the BKLA
Board, the BKLA Board shall recommend
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such approval, and BKLA shall take all reasonable, lawful action to solicit
such approval by its shareholders.
6.03 REGISTRATION STATEMENT. (a) Western agrees to prepare a
registration statement on Form S-4 or other applicable form (the
"REGISTRATION STATEMENT") to be filed by Western with the SEC in connection
with the issuance of Western Common Stock in the Merger (including the proxy
statement and prospectus and other proxy solicitation materials of BKLA
constituting a part thereof (the "PROXY STATEMENT") and all related
documents). BKLA agrees to cooperate, and to cause its Subsidiaries to
cooperate, with Western, its counsel and its accountants, in preparation of
the Registration Statement and the Proxy Statement. BKLA agrees to file the
Proxy Statement in preliminary form with the FDIC as soon as reasonably
practicable on a confidential basis, and Western agrees to file the
Registration Statement with the SEC as soon as reasonably practicable on a
confidential basis, after any SEC comments with respect to the preliminary
Proxy Statement are resolved. Each of BKLA and Western agrees to use all
reasonable efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as reasonably practicable
after filing thereof. Western also agrees to use all reasonable efforts to
obtain all necessary state securities law or "Blue Sky" permits and approvals
required to carry out the transactions contemplated by this Agreement. BKLA
agrees to furnish to Western all information concerning BKLA, its
Subsidiaries, officers, directors and shareholders as may be reasonably
requested in connection with the foregoing.
(b) Each of BKLA and Western agrees, as to itself and its
Subsidiaries, that none of the information supplied or to be supplied by it
for inclusion or incorporation by reference in the Registration Statement
will, at the time the Registration Statement and each amendment or supplement
thereto, if any, becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and the Proxy Statement and any amendment or supplement thereto
will, at the date of mailing to shareholders and at the time of the BKLA
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading or any statement which, in the light of the
circumstances under which such statement is made, will be false or misleading
with respect to any material fact, or which will omit to state any material
fact necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier statement in
the Proxy Statement or any amendment or supplement thereto. Each of BKLA and
Western further agrees that if it shall become aware prior to the Effective
Date of any information furnished by it that would cause any of the
statements in the Proxy Statement to be false or misleading with respect to
any material fact, or to omit to state any material fact necessary to make
the statements therein not false or misleading, promptly to inform the other
party thereof and to take the necessary steps to correct the Proxy Statement.
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(c) Western agrees to advise BKLA, promptly after Western receives
notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of
any stop order or the suspension of the qualification of Western Common Stock
for offering or sale in any jurisdiction, of the initiation or threat of any
proceeding for any such purpose, or of any request by the SEC for the
amendment or supplement of the Registration Statement or for additional
information.
6.04 PRESS RELEASES. Each of BKLA and Western agrees that it
will not, without the prior approval of the other party, issue any press
release or written statement for general circulation relating to the
transactions contemplated hereby, except as otherwise required by applicable
law or regulation or NASDAQ rules (provided that the issuing party shall
nevertheless provide the other party with notice of, and the opportunity to
review, any such press release or written statement).
6.05 ACCESS; INFORMATION. (a) Each of BKLA and Western agrees
that upon reasonable notice and subject to applicable laws relating to the
exchange of information, each party shall afford the other party and the
other party's officers, employees, counsel, accountants and other authorized
representatives, such access during normal business hours throughout the
period prior to the Effective Time to the books, records (including, without
limitation, tax returns and work papers of independent auditors), properties,
personnel and to such other information as the requesting party may
reasonably request and, during such period, the providing party shall furnish
promptly to the requesting party (i) a copy of each material report, schedule
and other document filed by it pursuant to the requirements of federal or
state securities or banking laws, and (ii) all other information concerning
the business, properties and personnel of it as the requesting party may
reasonably request.
