<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
January 27, 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, Suite 900
Newport Beach, California 92660
-----------------------------------
(Address of Principal Executive Offices)(Zip Code)
(714) 863-2300
--------------
(Registrant's Telephone Number, including Area Code)
Not Applicable
-----------------------------------------------------------
(Former Name or Former Address, If Changed Since Last Report)
1
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On January 27, 1998, Western Bancorp (the "Company") acquired Santa Monica Bank
("SMB") through the merger of Santa Monica Bank 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 2,646,000 shares of Company Common
Stock. 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 4,973,550 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.
See Exhibit 99.1 hereto.
The SMB Acquisition will be accounted for using the purchase method of
accounting.
The description of the Merger Agreement contained herein is qualified in its
entirety by reference to the Merger Agreement.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
Financial statements for Santa Monica Bank required by this item are
incorporated herein by reference to Exhibit 99.1.
(b) PRO FORMA Financial Information.
2
<PAGE>
Western Bancorp and Santa Monica Bank
Pro Forma Combined Financial Information
(Unaudited)
On January 27, 1998 the Company acquired SMB. The purchase price paid by the
Company was approximately $198.4 million and was paid in a combination of stock
and cash. The SMB Acquisition was accounted for as a purchase.
The following unaudited pro forma combined statement of condition and unaudited
pro forma combined statement of income were prepared in connection with the SMB
Acquisition and give effect to the adjustments described in the accompanying
notes.
The unaudited pro forma combined statement of income for the year ended December
31, 1997 is based on the consolidated statement of income for the Company for
the year ended December 31, 1997 and the consolidated statement of income for
SMB for the year ended December 31, 1997. The pro forma adjustments to income
and expense are the net result of pro forma amounts that assume the SMB
Acquisition was consummated on January 1, 1997. The unaudited pro forma
combined statements of income do not reflect any anticipated cost savings or
revenue enhancements.
The unaudited pro forma combined statement of condition and unaudited pro
forma combined statement of income and the accompanying notes should be read
in conjunction with and are qualified in their entirety by the consolidated
financial statements, including the accompanying notes, of the Company in its
Annual Report on Form 10-K for the year ended December 31, 1997. The
unaudited pro forma combined statement of condition and unaudited pro forma
combined statement of income and the accompanying notes should also be read
in conjunction with and are qualified in their entirety by the financial
statements, including the accompanying notes, of SMB in its audited
statements of condition as of December 31, 1997 and 1996 and related
statements of income for the three years then ended. (see Exhibit 99.1 to
this 8-K).
The pro forma data are presented for comparative purposes only and are not
necessarily indicative of the combined results of operations in the future.
The pro forma data are also not necessarily indicative of the combined
results of operations which would have been realized had the acquisition been
in effect during the period for which the pro forma combined financial
statements are presented. In addition, this Form 8-K includes forward-looking
statements that involve inherent risks and uncertainties. The Company
cautions readers that a number of important factors could cause actual
results to differ materially from those in the forward-looking statements.
Those factors include fluctuations in interest rates, inflation, government
regulations, the progress of integrating SMB and economic conditions and
competition in the geographic and business areas in which the Company
conducts its operations.
3
<PAGE>
<TABLE>
<CAPTION>
WESTERN BANCORP AND SANTA MONICA BANK
PRO FORMA COMBINED STATEMENT OF CONDITION
AS OF DECEMBER 31, 1997 (A)
(UNAUDITED)
Historical
---------------------------
Western Santa Monica Pro Forma Pro Forma
Bancorp Bank Adjustments (D) Combined
------------- ------------ -------------- -----------
(In thousands except per share data)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $ 97,456 $ 52,240 $ - $ 149,696
Federal funds sold 138,702 64,000 (51,202)(a) 151,500
------------- ------------ -------------- -----------
TOTAL CASH AND CASH EQUIVALENTS 236,158 116,240 (51,202) 301,196
FRB and FHLB stock 5,610 5,610
Securities:
Securities available for sale 201,904 148,793 350,697
------------- ------------ -------------- -----------
TOTAL SECURITIES 207,514 148,793 - 356,307
Net loans 864,840 393,943 1,258,783
Property, plant and equipment 13,685 10,187 6,197 (b) 30,069
Other real estate owned 6,261 3,323 9,584
Deferred tax asset, net 7,849 2,231 (533) (c) 9,547
Goodwill 30,430 - 121,022 (d) 151,452
Accrued interest receivable 8,204 3,372 11,576
Other assets 8,569 318 (1,365) (e) 7,522
------------- ------------ -------------- -----------
TOTAL ASSETS $1,383,510 $ 678,407 $ 74,119 $2,136,036
------------- ------------ -------------- -----------
------------- ------------ -------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Non-interest bearing deposits $ 457,503 $ 197,905 $ 655,408
Interest bearing deposits 769,290 394,632 1,163,922
------------- ------------ -------------- -----------
TOTAL DEPOSITS 1,226,793 592,537 - 1,819,330
Borrowed funds 12,751 1,962 14,713
Accrued interest payable & other liabilities 14,311 3,106 5,081 (f) 22,498
------------- ------------ -------------- -----------
TOTAL LIABILITIES 1,253,855 597,605 5,081 1,856,541
SHAREHOLDERS' EQUITY:
Preferred stock - - - -
Common stock 112,947 21,232 128,608 262,787
Surplus - 2,983 (2,983) -
Retained earnings 16,802 56,288 (56,288) 16,802
Unrealized net (losses) on investments
available for sale, net (94) 299 (299) (94)
------------- ------------ -------------- -----------
TOTAL SHAREHOLDERS' EQUITY 129,655 80,802 69,038 (g) 279,495
------------- ------------ -------------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $1,383,510 $ 678,407 $ 74,119 $2,136,036
------------- ------------ -------------- -----------
------------- ------------ -------------- -----------
Number of common shares outstanding 10,648.3 7084.2 15,622.3
Common shareholders' equity per share $ 12.18 $ 11.41 $ 17.89
Tangible common shareholders' equity per share $ 9.32 $ 11.41 $ 8.20
</TABLE>
4
<PAGE>
WESTERN BANCORP AND SANTA MONICA BANK
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997 (A)
(UNAUDITED)
<TABLE>
<CAPTION>
Historical
---------------------------
Western Santa Monica Pro Forma Pro Forma
Bancorp Bank Adjustments (D) Combined
------------- ------------ -------------- -----------
(In thousands except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 80,639 $ 36,794 $ - $ 117,433
Interest on investment securities 15,714 8,922 24,636
Interest on federal funds sold 4,681 3,652 (2,816)(h) 5,517
------------- ------------ -------------- -----------
TOTAL INTEREST INCOME 101,034 49,368 (2,816) 147,586
INTEREST EXPENSE:
Interest expense on deposits 28,276 14,575 42,851
Interest expense on notes payable and other
interest-bearing liabilities 1,082 196 1,278
------------- ------------ -------------- -----------
TOTAL INTEREST EXPENSE 29,358 14,771 - 44,129
------------- ------------ -------------- -----------
NET INTEREST INCOME: 71,676 34,597 (2,816) 103,457
Less: provision for loan and lease losses 2,800 - 2,800
------------- ------------ -------------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
AND LEASE LOSSES 68,876 34,597 (2,816) 100,657
NON-INTEREST INCOME:
Service charges and fees on deposit accounts 3,240 3,207 6,447
Trust fees - 3,354 3,354
Other fees and charges 3,859 471 4,330
Escrow fees 827 - 827
Gain on sale of loans and other assets 78 - 78
Securities gains 342 13 355
Other income 1,340 229 1,569
------------- ------------ -------------- -----------
TOTAL NON-INTEREST INCOME 9,686 7,274 - 16,960
NON-INTEREST EXPENSE:
Salaries and benefits 25,023 14,661 (131) (i) 39,553
Occupancy, furniture and equipment 7,843 4,151 274 (j) 12,268
Advertising and business development 1,225 844 2,069
Other real estate owned 242 (547) (305)
Professional services 3,706 1,444 5,150
Telephone, stationery and supplies 2,735 632 3,367
Goodwill amortization 2,538 - 8,068 (k) 10,606
Data processing 1,667 116 1,783
Customer services cost 1,263 265 1,528
Regulatory assessments 533 108 641
Merger costs 14,201 1,052 15,253
Other 4,781 2,333 7,114
------------- ------------ -------------- -----------
TOTAL NON-INTEREST EXPENSE 65,757 25,059 8,211 99,027
------------- ------------ -------------- -----------
Income before income taxes 12,805 16,812 (11,027) 18,590
Income taxes 9,643 5,905 (1,228) (l) 14,320
------------- ------------ -------------- -----------
NET INCOME $ 3,162 $ 10,907 $ (9,799) $ 4,270
------------- ------------ -------------- -----------
------------- ------------ -------------- -----------
Number of shares (weighted average) 10,523.9 7,084.2 15,497.9
Diluted shares 10,731.6 7,084.2 15,705.6
Basic earnings per share $ 0.30 $ 1.54 $ 0.28
Diluted earnings per diluted share $ 0.29 $ 1.54 $ 0.27
</TABLE>
5
<PAGE>
Western Bancorp and Santa Monica Bank
Notes to Pro Forma Combined Financial Statements
(Unaudited)
NOTE A: BASIS OF PRESENTATION
The SMB Acquisition was accounted for as a purchase. Under this method of
accounting, assets and liabilities of SMB are adjusted to their estimated fair
values and combined with the recorded book values of the assets and liabilities
of the Company. Applicable income tax effects of such adjustments are included
as a component of the Company's net deferred tax asset with a corresponding
offset to goodwill.
