<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
<TABLE>
<CAPTION>
(MARK ONE)
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
<TABLE>
<CAPTION>
<S> <C>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 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)
4100 NEWPORT PLACE, SUITE 900, NEWPORT BEACH 92660
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number: (714) 863-2300
------------------------
Securities registered pursuant to Section 12(b) of Exchange Act: None
Securities registered pursuant to Section 12(g) of Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the common stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices on the
Nasdaq National Market on March 13, 1998 was in excess of $384,100,000.
Number of registrant's shares of Common Stock outstanding as of March 13,
1998 was 15,678,960
Documents incorporated by reference: NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
10-K CROSS-REFERENCE INDEX
This Annual Report and Form 10-K incorporate into a single document the
requirements of the accounting profession and the Securities and Exchange
Commission, including a comprehensive explanation of 1997 results.
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
10-K Cross-Reference Index................................................................................. i
Table of Defined Terms..................................................................................... iii
PART I
ITEM 1. Business......................................................................................... 1
General................................................................................................ 1
Strategic Evolution.................................................................................... 2
Capital Transactions................................................................................... 4
Management Changes..................................................................................... 5
Business of the Company................................................................................ 6
Statistical Disclosure................................................................................. 9
Supervision and Regulation............................................................................. 9
ITEM 2. Properties....................................................................................... 19
SCB Properties......................................................................................... 19
SMB Properties......................................................................................... 20
ITEM 3. Legal Proceedings................................................................................ 20
General................................................................................................ 20
PDI Litigation......................................................................................... 21
FIP Litigation......................................................................................... 21
First Pension Litigation............................................................................... 22
ITEM 4. Submission of Matter to a Vote of Security Holders............................................... 23
SCB Merger............................................................................................. 23
SMB Acquisition........................................................................................ 23
PART II.................................................................................................... 23
ITEM 5. Market for Company's Common Stock and Related Security Holder Matters............................ 23
Marketplace Designation and Sales Price Information.................................................... 23
Dividends.............................................................................................. 24
Recent Sales of Unregistered Securities................................................................ 24
ITEM 6, 7 & 7A. Selected Financial Data; Management's Discussion and Analysis of Financial Condition and
Results of Operations; and Quantitative and Qualitative Disclosure About Market Risk................... 25
Overview............................................................................................... 25
Selected Financial Data................................................................................ 25
Balance Sheet Analysis................................................................................. 27
Liquidity, Interest Rate Risk and Market Risk.......................................................... 40
Results of Operations.................................................................................. 43
Recent Accounting Pronouncements....................................................................... 50
Year 2000 Risks and Preparedness....................................................................... 50
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
ITEM 8. Financial Statements and Supplementary Data...................................................... 52
Contents............................................................................................... 52
Independent Auditors' Reports.......................................................................... 53
Consolidated Balance Sheets............................................................................ 58
Consolidated Statements of Operations.................................................................. 59
Consolidated Statements of Changes in Shareholders' Equity............................................. 60
Consolidated Statements of Cash Flows.................................................................. 61
Notes to Consolidated Financial Statements............................................................. 63
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............ 98
PART III................................................................................................... 98
ITEM 10. Directors and Executive Officers of the Company................................................. 98
Directors.............................................................................................. 98
Committees of the Board of Directors................................................................... 100
Executive Officers..................................................................................... 101
ITEM 11. Executive Compensation.......................................................................... 102
Executive Compensation................................................................................. 102
Compensation of Directors.............................................................................. 104
Employment Arrangements................................................................................ 104
Executive Severance Plan............................................................................... 106
Board of Directors Report on Executive Compensation.................................................... 106
Performance Graph...................................................................................... 107
Section 16 Reporting................................................................................... 108
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................. 108
ITEM 13. Certain Relationships and Related Transactions.................................................. 110
Banking Transactions................................................................................... 110
Insurance Contracts.................................................................................... 110
Investment Banking Services............................................................................ 110
The 1998 Private Placement............................................................................. 111
ITEM 14. Exhibits and Reports on Form 8-K................................................................ 112
Exhibits............................................................................................... 112
Reports on Form 8-K.................................................................................... 114
Signatures............................................................................................. 115
</TABLE>
ii
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1995 Act................................................................................................... 18
1995 Private Placement..................................................................................... 5
1995 Private Placement Shares.............................................................................. 5
1996 Private Placement..................................................................................... 4
1996 Private Placement Investors........................................................................... 5
1996 Private Placement Shares.............................................................................. 4
1998 Private Placement..................................................................................... 4
1998 Private Placement Investors........................................................................... 4
1998 Private Placement Shares.............................................................................. 4
Amendment.................................................................................................. 23
Annual Report.............................................................................................. 2
Bank Defendants............................................................................................ 22
Bank Merger................................................................................................ 25
Banking Consolidation Bill................................................................................. 17
Banks...................................................................................................... 1
BHC Act.................................................................................................... 1
BIF........................................................................................................ 17
Board ..................................................................................................... 1
Cash Consideration......................................................................................... 3
Cash Liquidity............................................................................................. 28
CCB........................................................................................................ 2
CCB Merger................................................................................................. 2
CCB Private Placement...................................................................................... 5
CGCL....................................................................................................... 4
CMOs....................................................................................................... 29
Company.................................................................................................... 1
Company Common Stock....................................................................................... 2
Comptroller................................................................................................ 12
CRA........................................................................................................ 12
Credit Agreement........................................................................................... 24
Department................................................................................................. 17
DFI........................................................................................................ 11
DSL........................................................................................................ 17
Evan's Action.............................................................................................. 22
FASB....................................................................................................... 67
FDIC....................................................................................................... 9
FDICIA..................................................................................................... 12
Federal Banking Agencies................................................................................... 12
FFIEC...................................................................................................... 30
FIP........................................................................................................ 21
FIRREA..................................................................................................... 11
FRB........................................................................................................ 11
Fund....................................................................................................... 5
Holding Company Support Agreement.......................................................................... 78
Initial Shares............................................................................................. 21
Interstate Act............................................................................................. 17
IRC........................................................................................................ 81
KSOP....................................................................................................... 86
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Monarch.................................................................................................... 1
NBSC....................................................................................................... 3
New Note................................................................................................... 78
Non-Competition Period..................................................................................... 105
Note....................................................................................................... 2
NQSO....................................................................................................... 93
OREO....................................................................................................... 38
OTS........................................................................................................ 12
PDI........................................................................................................ 21
PDI Litigation............................................................................................. 21
Parent Company............................................................................................. 28
Plan....................................................................................................... 93
Regulation D............................................................................................... 4
Reverse Stock Split........................................................................................ 4
Rights Offering............................................................................................ 5
Rouseau Action............................................................................................. 22
RSA........................................................................................................ 40
RSL........................................................................................................ 40
SAC Reports................................................................................................ 38
SAIF....................................................................................................... 17
Salary Continuation Agreement.............................................................................. 104
SCB........................................................................................................ 1
SCB Meeting................................................................................................ 23
SCB Merger................................................................................................. 3
Second Amendment........................................................................................... 77
Severence Plan............................................................................................. 106
Securities Act............................................................................................. 4
SFAS 123................................................................................................... 67
SFAS 125................................................................................................... 67
SFAS 129................................................................................................... 67
SFAS 130................................................................................................... 68
SFAS 131................................................................................................... 68
SFAS 132................................................................................................... 68
Shareholder................................................................................................ 78
SMB........................................................................................................ 1
SMB Acquisition............................................................................................ 3
SMB Common Stock........................................................................................... 3
SMB Meeting................................................................................................ 23
SMB Merger................................................................................................. 23
Standby Agreements......................................................................................... 4
Stock Consideration........................................................................................ 3
Support Agreement.......................................................................................... 78
Western.................................................................................................... 1
Western Acquisition........................................................................................ 2
Year 2000 Plan............................................................................................. 50
Zwick Action............................................................................................... 22
</TABLE>
iv
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Western Bancorp, formerly Monarch Bancorp (the "Company"), was organized on
May 20, 1983 as a California corporation for the purpose of becoming a bank
holding company and to acquire all the outstanding capital stock of Monarch Bank
("Monarch"), a California state-chartered bank. The Company commenced operations
on June 18, 1984. The Company is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended ("BHC Act"), and is subject to the
supervision and regulation of the Board of Governors of the Federal Reserve
System (the "Board").
At December 31, 1997, the Company had total assets of $1.4 billion in its
two banking subsidiaries, Western Bank ("Western" and, from and after the
consummation of the SMB Acquisition described herein, "SMB") and Southern
California Bank ("SCB"). The Company's principal business is to provide, through
its two banking subsidiaries, financial services throughout Southern California.