(b) Each party agrees that it will not, and will cause its
representatives not to, use any information obtained pursuant to this Section
6.05 (as well as any other information obtained prior to the date hereof in
connection with the entering into of this Agreement) for any purpose
unrelated to the consummation of the transactions contemplated by this
Agreement or the Stock Option Agreement. Subject to the requirements of law,
each party will keep confidential, and will cause its representatives to keep
confidential, all information and documents obtained pursuant to this Section
6.05 (as well as any other information obtained prior to the date hereof in
connection with the entering into of this Agreement) unless such information
(i) was already known to such party, (ii) becomes available to such party
from other sources not known by such party to be bound by a confidentiality
obligation, (iii) is disclosed with the prior written approval of the
providing party or (iv) is or becomes readily ascertainable from published
information or trade sources. In the event that this Agreement is terminated
or the transactions contemplated by this Agreement shall otherwise fail to be
consummated, each party shall promptly cause all copies of documents or
extracts thereof containing information and data as to the other party to be
returned to the other party. No investigation by either party of the
business and affairs of the other party shall affect or be deemed to modify
or waive any
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representation, warranty, covenant or agreement in this Agreement, or the
conditions to either party's obligation to consummate the transactions
contemplated by this Agreement.
6.06 ACQUISITION PROPOSALS. BKLA agrees that it shall not,
and shall cause its Subsidiaries and its and its Subsidiaries' officers,
directors, agents, advisors and affiliates not to, solicit or encourage
inquiries or proposals with respect to, or engage in any negotiations
concerning, or provide any confidential information to, or have any
discussions with, any person relating to, any Acquisition Proposal, except to
the extent legally required for the discharge by the BKLA Board of its
fiduciary duties as advised by counsel to the BKLA Board. BKLA shall
immediately cease and cause to be terminated any activities, discussions or
negotiations conducted prior to the date of this Agreement with any parties
other than Western with respect to any of the foregoing and shall use its
reasonable best efforts to enforce any confidentiality or similar agreement
relating to an Acquisition Proposal. BKLA shall promptly (within 24 hours)
advise Western following the receipt by BKLA of any Acquisition Proposal and
the substance thereof (including the identity of the person making such
Acquisition Proposal), and advise Western of any developments with respect to
such Acquisition Proposal immediately upon the occurrence thereof.
6.07 AFFILIATE AGREEMENTS. (a) Not later than the 15th day
prior to the mailing of the Proxy Statement, BKLA shall deliver to Western a
schedule of each person that, to the best of its knowledge, is or is
reasonably likely to be, as of the date of the BKLA Meeting, deemed to be an
"affiliate" of BKLA (each, a "BKLA AFFILIATE") as that term is used in Rule
145 under the Securities Act or SEC Accounting Series Releases 130 and 135.
(b) BKLA shall use its reasonable best efforts to cause each
person who may be deemed to be a BKLA Affiliate to execute and deliver to
Western on or before the date of mailing of the Proxy Statement an agreement
in the form attached hereto as EXHIBIT A (the "Affiliate Agreements").
6.08 TAKEOVER LAWS. No party hereto shall take any action
that would cause the transactions contemplated by this Agreement or the Stock
Option Agreement to be subject to requirements imposed by any Takeover Law
and each of them shall take all necessary steps within its control to exempt
(or ensure the continued exemption of) the transactions contemplated by this
Agreement from, or if necessary challenge the validity or applicability of,
any applicable Takeover Law, as now or hereafter in effect.
6.09 CERTAIN POLICIES. Prior to the Effective Date, BKLA
shall, consistent with generally accepted accounting principles and on a
basis mutually satisfactory to it and Western, modify and change its loan,
litigation and real estate valuation policies and practices (including loan
classifications and levels of reserves) so as to be applied on a basis that
is consistent with that of Western.
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6.10 NASDAQ LISTING. Western agrees to use its reasonable
best efforts to list, prior to the Effective Date, on the NASDAQ, subject to
official notice of issuance, the shares of Western Common Stock to be issued
to the holders of BKLA Common Stock in the Merger.
6.11 REGULATORY APPLICATIONS. (a) Western and BKLA and their
respective Subsidiaries shall cooperate and use their respective reasonable
best efforts to prepare all documentation, to effect all filings and to
obtain all permits, consents, approvals and authorizations of all third
parties and Governmental Authorities necessary to consummate the transactions
contemplated by this Agreement. Western and BKLA shall use their reasonable
best efforts to make all required bank regulatory filings, including the
appropriate filings with the Commissioner, the FDIC and the Federal Reserve.
Each of Western and BKLA shall have the right to review in advance, and to
the extent practicable each will consult with the other, in each case subject
to applicable laws relating to the exchange of information, with respect to
all material written information submitted to any third party or any
Governmental Authority in connection with the transactions contemplated by
this Agreement. In exercising the foregoing right, each of the parties
hereto agrees to act reasonably and as promptly as practicable. Each party
hereto agrees that it will consult with the other party hereto with respect
to the obtaining of all material permits, consents, approvals and
authorizations of all third parties and Governmental Authorities necessary or
advisable to consummate the transactions contemplated by this Agreement and
each party will keep the other party appraised of the status of material
matters relating to completion of the transactions contemplated hereby.