The pro forma combined statement of condition as of December 31, 1997 combines
the individual historical statements of condition of the Company and SMB as of
December 31, 1997 and gives effect to additional equity which was raised by the
Company as part of the transaction and the estimated fair value adjustments.
The unaudited pro forma combined statement of income for the year ended December
31, 1997 is presented as if the acquisition was consummated on January 1, 1997.
The pro forma combined statement of income for the year ended December 31, 1997
combines the individual historical results of operations of the Company and SMB
for the year ended December 31, 1997 after giving effect to the amortization of
purchase accounting adjustments, the additional equity which was raised by the
Company and the reduced interest income resulting from the cash payments made as
part of the acquisition. The pro forma purchase accounting adjustments for the
year ended December 31, 1997 represent the amortization that would have taken
place from the beginning of the period.
NOTE B: PURCHASE PRICE AND FUNDING
Each share of common stock of SMB either received $28.00 in cash or 0.875 shares
of Company Common Stock which also had a value of $28.00. Based upon 7,084,224
SMB shares outstanding, total consideration to the SMB shareholders was
approximately $198.4 million. Other estimated costs of the acquisition bring
the total purchase price to $202.7 million. The table below illustrates the
computation (in thousands except for price paid per share):
<TABLE>
<CAPTION>
Purchase price of SMB:
- ----------------------
<S> <C>
SMB common shares outstanding 7,084.2
Price paid per share $ 28.00
--------
198,358
Other costs of the acquisition
Investment banking fees 2,682
Other direct costs, net of tax 1,699
--------
Total purchase price $202,739
--------
</TABLE>
Of the 7,084,244 shares of SMB Common Stock outstanding prior to the SMB
Acquisition, approximately 57.3 percent elected to receive the Cash
Consideration and 42.7 percent elected to receive the Stock Consideration.
As shown below, the Company required approximately $113.7 million in cash to
pay the Cash Consideration (in thousands except for the cash purchase price
per share and the exchange ratio):
6
<PAGE>
Western Bancorp and Santa Monica Bank
Notes to Pro Forma Combined Financial Statements, continued
(Unaudited)
NOTE B: PURCHASE PRICE AND FUNDING (continued)
<TABLE>
<CAPTION>
SMB SHAREHOLDERS ELECTING: Cash Stock
----------- -------
<S> <C> <C>
Number of shares 4,060.4 3,023.8
Cash purchase price per share $ 28.00
Exchange ratio 0.875
-------
Company shares issued to SMB shareholders 2,646
-------
-------
-----------
Cash paid to SMB shareholders electing cash $ 113,691
-----------
-----------
</TABLE>
To fund the Cash Consideration and other cash costs of the acquisition, the
Company issued approximately 2.3 million shares of Company Common Stock to
certain private investors for approximately $65.2 million in cash, received a
cash dividend from SMB of $45.0 million immediately after the SMB Acquisition
was consummated and received a cash dividend of $9.0 million from Southern
California Bank ("SCB"), the Company's other banking subsidiary:
<TABLE>
<CAPTION>
Amount
(In thousands)
SOURCES OF CASH:
<S> <C>
Private investors $ 65,171
Dividend from SMB to the Company 45,000
Dividend from SCB 9,000
------------
Total sources $ 119,171
------------
------------
USES OF CASH:
Cash paid to SMB shareholders $ 113,691
Investment banking fees 2,682
Other uses 2,798
------------
Total uses $ 119,171
------------
------------
</TABLE>
NOTE C: ALLOCATION OF PURCHASE PRICE
The purchase price of SMB has been allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents $ 116,240
Securities 148,793
Net loans 393,943
Goodwill 121,022
Property, plant and equipment 16,384
Other real estate owned 3,323
Other assets 3,929
Deposits (592,537)
Borrowed funds (1,962)
Other liabilities (6,396)
------------
$ 202,739
------------
------------
</TABLE>
Actual adjustments will be made on the basis of actual assets, liabilities and
other items as of the date of the SMB Acquisition on the basis of appraisals and
evaluations made as of that time and, therefore, fair value amounts will differ
from those above.
