<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-13551
------------------------
WESTERN BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3863296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
4100 NEWPORT PLACE, SUITE 900,
NEWPORT BEACH, CALIFORNIA 92660
(Address of principal executive offices)
Registrant's telephone number (949) 863-2444
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 10, 1998: 15,708,086 shares of common stock, no par
value.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997... 3
Condensed Consolidated Statements of Income for three month and six month periods
ended June 30, 1998 and 1997...................................................... 4
Condensed Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1998 and 1997............................................................ 5
Notes to Condensed Consolidated Financial Statements June 30, 1998................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk......................... 22
PART II-OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 23
Item 2. Change in Securities.............................................................. 23
Item 3. Default Upon Senior Securities.................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders............................... 23
Item 5. Other Information................................................................. 23
Item 6. Exhibits and Reports on Form 8-K.................................................. 24
SIGNATURES................................................................................................. 25
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 (A) 1997
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks.............................................................. $ 155,940 $ 97,456
Federal funds sold................................................................... 177,329 138,702
------------ ------------
Total cash and cash equivalents.................................................... 333,269 236,158
SECURITIES:
FRB and FHLB stock................................................................... 5,759 5,610
Securities available for sale (amortized cost of $218,233 and $202,064).............. 218,376 201,904
------------ ------------
Total securities................................................................... 224,135 207,514
Net loans and leases................................................................. 1,249,930 864,840
Premises and equipment............................................................... 32,034 13,685
Other real estate owned.............................................................. 4,946 6,261
Goodwill............................................................................. 145,525 30,430
Other assets......................................................................... 26,910 24,622
------------ ------------
Total assets....................................................................... $ 2,016,749 $1,383,510
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Non-interest bearing deposits........................................................ $ 637,837 $ 457,503
Interest bearing deposits............................................................ 1,059,515 769,290
------------ ------------
Total deposits..................................................................... 1,697,352 1,226,793
Borrowed funds....................................................................... 15,756 12,751
Accrued interest payable and other liabilities....................................... 14,495 14,311
------------ ------------
Total liabilities.................................................................. 1,727,603 1,253,855
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized, none issued.............. -- --
Common stock, no par value, 100,000,000 shares authorized 15,703,829 and 10,648,317
shares issued and outstanding....................................................... 263,257 112,947
Retained earnings.................................................................... 25,819 16,802
Accumulated other comprehensive income--unrealized net gains (losses) on securities
available for sale, net of tax...................................................... 70 (94)
------------ ------------
Total shareholders' equity......................................................... 289,146 129,655
------------ ------------
Total liabilities and shareholders' equity....................................... $ 2,016,749 $1,383,510
------------ ------------
------------ ------------
Number of common shares outstanding.................................................. 15,703.8 10,648.3
Common shareholders' equity per share................................................ $ 18.41 $ 12.18
Tangible common shareholders' equity per share....................................... $ 9.15 $ 9.32
</TABLE>
- ------------------------
(a) Reflects the acquisition of Santa Monica Bank consummated on January 27,
1998.
See "Notes to Unaudited Condensed Consolidated Financial Statements."
3
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 THREE MONTHS ENDED
-------------------- JUNE 30
1998 (A) 1997 (A) 1998 (A) 1997 (A)
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and
leases.............................. $ 56,671 $ 38,605 $ 29,916 $ 19,560
Interest on investment securities..... 6,966 8,500 3,256 4,192
Interest on federal funds sold........ 5,285 1,653 2,983 1,041
--------- --------- --------- ---------
Total interest income............... 68,922 48,758 36,155 24,793
INTEREST EXPENSE:
Interest expense on deposits.......... 17,762 13,736 9,097 7,060
Interest expense on borrowed funds.... 556 594 339 255
--------- --------- --------- ---------
Total interest expense.............. 18,318 14,330 9,436 7,315
--------- --------- --------- ---------
Net interest income:.................... 50,604 34,428 26,719 17,478
Less: provision for loan and lease
losses.............................. 300 1,400 150 675
--------- --------- --------- ---------
Net interest income after provision for
loan and lease losses.................. 50,304 33,028 26,569 16,803
NON INTEREST INCOME:
Service charges and fees on deposit
accounts............................ 3,786 2,779 1,877 1,396
Trust fees............................ 1,615 - 978 -
Escrow fees........................... 531 337 273 182
Other fees and charges................ 1,318 722 875 218
Gain on sale of loans and other
assets.............................. - 78 - -
Securities gains...................... 155 342 42 235
Other income.......................... 453 770 200 488
--------- --------- --------- ---------
Total non interest income........... 7,858 5,028 4,245 2,519
NON INTEREST EXPENSE:
Salaries and benefits................. 17,725 12,715 9,183 6,055
Occupancy, furniture and equipment.... 5,328 3,889 2,981 1,973
Advertising and business
development......................... 566 596 290 226
Other real estate owned............... (205) 69 (394) 23
Professional services................. 1,657 1,753 819 689
Telephone, stationery and supplies.... 1,437 1,420 701 708
Goodwill amortization................. 4,561 1,270 2,610 634
Data processing....................... 1,126 791 568 403
Customer services cost................ 842 559 521 428
Merger costs.......................... - 3,470 - 3,404
Other................................. 2,476 3,268 1,253 1,930
--------- --------- --------- ---------
Total non interest expense.......... 35,513 29,800 18,532 16,473
--------- --------- --------- ---------
Income before income taxes............ 22,649 8,256 12,282 2,849
Income taxes.......................... 11,142 4,811 6,110 2,380
--------- --------- --------- ---------
Net income.......................... $ 11,507 $ 3,445 $ 6,172 $ 469
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares
outstanding:
Basic............................... 14,821.5 10,492.5 15,695.0 10,497.9
Diluted............................. 15,040.0 10,778.3 15,931.2 10,798.7
Net income per share:
Basic............................... $ 0.78 $ 0.33 $ 0.39 $ 0.04
Diluted............................. $ 0.77 $ 0.32 $ 0.39 $ 0.04
</TABLE>
- ------------------------
(a) Santa Monica Bank was acquired on January 27, 1998. Accordingly, Santa
Monica Bank's operating results are not included in the amounts for the 1997
periods and are included only since February of the 1998 periods.
See "Notes to Unaudited Condensed Consolidated Financial Statements."