The Company has no industry segments other than banking.
Currently, the Company's primary market areas are the western part of Los
Angeles County, Orange County and San Diego County, California. Since January
27, 1998, when the Company acquired Santa Monica Bank through the merger of
Santa Monica Bank with and into Western, the Company has served the western part
of Los Angeles County through SMB, a California state-chartered bank and wholly-
owned subsidiary of the Company, with total assets at January 31, 1998 of
approximately $1.2 billion. The Company serves Orange County and parts of
southern Los Angeles County and northern San Diego County through SCB, a
California state-chartered bank and wholly-owned subsidiary of the Company, with
total assets at January 31, 1998 of approximately $882 million (SCB together
with Western prior to January 27, 1998 and with SMB from January 27, 1998,
collectively, the "Banks").
The Banks are full-service community banks offering a broad range of banking
products and services, including accepting time and demand deposits, originating
commercial loans, consumer loans and real estate loans, providing trust and
escrow services, and making other investments. The Banks originate several types
of loans, including secured and unsecured commercial and consumer loans,
commercial and residential real estate mortgage loans, and commercial and
residential construction loans. The Banks' loans are primarily short-term and
adjustable rate. Special services and requests beyond the lending limits of the
Banks are arranged through correspondent banks. In addition, SMB maintains a
trust department established in 1968 with over $732 million in assets under
management at January 31, 1998.
The Company, through the Banks, derives its income primarily from interest
received on real estate loans, commercial loans and consumer loans and, to a
lesser extent, from interest on investment securities, fees received in
connection with loans and other services offered, including loan servicing and
trust, escrow and deposit services. The Company's major operating expenses are
the interest it pays on deposits and on borrowings and general operating
expenses. The Banks rely on a foundation of locally generated deposits, and
management believes it has a relatively low cost of funds due to a high
percentage of low cost and non-interest bearing deposits. The Company's
operations, like those of other financial institutions operating in California,
are significantly influenced by economic conditions in California, including the
strength of the real estate market, and the fiscal and regulatory policies of
the federal government and of the regulatory authorities that govern financial
institutions. See "--Supervision and Regulation."
Ultimately, the Company is committed to building a network of premier
relationship-based, community banks in Southern California serving the needs of
small to medium-sized businesses and the owners and employees of those
businesses. The Company's target market area extends to San Luis Obispo County
on the North, the desert communities on the East, and San Diego on the South.
The strategy for serving the Company's target markets is the delivery of a
finely-focused set of value-added products and services
1
<PAGE>
that satisfy the primary needs of the Company's targeted customers, emphasizing
superior service and relationships rather than transaction volume. In order to
serve the Company's targeted markets and customers within those markets
effectively, the Company intends to continue to grow both through internal
growth of the Banks and through the acquisition of additional financial
institutions or branches of other financial institutions within the markets
targeted by the Company.
When the Company uses or incorporates by reference in this Annual Report on
Form 10-K (the "Annual Report") the words "anticipate," "estimate," "expect,"
"project," "intend," "commit," "believe" and similar expressions, the Company
intends to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties and assumptions, including those described in this
Annual 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.
STRATEGIC EVOLUTION
MONARCH BANCORP
The Company, originally named Monarch Bancorp, was organized on May 20, 1983
as a California corporation for the purpose of becoming a bank holding company
and to acquire all the outstanding capital stock of Monarch. As of June 30,
1996, prior to the consummation of the Western Acquisition described below, the
Company had total assets of approximately $60 million.
WESTERN ACQUISITION
On September 30, 1996 the Company acquired all of the issued and outstanding
shares of common stock of Western (the "Western Acquisition"), a California
state-chartered bank operating in the western part of Los Angeles County. At
that time, Western had five branch offices, including its head office in
Westwood. The Company paid $17.25 per share in cash for each of the 3,543,156
then outstanding shares of common stock of Western, or approximately $61.1
million, and an additional $5.5 million representing the difference between
$17.25 and the various exercise prices of the 425,724 outstanding options to
purchase shares of common stock of Western. The aggregate net consideration paid
in the Western Acquisition was approximately $66.6 million. The Western
Acquisition was accounted for under the purchase method of accounting.
The Company funded the purchase price in the Western Acquisition with (i)
the issuance of approximately 3.1 million shares of common stock of the Company
("Company Common Stock") in a private placement for approximately $42.2 million,
net of approximately $0.9 million in issuance costs incurred in such private
placement, and (ii) from the proceeds of a three year loan of $26.5 million (the
"Note") from The Northern Trust Company. A $15.5 million dividend was declared
by Western concurrently with the completion of the Western Acquisition and paid
to the Company, which was used to reduce the outstanding balance on the Note to
$11.0 million. The Company paid $1.4 million in investment banking fees to Belle
Plaine Partners, Inc. and incurred $700 thousand in other acquisition related
costs. Following consummation of the Western Acquisition, Western was operated
as a wholly-owned subsidiary of the Company, servicing targeted customers of the
Company in the western part of Los Angeles.
CCB MERGER
On June 4, 1997, California Commercial Bankshares, a bank holding company
("CCB"), merged with and into the Company (the "CCB Merger") in a transaction
accounted for using the pooling-of-interests method of accounting. In the CCB
Merger, 3,043,226 shares of Company Common Stock were issued to holders of
common stock of CCB based on a 1-for-1 exchange ratio (after giving effect to
the 8.5-to-1.0 Reverse Stock Split described below under "--Capital
Transactions"), and all of the then outstanding shares of common stock of CCB
were canceled. As a part of the CCB Merger, Monarch was merged with
2
<PAGE>
and into National Bank of Southern California, a wholly-owned subsidiary of CCB
prior to the CCB Merger ("NBSC"). Following consummation of the CCB Merger, NBSC
was operated as a wholly-owned subsidiary of the Company, servicing the
Company's targeted customers in Orange County with seven branch offices
including its headquarters in Newport Beach. On June 3, 1997, the Company Common
Stock was designated for quotation on the Nasdaq National
Market-Registered Trademark-.
The financial information as of all dates and for all periods prior to the
CCB Merger that is presented herein has been restated to present the combined
consolidated financial condition and results of operations of the Company and
CCB as if the CCB Merger had been in effect as of all dates and for all periods
presented. Upon consummation of the CCB Merger, the Company charged to expense
after-tax merger costs of approximately $3.0 million, representing investment
banking, filing and professional fees, employee compensation, and costs of
computer conversions and consolidation.
SCB MERGER
On October 10, 1997, SC Bancorp, a bank holding company, merged with and
into the Company (the "SCB Merger") in a transaction accounted for using the
pooling-of-interests method of accounting. In the SCB Merger approximately
3,555,500 shares of Company Common Stock (prior to adjustment for fractional
shares) were issued based on a 0.4556-for-1 exchange ratio, and all of the then
outstanding shares of common stock of SC Bancorp were cancelled. On December 15,
1997, the Company merged NBSC with and into SCB, a wholly-owned subsidiary of SC
Bancorp prior to the SCB Merger. Thereafter, SCB has operated as a wholly-owned
subsidiary of the Company, servicing the Company's targeted customers in
southern Los Angeles County, Orange County and northern San Diego County, with
21 branch offices as of December 31, 1997, including its head office in Newport
Beach. On January 31, 1998, SCB closed two of its branches, and SCB intends to
close three additional branches in the first quarter of 1998, leaving 16
branches.
The financial information as of all dates and for all periods prior to the
SCB Merger that is presented herein has been restated to present the combined
consolidated financial condition and results of operations of the Company and SC
Bancorp as if the SCB Merger had been in effect as of all dates and for all
periods presented. In conjunction with the SCB Merger, the Company charged to
expense after-tax merger costs of approximately $8.8 million, representing
investment banking, filing and professional fees, expenses related to branch
closures, interest rate swap termination fees, employee compensation, and costs
of computer conversions and consolidation. In addition, the Company realized tax
benefits of $1.8 million as a result of SC Bancorp employee and director options
being converted to Company Common Stock.
SMB ACQUISITION
On January 27, 1998, the Company acquired Santa Monica Bank through the
merger of Santa Monica Bank with and into Western (the "SMB Acquisition"). As
part of the SMB Acquisition, the name of Western 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 Company Common
Stock (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.