7
<PAGE>
Western Bancorp and Santa Monica Bank
Notes to Pro Forma Combined Financial Statements, continued
(Unaudited)
NOTE D: PRO FORMA ADJUSTMENTS
The estimated pro forma adjustments related to the SMB Acquisition are detailed
below (in thousands):
<TABLE>
<CAPTION>
Property,
Plant & Deferred Other Other Shareholders'
Cash Equipment Taxes Assets Goodwill Liabilities Equity
------- --------- -------- ------- -------- ----------- ---------
FAIR VALUE ADJUSTMENTS
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase price in excess of SMB's
shareholders' equity $ - $ - $ - $ - $121,937 $ - $ -
Fair value adjustment for property, plant
& equipment - 6,197 (2,572) - (3,625) - -
Fair value of favorable leases - - (371) 894 (523) - -
Write-off of unrecognized transition obligation
related to post-retirement health care
benefits - - 707 (1,704) 997 - -
Severance and other compensation costs - - 623 - 877 1,500 -
Investment banking and other
professional fees - - - - 427 427 -
Contract termination costs - - 311 - 439 750 -
Estimated conversion costs - - 208 - 292 500 -
Other fair value adjustments - - 141 (227) 201 113 -
------- ------- ------- -------- -------- -------- --------
- 6,197 (953) (1,037) 121,022 3,290 -
CAPITALIZED ACQUISITION COSTS
Investment banking fees (2,682) - - - - - -
Other capitalized acquisition costs - - 420 (328) - 1,791 -
------- ------- ------- -------- -------- -------- --------
(2,682) 6,197 (533) (1,365) 121,022 5,081 -
ADDITIONAL EQUITY
Issuance of shares to private investors 65,171 - - - - - 65,171
Cash paid to SMB shareholders electing
the Cash Consideration (113,691) - - - - - -
Company equity issued to SMB shareholders'
electing the Stock Consideration - - - - - - 84,669
SMB equity before SMB Acquisition - - - - - - (80,802)
-------- ------- ------- -------- -------- -------- --------
Pro Forma Adjustments $(51,202) $ 6,197 $ (533) $ (1,365) $121,022 $ 5,081 $ 69,038
-------- ------- ------- -------- -------- -------- --------
-------- ------- ------- -------- -------- -------- --------
</TABLE>
8
<PAGE>
Western Bancorp and Santa Monica Bank
Notes to Pro Forma Combined Financial Statements, continued
(Unaudited)
NOTE D: PRO FORMA ADJUSTMENTS (continued)
The following is the key to the pro forma adjustments:
a) Federal funds sold: As a result of the funding of this transaction, the
Company spent approximately $51.2 million of its cash resources.
b) The estimated fair value of SMB's property, plant & equipment is
approximately $6.2 million higher than its recorded book value on January
31, 1998.
c) A reduction in deferred taxes of approximately $533 thousand is a result of
the other fair value adjustments discussed within this note.
d) Reflects goodwill resulting from the purchase method of accounting. See
note C.
e) The approximate $1.4 million fair value reduction in other assets consists
mostly of a $1.7 million write-off of an unrecognized transition obligation
related to post-retirement health care benefits, partially offset by the
recognition of a favorable lease asset of approximately $900 thousand and
various other small adjustments.
f) The increase in other liabilities of $5.1 million consists of accrued
severance and compensation costs of $1.5 million, contract cancellation
costs of $750 thousand, estimated conversion costs of $1.0 million and
estimated legal, professional and other costs of approximately $1.9
million.
g) Additional common equity issued to certain private investors and SMB
shareholders electing the Stock Consideration was approximately $149.8
million, or an increase of $69.0 million from the equity of SMB at December
31, 1997. Approximately 4,974 thousand shares were issued as part of the
transaction: 2,328 thousand to certain private investors, and 2,646
thousand shares to former shareholders of SMB. See note B.
h) For the purposes of the unaudited pro forma combined statement of income,it
is estimated that the Company would have earned 5.50 percent on the $51.2
million of cash outflow during the year ended December 31, 1997, resulting
in approximately $2.8 million less interest income for the year. See (a)
above.
i) Salaries and benefits expense is estimated to be reduced by approximately
$131 thousand as a result of the write-off of the unrecognized transition
obligation related to post-retirement health care benefits. See (e) above.
j) Occupancy, furniture and equipment expense increases by an estimated $194
thousand of depreciation expense related to the fair market value
adjustment of SMB's property, plant and equipment (see (b) above) and by
approximately $80 thousand related to the amortization of the favorable
lease assets (see (e) above).
k) Goodwill is amortized on a straight line basis over 15 years.
l) Income taxes are estimated to be at a rate of 41.5 percent of pretax income
before goodwill amortization.
9
<PAGE>
(c) Exhibits.
The following exhibits are filed with this Current Report on Form 8-K:
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of July 30, 1997 and amended
and restated as of November 20, 1997, by and among Western Bancorp,
Western Bank and Santa Monica Bank (incorporated by reference to
Appendix A to the Registration Statement on Form S-4, Registration
Number 333-40611).
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Deloitte & Touche, LLP
99.1 Audited statements of condition of Santa Monica Bank as of December
31, 1997 and 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for the three years
then ended.
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 hereunto duly authorized.
Dated: April 7, 1998
WESTERN BANCORP
By: /s/ ARNOLD C. HAHN
----------------------------------
Name: Arnold C. Hahn
Title: Executive
Vice President and
Chief Financial Officer
10
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.2 Agreement and Plan of Merger, dated as of July 30, 1997 and amended
and restated as of November 20, 1997, by and among Western Bancorp,
Western Bank and Santa Monica Bank (incorporated by reference to
Appendix A to the Registration Statement on Form S-4, Registration
Number 333-40611).
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Deloitte & Touche, LLP
99.1 Audited statements of condition of Santa Monica Bank as of December
31, 1997 and 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for the three years
then ended.
11
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
Report of Independent Public Accountants dated January 21, 1998 on the financial
statements of Santa Monica Bank (the Bank) as of and for the years ended
December 31, 1997 and 1996 in this Form 8-K/A of Western Bancorp and the
incorporation by reference of our report into Western Bancorp's previously
filed Form S-8 Registration Statement File No. 333-44609. It should be noted
that we have not audited any financial statements of the Bank subsequent to
December 31, 1997 or performed any audit procedures subsequent to the date of
our report.
Arthur Andersen LLP
Los Angeles, California
April 7, 1998
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-44609 of Western Bancorp (formerly Monarch Bancorp) on Form S-8 of our
report dated January 19, 1996 on the statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 1995 (such
financial statements are not included herein), appearing in this Current Report
on Form 8-K/A of Western Bancorp. for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Los Angeles, California
April 7, 1998
<PAGE>
EXHIBIT 99.1 AUDITED STATEMENTS OF CONDITION OF SANTA MONICA BANK AS OF
DECEMBER 31, 1997 AND 1996, AND THE RELATED STATEMENTS OF
OPERATIONS, CHANGES IN STOCKHOLDERS' EQUITY AND CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Santa Monica Bank:
We have audited the accompanying statements of condition of Santa Monica Bank
(the Bank) as of December 31, 1997 and 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our reponsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Santa Monica Bank as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Los Angeles, California
January 21, 1998
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Santa Monica Bank
We have audited the statements of operations, changes in stockholders' equity
and cash flows of Santa Monica Bank (the "Bank") for the year ended
December 31, 1995. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows, of Santa Monica Bank, for
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Los Angeles, California
January 19, 1996
3
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CONDITION
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
-------------- --------------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 52,239,667 $ 57,535,025
FEDERAL FUNDS SOLD 64,000,000 43,000,000
-------------- --------------
Cash and cash equivalents 116,239,667 100,535,025
SECURITIES AVAILABLE FOR SALE 148,792,703 141,139,066
LOANS, NET 393,942,868 365,899,546
BANK PREMISES AND EQUIPMENT, NET 10,187,177 10,340,943
OTHER REAL ESTATE OWNED 3,322,647 8,606,042
ACCRUED INTEREST RECEIVABLE 3,372,331 3,496,127