(b) Each party agrees, upon request, to furnish the other party
with all information concerning itself, its Subsidiaries, directors, officers
and shareholders and such other matters as may be reasonably necessary or
advisable in connection with any filing, notice or application made by or on
behalf of such other party or any of its Subsidiaries to any third party or
Governmental Authority.
6.12 INDEMNIFICATION; DIRECTOR AND OFFICERS' INSURANCE.
(a) From and after the Effective Time through the sixth anniversary of the
Effective Date, Western agrees to indemnify and hold harmless each present
and former director and officer of BKLA or any Subsidiary of BKLA determined
as of the Effective Time (the "INDEMNIFIED PARTIES"), against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages or liabilities (collectively, "COSTS") incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of matters existing or
occurring at or prior to the Effective Time (including with respect to this
Agreement or any of the transactions contemplated hereby) (but excluding any
Costs arising out of any violation or alleged violation of the Exchange Act
or the rules and regulations thereunder with respect to insider trading),
whether asserted, claimed or arising prior to, at or after the Effective
Time, to the extent to which such Indemnified Parties were entitled under
California law and the BKLA Articles or the BKLA By-Laws in effect on the
date hereof, and Western shall also advance expenses as incurred to the
extent permitted under California law, the Western Articles
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and the Western By-Laws and, with respect to any Indemnified Party, any
indemnification agreement to which such person is a party.
(b) Any Indemnified Party wishing to claim indemnification under
Section 6.12(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall as promptly as possible notify Western thereof, but the
failure to so notify shall not relieve Western of any liability it may have
to such Indemnified Party if such failure does not materially prejudice
Western. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i)
Western shall have the right to assume the defense thereof and Western shall
not be liable to such Indemnified Parties for any legal expenses of other
counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if Western elects
not to assume such defense or counsel for the Indemnified Parties advises in
writing that there are issues which raise conflicts of interest between
Western and the Indemnified Parties, the Indemnified Parties may retain
counsel satisfactory to them, and Western shall pay the reasonable fees and
expenses of one such counsel for the Indemnified Parties in any jurisdiction
promptly as statements thereof are received, (ii) the Indemnified Parties
will cooperate in the defense of any such matter and (iii) Western shall not
be liable for any settlement effected without its prior written consent
(which consent shall not be unreasonably withheld); and PROVIDED, FURTHER,
that Western shall not have any obligation hereunder to any Indemnified Party
when and if a court of competent jurisdiction shall ultimately determine, and
such determination shall have become final and nonappealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby
is not permitted or is prohibited by applicable law.
(c) For a period of six years after the Effective Time, Western
shall use its reasonable best efforts to cause to be maintained in effect at
a minimum the current policies of directors' and officers' liability
insurance maintained by BKLA (provided that Western may substitute therefor
policies of comparable coverage with respect to claims arising from facts or
events which occurred before the Effective Time); PROVIDED, HOWEVER, that in
no event shall Western be obligated to expend, in order to maintain or
provide insurance coverage pursuant to this Section 6.12(c), any amount per
annum in excess of 125% of the amount of the annual premiums paid as of the
date hereof by BKLA for such insurance (the "MAXIMUM AMOUNT"). If the amount
of the annual premiums necessary to maintain or procure such insurance
coverage exceeds the Maximum Amount, Western shall use all reasonable efforts
to maintain the most advantageous policies of directors' and officers'
insurance obtainable for an annual premium equal to the Maximum Amount.
Notwithstanding the foregoing, prior to the Effective Time, Western may
request BKLA to, and BKLA shall, purchase insurance coverage, on such terms
and conditions as shall be acceptable to Western, extending for a period of
six years BKLA's directors' and officers' liability insurance coverage in
effect as of the date hereof (covering past or future claims with respect to
periods before the Effective Time) and such coverage shall satisfy Western's
obligations under this Section 6.12(c).
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(d) If Western or any of its successors or assigns (i) shall
consolidate with or merge into any other corporation or entity and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger or (ii) shall transfer all or substantially all of its properties and
assets to any individual, corporation or other entity, then and in each such
case, proper provision shall be made so that the successors and assigns of
Western shall assume the obligations set forth in this Section 6.12.