4
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1998 1997
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 11,507 $ 3,445
Adjustments to reconcile net income to net cash provided by operations:
(Gain) on sale of securities available for sale........................................ (155) (342)
(Gain) on sale of premises and equipment............................................... (10) --
(Gain) on sale of other real estate owned.............................................. (357) (4)
Provision for loan and lease losses.................................................... 300 1,400
Goodwill amortization.................................................................. 4,561 1,270
Depreciation........................................................................... 1,406 1,140
(Gain) on sale of loans................................................................ -- (78)
Amortization of (discounts) premiums on investment securities.......................... (614) (1)
(Decrease) in unearned lease income.................................................... (131) (51)
Net increase (decrease) in accrued interest payable and other liabilities.............. (3,583) (1,291)
Net (increase) decrease in other assets................................................ 1,850 2,898
----------- ----------
Net cash provided by operating activities............................................ 14,774 8,386
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities available for sale........................... 20,208 8,414
Principal payments received on investment securities available for sale.................. 181,552 117,446
Principal payments received on investment securities held to maturity.................... -- 439
Purchase of investment securities available for sale..................................... (127,922) (77,164)
Purchase of FRB or FHLB stock............................................................ (149) (58)
Proceeds from sale of premises and equipment............................................. 327 4
(Increase) decrease in net loans and leases.............................................. 1,498 (33,966)
Recoveries of loans and investment in leases............................................. 852 469
Additions to premises and equipment...................................................... (3,744) (82)
Reductions (increases) to other real estate owned........................................ 4,990 (480)
Change in assets and liabilities due to the acquisition of Santa Monica Bank:
Increase in investments available for sale............................................. (89,238) --
Increase in loans...................................................................... (387,609) --
Increase in other real estate owned.................................................... (3,318) --
Increase in other assets............................................................... (4,277) --
Increase in premises and equipment..................................................... (16,328) --
Increase in deposits................................................................... 584,095 --
Increase in borrowed funds............................................................. 1,960 --
Increase in other liabilities.......................................................... 5,988 --
Goodwill............................................................................... (119,656) --
----------- ----------
Net cash provided by investing activities............................................ 49,229 15,022
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1998 1997
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES:
Cash received from exercise of options................................................... 249 367
Proceeds from issuance of common stock................................................... 150,071 --
Common stock repurchased and retired..................................................... (11) (507)
Dividends paid........................................................................... (4,710) (749)
Net (decrease) increase in deposits...................................................... (113,536) 30,700
Additional (repayment of) borrowings..................................................... 1,045 (3,339)
----------- ----------
Net cash provided by financing activities............................................ 33,108 26,472
----------- ----------
Net increase in cash and cash equivalents................................................ 97,111 49,880
Cash and cash equivalents at the beginning of the period................................. 236,158 118,719
----------- ----------
Cash and cash equivalents at the end of the period....................................... $ 333,269 $ 168,599
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Dividends declared in prior period and paid in current period............................ 2,221 --
Property acquired through foreclosure.................................................... -- 7,147
Loans to facilitate the sale of OREO..................................................... 256 1,139
Increase (decrease) in unrealized gain on securities available for sale, net of tax...... 164 39
Cash paid for interest................................................................... 17,868 14,282
Cash paid for taxes...................................................................... 7 1,237
ACQUISITION OF SMB:
Fair value of assets acquired.......................................................... 794,782 --
Common stock issued to shareholders of SMB............................................. (84,900) --
Cash paid.............................................................................. (117,839) --
----------- ----------
Liabilities assumed.................................................................. $ 592,043 --
----------- ----------
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
6
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1--BASIS OF PRESENTATION
Western Bancorp (the "Company") is the holding company for Southern
California Bank ("SCB"), Santa Monica Bank ("SMB" and together with SCB, the
"Banks") and Venture Partners, Inc. The unaudited condensed consolidated
financial statements of the Company included herein reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary to present a fair statement of the results for the interim
periods indicated. Certain reclassifications have been made to the unaudited
condensed consolidated financial statements for 1997 to conform to the 1998
presentation. Certain information and note disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission"). The
results of operations for the three and six months ended June 30, 1998 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year.
The preparation of unaudited condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates subject to change include the allowance for loan and lease
losses, the carrying value of other real estate owned, and the deferred tax
asset.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report filed on Form 10-K for the
year ended December 31, 1997 and the financial statements and notes thereto
included in SMB's Annual Report for the year ended December 31, 1997 which was
included as an exhibit to a Current Report on Form 8-K/A filed by the Company on
April 9, 1998. As described more fully below, SMB was acquired by the Company on
January 27, 1998.
NOTE 2--COMPLETED ACQUISITIONS
On January 27, 1998, the Company acquired SMB through the merger of SMB with
and into Western Bank, a banking subsidiary of the Company (the "SMB
Acquisition"). As part of the SMB Acquisition, the name of Western Bank was
changed to "Santa Monica Bank." Upon the SMB Acquisition becoming effective,
each share of common stock, $3.00 par value, of Santa Monica Bank (the "SMB
Common Stock") issued and outstanding at the time was converted into the right
to receive either (i) $28.00 in cash (the "Cash Consideration") or (ii) 0.875
shares of Common Stock of the Company (the "Stock Consideration"). Of the
7,084,244 shares of SMB Common Stock outstanding at the time of the SMB
Acquisition, approximately 57.3 percent elected to receive the Cash
Consideration, resulting in a payment of $113,722,700 in the aggregate, and
approximately 42.7 percent received the Stock Consideration resulting in the
issuance of approximately 2,653,000 shares of common stock, no par value, of the
Company. In order to fund a part of the Cash Consideration payments, the Company
issued an additional 2,327,550 shares of Company Common Stock to certain private
investors for $65,171,400 in the aggregate. Accordingly, in the aggregate,
approximately 4,980,550 shares of Company Common Stock were issued in connection
with the SMB Acquisition. The total value of the consideration paid in the SMB
Acquisition was approximately $198.4 million in Company Common Stock and cash.
7
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
NOTE 3--PENDING ACQUISITIONS
On April 17, 1998 the Company announced it signed a definitive agreement to
acquire (the "BKLA Acquisition") the Bank of Los Angeles ("BKLA"). Shareholders
of BKLA will receive 0.4224 shares of Company Common Stock for each share of
common stock, no par value, of BKLA ("BKLA Common Stock"). The BKLA Acquisition
will use the pooling-of-interests method of accounting and is expected to close
either late in the third quarter of 1998 or in the fourth quarter of 1998.
On July 24, 1998, Western executed an Agreement and Plan on Merger (the
"Peninsula Merger Agreement") with Portola Merger Sub ("Merger Sub") and
Peninsula Bank of San Diego ("Peninsula") pursuant to which Western will acquire
Peninsula through the merger of Merger Sub with and into Peninsula (the
"Peninsula Acquisition"). The Peninsula Merger Agreement provides for the
holders of common stock, no par value, of Peninsula ("Peninsula Common Stock")
to receive shares of Western Common Stock based on a purchase price of $45.75
(after giving effect to the 5% stock dividend on Peninsula Common Stock declared
by the Board of Directors of Peninsula on June 23, 1998 and payable on July 24,
1998) using a floating exchange ratio for Western Common Stock within a price
range of $38.813 to $47.438 per share. The Peninsula Merger Agreement is subject
to several conditions, including approval of the holders of Peninsula Common
Stock which is intended to be sought in the fourth quarter of 1998 and certain
regulatory approval. The Peninsula Acquisition will use the pooling-of-interests
method of accounting and is expected to close at the end of 1998 or early 1999.
NOTE 4--UNAUDITED SUMMARY PRO FORMA DATA
The following tables show unaudited summary pro forma balance sheet and
income statement information for the SMB Acquisition consummated on January 27,
1998 and for the pending BKLA Acquisition and Peninsula Acquisition. Purchase
accounting is used for the pro forma information presented for the SMB
Acquisition, and pooling-of-interests accounting is used for the pro forma
information presented for the BKLA Acquisition and the Peninsula Acquisition.