DEFERRED TAX ASSET, NET 2,231,458 796,447
OTHER ASSETS 318,327 748,294
-------------- --------------
Total assets $ 678,407,178 $ 631,561,490
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CONDITION
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES:
NONINTEREST-BEARING DEPOSITS $197,905,237 $172,161,860
INTEREST-BEARING DEPOSITS 394,632,024 381,821,146
------------ ------------
Total deposits 592,537,261 553,983,006
MORTGAGE INDEBTEDNESS 1,961,836 1,981,863
OTHER LIABILITIES 3,105,851 2,621,314
------------ ------------
Total liabilities 597,604,948 558,586,183
------------ ------------
------------ ------------
STOCKHOLDERS' EQUITY:
Capital stock (authorized 50,000,000 and 10,000,000 shares
of $3 par value for 1997 and 1996, respectively; issued
and outstanding 7,077,332 shares for 1997 and 1996) 21,231,996 21,231,996
Surplus 2,982,631 2,982,631
Undivided profits 56,287,939 48,211,600
Unrealized holding gains on securities, net of income taxes
of $208,241 and $381,985 for 1997 and 1996, respectively 299,664 549,080
------------ ------------
Total stockholders' equity 80,802,230 72,975,307
------------ ------------
Total liabilities and stockholders' equity $678,407,178 $631,561,490
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SANTA MONICA BANK
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
INTEREST INCOME:
<S> <C> <C> <C>
Interest and fees on loans $36,794,152 $35,379,344 $34,822,229
Interest on investment securities:
Taxable 8,119,832 6,205,111 6,433,313
Tax-exempt 802,437 1,081,468 1,306,353
Other interest income 3,651,678 2,648,535 3,116,450
----------- ----------- -----------
Total interest income 49,368,099 45,314,458 45,678,345
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 14,575,335 13,303,545 13,998,103
Interest on other liabilities 195,990 194,801 207,492
----------- ----------- -----------
Total interest expense 14,771,325 13,498,346 14,205,595
----------- ----------- -----------
NET INTEREST INCOME 34,596,774 31,816,112 31,472,750
PROVISION FOR LOAN LOSSES - - 2,000,000
----------- ----------- -----------
Net interest income after provision
for loan losses 34,596,774 31,816,112 29,472,750
----------- ----------- -----------
NONINTEREST INCOME:
Trust department income 3,354,065 3,160,453 3,059,546
Service charges on deposit accounts 3,206,796 3,163,595 3,400,439
Other service charges, commissions and fees 471,369 480,342 532,647
Gain/(loss) on sale of OREO 546,855 (78,545) 400,449
Other income 242,635 220,139 216,394
----------- ----------- -----------
Total noninterest income 7,821,720 6,945,984 7,609,475
----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries 11,589,386 11,127,108 11,913,286
Profit sharing and other employee benefits 3,072,062 2,873,703 2,505,479
Net occupancy expense of bank premises 2,503,619 2,479,239 2,560,152
Furniture and equipment expense 1,647,624 1,580,679 1,614,476
</TABLE>
6
<PAGE>
-2-
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
FDIC assessment $ 107,605 $ 350,966 $ 723,897
Legal fees 1,188,311 1,288,871 1,437,698
Net OREO related expenses/(income) (174) 1,392,346 3,355,083
Merger related expenses 1,052,427 - -
Other operating expense 4,445,795 4,585,995 4,663,468
------------ ------------ ------------
Total noninterest expense 25,606,655 25,678,907 28,773,539
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 16,811,839 13,083,189 8,308,686
APPLICABLE INCOME TAX EXPENSE 5,904,567 3,466,929 3,041,346
------------ ------------ ------------
NET INCOME $ 10,907,272 $ 9,616,260 $ 5,267,340
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Capital Undivided
Stock Surplus Profits
------------ ----------- ------------
BALANCE, January 1, 1995 $ 21,231,996 $ 2,982,631 $ 34,389,599
Net income - - 5,267,340
Net change in unrealized holding gains on investment securities available for
sale, net of income taxes - - -
------------ ----------- ------------
BALANCE, December 31, 1995 21,231,996 2,982,631 39,656,939
Net income - - 9,616,260
Cash dividends at $.15 per share - - (1,061,599)
Net change in unrealized holding gains on investment securities available for
sale, net of income taxes - - -
------------ ----------- ------------
BALANCE, December 31, 1996 21,231,996 2,982,631 48,211,600
Net income - - 10,907,272
Cash dividends at $.40 per share - - ( 2,830,933)
Net change in unrealized holding gains on investment securities available for
sale, net of income taxes - - -
------------ ----------- ------------
BALANCE, December 31, 1997 $ 21,231,996 $ 2,982,631 $ 56,287,939
------------ ----------- ------------
------------ ----------- ------------
<CAPTION>
Unrealized
Holding Gains
on Securities,
Net Total
--------------- -----------
<S> <C> <C>
BALANCE, January 1, 1995 $ 405,404 $59,009,630
Net income - 5,267,340
Net change in unrealized holding gains on investment securities available for
sale, net of income taxes 189,434 189,434
------------- -----------
BALANCE, December 31, 1995 594,838 64,466,404
Net income - 9,616,260
Cash dividends at $.15 per share - (1,061,599)
Net change in unrealized holding gains on investment securities available for
sale, net of income taxes (45,758) (45,758)
------------- -----------
BALANCE, December 31, 1996 549,080 72,975,307
Net income - 10,907,272
Cash dividends at $.40 per share - ( 2,830,933)
Net change in unrealized holding gains on investment securities available for
sale, net of income taxes (249,416) (249,416)
------------- -----------
BALANCE, December 31, 1997 $ 299,664 $80,802,230
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
SANTA MONICA BANK
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 10,907,272 $ 9,616,260 $ 5,267,340
Adjustments to reconcile net income to net
cash provided by operating activities:
Net accretion of discount/premium on
investments (3,152,492) (828,703) (5,589,303)
Provision for loan losses - - 2,000,000
Writedowns of OREO - 736,154 2,327,804
Accretion of deferred loan fees and costs (824,291) (701,414) (481,667)
(Gain) loss on sale of OREO/premises
and equipment (546,855) 128,164 (414,127)
Depreciation 1,367,208 1,291,145 1,303,780
Decrease (increase) in accrued interest receivable 123,796 (93,144) (474,228)
Decrease in other assets 429,967 331,642 1,571,393
Increase (decrease) in accrued interest payable 29,374 (19,200) 54,533
Deferred tax (benefit) provision (1,261,267) 973,890 983,631
Decrease in current income tax receivable - - 2,253,366
Increase in other liabilities 455,163 522,188 849,579
------------- ------------ ------------
Total adjustments (3,379,397) 2,340,722 4,384,761
------------- ------------ ------------
Net cash provided by operating activities 7,527,875 11,956,982 9,652,101
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 435,587,125 174,287,012 391,140,000
Purchase of investment securities (440,511,012) (180,075,681) (352,795,444)
Net increase in loans (29,430,511) (9,413,816) (18,495,396)
Proceeds from sale of OREO/premises
and equipment 7,196,476 11,280,216 18,166,804
Capitalization of costs on OREO (144,194) (335,030) (1,888,794)
Loan origination fees received 1,015,797 656,180 766,639
Purchases of bank premises and equipment (1,240,209) (747,647) (613,301)
------------- ------------ ------------
Net cash (used in) provided by investing activities $ (27,526,528) $ (4,348,766) $ 36,280,508
------------- ------------ ------------
</TABLE>
9
<PAGE>
- 2 -
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits
and savings accounts $ 30,488,872 $ 1,521,538 $(45,307,113)
Net increase (decrease) in time deposits 8,065,383 2,183,282 (9,694,541)
Repayments of mortgage indebtedness (20,027) (18,637) (15,316)
Dividends paid (2,830,933) (1,061,599) -
------------ ------------ ------------
Net cash provided by (used in) financing
activities 35,703,295 2,624,584 (55,016,970)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 15,704,642 10,232,800 (9,084,361)
CASH AND CASH EQUIVALENTS,
beginning of year 100,535,025 90,302,225 99,386,586
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of year $116,239,667 $100,535,025 $ 90,302,225
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Loans transferred to OREO $ 1,194,683 $1,752,933 $ 7,857,718
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
SANTA MONICA BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SALE OF THE BANK
On July 30, 1997, management of Santa Monica Bank (the Bank) announced that it
had signed a definitive agreement to merge with Western Bank, a wholly owned
subsidiary of Western Bancorp. The Merger is scheduled to close on January 27,
1998. Under the terms of the agreement, each Santa Monica Bank shareholder will
have the right to receive, with certain limitations, either $28 per share in
cash or 0.875 shares of Western Bancorp common stock. The merged entity will
retain the name Santa Monica Bank and will operate primarily on the west side of
Los Angeles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Bank are in accordance with
generally accepted accounting principles and conform to practices within the
banking industry.