3
<PAGE>
The SMB Acquisition will be accounted for using the purchase method of
accounting. At December 31, 1997, based on unaudited data heretofore made
available to the Company, SMB had total assets of $678 million, deposits of $593
million, shareholders' equity of $81 million and approximately 7.1 million
shares of SMB Common Stock outstanding For the year ended December 31, 1997,
Santa Monica Bank reported net income and net income per share of approximately
$10.9 million and $1.54, respectively.
CAPITAL TRANSACTIONS
DIVIDENDS
On August 20, 1997, the Board of Directors of the Company approved the
institution of a quarterly dividend and thereafter declared a cash dividend of
$0.15 per share payable on December 10, 1997 to shareholders of record on
November 10, 1997 and $0.15 per share payable on March 27, 1998 to shareholders
of record on February 27, 1998. Because the Company must comply with the
California General Corporation Law ("CGCL") and applicable federal and state
banking regulations when paying dividends, there can be no assurance that the
Company will continue to pay dividends at this level, if at all. See
"--Regulation and Supervision."
SC Bancorp declared three cash dividends during 1997. On each of January 23,
March 27, and July 24, 1997, SC Bancorp declared a $0.05 per share cash
dividend, payable to its shareholders of record at the close of business on
February 6, May 2, and August 4, 1997, respectively. The dividends were paid on
February 20, May 20, and August 20, 1997, respectively, totaling $374,000,
$375,000, and $375,000, respectively.
For additional information regarding dividends, see "Item 5. Market for the
Company's Common Stock and Related Security Holder Matters--Dividends."
REVERSE STOCK SPLIT
On June 3, 1997 and in connection with the CCB Merger, the Company effected
an 8.5-to-1 reverse stock split (the "Reverse Stock Split"). All references to
share counts in this document have been adjusted to give effect to the Reverse
Stock Split.
CAPITAL RAISING TRANSACTIONS
1998 PRIVATE PLACEMENT. To fund a portion of the Cash Consideration paid in
the SMB Acquisition, on January 27, 1998 the Company issued 2,327,550 shares of
Company Common Stock (the "1998 Private Placement Shares") for $28 per share in
a private placement (the "1998 Private Placement") exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act") pursuant to
Regulation D ("Regulation D") of the Securities Act. The 1998 Private Placement
Shares were sold to certain "accredited investors" within the meaning of Rule
501(a) under the Securities Act, some of whom are officers, directors and/or
shareholders of the Company (the "1998 Private Placement Investors"). The 1998
Private Placement was effected pursuant to Standby Stock Purchase Agreements
entered into by and between the Company and the 1998 Private Placement Investors
("Standby Agreements"). Pursuant to the Standby Agreement, the Company has
agreed to file under the Securities Act, by no later than June 26, 1998, a
"shelf" registration statement providing for the registration of the 1998
Private Placement Shares. See "Item 13. Certain Relationships and Related
Transactions--The 1998 Private Placement."
1996 PRIVATE PLACEMENT. As part of the Western Acquisition on September 30,
1996, the Company sold approximately 3,076,000 shares (the "1996 Private
Placement Shares") of Company Common Stock for $14.025 per share in a private
placement (the "1996 Private Placement") for net proceeds of approximately
$42,213,000. The 1996 Private Placement was exempt from registration under the
Securities Act pursuant to Regulation D. The 1996 Private Placement Shares were
sold to certain "accredited investors" within the meaning of Rule 501(a) under
the Securities Act, some of whom are officers, directors and/or shareholders
4
<PAGE>
of the Company (the "1996 Private Placement Investors") and some of whom were
also among the 1998 Private Placement Investors. As part of the cost of the 1996
Private Placement, the Company issued to parties related to Belle Plaine
Financial, L.L.C., an affiliate of Belle Plaine Partners, Inc., the exclusive
financial advisor to the Company pursuant to an agreement dated May 17, 1997,
92,275 warrants to acquire Company Common Stock at $16.83 per share, which
included 33,557 warrants to Castle Creek Partners Fund-I, L.P. (the "Fund") and
28,089 warrants to John M. Eggemeyer, a director of the Company. The warrants
expire on September 30, 2001. Such warrants were issued as payment of a portion
of Belle Plaine Partners, Inc. advisory fees. Belle Plaine Financial, L.L.C. is
an entity affiliated with John M. Eggemeyer.
1995 PRIVATE PLACEMENT. In a private placement which closed in March 1995
(the "1995 Private Placement"), the Company issued approximately 535,000 shares
(the "1995 Private Placement Shares") of Company Common Stock for $11.475 per
share, resulting in net proceeds of approximately $5,669,000. The 1995 Private
Placement was exempt from registration under the Securities Act pursuant to
Regulation D. The 1995 Private Placement Shares were sold to certain "accredited
investors" within the meaning of Rule 501(a) under the Securities Act, including
certain directors and shareholders of the Company.
CCB PRIVATE PLACEMENT. In November 1995, CCB sold 474,000 shares of its
common stock through a private placement at $6.75 per share (the "CCB Private
Placement") for the purpose of contributing most of the proceeds into NBSC as
additional capital. Of the total proceeds of approximately $3,200,000, CCB
contributed $2,900,000 into NBSC's capital in December 1995. The CCB Private
Placement was exempt from registration under the Securities Act pursuant to
Section 4(2) thereunder.
RIGHTS OFFERING. In September 1995, pursuant to a shareholders' rights and
public offering (the "Rights Offering"), the Company issued approximately
340,000 shares of Company Common Stock for $11.475 per share, resulting in net
proceeds of approximately $3,464,000 in an offering registered under the
Securities Act. In the Rights offering, the Company offered both to shareholders
of the Company and to the public up to 373,799 shares of Company Common Stock.
Shareholders of the Company were issued rights to subscribe for all or any
portion of four (4) shares of Company Common Stock for each share of Company
Common Stock held. Shares of Company Common Stock for which shareholders of
Company Common Stock did not subscribe were offered to the public. In connection
with the Rights Offering, Belle Plaine Partners, Inc. and McAllen Capital
Partners, of which John M. Eggemeyer and John W. Rose, directors of the Company,
are principals, respectively, acted as financial advisors to the Company.
Pursuant to the Rights Offering, the Company issued to parties related to such
financial advisors, including John M. Eggemeyer and John W. Rose, 48,400
warrants to acquire Company Common Stock at $13.77 per share as a portion of
their advisory fees. The warrants expire on September 30, 2000.
For additional information regarding capital activities, see "Item 6, 7 and
7A. Selected Financial Data and Management's Discussion and Analysis of
Financial Condition and Results of Operations; and Qualitative and Quantitative
Disclosure About Market Risk--Balance Sheet Analysis--CAPITAL ACTIVITIES."
MANAGEMENT CHANGES
In conjunction with the Western Acquisition in 1996, the Company
restructured its management team. Hugh S. Smith, Jr., former Chairman and Chief
Executive Officer of Western, became Chairman and Chief Executive Officer of the
Company. Matthew P. Wagner, formerly an Executive Vice President of U.S. Bancorp
in Minneapolis, Minnesota, was recruited to become President and Chief Executive
Officer of Western. Mr. Wagner was appointed President of the Company in
February 1997. Arnold C. Hahn, formerly a Senior Vice President of U.S. Bancorp
in Minneapolis, Minnesota, was recruited to become an Executive Vice President
and Chief Financial Officer of the Company.
During 1997, the Company hired additional executive management to fill out
its senior management team. Suzanne R. Brennan, formerly a Senior Vice President
of U.S. Bancorp, was hired as Executive Vice President of Operations. Robert M.
Borgman, President of National Business Finance, Inc., a factoring
5
<PAGE>
company purchased by Norwest Corporation, was hired as Executive Vice President
and Chief Credit Officer. Julius G. Christensen, formerly in practice with the
law firm of Sullivan & Cromwell, was hired as Executive Vice President, General
Counsel and Secretary.
In December 1997, Mr. Smith stepped down as Chief Executive Officer and Mr.
Wagner was elected by the Board of Directors to that position. Mr. Smith remains
Chairman of the Company. For additional information regarding the Company's
executive officers, see "Item 10. Directors and Executive Officers of the
Company--Executive Officers."
BUSINESS OF THE COMPANY
BANKING BUSINESS
The Company, through the Banks, provides, trust, escrow, banking and other
financial services throughout Southern California to small and medium-sized
businesses and the owners and employees of those businesses. The Banks offer a
broad range of banking products and services, including many types of business
and personal savings and checking accounts and other consumer banking services.