SMB is already included in the balance sheet as of June 30, 1998. The pro forma
income statement information for the six month periods ended June 30, 1998 and
June 30, 1997 includes operating results of SMB as if the SMB Acquisition was
consummated at the beginning of those periods. Results for the Company for the
six month period ended June 30, 1998 already include the results of SMB for the
months of February through June. January results for SMB and an additional month
of amortization of purchase accounting entries are included in the pro forma
results for the six months ended June 30, 1998 shown below. The balance sheet
and income statement adjustments shown below are based on management's
estimates, for pro forma presentation, of costs and, in the case of the SMB
Acquisition, the fair value adjustments associated with these transactions. The
Company's cost estimates are forward-looking. Readers are cautioned that the
type and amount of actual costs incurred could vary materially from these
estimates if future developments differ from the underlying assumptions used by
management in determining the current estimate of these costs.
The unaudited summary pro forma balance sheet information is not necessarily
indicative of the actual financial position that would have existed had the BKLA
Acquisition or the Peninsula Acquisition been consummated on June 30, 1998 or
December 31, 1997, or that may exist in the future. The unaudited summary pro
forma income statement information is not necessarily indicative of the results
that would have occurred had either the SMB Acquisition, the BKLA Acquisition or
the Peninsula Acquisition been consummated on the dates indicated or that may be
achieved in the future. Assuming the consummations of the BKLA Acquisition and
the Peninsula Acquisition, the actual financial position and results of
8
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
NOTE 4--UNAUDITED SUMMARY PRO FORMA DATA (CONTINUED)
operations will differ, perhaps significantly, from the pro forma amounts
reflected herein because of a variety of factors, including changes in value and
changes in operating results between the dates of the pro forma financial data
and the date on which the BKLA Acquisition and the Peninsula Acquisition take
place.
UNAUDITED SUMMARY PRO FORMA BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------------------------------------------------------------------
PRO FORMA PRO FORMA
THE COMPANY BKLA ADJUSTMENTS COMBINED PENINSULA ADJUSTMENTS COMBINED
----------- --------- ----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets.......... $ 2,016,749 $ 289,768 $ 1,680 $ 2,308,197 $ 428,272 $ 2,400 $ 2,738,869
Securities............ 224,135 88,679 312,814 111,618 424,432
Loans and leases,
net.................. 1,249,930 150,962 1,400,892 240,785 1,641,677
Goodwill.............. 145,525 5,504 151,029 -- 151,029
Deposits.............. 1,697,352 242,552 1,939,904 397,055 2,336,959
Shareholders' equity.. 289,146 33,551 (5,400) 317,297 27,258 (6,115) 338,440
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------------------------------------------------------
PRO FORMA PRO FORMA
THE COMPANY BKLA ADJUSTMENTS COMBINED PENINSULA ADJUSTMENTS COMBINED
----------- --------- ----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $ 1,383,510 $ 272,033 $ 1,680 $ 1,657,223 $ 418,245 $ 2,400 $ 2,077,868
Securities............ 207,514 60,433 267,947 125,041 392,988
Loans and leases,
net.................. 864,840 139,814 1,004,654 232,198 1,236,852
Goodwill.............. 30,430 5,939 36,369 -- 36,369
Deposits.............. 1,226,793 238,012 1,464,805 389,232 1,854,037
Shareholders' equity.. 129,655 31,054 (5,400) 155,309 25,356 (6,115) 174,550
</TABLE>
9
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
NOTE 4--UNAUDITED SUMMARY PRO FORMA DATA (CONTINUED)
UNAUDITED SUMMARY PRO FORMA INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------------------------
SMB SMB PRO FORMA PRO FORMA
THE COMPANY BKLA (JANUARY) ADJUSTMENTS COMBINED PENINSULA COMBINED
----------- --------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income............... $ 50,604 $ 7,497 $ 2,970 (235) $ 60,836 $ 10,196 $ 71,032
Provision for loan and lease
losses........................... 300 -- 80 -- 380 139 519
Non interest income............... 7,858 1,030 614 -- 9,502 2,467 11,969
Non interest expense.............. 35,513 5,274 2,350 677 43,814 8,958 52,772
Net income........................ 11,507 2,037 691 (810) 13,425 2,229 15,654
Basic net income per share........ $ 0.78 $ 0.43 $ 0.10 -- $ 0.76 $ 0.90 $ 0.77
Diluted net income per share...... $ 0.77 $ 0.38 $ 0.10 -- $ 0.74 $ 0.90 $ 0.75
Weighted average shares
outstanding:
Basic........................... 14,822 4,777 7,084 17,668 2,487 20,307
Diluted......................... 15,040 5,369 7,084 18,137 2,487 20,775
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------------------------------------
SMB PRO FORMA PRO FORMA
THE COMPANY BKLA SMB ADJUSTMENTS COMBINED PENINSULA COMBINED
----------- --------- --------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income................ $ 34,428 $ 4,905 $ 16,820 (1,408) $ 54,745 $ 8,707 $ 63,452
Provision for loan and lease
losses............................ 1,400 410 -- -- 1,810 325 2,135
Non interest income................ 5,028 629 3,534 -- 9,191 2,059 11,250
Non interest expense............... 29,800 4,089 11,686 4,060 49,635 7,724 57,359
Net income......................... 3,445 1,035 5,664 (4,854) 5,290 1,673 6,963
Basic net income per share......... $ 0.33 $ 0.36 $ 0.80 -- $ 0.32 $ 0.67 $ 0.36
Diluted net income per share....... $ 0.32 $ 0.32 $ 0.80 -- $ 0.31 $ 0.67 $ 0.35
Weighted average shares
outstanding:
Basic............................ 10,493 2,879 7,084 -- 16,682 2,487 19,321
Diluted.......................... 10,778 3,277 7,084 -- 17,136 2,487 19,775
</TABLE>
10
<PAGE>
NOTE 5--STATEMENT OF COMPREHENSIVE INCOME
Effective with the quarter ending March 31, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires all items that are required to be
recognized under accounting standards as components of comprehensive income to
be reported in a financial statement that is displayed in equal prominence with
the other financial statements and to disclose as a part of shareholders' equity
accumulated comprehensive income. The Company has chosen, for purposes of its
interim financial reporting, to present a statement of comprehensive income in
the notes to the financial statements. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income generally includes
net income, foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on investments in certain debt and equity securities
(i.e., securities available for sale). The Company's statement of comprehensive
income for the periods presented is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income............................................................ $ 11,507 $ 3,445 $ 6,172 $ 469
Other comprehensive income (loss), net of related income taxes:
Unrealized gains (losses) on securities:
Unrealized holding gains arising during the period.................. 239 193 138 1,086
Less reclassification of realized gains included in income.......... (75) (154) -- (105)
--------- --------- --------- ---------
164 39 138 981
--------- --------- --------- ---------
Comprehensive income.................................................. $ 11,671 $ 3,484 $ 6,310 $ 1,450
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NOTE 6--NET INCOME PER SHARE
The following is a summary of the calculation of basic and diluted net
income per share for the three and six month periods ended June 30, 1998 and
1997 in thousands, except per share amounts:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income.................................................... $ 11,507 $ 3,445 $ 6,172 $ 469
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding........................... 14,821.5 10,492.5 15,695.0 10,497.9
Basic net income per share.................................... $ 0.78 $ 0.33 $ 0.39 $ 0.04
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding........................... 14,821.5 10,492.5 15,695.0 10,497.9
Effect of dilutive stock options and warrants................. 218.5 285.8 236.2 300.8
---------- ---------- ---------- ----------
Diluted shares outstanding.................................... 15,040.0 10,778.3 15,931.2 10,798.7
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net income per share.................................. $ 0.77 $ 0.32 $ 0.39 $ 0.04
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following tables and data set forth certain statistical information
relating to the Company as of June 30, 1998 and for the three and six month
periods ended June 30, 1998 and June 30, 1997. This discussion should be read in
conjunction with the Unaudited Condensed Consolidated Financial Statements as of
June 30, 1998 and December 31, 1997 and for the three and six month periods
ended June 30, 1998 and June 30, 1997.