a. NATURE OF OPERATIONS
The Bank's primary operations are related to traditional banking
activities, including the acceptance of deposits, the lending and investing
of money and trust department operations. The Bank's customers consist of
small to mid-sized businesses and individuals located in western Los
Angeles County. The Bank operates seven branches in Los Angeles County
with its headquarters in the city of Santa Monica.
b. CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statements of cash flow, cash and
cash equivalents are defined as those amounts included in the balance-sheet
caption "cash and due from banks" and "federal funds sold".
c. SECURITIES AVAILABLE FOR SALE
Securities available for sale are reported at fair value, with unrealized
gains and losses excluded from earnings and reported in a separate
component of stockholders' equity, net of income taxes. Accretion of
discounts and amortization of premiums are recognized as an adjustment to
interest income. Realized gains or losses upon disposition are recognized
in earnings based upon the specific identification method.
d. LOANS
Loans are carried at amounts advanced less payments collected, deferred net
loan origination fees, unearned income and the allowance for loan losses.
Interest on loans is computed by methods which generally result in level
rates of return on principal amounts outstanding. Interest is accrued
daily as earned except where reasonable doubt exists as to collectibility
of the loan; generally when a loan becomes contractually past-due ninety
days, in which case the accrual of income is discontinued.
11
<PAGE>
- 2 -
When a loan is placed on non-accrual status, all interest previously
accrued but uncollected is reversed against current period operating
results. Income on such loans is then recognized only to the extent that
cash is received and where the ultimate collection of the carrying amount
of the loan is probable after giving consideration to borrowers' current
financial condition, historical repayment performance and other factors.
Accrual of interest is resumed only when (i) principal and interest are
brought fully current and (ii) such loans are considered, in management's
judgment, to be fully collectible or otherwise become well secured and in
the process of collection. Under regulatory guidelines a sustained period
of repayment performance for a minimum of six months must be generally
achieved for such loans to be returned to accrual status.
Interest accruals may be continued for loans that have become contractually
past-due ninety days when such loans are well secured and in the process of
collection and accordingly, management has determined such loans to be
fully collectible as to both principal and interest. For this purpose,
loans are considered well secured if they are collateralized by property
having a realizable value in excess of the amount of principal and accrued
interest outstanding or are guaranteed by a financially capable party.
Loans are considered to be in the process of collection if collection is
proceeding in due course either through legal action or through other
collection efforts which management reasonably expects to result in
repayment of the loan or its restoration to a current status in the near
future.
A loan is considered impaired when it is probable that a creditor will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. Generally, this includes all
loans which are ninety days or more delinquent and not accruing interest.
The Bank measures impairment by discounting expected future cash flows at
the loan's effective interest rate, or by reference to an observable market
price, or the fair value of the collateral for a collateral dependent loan.
The effective interest rate is the contractual rate adjusted for any
deferred loan fees, premiums or discounts that existed at the time the
loans were originated or acquired.
Troubled debt restructurings are those loans for which the Bank has, for
reasons related to borrowers' financial difficulties, granted concessions
to borrowers (including reductions of either interest or principal) that it
would not otherwise consider, whether or not such loans are secured or
guaranteed by others. Troubled debt restructurings are accounted for as
impaired loans.
Loan losses are charged to the allowance for loan losses and recoveries are
credited to the allowance. The annual provision for loan losses is charged
to operating expense and added to the allowance. Management's
determination of the adequacy of the allowance for loan losses is
determined based upon the measurement of impairment for specifically
identified impaired loans, as well as economic conditions, volume, growth,
past losses and collection experience, risk characteristics of the
portfolio and such other factors which, in management's judgment, deserve
current recognition. These estimates are inherently uncertain and depend
on the outcome of future events. Although management believes that the
level of the allowance is adequate to absorb losses inherent in the loan
portfolio, additional declines in the local economy or rising interest
rates may result in increasing losses that cannot reasonably be predicted
at this time.
Loan origination fees, net of associated costs, are deferred and recognized
over the life of the loan as an adjustment of the loan yield using the
effective interest method. Total deferred fees on loans as of December 31,
1997 and 1996 amounted to $1,549,164 and $1,357,658, respectively.
12
<PAGE>
- 3 -
e. OTHER REAL ESTATE OWNED (OREO)
OREO includes real property acquired in full or partial satisfaction of
loans through foreclosure, including direct foreclosure or deed in lieu of
foreclosure. OREO is classified as held for sale and recorded at the lower
of cost or the property's estimated fair value at the time of foreclosure
less selling costs. Subsequent declines in the property's fair value,
taking into consideration management's intended plans for disposition, less
estimated costs to sell, are reflected in OREO related expenses in the
periods in which they become known. Costs of holding OREO are reflected in
OREO related expenses as incurred. Gains and losses on sales of OREO are
recognized in conformity with standards governing accounting for sales of
real estate, including criteria relating to the nature of the property sold
and the terms of the sale.
Valuation estimates for OREO are inherently uncertain. Although management
believes it has adequately provided for existing losses, further declines
in real estate values could result in additional losses being recorded in
future periods.
f. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is charged to operating expense over the
estimated useful lives of the assets (buildings: 15 to 45 years; equipment:
3 to 30 years). Depreciation on buildings and equipment is computed by use
of the straight-line method. Leasehold improvements are amortized by use of
the straight-line method over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter.
Expenditures for remodelings and improvements are capitalized, and
maintenance and repairs are charged to expense as incurred.
g. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank does not enter into any derivative transactions, as defined by
SFAS No. 119, other than standby letters of credits and commitments to
extend credit.
h. OTHER OFF-BALANCE-SHEET INSTRUMENTS
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit, and standby letters of credit. Such
financial instruments are recorded in the financial statements when they
are funded or related fees are incurred or received.
i. INCOME TAXES
Deferred income taxes are recognized for future tax consequences of
differences between the tax basis of assets and liabilities and their
periodic financial reporting amounts based on enacted tax laws and
statutory tax rates.
j. EMPLOYEE RETIREMENT PLANS
The Bank records expense for contributions to employee retirement plans
during the years for which such contributions are declared.
k. TRUST FEES
Trust fees are recorded on the accrual basis.
13
<PAGE>
- 4 -
l. POSTRETIREMENT BENEFITS
Expenses are provided for post-retirement benefits other than pensions
during the years in which the employee's service is rendered, based upon an
estimate of the expected cost of providing such benefits.
m. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
n. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current
year presentation.
3. AVERAGE FEDERAL RESERVE BALANCES
The average cash reserve balances required to be maintained at the Federal
Reserve Bank under the Federal Reserve Act and Regulation D were approximately
$15.7 million and $14.9 million for the years ended December 31, 1997 and 1996,
respectively.