The Banks originate several types of loans, including secured and unsecured
commercial and consumer loans, commercial and residential real estate mortgage
loans, and commercial and residential construction loans. The Banks' loans are
primarily short-term and adjustable rate. Special services or requests beyond
the lending limits of the Banks are arranged through correspondent banks. The
Banks have a network of ATMs and offer access to ATM networks through other
major banks. The Banks issue MasterCard and VISA credit cards through a
correspondent bank and are also merchant depositories for cardholder drafts
under Visa and Master Card credit cards. Similar to other state-chartered banks
of their size, the Banks can provide investment and international banking
services through correspondent banks.
The Company, through the Banks, concentrates its lending activities in three
principal areas:
(1) Real Estate Loans. Real estate loans are comprised of construction
loans, miniperm loans collateralized by first or junior trust deeds on
specific properties and equity lines of credit. The properties
collateralizing real estate loans are principally located in the Company's
primary market areas of Los Angeles, Orange and San Diego counties and the
contiguous communities. The construction loans are comprised of loans on
residential and income producing properties generally have terms of less
than two years and typically bear an interest rate that floats with the
prime rate or other established index. The miniperm loans finance the
purchase and/or ownership of income producing properties. Miniperm loans are
generally made with an amortization schedule ranging from fifteen to thirty
years with a lump sum balloon payment due in one to ten years. Equity lines
of credit are revolving lines of credit collateralized by junior trust deeds
on real properties. They bear a rate of interest that floats with the prime
rate, LIBOR, or other established index and have maturities of five to seven
years. The Company also makes a small number of loans on 1-4 family
residential properties and 5 or more unit residential properties. From time
to time, the Company purchases participation interests in loans made by
other institutions. These loans are subject to the same underwriting
criteria and approval process as loans made directly by the Company.
(2) Commercial Loans. Commercial loans are made to finance operations,
to provide working capital or for specific purposes, such as to finance the
purchase of assets, equipment or inventory. Since a borrower's cash flow
from operations is generally the primary source of repayment, the Company's
policies provide specific guidelines regarding required debt coverage and
other important financial ratios. Commercial loans include lines of credit
and commercial term loans. Lines of credit are extended to businesses or
individuals based on the financial strength and integrity of the borrower
and are generally (with some exceptions) collateralized by short term assets
such as accounts receivable and inventory (monitored by the Company's asset
based lending department), equipment or real estate and generally have a
maturity of one year or less. Such lines of credit bear an interest rate
that floats with the prime rate, LIBOR or other established index.
Commercial term loans are
6
<PAGE>
typically made to finance the acquisition of fixed assets, refinance short
term debt originally used to purchase fixed assets or, in rare cases, to
finance the purchase of businesses. Commercial term loans generally have
terms from one to five years. Commercial term loans may be collateralized by
the asset being acquired or other available assets and bear interest which
either floats with the prime rate, LIBOR or other established index or is
fixed for the term of the loan.
(3) Consumer Loans and Leases. Consumer loans include personal loans,
auto loans, boat loans, home improvement loans, equipment loans, revolving
lines of credit and other loans typically made by banks to individual
borrowers. The Company also makes leases on new and used automobiles. These
leases may be closed-end or commercial leases, have terms of one to five
years and bear interest at a fixed rate.
As part of its efforts to achieve long-term stable profitability and respond
to a changing economic environment in Southern California, the Company is
investigating all possible options to augment its traditional focus by
broadening its customer services. The Company believes that its strengthened
capital base will permit an acceleration of efforts to achieve growth and
greater diversification of both the Banks' loan portfolios and deposit bases and
new sources of fee income. Possible avenues of growth and future diversification
include expanded days and hours of operation, new types of lending, brokerage,
annuity and mutual funds products, as well as the acquisition of additional
financial institutions or branches of other financial institutions, in cities
and areas adjoining the Company's current market area. Examples of the
diversification heretofore achieved through acquisition are the ability to
provide (i) escrow services and international banking services through
departments acquired in the CCB Merger; (iii) asset based lending services and
cash management services through departments acquired in the SCB Merger; and (v)
trust services through departments acquired in the SMB Acquisition. See
"--Strategic Evolution." However, there can be no assurance that the Company
will be able to acquire additional financial institutions or expand or diversify
its services or market area.
MARKET AREA
SMB's primary market area is the western part of Los Angeles County. As of
March 15, 1998 SMB had 13 branch offices, including branch offices in Santa
Monica, Westwood, Malibu, Pacific Palisades, Marina Del Rey, Beverly Hills,
Century City and Encino. These communities are generally affluent with a strong
base of small to medium-sized businesses, including businesses that provide
services to the entertainment industry. SMB's market area offers opportunities
in new construction lending, retail banking and commercial banking for small
businesses, professionals and some light industry.
SCB's primary market area includes southern Los Angeles County, Orange
County and northern San Diego County. As of March 15, 1998 SCB had 6 branch
offices in southern Los Angeles County, 12 branch offices throughout Orange
County and 1 in northern San Diego County. SCB has plans to close three branches
in Orange County by the end of the first quarter of 1998. There is no one
dominant business segment in SCB's primary market area. SCB's market area offers
opportunities in retail banking and commercial banking for small to medium sized
businesses, professionals and some light industry.
BUSINESS CONCENTRATIONS
No individual or single group of related accounts is considered material in
relation to the Company's assets or the Banks' assets or deposits, or in
relation to the overall business of the Banks or the Company.
COMPETITION
The banking business in California generally, and in the Banks' primary
service areas specifically, is highly competitive with respect to both loans and
deposits as well as other banking services, and is dominated by a relatively
small number of major banks with many offices and operations over a wide
geographic area. Among the advantages such major banks have over the Banks are
their ability to finance
7
<PAGE>
and engage in wide-ranging advertising campaigns and to allocate their
investment assets to regions of higher yield and demand. Such banks offer
certain services which are not offered directly by the Banks (but which can be
offered indirectly by the Banks through correspondent institutions). In
addition, by virtue of their greater total capitalization, such banks have
substantially higher lending limits than the Banks. (Legal lending limits to an
individual customer are based upon a percentage of a bank's total capital
accounts. See "--Supervision and Regulation.") Other entities, both governmental
and in private industry, seeking to raise capital through the issuance and sale
of debt or equity securities also provide competition for the Banks in the
acquisition of deposits. Banks also compete with money market funds and other
money market instruments which are not subject to interest rate ceilings. In
recent years, increased competition has also developed from specialized finance
and non-finance companies that offer wholesale finance, credit card, and other
consumer finance services, including on-line banking services and personal
finance software. Competition for deposit and loan products remains strong, from
both banking and non-banking firms, and affects the rates of those products as
well as the terms on which they are offered to customers.
Technological innovation continues to contribute to greater competition in
domestic and international financial services markets. Technological innovation
has, for example, made it possible for non-depository institutions to offer
customers automated transfer payment services that previously have been
traditional banking products. In addition, customers now expect a choice of
several delivery systems and channels, including telephone, mail, home computer,
ATMs, self-service branches, and in-store branches.
Mergers between financial institutions have placed additional pressure on
banks within the industry to streamline their operations, reduce expenses, and
increase revenues to remain competitive. In addition, competition has
intensified due to recently enacted federal and state interstate banking laws,
which permit banking organizations to expand geographically with fewer
restrictions than in the past. Such laws allow banks to merge with other banks
across state lines, thereby enabling banks to establish or expand banking
operations in the Company's most significant markets. The competitive
environment also is significantly impacted by federal and state legislation
which may make it easier for non-bank financial institutions to compete with the
Company. (See "--Supervision and Regulation.")
Economic factors, along with legislative and technological changes, will
have an ongoing impact on the competitive environment within the financial
services industry. As a major and active participant in financial markets, the
Company strives to anticipate and adapt to these changing competitive
conditions, but there can be no assurance as to their impact on the Company's
future business or results of operations or as to the Company's continued
ability to anticipate and adapt to such changing conditions. In order to compete
with other competitors in their primary service areas, the Banks attempt to use
to the fullest extent possible the flexibility which the Banks' independent
status permits, including an emphasis on specialized services, local promotional
activity, and personal contacts by their respective officers, directors and
employees with their customers. In particular, each of the Banks strive to offer
highly personalized banking services. In addition, the Company intends to
continue diversifying its services and banking products through internal growth
and acquisitions of additional financial institutions or branches of other
financial institutions, and to leverage, through cross-marketing services and
banking products provided by one of the Banks, but not the other, into new
markets serviced by the other Bank. The Company believes that through the
cross-marketing of products into new markets, the Banks can distinguish
themselves from other community banks with which the Banks compete based on the
range of services provided and banking products offered.