6.13 BENEFIT PLANS. BKLA consents and covenants that from and
after the Effective Date BKLA's Benefits Plans will be governed, managed
and/or terminated by Western, all within Western's sole discretion.
6.14 ACCOUNTANTS' LETTERS. Each of BKLA and Western shall use
its reasonable best efforts to cause to be delivered to the other party, and
to Western's directors and officers who sign the Registration Statement, a
letter of their respective independent auditors, dated (i) the date on which
the Registration Statement shall become effective and (ii) a date shortly
prior to the Effective Date, and addressed to such directors and officers, in
form and substance customary for "comfort" letters delivered by independent
accountants in accordance with Statement of Accounting Standards No. 72.
6.15 NOTIFICATION OF CERTAIN MATTERS. Each of BKLA and
Western shall give prompt notice to the other of any fact, event or
circumstance known to it that (i) is reasonably likely, individually or taken
together with all other facts, events and circumstances known to it, to
result in any Material Adverse Effect with respect to it or (ii) would cause
or constitute a material breach of any of its representations, warranties,
covenants or agreements contained herein.
6.16 SHAREHOLDER AGREEMENTS. The directors and certain
officers and shareholders of BKLA, in their capacities as shareholders, in
exchange for good and valuable consideration, have executed and delivered to
Western shareholder agreements substantially in the form of EXHIBIT B hereto
(the "SHAREHOLDER AGREEMENTS"), committing such persons, among other things,
(i) to vote their shares of BKLA Common Stock in favor of the Agreement at
the BKLA Meeting and (ii) to certain representations concerning the ownership
of BKLA Common Stock and Western Common Stock to be received in the Merger.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligation of each of Western and BKLA to consummate
the Merger is subject to the
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fulfillment or written waiver by Western and BKLA prior to the Effective Time
of each of the following conditions:
(a) SHAREHOLDER APPROVALS. This Agreement and the Merger shall
have been duly adopted by the requisite vote of the shareholders of BKLA.
(b) REGULATORY APPROVALS. All regulatory approvals required to
consummate the transactions contemplated hereby shall have been obtained and
shall remain in full force and effect and all statutory waiting periods in
respect thereof shall have expired and no such approvals shall contain any
conditions, restrictions or requirements which the Western Board reasonably
determines would (i) following the Effective Time, have a Material Adverse
Effect on the Surviving Corporation and its Subsidiaries taken as a whole or
(ii) reduce the benefits of the transactions contemplated hereby to such a
degree that Western would not have entered into this Agreement had such
conditions, restrictions or requirements been known at the date hereof.
(c) NO INJUNCTION. No Governmental Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order
(whether temporary, preliminary or permanent) which is in effect and
prohibits consummation of the transactions contemplated by this Agreement.
(d) REGISTRATION STATEMENT. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
SEC.
(e) BLUE SKY APPROVALS. All permits and other authorizations
under state securities laws necessary to consummate the transactions
contemplated hereby and to issue the shares of Western Common Stock to be
issued in the Merger shall have been received and be in full force and effect.
(f) LISTING. The shares of Western Common Stock to be issued in
the Merger shall have been approved for listing on the NASDAQ, subject to
official notice of issuance.
7.02 CONDITIONS TO OBLIGATION OF BKLA. The obligation of BKLA
to consummate the Merger is also subject to the fulfillment or written waiver
by BKLA prior to the Effective Time of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Western set forth in this Agreement (subject to the standard
set forth in Section 5.02) shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on and as of the
Effective Date (except that representations and warranties that by their
terms speak
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only as of the date of this Agreement or some other date shall be true and
correct as of such date), and BKLA shall have received a certificate, dated
the Effective Date, signed on behalf of Western by the Chief Executive
Officer and the Chief Financial Officer of Western to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF WESTERN. Western shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time, and BKLA shall
have received a certificate, dated the Effective Date, signed on behalf of
Western by the Chief Executive Officer and the Chief Financial Officer of
Western to such effect.
(c) ACCOUNTANTS' LETTERS. BKLA shall have received the letters
referred to in Section 6.14 from Western's independent auditors.
(d) OPINION OF BKLA'S INDEPENDENT AUDITORS; ACCOUNTING TREATMENT.