4. SECURITIES AVAILABLE FOR SALE
Securities available for sale with total amortized cost of $27,853,297 as of
December 31, 1997 and $29,323,453 as of December 31, 1996 were pledged to secure
trust funds and public deposits and for other purposes required or permitted by
law.
The total amortized cost and aggregate fair values of securities available for
sale at December 31, 1997 were:
<TABLE>
<CAPTION>
Total Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. treasury securities:
Due within one year $ 39,939,650 $ 61,788 $ - $ 40,001,438
After one but within five years 29,909,539 254,523 - 30,164,062
U.S. government agency securities:
Due within one year 69,728,869 - 92,869 69,636,000
--------------- ----------- ----------- ------------
Total 139,578,058 316,311 92,869 139,801,500
--------------- ----------- ----------- ------------
Obligations of states and
political subdivisions:
Due within one year 5,002,682 71,975 - 5,074,657
After one but within five years 3,704,059 212,487 - 3,916,546
--------------- ----------- ----------- ------------
Total 8,706,741 284,462 - 8,991,203
--------------- ----------- ----------- ------------
Total securities available for sale $ 148,284,799 $ 600,773 $ 92,869 $148,792,703
--------------- ----------- ----------- ------------
--------------- ----------- ----------- ------------
</TABLE>
14
<PAGE>
- 5 -
The total amortized cost and aggregate fair values of securities available for
sale at December 31, 1996 were:
<TABLE>
<CAPTION>
Total Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
U.S. treasury securities:
Due within one year $ 60,006,723 $ 185,465 $ - $ 60,192,188
After one but within five years 29,975,306 207,507 - 30,182,813
U.S. government agency securities:
Due within one year 36,317,079 - 45,741 36,271,338
------------- ----------- ---------- -------------
Total 126,299,108 392,972 45,741 126,646,339
------------- ----------- ---------- -------------
Obligations of states and
political subdivisions:
Due within one year 5,176,198 88,737 - 5,264,935
After one but within five years 8,733,114 494,678 - 9,227,792
------------- ----------- ---------- -------------
Total 13,909,312 583,415 - 14,492,727
------------- ----------- ---------- -------------
Total securities
available for sale $ 140,208,420 $ 976,387 $ 45,741 $ 141,139,066
------------- ----------- ---------- -------------
------------- ----------- ---------- -------------
</TABLE>
The Bank had security gains of $13,600 and $7,200 in 1997 and 1996,
respectively.
5. LOANS
The Bank has limited its lending activity to its immediate service area,
resulting in a natural concentration of loans secured primarily by real estate
in western Los Angeles County. As a result, the performance of the Bank's loan
portfolio will be impacted by trends in the local economy, to the extent such
trends influence borrowers' repayment ability.
<TABLE>
<CAPTION>
Classification of loans at December 31:
1997 1996
------------- -------------
<S> <C> <C>
Real estate loans:
Conventional loans $ 233,831,022 $ 225,409,589
Interim construction loans 20,915,291 16,679,165
Commercial and industrial loans 107,733,062 95,773,016
Loans to individuals for household,
family and other consumer expenditures 38,725,156 36,148,692
All other loans (including overdrafts) 1,377,410 983,327
------------- -------------
Total loans 402,581,941 374,993,789
Less:
Unearned income 134,618 139,147
Allowance for loan losses 8,504,455 8,955,096
------------- -------------
Total loans, net $ 393,942,868 $ 365,899,546
------------- -------------
------------- -------------
</TABLE>
15
<PAGE>
- 6 -
The following is a summary of the transactions in the allowance for loan losses
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance, at beginning of year $ 8,955,096 $11,032,324 $14,897,660
Recoveries credited to allowance 1,794,503 1,906,637 1,971,741
Losses charged to allowance (2,245,144) (3,983,865) (7,837,077)
----------- ----------- -----------
Net chargeoffs (450,641) (2,077,228) (5,865,336)
Provision for loan losses
charged to expense - - 2,000,000
----------- ----------- -----------
Balance, at end of year $ 8,504,455 $ 8,955,096 $11,032,324
----------- ----------- -----------
----------- ----------- -----------
Non-accrual loans as of December 31 are as follows:
1997 1996
----------- -----------
Commercial and industrial loans $ 242,143 $ 1,224,217
Consumer loans 776,496 2,814,244
Real estate and construction loans 1,032,920 1,590,668
----------- -----------
Total $ 2,051,559 $ 5,629,129
----------- -----------
----------- -----------
</TABLE>
Total non-accrual loans includes restructured loans of $256,981 and $1,443,682
at December 31, 1997 and 1996, respectively. During 1997 and 1996, income
recognized on non-accruals was $11,614 and $49,224, respectively. Interest
income that would have been recorded under the original terms of such loans was
$183,332, $590,749 and $754,216 for the years ended December 31, 1997, 1996 and
1995, respectively.
As of December 31, 1997 and 1996, the Bank had classified $2,262,496 and
$6,483,603 in loans as impaired, respectively. Generally, no specific allowance
was established for these loans, as identified losses on such loans had been
charged off under regulatory guidelines, or because sufficient collateral exists
to provide for recovery of the recorded loan amount. The average balance of
impaired loans during the years ended December 31, 1997 and 1996 was $2,716,080
and $5,203,036, respectively and interest income recognized on such loans during
such years was $106,046 and $230,783, respectively.
In the ordinary course of business, the Bank has granted loans to certain
directors, executive officers and the businesses with which they are associated.
All such loans and loan commitments were made under the terms that are
consistent with the Bank's normal lending policies.
The following is an analysis of all activity of all such loans for the year
ending December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Outstanding balance, beginning of year $ 2,501,879 $ 8,227,900
Credit granted, including renewals 600,000 -
Repayments (951,566) (5,726,021)
----------- -----------
Outstanding balance, end of year $ 2,150,313 $ 2,501,879
----------- -----------
----------- -----------
</TABLE>
16
<PAGE>
- 7 -
6. BANK PREMISES AND EQUIPMENT
The following is a summary of the major categories of bank premises and
equipment:
<TABLE>
<CAPTION>
Accumulated
Depreciation and Book
Cost Amortization Value
------------ ---------------- --------------
<S> <C> <C> <C>
DECEMBER 31, 1997:
Land $ 4,911,000 $ - $ 4,911,000
Premises 5,568,729 3,694,604 1,874,125
Equipment 9,691,181 7,639,672 2,051,509
Leasehold improvements 5,810,624 4,460,081 1,350,543
------------ -------------- ------------
Total $ 25,981,534 $ 15,794,357 $ 10,187,177
------------ -------------- ------------
------------ -------------- ------------
DECEMBER 31, 1996:
Land $ 4,911,000 $ - $ 4,911,000
Premises 5,455,414 3,450,957 2,004,457
Equipment 9,590,814 7,757,022 1,833,792
Leasehold improvements 5,792,595 4,200,901 1,591,694
------------ -------------- ------------
Total $ 25,749,823 $ 15,408,880 $ 10,340,943
------------ -------------- ------------
------------ -------------- ------------
</TABLE>
Depreciation included in other operating expenses was $1,367,208, $1,291,145 and
$1,303,780 for each of the three years ending December 31, 1997. Included in
other operating expenses are net rental payments for bank premises and equipment
of $1,136,489 in 1997, $1,261,449 in 1996 and $1,300,404 in 1995.