8
<PAGE>
EMPLOYEES
As of January 31, 1998, SCB had 350 full time equivalent employees, SMB had
368 full time equivalent employees, and the Company had 9 full time equivalent
employees in addition to those employed by the Banks.
STATISTICAL DISCLOSURE
Statistical information relating to the Company and its subsidiaries is
presented within "Item 6, 7 & 7A. Selected Financial Data and Management's
Discussion and Analysis of Financial Condition and Results of Operations; and
Qualitative and Quantitative Disclosure About Market Risk" and should be read in
conjunction with the Consolidated Financial Statements contained in "Item 8.
Financial Statements and Supplementary Data."
SUPERVISION AND REGULATION
GENERAL
The banking and financial services businesses in which the Company engages
are highly regulated. Such regulation is intended, among other things, to
protect depositors covered by the Federal Deposit Insurance Corporation ("FDIC")
and the banking system as a whole. The commercial banking business is also
influenced by the monetary and fiscal policies of the federal government and the
policies of regulatory agencies, particularly the Board. The Board implements
national monetary policies (with objectives such as curbing inflation and
combating recession) by its open-market operations in United States Government
securities, by adjusting the required level of reserves for financial
intermediaries subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on deposits.
Indirectly such actions may also impact the ability of non-bank financial
institutions to compete with the Banks. See "--Competition." The nature and
impact of any future changes in monetary policies cannot be predicted.
The laws, regulations, and policies affecting financial services businesses
are continuously under review by Congress and state legislatures, and federal
and state regulatory agencies. From time to time, legislation is enacted which
has the effect of increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance between banks and
other financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial intermediaries are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
Changes in the laws, regulations or policies that impact the Company cannot
necessarily be predicted, but they may have a material affect on the business
and earnings of the Company.
The following is a summary of significant statutes, regulations, and
policies that currently apply to the operation of banking institutions. This
summary is qualified in its entirety by reference to the full text of such
statutes, regulations or policies.
BANK HOLDING COMPANY REGULATION
The Company, as a bank holding company, is subject to regulation under the
BHC Act, and is registered with and subject to the supervision and examination
of the Board. Pursuant to the BHC Act, the Company is required to obtain the
prior approval of the Board before it may acquire all or substantially all of
the assets of any bank, or ownership or control of voting shares of any bank if,
after giving effect to such acquisition, the Company would own or control,
directly or indirectly, more than 5 percent of such bank.
Under the BHC Act, the Company may not engage in any business other than
managing or controlling banks or furnishing services to its subsidiaries that
the Board deems to be so closely related to banking as
9
<PAGE>
"to be a proper incident thereto." The Company is also prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5 percent of the voting shares of any company unless the company is engaged in
banking activities. The Board's approval must be obtained before the shares of
any such company can be acquired and, in certain cases, before any approved
company can open new offices.
As a bank holding company, the Company is required to file reports with the
Board and to provide such additional information as the Board may require. The
Board also has the authority to examine the Company and each of its subsidiaries
with the cost thereof to be borne by the Company.
In addition, banking subsidiaries of bank holding companies are subject to
certain restrictions imposed by federal law in dealings with their holding
companies and other affiliates. Subject to certain exceptions set forth in the
Federal Reserve Act, a bank can make a loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, accept securities of an affiliate as collateral security for a loan
or extension of credit to any person or company, issue a guarantee, or accept
letters of credit on behalf of an affiliate only if the aggregate amount of the
above transactions of such subsidiary does not exceed 10 percent of such
subsidiary's capital stock and surplus on a per affiliate basis or 20 percent of
such subsidiary's capital stock and surplus on an aggregate affiliate basis.
Such transactions must be on terms and conditions that are consistent with safe
and sound banking practices. A bank and its subsidiaries generally may not
purchase a "low-quality asset," as that term is defined in the Federal Reserve
Act, from an affiliate. Such restrictions also prevent a holding company and its
other affiliates from borrowing from a banking subsidiary of the holding company
unless the loans are secured by collateral.
The BHC Act also prohibits a bank holding company or any of its subsidiaries
from acquiring voting shares or substantially all the assets of any bank located
in a state other than the state in which the operations of the bank holding
company's banking subsidiaries are principally conducted unless certain
requirements are met. (See "--INTERSTATE BANKING AND BRANCHING.")
The BHC Act and regulations of the Board also impose certain constraints on
the redemption or purchase by a bank holding company of its own shares of stock.
The Board has cease and desist powers to cover parent bank holding companies
and non-banking subsidiaries where action of a parent bank holding company or
its non-financial institutions represent an unsafe or unsound practice or
violation of law. The Board has the authority to regulate debt obligations
(other than commercial paper) issued by bank holding companies by imposing
interest ceilings and reserve requirements on such debt obligations.
DIVIDENDS. The ability of the Company to pay dividends to its shareholders
is subject to the restrictions set forth in the CGCL. The CGCL provides that a
corporation may make a distribution to its shareholders if the corporation's
retained earnings equal at least the amount of the proposed distribution. The
CGCL further provides that, in the event that sufficient retained earnings are
not available for the proposed distribution, a corporation may nevertheless make
a distribution to its shareholders if it meets two conditions, which generally
are as follows: (i) the corporation's assets equal at least 1 1/4 times its
liabilities; and (ii) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's interest expense for such fiscal
years, then the corporation's current assets equal at least 1 1/4 times its
current liabilities. The Company's ability to pay dividends is also subject to
certain other limitations. See "Item 5. Market for Company Common Stock and
Related Security Holder Matters--Dividends."
The Company's primary sources of income are the receipt of dividends from
the Banks and interest income on its investments. The availability of dividends
from the Banks are limited by various statutes and regulations of state and
federal law. California law restricts the amount available for cash dividends by
10
<PAGE>
state-chartered banks to the lesser of retained earnings or the bank's net
income for its last three fiscal years (less any distributions to shareholders
made during such period). In the event a bank has no retained earnings or net
income for its last three fiscal years, cash dividends may be paid in an amount
not exceeding the net income for such bank's last preceding fiscal year only
after obtaining the prior approval of the California Department of Financial
Institutions (the "DFI").
The FDIC in the case of SMB, and the Board and the FDIC in the case of SCB,
also have authority to prohibit SMB or SCB, as appropriate, from engaging in
what, in the Board's and/or the FDIC's opinion, constitutes an unsafe or unsound
practice in conducting its business. It is possible, depending upon the
financial condition of the bank in question and other factors, that the Board
and/or the FDIC could assert that the payment of dividends or other payments
might, under some circumstances, be such an unsafe or unsound practice.
REGULATION OF THE BANKS
Banks are extensively regulated under both federal and state law. See
"--FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991." The Banks, as
California state-chartered banks, are subject to primary supervision, periodic
examination and regulation by the Federal Reserve Bank of San Francisco ("FRB")
and the FDIC.
The Banks are insured by the FDIC, which currently insures deposits of each
member bank to a maximum of $100,000 per depositor. For this protection, the
Banks, as is the case with all insured banks, pay a semi-annual statutory
assessment and are subject to the rules and regulations of the FDIC. SCB is a
member of the Federal Reserve System and is subject to certain regulations of
the Board. SMB is not a member of the Federal Reserve System, but is
nevertheless subject to certain regulations of the Board.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Banks. State and
federal statutes and regulations relate to many aspects of the Banks'
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends
and locations of branch offices. Further, the Banks are required to maintain
certain levels of capital.
CAPITAL ADEQUACY GUIDELINES. With the enactment of the Financial
Institution Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the Company
and the Banks are subject to certain capital requirements and standards. The
FDIC has issued guidelines to implement the risk-based capital requirements. The
guidelines are intended to establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet items into account
in assessing capital adequacy and minimizes disincentives to holding liquid,
low-risk assets. Under these guidelines, assets and credit equivalent amounts of
off-balance sheet items, such as letters of credit and outstanding loan
commitments, are assigned to one of several risk categories, which range from 0
percent for risk-free assets, such as cash and certain U.S. Government
securities, to 100 percent for relatively high-risk assets, such as loans and
investments in fixed assets, premises and other real estate owned. The
aggregated dollar amount of each category is then multiplied by the risk-weight
associated with that category. The resulting weighted values from each of the
risk categories are then added together to determine the total risk-weighted
assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus and
retained earnings, qualifying non-cumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchased credit card
relationships may be included, subject to certain limitations. At least 50
percent of the banking organization's total regulatory capital must consist of
Tier 1 capital.
11
<PAGE>
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25 percent of risk-weighted assets; (ii) perpetual
preferred stock, cumulative perpetual preferred stock and long-term preferred
stock and related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50 percent of Tier 1
capital. The inclusion of the foregoing elements of Tier 2 capital are subject
to certain requirements and limitations of the federal banking agencies.