BKLA shall have received from Vavrinek, Trine, Day & Co., LLP, its
independent auditors, (i) an opinion dated the Effective Date, to the effect
that, on the basis of facts, representations and assumptions set forth in
such opinion, (A) the Merger constitutes a "reorganization" within the
meaning of Section 368 of the Code and (B) no gain or loss will be recognized
by shareholders of BKLA who receive shares of Western Common Stock in
exchange for shares of BKLA Common Stock, except with respect to cash
received in lieu of fractional share interests, and (ii) letters, dated the
date of or shortly prior to each of the mailing date of the Proxy Statement
and the Effective Date, stating its opinion that the Merger shall qualify for
pooling-of-interests accounting treatment. In rendering its opinion,
Vavrinek, Trine, Day & Co., LLP may require and rely upon representations
contained in letters from BKLA, Western and shareholders of BKLA.
(e) DIRECTOR. Western shall have elected as a director, the
individual agreed in accordance with Section 2.01 hereof, effective
immediately after the Effective Time.
7.03 CONDITIONS TO OBLIGATION OF WESTERN. The obligation of
Western to consummate the Merger is also subject to the fulfillment or
written waiver by Western prior to the Effective Time of each of the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of BKLA set forth in this Agreement (subject to the standard set
forth in Section 5.02) shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on and as of the
Effective Date (except that representations and warranties that by their
terms speak only as of the date of this Agreement or some other date shall be
true and correct as of such date) and Western shall have received a
certificate, dated the Effective Date, signed on behalf of BKLA by the Chief
Executive Officer and the Chief Financial Officer of BKLA to such effect.
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<PAGE>
(b) PERFORMANCE OF OBLIGATIONS OF BKLA. BKLA shall have performed
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Effective Time, and Western shall have
received a certificate, dated the Effective Date, signed on behalf of BKLA by
the Chief Executive Officer and the Chief Financial Officer of BKLA to such
effect.
(c) OPINION OF WESTERN'S COUNSEL. Western shall have received an
opinion of Sullivan & Cromwell, special counsel to Western, dated the
Effective Date, to the effect that, on the basis of facts, representations
and assumptions set forth in such opinion, the Merger constitutes a
reorganization under Section 368 of the Code. In rendering its opinion,
Sullivan & Cromwell may require and rely upon representations contained in
letters from BKLA, Western and shareholders of BKLA.
(d) ACCOUNTANTS' LETTERS. Western shall have received the letters
referred to in Section 6.14 from BKLA's independent auditors.
(e) ACCOUNTING TREATMENT. Western shall have received from KPMG
Peat Marwick LLP, Western's independent auditors, letters, dated the date of
or shortly prior to each of the mailing date of the Proxy Statement and the
Effective Date, stating its opinion that the Merger shall qualify for
pooling-of-interests accounting treatment.
ARTICLE VIII
TERMINATION
8.01 TERMINATION. This Agreement may be terminated, and the
Acquisition may be abandoned:
(a) MUTUAL CONSENT. At any time prior to the Effective Time, by
the mutual consent of Western and BKLA, if the Board of Directors of each so
determines by vote of a majority of the members of its entire Board.
(b) BREACH. At any time prior to the Effective Time, by Western
or BKLA, if its Board of Directors so determines by vote of a majority of the
members of its entire Board, in the event of either: (i) a breach by the
other party of any representation or warranty contained herein (subject to
the standard set forth in Section 5.02), which breach cannot be or has not
been cured within 30 days after the giving of written notice to the breaching
party of such breach; or (ii) a breach by the other party of any of the
covenants or agreements contained herein, which breach cannot be or has not
been cured within 30 days after the giving of written notice to the breaching
party of such breach, provided that such breach (whether under (i) or (ii))
would be
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reasonably likely, individually or in the aggregate with other breaches, to
result in a Material Adverse Effect.
(c) DELAY. At any time prior to the Effective Time, by Western or
BKLA, if its Board of Directors so determines by vote of a majority of the
members of its entire Board, in the event that the Merger is not consummated
by December 31, 1998.
(d) NO APPROVAL. By BKLA or Western in the event (i) the approval
of any Governmental Authority required for consummation of the Merger and the
other transactions contemplated by this Agreement shall have been denied by
final nonappealable action of such Governmental Authority or (ii) the
shareholder approval required by Section 7.01(a) herein is not obtained at
the BKLA Meeting.
(e) FAILURE TO RECOMMEND, ETC. At any time prior to the BKLA
Meeting, by Western if the BKLA Board shall have failed to make its
recommendation referred to in Section 6.02, withdrawn such recommendation or
modified or changed such recommendation in a manner adverse in any respect to
the interests of Western.