The future minimum rental commitments, primarily representing noncancellable
operating leases for premises, were as follows at December 31, 1997:
<TABLE>
<CAPTION>
Period Minimum Rental Commitments
------ --------------------------
<S> <C>
1998 $ 1,112,616
1999 1,112,616
2000 1,015,389
2001 826,105
2002 707,117
Thereafter 799,540
-----------
Total $ 5,573,383
-----------
-----------
</TABLE>
Certain of these leases contain renewal or purchase options, escalation clauses,
related guarantees and obligations assumed which are immaterial.
17
<PAGE>
- 8 -
7. DEPOSITS
Interest expense for each of the three years ended December 31, 1997 relating to
interest-bearing deposits is set forth as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Demand, interest-bearing $ 1,140,017 $ 1,125,869 $ 1,303,998
Money market and savings 10,164,344 9,273,846 9,889,963
Time certificates of deposit:
Under $100,000 1,913,235 1,838,113 1,776,939
$100,000 and over 1,357,739 1,065,717 1,027,203
------------ ------------ ------------
Interest expense on deposits $ 14,575,335 $ 13,303,545 $ 13,998,103
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Bank made interest payments of $14,741,951, $13,514,230 and $14,205,595
during each of the three years ended December 31, 1997.
8. INCOME TAXES
The components for the three years ended December 31, 1997 of income tax expense
(benefit) were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current provision:
Federal $ 5,769,544 $ 2,478,832 $ 2,027,901
State 1,396,290 14,207 29,814
------------ ------------ ------------
7,165,834 2,493,039 2,057,715
------------ ------------ ------------
Deferred provision (benefit):
Federal 520,639 99,327 194,912
State (1,781,906) 874,563 788,719
------------ ------------ ------------
(1,261,267) 973,890 983,631
------------ ------------ ------------
Total $ 5,904,567 $ 3,466,929 $ 3,041,346
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
18
<PAGE>
- 9 -
Components of deferred taxes for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Bad debt and loan loss deductions $ 1,490,159 $ 1,559,225
Depreciation 169,965 -
Reserve for post-employment 618,910 498,150
OREO charge-offs 294,438 1,429,415
California franchise tax 145,213 293,497
AMT credit - 18,043
State net operating loss carryforwards - 284,862
Other 35,904 26,486
----------- -----------
Total deferred assets 2,754,589 4,109,678
Deferred tax liabilities:
Depreciation - 65,303
Unrealized gains on securities 208,241 381,985
Prepaids 244,207 245,911
----------- -----------
Total deferred liabilities 452,448 693,199
Total deferred taxes 2,302,141 3,416,479
Valuation allowance 70,683 2,620,032
----------- -----------
Net deferred tax asset $ 2,231,458 $ 796,447
----------- -----------
----------- -----------
</TABLE>
Valuation allowances were established to the extent uncertainty exists as to the
recoverability of the net deferred tax asset as of December 31, 1997 and 1996.
During 1997 and 1996, the valuation allowance was reversed by approximately $2.1
million and $1.8 million, respectively, due to management's reassessment of the
ultimate realizability of the net deferred tax asset.
A reconciliation of the statutory federal income tax rate with the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Percent of Percent of Percent of
Pretax Income Pretax Income Pretax Income
------------- ------------- -------------
<S> <C> <C> <C>
Tax expense at statutory rate 35.00% 35.00% 35.00%
Tax-exempt interest (1.57) (2.72) (4.97)
State taxes, net of federal benefits 7.85 7.40 6.50
Executive life insurance .16 0.22 0.26
Valuation allowance (10.39) (12.16) (1.25)
Other permanent items 1.88 (1.24) 1.06
Merger related expenses 2.19 - -
------- ------- -------
Effective tax rate 35.12% 26.50% 36.60%
------- ------- -------
------- ------- -------
</TABLE>
The Bank made tax payments of $ 7,451,131 and $2,236,498 during the years ended
December 31, 1997 and 1996, respectively. The Bank received a refund of
$2,660,977 in 1995. As of December 31, 1997, the Bank has no net operating loss
carryforwards for federal or state income tax purposes.
19
<PAGE>
- 10 -
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank's commitments under standby letters of credit amounted to $925,254 and
$2,226,243 at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, the Bank had outstanding undisbursed loan
commitments of $75,319,105 and $44,016,458, respectively. The Bank considers
these commitments in its determination of the adequacy of the allowance for loan
losses.
The Bank faces legal claims in the ordinary conduct of its business which, in
the opinion of counsel and the judgment of management, will not materially
affect its financial position or results of operations.
10. INCENTIVE STOCK OPTIONS
The Bank had an incentive stock option plan which expired on January 15, 1993
and provided options to purchase 440,698 shares of the Bank's common stock.
Options were granted at prices at least equal to the fair market value at the
time of the grant and were exercisable over periods of up to ten years.
The following is a summary of the transactions under the stock option plan:
<TABLE>
<CAPTION>
1997 1996
--------------------------- -------------------------
Number of Option Number of Option
Shares Price Shares Price
---------- -------------- --------- -------------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of period 16,224 $21.12-$32.50 19,905 $21.12-$32.50
Expired - - (3,681) $31.25
---------- -------------- ------- -------------
Options outstanding,
end of period 16,224 $21.12-$32.50 16,224 $21.12-$32.50
---------- -------------- ------- -------------
---------- -------------- ------- -------------
</TABLE>
11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Bank could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
20
<PAGE>
- 11 -
<TABLE>
<CAPTION>
December 31,
-------------
1997 1996
----------------------- -------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
-------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $116,240 $116,240 $100,535 $100,535
Securities available for sale 148,793 148,793 141,139 141,139
Loans 393,943 396,801 365,899 368,289
Accrued interest receivable 3,372 3,372 3,496 3,496
Liabilities:
Noninterest-bearing deposits 197,905 197,905 172,162 172,162
Interest-bearing deposits 394,632 394,704 381,821 381,667
Mortgage indebtedness 1,962 1,962 1,982 1,982
</TABLE>
The following methods and assumptions were used by the Bank in estimating fair
values of financial instruments as disclosed herein:
a. CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents approximate their fair
value.
b. SECURITIES AVAILABLE FOR SALE
Fair values for securities are based on quoted market prices. The carrying
values approximate fair values.
c. LOANS
For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for real estate, commercial loans and other performing fixed-rate
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
No adjustment was made to the entry-value interest rates for changes in
credit of performing loans for which there are no known credit concerns.
Management segregates loans in appropriate risk categories. Management
believes that the risk factor embedded in the entry-value interest rates,
along with the general reserves applicable to the performing loan
portfolio for which there are no known credit concerns, result in a fair
valuation of such loans on an entry-value basis. The fair value of certain
nonperforming loans with a recorded book value of approximately $2 million
and $6 million in 1997 and 1996 were not estimated because it is not
practicable to reasonably assess the credit adjustment that would be
applied in the marketplace for such loans.
21
<PAGE>
- 12 -
d. ACCRUED INTEREST
The carrying amounts of accrued interest approximate their fair values.
e. OFF-BALANCE-SHEET INSTRUMENTS
Fair value estimates were not made for these financial instruments as there
is not a quoted market price for these types of instruments, and the Bank
has not yet developed a valuation model necessary to make such an estimate.