The FDIC has also adopted a minimum leverage capital ratio of Tier 1 capital
to average total assets of 3 percent for the highest rated banks. This leverage
capital ratio is only a minimum. Institutions experiencing or anticipating
significant growth or those with other than minimum risk profiles are expected
to maintain capital well above the minimum level. Furthermore, higher leverage
capital ratios are required to be considered well capitalized or adequately
capitalized under the prompt corrective action provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "FDICIA").
The Regulatory Capital Guidelines as well as the actual capitalization for
SCB, Western and the Company as of December 31, 1997 follow:
<TABLE>
<CAPTION>
REQUIREMENT ACTUAL
-------------------------- ----------------------------------
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED WESTERN SCB CONSOLIDATED
----------- ------------- --------- --------- ------------
(GREATER THAN OR EQUAL TO)
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital ratio................... 4.00% 6.00% 10.85% 10.41% 9.66%
Total risk-based capital.......................... 8.00% 10.00% 12.10% 11.66% 10.91%
Tier 1 leverage capital ratio..................... 4.00% 5.00% 7.43% 8.22% 7.33%
</TABLE>
COMMUNITY REINVESTMENT ACT AND FAIR LENDING REQUIREMENTS. The Banks are
subject to certain fair lending requirements and reporting obligations involving
lending operations and Community Reinvestment Act ("CRA") activities. CRA
generally requires the Board, the Comptroller of the Currency ("Comptroller"),
the Office of Thrift Supervision ("OTS") and the FDIC (collectively, the
"Federal Banking Agencies") to evaluate the record of financial institutions in
meeting the credit needs of their local community, including low and moderate
income neighborhoods. In addition to substantial penalties and corrective
measures that may be required for a violation of certain fair lending laws, the
Federal Banking Agencies may take compliance with such laws and CRA into account
when regulating and supervising other activities.
The Federal Banking Agencies adopted a performance-based evaluation system
which bases CRA ratings on an institutions' actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements.
LOANS TO AFFILIATES. Banks are subject to certain restrictions imposed by
federal law on any extensions of credit to, or the issuance of a guarantee or
letter of credit on behalf of, its affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of such affiliates. Such restrictions
prevent affiliates from borrowing from the Banks unless the loans are secured by
marketable obligations of designated amounts. Further, such secured loans and
investments by the Banks in any other affiliate is limited to 10 percent of such
subsidiary bank's capital and surplus (as defined by federal regulations) and
such secured loans and investments are limited, in the aggregate, to 20% of such
subsidiary bank's capital and surplus (as defined by federal regulations).
California law also imposes certain restrictions with respect to transactions
involving other controlling persons of the Banks. Additional restrictions on
transactions with affiliates may be imposed on the Banks under the prompt
corrective action provisions of the FDICIA.
12
<PAGE>
POTENTIAL ACTIONS. Commercial banking organizations, such as the Banks, may
be subject to potential enforcement actions by the Board, the FDIC and the DFI
for unsafe or unsound practices in conducting their businesses or for violations
of any law, rule, regulation or any condition imposed in writing by the agency
or any written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits,
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the imposition
of restrictions and sanctions under the prompt corrective action provisions of
FDICIA.
On December 19, 1991, FDICIA was enacted into law. Set forth below is a
brief discussion of certain portions of this law and implementing regulations
that have been adopted or proposed by the Federal Banking Agencies.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the Federal Banking
Agencies to prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies relating to internal
controls, loan documentation, credit underwriting, interest rate exposure and
asset growth. Standards must also be prescribed for classified loans, earnings
and the ratio of market value to book value for publicly traded shares. FDICIA
also requires the Federal Banking Agencies to issue uniform regulations
prescribing standards for real estate lending that are to consider such factors
as the risk to the deposit insurance fund, the need for safe and sound operation
of insured depository institutions and the availability of credit. Further,
FDICIA requires the Federal Banking Agencies to establish standards prohibiting
compensation, fees and benefit arrangements that are excessive or could lead to
financial loss.
SAFETY AND SOUNDNESS STANDARDS. In February 1995, the Federal Banking
Agencies adopted final guidelines establishing standards for safety and
soundness, as required by FDICIA. The guidelines set forth operational and
managerial standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. Guidelines for asset
quality and earnings standards will be adopted in the future. The guidelines
establish the safety and soundness standards that the agencies will use to
identify and address problems at insured depository institutions before capital
becomes impaired. If an institution fails to comply with a safety and soundness
standard, the appropriate Federal Banking Agency may require the institution to
submit a compliance plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA requires each Federal Banking
Agency to take prompt corrective action to correct the problems of insured
depository institutions that fall below one or more prescribed minimum capital
ratios. The purpose of this law is to resolve the problems of insured depository
institutions at the least possible long-term cost to the appropriate deposit
insurance fund. The law requires each Federal Banking Agency to promulgate
regulations defining the following five categories in which an insured
depository institution will be placed, based on the level of its capital ratios:
well capitalized (significantly exceeding the required minimum capital
requirements), adequately capitalized (meeting the required capital
requirements), undercapitalized (failing to meet any one of the capital
requirements), significantly undercapitalized (significantly below any one
capital requirement) and critically undercapitalized (failing to meet all
capital requirements).
Under final regulations adopted by the Federal Banking Agencies implementing
the prompt corrective action provisions of FDICIA, an insured depository
institution are deemed to be:
- "well capitalized" if it (i) has total risk-based capital of 10 percent or
greater, Tier 1 risk-based capital of 6 percent or greater and a leverage
capital ratio of 5 percent or greater and (ii) is not
13
<PAGE>
subject to an order, written agreement, capital directive or prompt
corrective action directive to meet and maintain a specific capital level
for any capital measure;
- "adequately capitalized" if it has total risk-based capital of 8 percent
or greater, Tier 1 risk-based capital of 4 percent or greater and a
leverage capital ratio of 4 percent or greater (or a leverage capital
ratio of 3 percent or greater if the institution is rated composite 1
under the applicable regulatory rating system in its most recent report of
examination);
- "undercapitalized" if it has total risk-based capital that is less than 8
percent, Tier 1 risk-based capital that is less than 4 percent or a
leverage capital ratio that is less than 4 percent (or a leverage capital
ratio that is less than 3 percent if the institution is rated composite 1
under the applicable regulatory rating system in its most recent report of
examination);
- "significantly undercapitalized" if it has total risk-based capital that
is less than 6 percent, Tier 1 risk-based capital that is less than 3
percent or a leverage capital ratio that is less than 3 percent; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2 percent.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized, may be reclassified to
the next lower capital category if the appropriate Federal Banking Agency, after
notice and opportunity for hearing, (i) determines that the institution is in an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and Federal Banking Agencies are given less flexibility in
deciding how to address the problems associated with such category.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate Federal Banking Agency, subject to
asset growth restrictions, and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate Federal Banking Agency within 45 days after
becoming undercapitalized. The appropriate Federal Banking Agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate Federal Banking
Agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to implement,
an acceptable capital restoration plan, is subject to additional restrictions
and sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, or a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits;
14
<PAGE>
(iv) further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers, subject to certain grandfather provisions for those elected
prior to enactment of FDICIA; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate Federal Banking Agency. Although the appropriate Federal Banking
Agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate Federal Banking
Agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate Federal Banking
Agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
The FDIC has adopted risk-based minimum capital guidelines intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off-balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off-balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0 percent for assets with low credit risk, such as
certain U.S. Treasury securities, to 100 percent for assets with relatively high
credit risk, such as business loans.
In addition to the risk-based guidelines, the FDIC requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total
assets is 3 percent. For all banks not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3
percent minimum, or 4 percent to 5 percent. In addition to these uniform risk-
based capital guidelines and leverage ratios that apply across the industry, the
FDIC has the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum guidelines and
ratios.
In August 1995, the Federal Banking Agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the Federal Banking Agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
Federal Banking Agency.
15
<PAGE>
In January 1995, the Federal Banking Agencies issued a final rule relating
to capital standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking activities and
who fail to adequately manage these risks, will be required to set aside capital
in excess of the regulatory minimums. The Federal Banking Agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
In December 1993, the Federal Banking Agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss allowances to classified
assets. The benchmark set forth by such policy statement is the sum of (a)
assets classified as loss; (b) 50 percent of assets classified as doubtful; (c)
15 percent of assets classified as substandard; and (d) estimated credit losses
on other assets over the upcoming 12 months.