When the Company uses or incorporates by reference in this Quarterly Report
on Form 10-Q (the "Quarterly Report") the words "anticipate," "estimate,"
"expect," "project," "intend," "commit," "believe" and similar expressions, the
Company intends to identify certain forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions, including those
described in this Quarterly Report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected,
projected, intended, committed or believed.
FINANCIAL CONDITION
On January 27, 1998, the Company consummated the SMB Acquisition in a
transaction accounted for using the purchase method of accounting. As a result
of the SMB Acquisition and the additional equity that was raised to help fund
the transaction, consolidated assets, total deposits and shareholders' equity
increased by approximately $795 million, $584 million and $150 million,
respectively (based on SMB's unaudited balance sheet at January 31, 1998). Due
to the use of purchase accounting for the SMB Acquisition, goodwill accounted
for approximately $120 million of the total increase in assets resulting from
this transaction.
Adjusting for the increases related to the SMB Acquisition, since December
31, 1997 the Company's total assets have declined by approximately $162 million.
The major components of this decline in assets are a decrease in federal funds
sold of approximately $81 million and a decrease of approximately $73 million in
securities available for sale. The reduction in securities resulted from sales
of approximately $20 million of securities and maturities and principal payments
of approximately $182 million offset partially by purchases of approximately
$130 million. The reduction in federal funds sold occurred as a result of the
decrease in deposits discussed below.
Adjusting for the increases related to the SMB Acquisition, since December
31, 1997 the Company's total deposits have declined by approximately $114
million. Of this decline, approximately $108 million was in interest bearing
deposits. This decline results primarily from the decision by management of the
Company to close some branches and to lower the rate paid on certain of its
higher cost deposits.
RESULTS OF OPERATIONS
Consolidated net income for the quarter ended June 30, 1998 was $6,172,000
or $0.39 per diluted share. This compares with earnings of $469,000, or $0.04
per diluted share, for the quarter ended June 30, 1997. On an operating basis,
before the amortization of goodwill, net income for the three month periods
would have been $8,782,000 and $4,112,000 in 1998 and 1997, respectively, or
$0.55 and $0.38 per diluted share, respectively, a growth of approximately 45%.
Diluted operating net income per share grew approximately 6% from $0.52 per
diluted share in the first quarter of 1998. Operating results for the 1998
period include those of Santa Monica Bank, since the date of acquisition on
January 27, 1998.
Consolidated net income for the six months ended June 30, 1998 was
$11,507,000, or $0.77 per diluted share. This compares with earnings of
$3,445,000, or $0.32 per diluted share, for the six months ended June 30, 1997.
On an operating basis, before the amortization of goodwill and before the
after-tax gain on sale of loans, net income for the six month periods would have
been $16,068,000 and $7,744,000 in 1998
12
<PAGE>
and 1997, respectively, or $1.07 and $0.72 per diluted share, respectively, a
growth of approximately 49%. Operating results for the 1998 period include those
of Santa Monica Bank, since the date of acquisition on January 27, 1998.
The Company's operating return on tangible assets improved from 1.15% in the
first quarter of 1997 to 1.46% in the fourth quarter of 1997 to 1.71% in the
first quarter of 1998 to 1.87% in the second quarter of 1998. This improvement
comes from improving credit quality, a higher net interest margin and
improvements in efficiency.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE INFORMATION:
Number of shares (weighted average, in thousands)...... 14,821.5 10,492.5 15,695.0 10,497.9
Diluted shares (weighted average, in thousands)........ 15,040.0 10,778.3 15,931.2 10,798.7
Basic income per share................................. $ 0.78 $ 0.33 $ 0.39 $ 0.04
Diluted income per share............................... $ 0.77 $ 0.32 $ 0.39 $ 0.04
Before merger costs and goodwill amortization:
Basic income per share............................... $ 1.08 $ 0.74 $ 0.56 $ 0.39
Diluted income per share............................. $ 1.07 $ 0.72 $ 0.55 $ 0.38
PROFITABILITY MEASURES:
Return on average assets............................... 1.20% 0.52% 1.22% 0.14%
Return on average equity............................... 9.0% 5.3% 8.6% 1.4%
Before merger costs and goodwill amortization
Return on average tangible assets...................... 1.79% 1.20% 1.87% 1.25%
Return on average equity............................... 12.5% 11.8% 12.2% 12.4%
Efficiency ratio....................................... 52.9% 63.6% 51.4% 62.2%
ADJUSTMENTS TO NET INCOME (IN THOUSANDS):
Net income............................................. $ 11,507 $ 3,445 $ 6,172 $ 469
Merger costs........................................... -- 3,470 -- 3,404
Tax benefits......................................... -- 395 -- 395
------------ ------------ ------------ ------------
After tax merger costs................................. -- 3,075 -- 3,009
Goodwill amortization.................................. 4,561 1,270 2,610 634
Gain on sale of loans available for sale - after tax... -- (46) -- --
------------ ------------ ------------ ------------
Adjusted net income.................................. $ 16,068 $ 7,744 $ 8,782 $ 4,112
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
ADJUSTMENTS TO REVENUES (IN THOUSANDS):
Net interest income.................................... $ 50,604 $ 34,428 $ 26,719 $ 17,478
Non interest income.................................... 7,858 5,028 4,245 2,519
------------ ------------ ------------ ------------
Revenue before adjustments........................... 58,462 39,456 30,964 19,997
Gain on sale of loans.................................. -- (78) -- --
------------ ------------ ------------ ------------
Adjusted revenues.................................... $ 58,462 $ 39,378 $ 30,964 $ 19,997
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
ADJUSTMENTS TO EXPENSES (IN THOUSANDS):
Non interest expense................................... $ 35,513 $ 29,800 $ 18,532 $ 16,473
Merger costs........................................... -- (3,470) -- (3,404)
Goodwill amortization.................................. (4,561) (1,270) (2,610) (634)
------------ ------------ ------------ ------------
Adjusted expenses.................................... $ 30,952 $ 25,060 $ 15,922 $ 12,435
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Operating profits for the Company are dependent on loan growth, controlling
costs and continual efforts to prevent any unexpected loan and lease losses that
would require additions to the allowance for
13
<PAGE>
loan and lease losses ("ALLL"). The demand for loans has increased in the
Company's primary market areas, and the Company plans to take advantage of this
increased demand, while maintaining its credit quality standards. However, the
competition for loans has also increased with some lenders willing to lend on
terms that management of the Company is unwilling to match due to its credit
philosophy. As a result of such increased competition and this credit philosophy
and the SMB Acquisition loans have remained relatively flat since December 31,
1997. As a result of a decline in deposits, the Company's loan-to-deposit ratio
has increased from 71.8% as of December 31, 1997 to 75.1% as of June 30, 1998.