Management believes that the current fees assessed on these
off-balance-sheet items represent the market rate that would be charged for
similar agreements.
f. DEPOSIT LIABILITIES
The fair values disclosed for noninterest-bearing demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of interest
bearing variable-rate, fixed-term money-market accounts and certificates of
deposit (CDs) approximate their fair values at the reporting date. Fair
values for fixed-rate CDs are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
g. MORTGAGE INDEBTEDNESS
The fair value of the Bank's mortgage indebtedness is estimated using a
discounted cash flow analysis based on the Bank's current incremental
borrowing rates for similar types of borrowing arrangements.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1996.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements
since that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
12. EMPLOYEE BENEFIT PLANS
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Bank provides post-retirement health care benefits to eligible retirees
as follows:
Employees hired before January 1, 1992 are eligible for retiree medical and
dental benefits when they reach age 65 or at age 62 with 15 years of
service.
Employees hired during calendar year 1992 are eligible for retiree medical
and dental benefits when they reach age 62 with at least 15 years of
service.
Employees hired on or after January 1, 1993 are not eligible for retirement
benefits.
A person with a title of Director for 5 years immediately before the date
of retirement will automatically qualify for benefits regardless of the
person's age at retirement.
22
<PAGE>
- 13 -
The health care benefits for retirees and eligible dependents are the same
as for active employees and subject to the same limitations and exclusions.
The maximum monthly employer contribution for single retirees is $300 and
retirees with dependents is $600. The cost of such benefits, which are
primarily health care, is recognized in the financial statements throughout
an employee's active working career. The cumulative effect of the adoption
of this accounting method in 1993 of $2,624,885 is being amortized over 20
years. The periodic expenses for post-retirement benefits for the Health
Care Plan using a discount factor of 7% includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
Health Care Health Care Health Care
Plan Plan Plan
----------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 81,772 $ 81,000 $ 96,400
Interest cost 198,134 168,000 190,000
Amortization of transition obligation 131,244 131,244 131,244
Amortization of unrecognized gains - (56,244) (47,700)
---------- ---------- ----------
Total expense $ 411,150 $ 324,000 $ 369,944
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The actuarial and recorded liabilities for post-retirement benefits were as
follows:
<TABLE>
<CAPTION>
1997 1996
Health Care Health Care
Plan Plan
----------- -----------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $ 1,782,164 $ 1,863,912
Fully eligible active plan participants 364,353 273,245
Other active plan participants 735,990 788,025
----------- -----------
Total accumulated post-retirement benefit obligation $ 2,882,507 $ 2,925,182
----------- -----------
----------- -----------
Funded status $ 2,882,507 $ 2,925,182
Unrecognized cumulative gains 433,158 284,658
Unrecognized transition obligation (1,968,756) (2,100,000)
----------- -----------
Accrued post-retirement benefit cost $ 1,346,909 $ 1,109,840
----------- -----------
----------- -----------
</TABLE>
EMPLOYEE RETIREMENT PLANS
The Bank maintains a funded non-contributory profit sharing retirement plan (the
Profit Sharing Plan) for all eligible employees with one year of continuous
service. As of the last day of a plan year, the Board of Directors may in its
sole discretion determine whether the Bank shall make a contribution to the
Profit Sharing Plan. The extent of an employee's participation is determined by
length of service and salary level. The Bank made a profit sharing contribution
of $353,578, $232,232, and $0 in 1997, 1996, and 1995, respectively. The Profit
Sharing Plan will be terminated as a result of the merger with Western Bank and
participants will have the option to withdraw their funds from the plan or to
transfer them to the Western Bancorp 401(K) plan or to a qualified "Rollover"
account.
23
<PAGE>
- 14 -
On September 1, 1995, the Bank introduced a 401(K) plan (the 401(K) Plan) to its
employees meeting the eligibility requirements set forth above. Based on the
provisions set forth in the 401(K) Plan, employees can contribute up to 15% of
their salaries for a maximum contribution of $9,250. As of January 1, 1996,
this amount was increased to $9,500. Furthermore, the Board of Directors
reserves the right to approve matching of contributions based on its sole
discretion. The Bank made matching 401(K) Plan contributions of $176,422 and
$157,768 in 1997 and 1996, respectively. As a result of the merger, the 401(K)
Plan will be merged with the Western Bancorp 401(K) plan.
13. REGULATORY EXAMINATIONS AND REGULATORY AGREEMENTS
All Banks are subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 1997, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. No conditions or events
have occurred since this notification that management believes will change the
institution's classification.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision:
------------------------ ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------- ------------ -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total Capital
(to Risk-Weighted Assets) $ 85,872,000 20.14% $ 34,113,000 8.00% $ 42,642,000 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) 80,503,000 18.88 17,057,000 4.00 25,585,000 6.00
Tier 1 Capital
(to Adjusted Assets) 80,503,000 11.85 27,177,000 4.00 33,971,000 5.00
AS OF DECEMBER 31, 1996:
Total Capital
(to Risk-Weighted Assets) $ 77,350,227 19.84% $ 31,191,000 8.00% $ 38,989,000 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) 72,426,227 18.58 15,595,000 4.00 23,393,000 6.00
Tier 1 Capital
(to Adjusted Assets) 72,426,227 11.41 25,380,000 4.00 31,725,000 5.00
</TABLE>
24
<PAGE>
- 15 -
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------------ ------------ ------------- ------------- ------------
1997:
- ----
<S> <C> <C> <C> <C> <C>
Total interest income $ 11,647,976 $ 12,168,064 $ 12,739,736 $ 12,812,323 $ 49,368,099
Total interest expense 3,369,935 3,625,639 3,998,949 3,776,802 14,771,325
------------ ------------ ------------- ------------- ------------
Net interest income 8,278,041 8,542,425 8,740,787 9,035,521 34,596,774
Provision for loan losses - - - - -
------------ ------------ ------------- ------------- ------------
Net interest income after
provision for loan losses 8,278,041 8,542,425 8,740,787 9,035,521 34,596,774
Total other operating
income 1,725,533 1,808,280 1,796,289 1,944,763 7,274,865
Total other operating
expense 6,038,170 5,648,004 6,845,204 6,528,422 25,059,800
------------ ------------ ------------- ------------- ------------
Income before income taxes 3,965,404 4,702,701 3,691,872 4,451,862 16,811,839
Applicable income taxes 1,352,344 1,652,130 1,333,985 1,566,108 5,904,567
------------ ------------ ------------- ------------- ------------
Net income $ 2,613,060 $ 3,050,571 $ 2,357,887 $ 2,885,754 $ 10,907,272
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
1996:
Total interest income $ 11,121,442 $ 10,981,626 $ 11,392,554 $ 11,818,836 $ 45,314,458
Total interest expense 3,471,854 3,252,482 3,338,921 3,435,089 13,498,346
------------ ------------ ------------- ------------- ------------
Net interest income 7,649,588 7,729,144 8,053,633 8,383,747 31,816,112
Provision for loan losses - - - - -
------------ ------------ ------------- ------------- ------------
Net interest income after
provision for loan losses 7,649,588 7,729,144 8,053,633 8,383,747 31,816,112
Total other operating
income 1,717,114 1,700,398 1,684,112 1,922,905 7,024,529
Total other operating
expense 6,876,962 6,599,328 6,060,095 6,221,067 25,757,452
------------ ------------ ------------- ------------- ------------
Income before income taxes 2,489,740 2,830,214 3,677,650 4,085,585 13,083,189
Applicable income taxes 519,252 694,416 1,033,184 1,220,077 3,466,929
------------ ------------ ------------- ------------- ------------
Net income $ 1,970,488 $ 2,135,798 $ 2,644,466 $ 2,865,508 $ 9,616,260
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
</TABLE>
25