OTHER ITEMS. FDICIA also, among other things, (i) limits the percentage of
interest paid on brokered deposits and limits the unrestricted use of such
deposits to only those institutions that are well capitalized; (ii) requires the
FDIC to charge insurance premiums based on the risk profile of each institution;
(iii) eliminates "pass through" deposit insurance for certain employee benefit
accounts unless the depository institution is well capitalized or, under certain
circumstances, adequately capitalized; (iv) prohibits insured state chartered
banks from engaging as principal in any type of activity that is not permissible
for a national bank unless the FDIC permits such activity and the bank meets all
of its regulatory capital requirements; (v) directs the appropriate federal
banking agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk-based capital; and (vi) provides that, subject to
certain limitations, any federal savings association may acquire or be acquired
by any insured depository institution.
In addition, the FDIC has issued final and proposed regulations implementing
provisions of FDICIA relating to powers of insured state banks. Final
regulations issued in October 1992 prohibit insured state banks from making
equity investments of a type, or in an amount, that are not permissible for
national banks. In general, equity investments include equity securities,
partnership interests and equity interests in real estate. Under the final
regulations, non-permissible investments were to be divested by no later than
December 19, 1996. The Banks have no such non-permissible investments.
Regulations issued in December 1993 prohibit insured state banks from
engaging as principal in any activity not permissible for a national bank
without FDIC approval. The proposal also provides that subsidiaries of insured
state banks may not engage as principal in any activity that is not permissible
for a subsidiary of a national bank, without FDIC approval.
REAL ESTATE LENDING AND APPRAISAL. In December 1992, the Federal Banking
Agencies issued final regulations prescribing uniform guidelines for real estate
lending. The regulations require insured depository institutions to adopt
written policies establishing standards, consistent with such guidelines, for
extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state-certified or state-licensed appraisers for
transactions in excess of certain amounts. State-certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A
state-licensed appraiser is required for all other appraisals. However,
appraisals performed in connection with "federally related transactions" must
now comply with the Federal Banking Agencies' appraisal standards. Federally
related transactions include the sale, lease, purchase, investment in, or
exchange of, real property or interests in real property, the financing of real
property, and the use of real property or interests in real property as security
for a loan or investment, including mortgage backed securities.
16
<PAGE>
PREMIUMS FOR DEPOSIT INSURANCE. Federal law has established several
mechanisms to increase funds to protect deposits insured by the Bank Insurance
Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to
$30 billion from the United States Treasury; up to 90 percent of the fair market
value of assets of institutions acquired by the FDIC as receiver from the
Federal Financing Bank; and from depository institutions that are members of the
BIF. Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves of
$1.25 for each $100 of insured deposits. The FDIC also has authority to impose
special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," or 1.25
percent, the total amount raised from BIF members by the risk-based assessment
system may not be less than the amount that would be raised if the assessment
rate for all BIF members were .023 percent of deposits. The FDIC, effective
September 15, 1995, lowered assessments from their rates of $.23 to $.31 per
$100 of insured deposits to rates of $.04 to $.31, depending on the condition of
the bank, as a result of the re-capitalization of the BIF. On November 15, 1995,
the FDIC voted to drop its premiums for well capitalized banks to zero effective
January 1, 1996. Other banks will be charged risk-based premiums up to $.27 per
$100 of deposits.
BANKING CONSOLIDATION BILL
Governor Pete Wilson signed Assembly Bill 3351 (the "Banking Consolidation
Bill"), authored by Assemblyman Ted Weggeland and sponsored by the California
State Banking Department (the "Department"), effective July 1, 1997, which
creates the DFI to be headed by a Commissioner of Financial Institutions out of
the existing Department which regulates state-chartered commercial banks and
trust companies in California.
The Banking Consolidation Bill, among other provisions, also (i) transfers
regulatory jurisdiction over state chartered savings and loan associations from
the Department of Savings and Loans ("DSL") to the newly created DFI and
abolishes the DSL; (ii) transfers regulatory jurisdiction over state-chartered
industrial loan companies and credit unions from the Department of Corporations
to the DFI; and (iii) establishes within the DFI separate divisions for credit
unions, commercial banks, industrial loan companies and savings and loans. As
the Banking Consolidation Bill has only recently been enacted, it is impossible
to predict with any degree of certainty what impact it will have on the banking
industry in general and the Banks in particular.
SAVINGS ASSOCIATION INSURANCE FUND
Congress has recently passed, and President Clinton has signed into law,
provisions to strengthen the Savings Association Insurance Fund (the "SAIF") and
to repay outstanding bonds that were issued to re-capitalize the SAIF's
successor as a result of payments made due to the insolvency of savings and loan
associations and other federally insured savings institutions in the late 1980's
and early 1990's. The new law required savings and loan associations to bear the
cost of re-capitalizing the SAIF and, after January 1, 1997, banks must
contribute towards paying off the financing bonds, including interest. In 2000
(or upon the earlier merger, as currently proposed, of the BIF and SAIF), the
banking industry will assume the bulk of the payments. Additionally, the new law
provides "regulatory relief" for the banking industry by eliminating
approximately 30 laws and regulations. The costs and benefits of the new law to
the Banks can not currently be accurately predicted.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after
17
<PAGE>
the date of enactment, a bank holding company that is adequately capitalized and
managed may obtain regulatory approval to acquire an existing bank located in
another state without regard to state law. A bank holding company would not be
permitted to make such an acquisition if, upon consummation, it would control
(a) more than 10 percent of the total amount of deposits of insured depository
institutions in the United States or (b) 30 percent or more of the deposits in
the state in which the bank is located. A state may limit the percentage of
total deposits that may be held in that state by any one bank or bank holding
company if application of such limitation does not discriminate against
out-of-state banks. An out-of-state bank holding company may not acquire a state
bank in existence for less than a minimum length of time that may be prescribed
by state law except that a state may not impose more than a five year existence
requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirement and conditions as for a merger
transaction. Effective October 2, 1995, California adopted legislation which
"opts California into" the Interstate Act. However, the California legislation
restricts out of state banks from purchasing branches or starting a de novo
branch to enter the California banking market. Such banks may proceed only by
way of purchases of whole banks.
The Interstate Act is likely to increase competition in the Banks' market
areas especially from larger financial institutions and their holding companies.
It is difficult to assess the impact such increased competition will likely have
on the Banks' operations.
On September 28, 1995, Governor Wilson signed Assembly Bill 1482, the
Caldera, Weggeland, and Killea California Interstate Banking and Branching Act
of 1995 (the "1995 Act"). The 1995 Act, which was filed with the Secretary of
State as Chapter 480 of the California Statutes of 1995, became operative on
October 2, 1995.
The 1995 Acts opts in early for interstate branching, allowing out-of-state
banks to enter California by merging or purchasing a California bank or
industrial loan company which is at least five years old. Also, the 1995 Act
repeals the California Interstate (National) Banking Act of 1986, which
regulated the acquisition of California banks by out-of-state bank holding
companies. In addition, the 1995 Act permits California state banks, with the
approval of the DFI, to establish agency relationships with FDIC-insured banks
and savings associations. Finally, the 1995 Act provides for regulatory relief,
including (i) authorization for the DFI to exempt banks from the requirement of
obtaining approval before establishing or relocating a branch office or place of
business, (ii) repeal of the requirement of directors' oaths (California
Financial Code Section 682), and (iii) repeal of the aggregate limit on real
estate loans (California Financial Code Section 1230).
HAZARDOUS WASTE CLEAN-UP COSTS
The Company is aware of legislation and cases relating to hazardous waste
clean-up costs and potential liability. Since the Company is not involved in any
business that manufactures, uses or transports chemicals, waste, pollutants or
toxins that might have a material adverse effect on the environment, its primary
exposure to enviromental laws is through its lending activities. Based on a
general survey of the loan portfolios of the Banks, conversations with local
authorities and appraisers, and the type of lending currently and historically
done by the Banks, the Company is not reasonably exposed to any significant loss
or liability related to such enviromental laws. The Banks have generally not
made the types of loans generally associated with hazardous waste contamination
problems and the Company is not aware of any potential liability for hazardous
waste contamination that might have a material adverse effect on the Company.
18
<PAGE>
ITEM 2. PROPERTIES
SCB PROPERTIES
SCB's principal office is located at 4100 Newport Place, Suite 900, Newport
Beach, California. In total, as of December 31, 1997, SCB had twenty-one (21)
branch offices and two other properties, seven (7) of which were owned and
sixteen (16) of which were leased. As part of the merger of NBSC with and into
SCB, SCB consolidated certain operations and discontinued operations at six (6)
locations, five (5) of which were branch offices, in the first quarter of 1998.