NET INTEREST INCOME
Net interest income is the difference between interest earned on assets and
interest paid on liabilities. Net interest margin is net interest income
expressed as a percentage of average interest-earning assets. The following
tables provide information concerning average interest-earning assets and
interest-bearing liabilities and yields and rates thereon for the three and six
months ended June 30, 1998 and June 30, 1997, respectively. Nonaccrual loans are
included in the average earning assets amounts.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVERAGE BALANCE SHEETS
(In thousands)
AVERAGE ASSETS
Loans and leases, net of deferred fees and costs......... $ 1,197,284 $ 819,900 $ 1,265,009 $ 827,750
Investments.............................................. 247,834 294,596 231,531 289,026
Federal funds sold....................................... 193,842 60,521 219,319 73,388
------------ ------------ ------------ ------------
Average Earning Assets............................... 1,638,960 1,175,017 1,715,859 1,190,164
Goodwill................................................. 127,256 32,304 146,359 31,967
Other assets............................................. 166,633 124,801 171,303 125,088
------------ ------------ ------------ ------------
Average Total Assets................................. $ 1,932,849 $ 1,332,122 $ 2,033,521 $ 1,347,219
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY
Non interest bearing deposits............................ $ 585,378 $ 398,573 $ 620,236 $ 406,903
Interest bearing deposits................................ 1,053,197 774,642 1,089,602 781,725
------------ ------------ ------------ ------------
Average Deposits..................................... 1,638,575 1,173,215 1,709,838 1,188,628
Other interest bearing liabilities....................... 16,354 16,128 17,951 14,510
Other liabilities........................................ 19,296 10,855 17,488 11,362
------------ ------------ ------------ ------------
Average Liabilities.................................. 1,674,225 1,200,198 1,745,277 1,214,500
Shareholders' equity..................................... 258,624 131,924 288,244 132,719
------------ ------------ ------------ ------------
Average Liabilities and Shareholders' Equity............. $ 1,932,849 $ 1,332,122 $ 2,033,521 $ 1,347,219
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
YIELD ANALYSIS
(Dollars in millions)
Average earning assets............................................. $ 1,639.0 $ 1,175.0 $ 1,715.9 $ 1,190.2
Yield.......................................................... 8.48% 8.37% 8.45% 8.36%
Average interest bearing deposits.................................. $ 1,053.2 $ 774.6 $ 1,089.6 $ 781.7
Cost........................................................... 3.40% 3.58% 3.35% 3.62%
Average deposits................................................... $ 1,638.6 $ 1,173.2 $ 1,709.8 $ 1,188.6
Cost........................................................... 2.19% 2.36% 2.13% 2.38%
Average interest bearing liabilities............................... $ 1,069.6 $ 790.8 $ 1,107.6 $ 796.2
Cost........................................................... 3.45% 3.65% 3.42% 3.68%
Interest spread.................................................... 5.03% 4.72% 5.03% 4.68%
Net interest margin................................................ 6.23% 5.91% 6.25% 5.89%
</TABLE>
Interest income increased by approximately $11.4 million from $24.8 million
for the second quarter of 1997 to $36.2 million for the same period of 1998. The
increase was due mostly to the SMB Acquisition which was consummated on January
27, 1998.
The following table shows the average earning assets and interest income for
the second quarter of 1998 and 1997 and the amount of increase attributable to
SMB since the SMB Acquisition (dollars in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED IMPACT OF CONSOLIDATED NET DECREASE
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Average earning assets................................... $1,715,859 $ 579,531 $1,190,164 $ (53,836)
Interest income.......................................... 36,155 12,019 24,793 (657)
Yield................................................ 8.45% 8.32% 8.36%
</TABLE>
The following table shows the average earning assets and interest income for
the first six months of 1998 and 1997 and the amount of increase attributable to
SMB since the SMB Acquisition (dollars in thousands):
<TABLE>
<CAPTION>
NET INCREASE
CONSOLIDATED IMPACT OF CONSOLIDATED (DECREASE)
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Average earning assets................................... $1,638,960 $ 481,622 $1,175,017 $ (17,679)
Interest income.......................................... 68,922 19,881 48,758 283
Yield................................................ 8.48% 8.32% 8.37% --
</TABLE>
Without the increase due to the SMB Acquisition, average earning assets
declined by approximately $53.8 million and $17.7 million for the three and six
months ended June 30, 1998, respectively, compared to the same periods of 1997.
Without the increase due to the SMB Acquisition, interest income declined by
$657,000 and increased by $283,000 for the three and six months ended June 30,
1998, respectively, compared to the same periods of 1997. The relatively low
decline in interest income in the second quarter and the increase in interest
income for the six months ending June 30, 1998 in relation to the decline in
average earning assets was largely attributable to the decline in nonaccrual
loans and payments on loans with lower yields. The nonaccrual loans, excluding
SMB's nonaccrual loans of $3.1 million as of June 30, 1998, amounted to $10.6
million as of June 30, 1998 compared to $14.7 million as of June 30, 1997.
15
<PAGE>
Interest expense increased approximately by $2.1 million from $7.3 million
for the second quarter of 1997 to $9.4 million for the same period of 1998. The
increase was mostly due to the SMB Acquisition which was consummated on January
27, 1998.
The following table shows the average interest bearing liabilities and
interest expense for the second quarter of 1998 and 1997 and the amount of
increase attributable to SMB (dollars in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED IMPACT OF CONSOLIDATED NET DECREASE
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Average interest bearing liabilities..................... $1,107,553 $ 401,468 $ 796,235 $ (90,150)
Interest expense......................................... 9,436 3,279 7,315 (1,158)
Cost................................................. 3.42% 3.28% 3.68%
</TABLE>
The following table shows the average interest bearing liabilities and
interest expense for the first six months of 1998 and 1997 and the amount of
increase attributable to SMB (dollars in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED IMPACT OF CONSOLIDATED NET DECREASE
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Average interest bearing liabilities..................... $1,069,551 $ 335,770 $ 790,770 $ (56,989)
Interest expense......................................... 18,318 5,535 14,330 (1,547)
Cost................................................. 3.45% 3.32% 3.65%
</TABLE>
Without the increase due to the SMB Acquisition, average interest bearing
liabilities declined by approximately $90.2 million and $57.0 million for the
three and six months ending June 30, 1998 compared to the same periods of 1997.
Without the increase due to the SMB Acquisition interest expense declined by
approximately $1.2 million and $1.5 million for the three and six months ending
June 30, 1998 compared to the same periods of 1997. The decline in interest
bearing deposits and the cost of the deposits for the three and six month
periods was largely related to the downward pricing and subsequent reduction of
higher cost time deposits.
ALLOWANCE FOR LOAN AND LEASE LOSSES
During the three months ended June 30, 1998, approximately $727,000 of loans
were charged to the Company's ALLL, and approximately $273,000 of loans were
recovered resulting in net charge-offs for the period of approximately $454,000.
For the six months ended June 30, 1998, approximately $1,023,000 of loans were
charged to the Company's ALLL, and approximately $853,000 of loans were
recovered resulting in net charge-offs for the six month period of approximately
$170,000. The ratio of ALLL to total loans was 1.94% as of June 30, 1998
compared to 1.80% at December 31, 1997. During the six month period ended June
30, 1998, the ALLL increased by approximately $8,787,000 from $15,894,000 at
December 31, 1997 to $24,681,000 at June 30, 1998 resulting from $300,000 of
provision, $170,000 of net charge-offs and $8,657,000 added from the SMB
Acquisition.