(f) TERMINATION BY WESTERN. This Agreement may be terminated and
the Merger may be abandoned by Western by the giving of notice to BKLA at any
time prior to 5 p.m. on April 29, 1998, if Western determines in its sole
discretion, upon completion of its due diligence review of BKLA, to so
terminate.
(g) WESTERN COMMON STOCK. This Agreement may be terminated by
BKLA in the event that, with respect to any Ten Day Period (as defined
below), both (i)(A) the Ten Day Average Price (as defined below) shall be
less that $35.37 per share and (B) the Western Common Stock Price Percentage
(as defined below) shall be less than the BKX Index Percentage (as defined
below) and (ii) BKLA has delivered written notice to Western of its intention
to terminate this Agreement within forty-eight (48) hours following the date
of such event (it being understood that, if the circumstances set forth in
clause (i) shall have occurred and BKLA fails to timely deliver the notice
referred to in this clause (ii), BKLA shall have the right to terminate if
any such event subsequently occurs and BKLA timely delivers such notice);
PROVIDED, HOWEVER, that, if Western effects a stock dividend,
reclassification, recapitalization, stock split, combination, exchange of
shares or similar transaction after the date hereof and prior to the
Effective Time, the provisions of this Section 8.01(g) shall be appropriately
adjusted;
As used in this Section 8.01(g), (w) "Western Common Stock Price
Percentage" means the percentage determined by dividing the Ten Day Average
Price by $42.61 (as such amount may be adjusted pursuant to the paragraph
above); (x) "BKX Index Percentage " means the percentage determined by
dividing (i) the product of (A) the Keefe Bank Index as of the date of
determination times (B) .66 by (ii) the Keefe Bank Index as of the date
hereof; (y) "Ten Day Average Price" means the average sales price per share
of Western Common Stock for a Ten Day
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Period determined by averaging the last reported sales price on each trading
day, and (z) "Ten Day Period" means any period of ten (10) consecutive
trading days.
(h) ACQUISITION PROPOSAL. This Agreement may be terminated by
BKLA by written notice to Western if BKLA receives an Acquisition Proposal on
terms and conditions which the BKLA Board determines, after receiving the
advice of its outside counsel that to proceed with the Merger will violate
the fiduciary duties of the BKLA Board to BKLA's shareholders in light of
such Acquisition Proposal, to accept such proposal; PROVIDED, HOWEVER, that
BKLA shall not be entitled to terminate this Agreement pursuant to this
Section 8.01(h) unless it shall have provided Western with written notice of
such a possible determination (which written notice will inform Western of
the material terms and conditions of the proposal, including the identity of
the proponent) not less than two business days prior to such determination.
8.02 EFFECT OF TERMINATION AND ABANDONMENT. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to
Section 8.01, no party to this Agreement shall have any liability or further
obligation to any other party hereunder except as set forth in Section 8.03
and Section 9.01.
8.03 TERMINATION FEE.
(a) MATERIAL BREACH BY WESTERN. Should BKLA terminate this
Agreement pursuant to Section 8.01(b) (unless such breach under Section
8.01(b) shall result from no act or omission of Western), Western shall
promptly, if so requested by BKLA, but in no event later than five business
days after the date of such request, pay BKLA a fee equal to BKLA's
out-of-pocket expenses in connection with this Agreement and the transactions
contemplated hereby, up to a maximum of $500,000, which amount shall be
payable in same day funds, provided however that no fee shall be paid
pursuant to this Section 8.03(a) if BKLA shall be in material breach of its
obligations hereunder and Western shall owe no further duty or liability on
account of this Agreement to BKLA.
(b) MATERIAL BREACH BY BKLA; ENTERING ACQUISITION PROPOSAL.
Should Western terminate this Agreement pursuant to either Section 8.01(e) or
8.01(b) (unless such breach under Section 8.01(b) shall result from no act or
omission of BKLA), BKLA shall promptly, if so requested by Western, but in no
event later than five business days after the date of such request, pay
Western a fee equal to Western's out-of-pocket expenses in connection with
this Agreement and the transactions contemplated hereby, up to a maximum of
$500,000, which amount shall be payable in same day funds, provided however
that no fee shall be paid pursuant to this Section 8.03 if Western shall be
in material breach of its obligations hereunder and BKLA and the shareholders
who are parties to the Shareholder Agreements shall owe no further duty or
liability on account of this Agreement or the Shareholders Agreement to
either Western or Santa Monica Bank. In the event that there is a termination
as a result of BKLA entering into an
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Acquisition Proposal pursuant to Section 8.01(h), BKLA shall pay Western up
to $500,000 to cover out-of-pocket expenses in addition to Western's rights
under the Stock Option Agreement and BKLA and the shareholders who are
parties to the Shareholder Agreements shall owe no further duty or liability
on account of this Agreement to either Western or Santa Monica Bank except
under the Stock Option Agreement.
ARTICLE IX
MISCELLANEOUS
9.01 SURVIVAL. No representations, warranties, agreements and
covenants contained in this Agreement shall survive the Effective Time (other
than Sections 3.01, 3.03, 3.04, 3.07, 6.12 and this Article IX which shall
survive the Effective Time) or the termination of this Agreement if this
Agreement is terminated prior to the Effective Time (other than Sections
6.03(b), 6.05(b), 8.02, 8.03 and this Article IX which shall survive such
termination).
9.02 WAIVER; AMENDMENT. Prior to the Effective Time, any
provision of this Agreement may be (i) waived by the party benefitted by the
provision, or (ii) amended or modified at any time, by an agreement in
writing between the parties hereto executed in the same manner as this
Agreement, except that after the BKLA Meeting, this Agreement may not be
amended if it would violate the CGCL or reduce the consideration to be
received by BKLA shareholders in the Merger.
9.03 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to constitute an original.
9.04 GOVERNING LAW; WAIVER OF JURY TRIAL. This Agreement
shall be governed by, and interpreted in accordance with, the laws of the
State of California applicable to contracts made and to be performed entirely
within such State. Each of the parties hereto hereby irrevocably waives any
and all right to trial by jury in any legal proceeding arising out of or
related to this Agreement or the transactions contemplated hereby.
9.05 EXPENSES. Each party hereto will bear all expenses
incurred by it in connection with this Agreement and the transactions
contemplated hereby, except as provided in Section 8.02.
9.06 NOTICES. All notices, requests and other communications
hereunder to a party shall be in writing and shall be deemed given if
personally delivered, telecopied (with machine-generated confirmation) or
mailed by registered or certified mail (return receipt requested) to such
party at its address set forth below or such other address as such party may
specify by notice to the parties hereto.
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If to, to:
Bank of Los Angeles
8901 Santa Monica Blvd.
West Hollywood, CA 90069-4901
Attention: Adriana M. Boeka
Facsimile: (310) 843-1498
With a copy to:
Horgan, Rosen, Beckham & Coren
21700 Oxnard Street
Suite 1400
Woodland Hills, CA 91367
Attention: Arthur Coren
Facsimile: (818) 340-6190
If to Western or Santa Monica Bank, to:
Western Bancorp
1251 Westwood Boulevard
Los Angeles, CA 90024
Attention: Matthew P. Wagner
Facsimile: (310) 477-8611
With a copy to:
Sullivan & Cromwell
444 South Flower Street
Los Angeles, California 90071
Attention: Stanley F. Farrar
Facsimile: (213) 683-0457
9.07 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This
Agreement, the Stock Option Agreement, the Affiliate Agreements and the
Shareholder Agreements represent the entire understanding of the parties
hereto with reference to the transactions contemplated hereby and thereby and
this Agreement supersedes any and all other oral or written agreements
heretofore made (other than any such Stock Option Agreement, Affiliate
Agreements or Shareholder Agreements). Nothing in this Agreement expressed
or implied, is intended to confer upon any person, other than the parties
hereto or their respective successors, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
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9.08 INTERPRETATION; EFFECT. When a reference is made in this
Agreement to Sections, Exhibits or Schedules, such reference shall be to a
Section of, or Exhibit or Schedule to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement
are for reference purposes only and are not part of this Agreement. Whenever
the words "include," "includes" or "including" are used in this Agreement,
they shall be deemed to be followed by the words "without limitation." No
provision of this Agreement shall be construed to require BKLA, Western or
any of their respective Subsidiaries, affiliates or directors to take any
action which would violate applicable law (whether statutory or common law),
rule or regulation.
* * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in counterparts by their duly authorized officers, all as of
the day and year first above written.