Nonperforming assets decreased by approximately $566,000 during the quarter
ended June 30, 1998 from approximately $19,221,000 at March 31, 1998 to
approximately $18,655,000 at June 30, 1998, due to an increase of approximately
$1,996,000 in nonaccrual loans and a decrease in OREO of approximately
$2,562,000 during the period. The coverage of ALLL to nonperforming assets
increased from 115.6% at December 31, 1997 to 132.3% at June 30, 1998. Due to
the continued improvement in credit quality in the loan portfolio, management
believes that the ALLL is adequate based on all current available information.
16
<PAGE>
NON INTEREST INCOME
The following tables show the details of non interest income for the three
month periods ended June 30, 1998 and June 30, 1997. Due to the purchase
accounting treatment of the SMB Acquisition, the 1997 numbers do not include
SMB:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------
1998
--------------------------------------- 1997
THE COMPANY -------------
SMB WITHOUT SMB CONSOLIDATED CONSOLIDATED
--------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges and fees on deposit accounts................. $ 787 $ 1,090 $ 1,877 $ 1,396
Trust fees................................................... 978 -- 978 --
Escrow fees.................................................. -- 273 273 182
Other fees and charges....................................... 135 740 875 218
Securities gains............................................. -- 42 42 235
Other income................................................. 53 147 200 488
--------- ------ ------ ------
Total non interest income $ 1,953 $ 2,292 $ 4,245 $ 2,519
--------- ------ ------ ------
--------- ------ ------ ------
</TABLE>
The following tables show the details of non interest income for the six
month periods ended June 30, 1998 and June 30, 1997. Due to the purchase
accounting treatment of the SMB Acquisition, the 1997 numbers do not include
SMB:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------
1998
--------------------------------------- 1997
THE COMPANY -------------
SMB WITHOUT SMB CONSOLIDATED CONSOLIDATED
--------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges and fees on deposit accounts................. $ 1,311 $ 2,475 $ 3,786 $ 2,779
Trust fees................................................... 1,615 -- 1,615 --
Escrow fees.................................................. -- 531 531 337
Other fees and charges....................................... 215 1,103 1,318 722
Gain on sale of loans and other assets....................... -- -- -- 78
Securities gains............................................. -- 155 155 342
Other income................................................. 93 360 453 770
--------- ------ ------ ------
Total non interest income................................ $ 3,234 $ 4,624 $ 7,858 $ 5,028
--------- ------ ------ ------
--------- ------ ------ ------
</TABLE>
Before giving effect to the SMB Acquisition, non interest income declined by
$227,000 and $404,000 for the three and six months ending June 30, 1998 compared
to the same periods of 1997. The decline in non interest income is largely due
to the gain on sale of securities in the amount of $235,000 and $342,000 for the
three and six month periods ending June 30, 1997 compared to $42,000 and
$155,000 for the same periods of 1998. Other variances are attributable to small
changes in other components of the above-listed categories. Escrow fees
increased by $91,000 and $194,000 for the three and six months ending June 30,
1998 compared to the same periods of 1997 as the Company focused more resources
on this business. Trust fees are generated from the approximately $751 million
of assets held in trust by SMB as of June 30, 1998.
17
<PAGE>
NON INTEREST EXPENSE
The following table shows the details of non interest expense for the three
month periods ended June 30, 1998 and June 30, 1997. Due to purchase accounting
treatment of the SMB Acquisition, SMB results are not included in the 1997
numbers:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------
1998
-------------------------------------- 1997
THE COMPANY ------------
SMB WITHOUT SMB CONSOLIDATED CONSOLIDATED
--------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and benefits....................................... $ 3,312 $ 5,871 $ 9,183 $ 6,055
Occupancy, furniture and equipment.......................... 996 1,985 2,981 1,973
Advertising and business development........................ 164 126 290 226
Other real estate owned..................................... (95) (299) (394) 23
Professional services....................................... 144 675 819 689
Telephone, stationery and supplies.......................... 336 365 701 708
Data processing............................................. 32 536 568 403
Customer services cost...................................... 19 502 521 428
Other....................................................... 541 712 1,253 1,930
--------- ------------- ------------ ------------
Operating non interest expense.............................. 5,449 10,473 15,922 12,435
Goodwill amortization..................................... 1,974 636 2,610 634
Merger costs.............................................. -- -- -- 3,404
--------- ------------- ------------ ------------
Total non interest expense................................ $ 7,423 $ 11,109 $ 18,532 $ 16,473
--------- ------------- ------------ ------------
--------- ------------- ------------ ------------
</TABLE>
The following tables show the details of non interest expense for the six
month periods ended June 30, 1998 and June 30, 1997. Due to purchase accounting
treatment of the SMB Acquisition, SMB results are not included in the 1997
numbers:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------
1998
-------------------------------------- 1997
THE COMPANY ------------
SMB WITHOUT SMB CONSOLIDATED CONSOLIDATED
--------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and benefits...................................... $ 5,828 $ 11,897 $ 17,725 $ 12,715
Occupancy, furniture and equipment......................... 1,685 3,643 5,328 3,889
Advertising and business development....................... 323 243 566 596
Other real estate owned.................................... (95) (110) (205) 69
Professional services...................................... 240 1,417 1,657 1,753
Telephone, stationery and supplies......................... 551 886 1,437 1,420
Data processing............................................ 63 1,063 1,126 791
Customer services cost..................................... 37 805 842 559
Other...................................................... 733 1,743 2,476 3,268
--------- ------------- ------------ ------------
Operating non interest expense............................. 9,365 21,587 30,952 25,060
Goodwill amortization.................................... 3,291 1,270 4,561 1,270
Merger costs............................................. -- -- -- 3,470
--------- ------------- ------------ ------------
Total non interest expense............................... $ 12,656 $ 22,857 $ 35,513 $ 29,800
--------- ------------- ------------ ------------
--------- ------------- ------------ ------------
</TABLE>
Before giving effect to the SMB Acquisition and excluding merger expenses in
1997, operating non interest expense declined by $1,960,000 and $3,473,000 for
the three and six months ending June 30, 1998 compared to the same periods of
1997. The reduction was in almost every category listed above as combined
resources of all banks acquired were applied to achieve increased efficiencies,
especially in
18
<PAGE>
salaries, benefits and other operating expenses. Data processing expense
increased as the Company upgraded its current systems to accommodate the
consolidations at each of the Banks.
The efficiency ratio (operating expense before goodwill amortization and
merger costs divided by net interest income plus non interest income) is a
measure of how effective the Company is at using its expense dollars. A lower or
declining ratio indicates improving efficiency. Due to the efficiency
improvements discussed above, the Company's efficiency ratio improved from 62.2%
in the second quarter of 1997 to 51.4% in the second quarter of 1998.
CREDIT QUALITY AND ANALYSIS
The Company defines nonperforming assets to include (i) loans on which it
has ceased to accrue interest ("Nonaccrual Loans") and, (ii) foreclosed real
estate owned. "Impaired loans" are commercial, commercial real estate, and
individually significant mortgage and consumer loans for which it is probable
that the Company will not be able to collect all amounts due according to
contractual terms of the loan agreement. The category of "impaired loans" is not
coextensive with the category of "nonaccural loans," although the two categories
overlap. "Nonaccrual loans" include impaired loans and are those on which the
accrual of interest is discontinued when collectibility of principal or interest
is uncertain or payments of principal or interest have become contractually past
due 90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the loan
impaired, if (i) it is probable that the Company will collect all amounts due in
accordance with the contractual terms of the loan or (ii) the loan is not a
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, the impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Planned-workout arrangements are currently in place for all nonperforming
assets, and, unless there are any unexpected changes in the financial condition
of the borrowers, management is not aware of any additional significant loss
potential that has not already been included in the ALLL.