BANK OF LOS ANGELES
By:
------------------------------
Name:
Title:
WESTERN BANCORP
By:
------------------------------
Name:
Title:
SANTA MONICA BANK
By:
------------------------------
Name:
Title:
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FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20006
FORM 8K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
May 6, 1998
(Date of Report) (Date of Earliest Event)
BANK OF LOS ANGELES
(Exact Name of Registrant as Specified in its Charter)
California
(State or Other Jurisdiction of Incorporation)
(310) 843-1455
(Registrant's Telephone Number, Including Area Code)
23790 95-3612029
(FDIC Certificate Number) (IRS Employer Identification No.)
8901 Santa Monica Boulevard
West Hollywood, California 90069
(Address of Principal Executive Offices) (Zip Code)
<PAGE>
Item 5. Other Events.
On May 6, 1998, Bank of Los Angeles ("BKLA") announced that its Chairman of the
Board, Maurice (Morry) J. Burford, passed away in the early morning hours of May
6, 1998. It was also announced that the Board of Directors appointed Adriana M.
Boeka, then current Vice Chairman, Chairman of the Board of Directors. A copy
of the press releases issued by BKLA in connection with the announcement are
attached hereto as Exhibit 99.1 and Exhibit 99.2 and are incorporated herein by
reference in their entirety.
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:
Exhibit 99.1 Press Release of BKLA, dated May 6, 1998
Exhibit 99.2 Press Release of BKLA, dated May 12, 1998
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: May 13, 1998
BANK OF LOS ANGELES
---------------------------------
Adriana M. Boeka
Chairman of the Board
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
Exhibit 99.1 Press Release of BKLA, dated May 6, 1998
Exhibit 99.2 Press Release of BKLA, dated May 12, 1998
<PAGE>
[LETTERHEAD]
PRESS RELEASE
CONTACT: Adriana M. Boeka
Chairman of the Board
310/843-1480
FOR IMMEDIATE RELEASE: MAY 6, 1998
WEST HOLLYWOOD, CA - BANK OF LOS ANGELES (BKLA): Bank of Los Angeles today
sadly announced that its Chairman of the Board, Maurice (Morry) J. Burford,
passed away during the early morning hours of May 6, 1998. Mr. Burford was at
UCLA Medical Center.
Adriana M. Boeka, current Vice Chairman, has been appointed Chairman of the
Board by the Bank's Board of Directors.
<PAGE>
[LETTERHEAD]
PRESS RELEASE
CONTACT: Adriana M. Boeka
Chairman of the Board
310/843-1480
FOR IMMEDIATE RELEASE: MAY 12, 1998
BANK OF LOS ANGELES ANNOUNCES
PASSING OF MORRY J. BURFORD
WEST HOLLYWOOD, CA - BANK OF LOS ANGELES (BKLA): It was with deep regret
that the Board of Directors and the senior management of Bank of Los Angeles,
West Hollywood, California, announced the passing of the Bank's Chairman of
the Board, Maurice (Morry) J. Burford.
Mr. Burford headed a group that acquired a majority interest in the Bank in
1995. Under his direction, the Bank grew significantly from approximately $80
million in assets to $278 million in assets as of March 31, 1998. This growth
had been accomplished through an orderly restructuring of the management team
and staff, enhancement in the services provided to the Bank's customers, and
through the acquisition of World Trade Bank in 1995, American West Bank and
Culver National Bank in 1997.
Mr. Burford's honesty, integrity, and direct no-nonsense business approach
were well known throughout the financial services community and by those who
had the honor to work with and know him. He held all members of the Banks'
professional staff to a high standard, but never demanded more of them than
he gave himself. His commitment to achieving shareholder value was evidenced
by the Bank's recent agreement with Western Bancorp which provides for the
merger of the Bank with and into Santa Monica Bank, a wholly-owned subsidiary
of Western Bancorp.
The Agreement and Plan of Reorganization, dated as of April 16, 1998, by and
among Western Bancorp, Santa Monica Bank and Bank of Los Angeles, is
unaffected by the Bank of Los Angeles' Chairman's death. Due diligence was
completed April 29, 1998 and the closing, subject to regulatory and
shareholder approvals, is scheduled to be completed in the fourth quarter of
1998.
The Board of Directors has appointed Ms. Adriana M. Boeka, the former Vice
Chairman of the Bank, as successor Chairman of the Board of Directors. John
Feldman will continue to serve as the President and Chief Executive Officer
of the Bank. The Board and senior management are committed to accomplishing
the proposed merger with Western Bancorp and will continue to operate the
Bank pending the completion of that transaction with the same commitment to
excellence, safety and soundness that were personified by Mr. Burford.