19
<PAGE>
The following table shows the historical trends in nonperforming assets and
comparative key credit statistics at the Company:
CREDIT QUALITY MEASURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR
-------------------------------------------------------------- ENDED
30-JUN 31-MAR 31-DEC 30-SEP 30-JUN 31-DEC
1998 1998 1997 1997 1997 1996
------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans past due 90 days and still
accruing........................... $ 2,495 $ - $ 31 $ 1,267 $ 422 $ 193
Nonaccrual loans and leases......... 13,709 11,713(1) 7,488 9,468 14,665 16,157
Other real estate owned............. 4,946 7,508(2) 6,261 8,354 7,680 7,082
------------ ------------ ---------- ---------- ---------- ----------
Nonperforming assets.............. 18,655 19,221 13,749 17,822 22,345 23,239
Impaired loans gross................ 16,192 17,579 13,482 14,960 18,530 21,034
Allocated reserves.................. 2,274 679 679 418 1,806 2,172
------------ ------------ ---------- ---------- ---------- ----------
Net investment in impaired
loans........................... 13,918 16,900 12,803 14,542 16,724 18,862
Charge-offs......................... 727 296 422 1,461 1,394 4,675
Recoveries.......................... 273 580 481 551 349 1,123
------------ ------------ ---------- ---------- ---------- ----------
Net charge-offs................... 454 (284) (59) 910 1,045 3,552
Allowance for loan and lease losses
("ALLL")........................... 24,681 24,985 15,894 15,160 15,345 15,757
Loans and leases, net of deferred
fees and costs..................... 1,274,611 1,253,887 880,734 874,283 849,141 817,358
Average loans and leases for the
quarter, net of deferred fees and
costs.............................. 1,265,049 1,128,806 868,466 854,323 828,362 601,115
ALLL to loans and leases............ 1.94% 1.99% 1.80% 1.73% 1.81% 1.93%
ALLL to nonaccrual loans and
leases............................. 180.0% 213.3% 212.3% 160.1% 104.6% 97.5%
ALLL to nonperforming assets........ 132.3% 130.0% 115.6% 85.1% 68.7% 67.8%
Nonperforming assets to loans,
leases and OREO.................... 1.46% 1.52% 1.55% 2.02% 2.61% 2.82%
Annualized net charge-offs
(recoveries) to average loans and
leases............................. 0.14% (0.10%) (0.03%) 0.43% 0.50%
Full year net charge-offs to average
loans and leases................... 0.31% 0.59%
</TABLE>
- ------------------------
(1) Includes approximately $2.2 million related to the January 27, 1998 SMB
Acquisition.
(2) Includes approximately $3.3 million related to the January 27, 1998 SMB
Acquisition.
The Company has established a monitoring system for its loans in order to
identify impaired loans, potential problem loans and to permit periodic
evaluation of impairment and the adequacy of the ALLL in a timely manner. The
monitoring system and ALLL methodology have evolved over a period of years and
loan classifications have been incorporated into the determination of the ALLL.
This monitoring system and allowance methodology include a loan-by-loan analysis
for all classified loans as well as loss factors for the balance of the
portfolio that are based on migration analysis relative to the unclassified
portfolio. This analysis includes such factors as historical loss experience,
current portfolio delinquency and trends, and
20
<PAGE>
other inherent risk factors such as economic conditions, risk levels of
particular loan categories, internal loan review and oversight, and
concentrations in the portfolio.
Loans past due 90 days and still accruing represent loans which are past due
90 days or more as to interest or principal, but not included in the nonaccrual
or restructured categories. All loans in this category are well-secured and in
the process of collection or renewal
On June 30, 1998, the Company had approximately $16,192,000 of loans, which
were considered impaired, which decreased from $17,579,000 at March 31, 1998.
Specific reserves of approximately $2,274,000 were established for certain
impaired loans in addition to reserves estimated in the quarterly ALLL review.
Of these loans, approximately $13,709,000 are on a nonaccrual status.
Non accrual loans increased by $1,996,000 during the period to $13,709,000
largely due to a real estate mini-perm loan of $1,200,000 which is well secured.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
On a stand-alone basis, the Company's sources of liquidity include dividends
from the Banks and outside borrowings. The amount of dividends that the Banks
can pay to the Company is restricted by regulatory guidelines.
The primary functions of asset/liability management are to ensure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities at the Banks. Liquidity management
involves the ability to meet the cash flow requirements of customers who may be
either depositors wanting to withdraw funds or borrowers who may need assurance
that sufficient funds will be available to meet their credit needs. Interest
rate sensitivity management seeks to avoid fluctuating interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Historically, the overall liquidity of the Banks is based on the core
deposit base of the Banks. The Banks have not relied on large denomination time
deposits.
To meet short-term liquidity needs, the Company has maintained at the Banks
what it believes are adequate balances in federal funds sold, certificates of
deposits with other financial institutions and investment securities having
maturities of five years or less. On a consolidated basis, liquid assets (cash,
federal funds sold and investment securities available for sale) as a percent of
total deposits are 32.5% and 35.7% as of June 30, 1998 and December 31, 1997,
respectively.
INCOME TAXES
The Company's normal effective income tax rate is approximately 42.0%,
representing a blend of the statutory Federal income tax rate of 35.0% and the
California income tax rate of 10.84%. The Company's actual effective income tax
rates were 49.7% and 83.5% for the three months ended June 30, 1998 and 1997,
respectively, and 49.2% and 58.3% for the six month periods ending June 30, 1998
and 1997, respectively. The actual effective tax rates are higher during the
1998 period largely as a result of nondeductible goodwill. The actual effective
tax rates are higher during the 1997 periods as a result of nondeductible
goodwill and nondeductible merger costs.
21
<PAGE>
REGULATORY MATTERS
The regulatory capital guidelines as well as the actual regulatory capital
ratios for SCB, SMB and the Company on a consolidated basis, as of June 30,
1998, follow:
<TABLE>
<CAPTION>
REGULATORY REQUIREMENTS
----------------------------
(GREATER THAN OR EQUAL TO
STATED PERCENTAGE) ACTUAL
ADEQUATELY WELL --------------------
CAPITALIZED CAPITALIZED SCB SMB CONSOLIDATED
----------- --------------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Detailed computations of
Tier 1 leverage capital ratio................ 4.00% 5.00% 8.33% 7.09% 7.63%
Tier 1 risk-based capital ratio.............. 4.00% 6.00% 9.65% 10.01% 9.82%
Total risk-based capital....................... 8.00% 10.00% 10.90% 11.27% 11.07%
</TABLE>
YEAR 2000 RISKS AND PREPAREDNESS
There has been no material change in the information provided in the
Company's Annual Report on Form 10-K with regard to the Company's Year 2000
risks and preparedness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk sensitive instruments are generally defined as on and off
balance sheet derivatives and other financial instruments. At December 31, 1997
and June 30, 1998, the Company had no material on or off balance sheet
derivatives. The Company's financial instruments include interest sensitive
loans receivable, federal funds sold, FRB and FHLB stock, investment securities,
deposits and borrowings. At December 31, 1997, the Company reported that it had
$1.2 billion in interest sensitive assets and $782 million in interest sensitive
liabilities. At June 30, 1998, the Company's interest sensitive assets and
interest sensitive liabilities totaled approximately $1.7 billion and $1.1
billion, respectively. The increases in such assets and liabilities from
December 31, 1997 to June 30, 1998 was largely the result of the SMB
acquisition. See "Note 2--Completed Acquisitions of the Notes to Unaudited
Condensed Consolidated Financial Statements."
The yield on interest sensitive assets and the cost of interest sensitive
liabilities for the second quarter of 1998 was 8.45% and 3.42%, respectively,
compared to 8.27% and 3.65%, respectively, at December 31, 1997. The increase in
the yield on interest sensitive assets is primarily a result of the percentage
of average loans to average interest sensitive assets increasing from
approximately 71.8% at December 31, 1997 to 73.7% for the quarter ended June 30,
1998. The decrease in the cost of interest sensitive liabilities is primarily a
result of the reduction in the rates paid on higher cost deposits over the same
period.
The Company's interest sensitive assets and interest sensitive liabilities
were reported to have estimated fair values of $1.2 billion and $783 million,
respectively, at December 31, 1997. The interest sensitive assets and interest
sensitive liabilities acquired in the SMB acquisition were recorded at their
estimated fair values on the January 27, 1998 acquisition date. Because of the
slight change in market interest rates since December 31, 1997 and consistent
contractual maturities, management believes that there has been no material
change in the difference between the book value of the interest sensitive assets
and liabilities and their estimated fair values.
22
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting of Shareholders on April 30, 1998
(the "1998 Annual Meeting"). There were 15,678,960 issued and outstanding shares
of Company Common Stock on March 13, 1998, the Record Date for the 1998 Annual
Meeting.
At the 1998 Annual Meeting, the following actions were taken:
ELECTION OF DIRECTORS
At the 1998 Annual Meeting, nine directors of the Company were elected. The
following chart indicates the number of shares cast for each elected director:
<TABLE>
<CAPTION>
DIRECTOR VOTES FOR VOTES WITHHELD
- ---------------------------------------------------------------- ------------ --------------
<S> <C> <C>
Aubrey L. Austin................................................ 12,497,773 82,433
Rice E. Brown................................................... 12,475,877 104,329
John M. Eggemeyer............................................... 12,497,859 82,347
William C. Greenbeck............................................ 12,495,322 84,884
Robert L. McKay................................................. 12,497,792 82,414
Hugh S. Smith, Jr............................................... 12,497,453 82,753
Mark H. Stuenkel................................................ 12,481,055 99,151
Matthew P. Wagner............................................... 12,495,155 85,051
Dale E. Walter.................................................. 12,497,792 82,414
</TABLE>
STOCK OPTION PLAN AMENDMENT
The following chart indicates the results of the vote on the approval of the
amendment and restatement of the Company's 1993 Stock Option Plan:
<TABLE>
<S> <C>
FOR............................................................. 11,754,431
AGAINST......................................................... 228,966
ABSTAIN......................................................... 462,722
BROKER NON VOTES................................................ 134,087
</TABLE>
ITEM 5. OTHER INFORMATION
None
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of April 16, 1998, and amended and restated as of June
24, 1998 and July 16, 1998, by and among Western Bancorp, Santa Monica Bank and Bank of Los
Angeles (Exhibit 99.3 to Western Bancorp's Current Report on Form 8-K dated April 30, 1997
incorporated herein by reference)
2.2 Agreement and Plan of Merger, dated as July 24, 1998, by and among Western Bancorp, Portola
Merger Sub and Peninsula Bank of San Diego. (Exhibit 10.- to Western Bancorp's Registration
Statement No. incorporated herein by reference)
3.1 Restated Articles of Incorporation of Western Bancorp (Exhibit 3.6 of Registration Statement
No. 333-26915 incorporated herein by reference)
3.3 Restated Bylaws of Western Bancorp approved on October 10, 1997 (Exhibit 3.2 of Registration
Statement No. 333-35271 incorporated herein by reference)
10.1 Third Amendment to Revolving Credit Agreement, First Amendment to Pledge Agreement and Waiver,
dated January 26, 1997. (Exhibit 10.1 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by reference)
10.2 Amended and Restated 1993 Stock Option Plan (Exhibit 10.1 of the Company's Proxy Materials for
the 1998 Annual Meeting of Shareholders filed on Schedule 14A and incorporated herein by
reference)
10.3 Employment Agreement, dated January 1, 1997, by and among Western Bank and Aubry L. Austin.
(Exhibit 10.7 of the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 and incorporated herein by reference)
10.4 Western Bancorp Executive Severance Policy. (Exhibit 10.8 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference)
11.1 Computation of Per Share Earnings (See Unaudited Condensed Consolidated Statements of Income
contained in Item 1 of this Quarterly Report on Form 10-Q)
27.1 Financial Data Schedule
</TABLE>
REPORTS ON FORM 8-K
On April 9, 1998, the Company filed a Current Report on Form 8-K/A which
included, under Items 5 and 7, the financial statements reflecting the effect of
the SMB Acquisition.
On May 1, 1998, the Company filed a Current Report on Form 8-K announcing,
under Item 5, the signing of a definitive agreement to acquire Bank of Los
Angeles.
On June 18, 1998, the Company filed a Current Report on Form 8-K which
included, under Item 5, certain documents and reports filed by BKLA pursuant to
the Securities Exchange Act of 1934, as amended.
On June 15, 1998, the Company filed a Current Report on Form 8-K announcing,
under Item 5, the declaration of a cash dividend.
24
<PAGE>
SIGNATURES
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 thereunto duly authorized.
<TABLE>
<S> <C> <C>
WESTERN BANCORP
Date: August 13, 1998 /s/ ARNOLD C. HAHN
-----------------------------------------
Arnold C. Hahn,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: August 13, 1998 /s/ JULIUS G. CHRISTENSEN
-----------------------------------------
Julius G. Christensen,
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 155,940
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 177,329
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 218,376
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,274,611
<ALLOWANCE> 24,681
<TOTAL-ASSETS> 2,016,749
<DEPOSITS> 1,697,352
<SHORT-TERM> 13,805
<LIABILITIES-OTHER> 14,495
<LONG-TERM> 1,951
0
0
<COMMON> 263,257
<OTHER-SE> 25,889
<TOTAL-LIABILITIES-AND-EQUITY> 2,016,749
<INTEREST-LOAN> 56,671
<INTEREST-INVEST> 6,966
<INTEREST-OTHER> 5,285
<INTEREST-TOTAL> 68,922
<INTEREST-DEPOSIT> 17,762
<INTEREST-EXPENSE> 556
<INTEREST-INCOME-NET> 18,318
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 155
<EXPENSE-OTHER> 35,513
<INCOME-PRETAX> 22,649
<INCOME-PRE-EXTRAORDINARY> 11,507
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,507
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.77
<YIELD-ACTUAL> 6.23
<LOANS-NON> 13,709
<LOANS-PAST> 2,495
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 16,192
<ALLOWANCE-OPEN> 15,894
<CHARGE-OFFS> 1,023
<RECOVERIES> 853
<ALLOWANCE-CLOSE> 24,681
<ALLOWANCE-DOMESTIC> 24,681
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