OWNED PROPERTIES
17046 Bellflower Boulevard
Bellflower, California
12802 East Hadley Street
Whittier, California
13525 West Whittier Boulevard
Whittier, California
275 West Central Avenue
Brea, California
10990 Downey Avenue
Downey, California
303 West Katella Avenue
Orange, California
13372 East Telegraph Road
Santa Fe Springs, California
LEASED PROPERTIES
3800-4 (and a portion of 3808) East La Palma Avenue
Anaheim, California
303 Crescent Avenue
Avalon, California
22831 Lake Forest Drive
El Toro, California
9042 Garfield Avenue
Huntington Beach, California
4180 La Jolla Village Drive,
Suites 125 and 430
La Jolla, California
LEASED PROPERTIES
16420 Valley View Avenue*
La Mirada, California
401 Glenneyre Street
Laguna Beach, California
30000 Town Center Drive
Laguna Niguel, California
4100 Newport Place
Newport Beach, California
3951 South Plaza Drive
Santa Ana, California Branch
DISCONTINUED PROPERTIES
8010 Santa Ana Canyon Road
Anaheim Hills, California
17330 Brookhurst Street
Fountain Valley, California
17252 Armstrong Avenue*
Irvine, California
2101 West Imperial Highway
La Habra, California
23521 Paseo de Valencia
Laguna Hills, California
625 The City Drive South
Orange, California
* Non-branch property.
19
<PAGE>
SMB PROPERTIES
SMB's principal office is located at 1251 Fourth Street, Santa Monica,
California. In total, as of January 27, 1998 SMB had thirteen (13) branch
offices and eight (8) other properties, ten (10) of which were owned and eleven
(11) of which were leased. Prior to the acquisition of SMB on January 27, 1998,
Western had five (5) branch offices, one (1) of which was owned and four (4) of
which were leased.
OWNED PROPERTIES
1231 4th Street*
Santa Monica, California
1235 4th Street*
Santa Monica, California
1251 4th Street
Santa Monica, California
1324 5th Street*
Santa Monica, California
1326-30 5th Street*
Santa Monica, California
1327 5th Street*
Santa Monica, California
Corner of 5th and Arizona*
Santa Monica, California
1401 Wilshire Boulevard
Santa Monica, California
4700 Lincoln Boulevard
Marina del Rey, California
1261-1267 Westwood Boulevard*
Los Angeles, California
LEASED PROPERTIES
9444 Wilshire Boulevard
Beverly Hills, California
15910 Ventura Boulevard
Encino, California
1888 Century Park East, Suites 110 & 409
Los Angeles, California
1251 Westwood Boulevard
Los Angeles, California
(Ground lease)
12100 Wilshire Boulevard
Los Angeles, California
23705 West Malibu Road
Malibu, California
15245 Sunset Boulevard
Pacific Palisades, California
1237 4th Street*
Santa Monica, California
3302 Pico Boulevard
Santa Monica, California
2221 Santa Monica Boulevard
Santa Monica, California
152 Santa Monica Place
Santa Monica, California
* Non-branch property.
For additional information regarding properties of the Company and of the Banks,
see "Item 8. Financial Statements and Supplementary Data."
ITEM 3. LEGAL PROCEEDINGS
GENERAL
From time to time, the Company and the Banks are party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's and/or the Banks' exposure to the cases
individually and in the aggregate and provides for potential losses on such
litigation if the amount of the loss is determinable and if the incurrence of
the loss is probable.
Set forth below is a brief summary of the status of certain pending legal
proceedings to which the Company and/or the Banks are subject. Management
believes that the reserves which it has established for these matters are
adequate at this time. However, litigation is inherently uncertain and no
assurance can
20
<PAGE>
be given that this or any other litigation will not result in any loss which
might be material to the Company and/or the Banks.
PDI LITIGATION
NBSC v. Vincent E. Galewick, Performance Development, Inc. et al. (the "PDI
Litigation"), is an interpleader action filed by NBSC on August 22, 1995 in the
Orange County Superior Court. The dispute arose from a demand by the California
Department of Corporations under California Government Code Section 7480 on
August 17, 1995 for the identification of account names and account number
associated with Vincent Galewick and Performance Development, Inc. (collectively
"PDI"). As a result of receipt of a declaration by the California Department of
Corporations under California Financial Code Section 952, NBSC froze $12,301,113
in PDI's accounts. On August 21, 1995, a temporary restraining order was issued
restraining PDI and others from transferring funds. NBSC was thereafter
threatened by various parties with lawsuits for refusal to release the funds,
and an attack was made on the applicability of the temporary restraining order
to the funds. NBSC deposited the funds with the Orange County Superior Court and
filed the interpleader action to allow the court to determine the disposition of
the funds. In response, the defendants filed a cross complaint against NBSC
alleging $25 million (the original claim alleged $45 million and was reduced
during discovery) in damages due to lost opportunities, breach of contract, loss
of goodwill and damage to their reputation due to the inability to use the
$12,301,113. Additional claims for an unspecified amount of punitive damages,
consequential damages and incidental damages have been alleged. Discovery has
not yet been completed. Trial is anticipated to take place in the fourth quarter
of 1998.
FIP LITIGATION
Financial Institution Partners, L.P. v. California Commercial Bankshares et
al., is an action filed by Financial Institution Partners, L.P. (collectively
with its purported assignee, Hovde Capital, Inc., "FIP") on December 19, 1996 in
the United States District Court for the Central District of California. The
dispute arose from the purchase by FIP in December 1995 of 288,888 shares of
common stock of CCB (the "Initial Shares") in a private placement at $6.75 per
share ($1,949,994 in the aggregate), and FIP's agreement to purchase an
additional 266,659 shares of common stock of CCB on or prior to May 5, 1996,
subject to satisfaction of certain closing conditions, including the receipt of
required regulatory approval, if any.
FIP informed CCB on April 30, 1996 that it had been informed that no
regulatory approval was required for the purchase of additional shares of common
stock of CCB. Nevertheless, FIP did not purchase any additional shares of CCB
Common Stock pursuant to the agreement and has alleged, among other things, that
CCB failed to cooperate fully in the due diligence review of CCB that FIP
alleges was a condition precedent to its purchase of those additional shares. On
June 11, 1996, FIP requested that CCB either (a) amend the agreement to allow
FIP until December 31, 1996 to purchase additional shares of common stock of CCB
at an increased purchase price based upon the earnings of CCB from June 1, 1996
through November 30, 1996, or (b) repurchase the Initial Shares for an amount
equal to the purchase price, plus $6.00 per share, plus 9 percent interest, plus
FIP's legal, accounting and due diligence expenses. On June 28, 1996, CCB
informed FIP that its rights to purchase additional shares had expired under the
terms of the parties' agreement and declined either to amend the agreement or
repurchase the Initial Shares.
On December 19, 1996, FIP filed a complaint in the United States District
Court for the Central District of California against CCB, NBSC and certain of
their respective officers and directors alleging claims for breach of contract
(declaratory relief and specific performance), violation of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, intentional misrepresentation,
negligent misrepresentation, suppression of fact and breach of contract
(rescission, restitution and damages). On August 20, 1997, FIP filed a Third
Amended Complaint adding the Company as a defendant and alleging additional
claims for breach of contact (right of first refusal) and civil violation of
Penal Code Section 496. The complaint
21
<PAGE>
seeks rescission of FIP's purchase of the Initial Shares, consequential damages
in excess of $1,650,000 and punitive damages. In the alternative, FIP seeks a
declaratory judgment requiring CCB to sell an additional 266,659 shares to FIP
at $6.75 per share if FIP determines it wishes to purchase such shares and
requiring CCB and the Company to comply with the terms of the agreement, which
FIP contends provides it with a right of first refusal as to any offers by
defendants of shares of common stock of CCB in an amount necessary to maintain
FIP's agreed beneficial ownership interest in CCB. FIP's complaint does not
specify which company's stock it believes it currently has a right of refusal to
purchase, or whether the number of shares it believes it has a right, or right
of first refusal, to purchase is subject to adjustment as a result of the CCB
Merger.
On September 19, 1997, the Company filed an answer to the complaint. The
Company believes that FIP's claims are without merit, that FIP has not been
damaged but in fact has earned a substantial profit from its purchase of the
Initial Shares, that FIP breached its agreement with CCB, and that FIP has no
contractual right or right of first refusal to purchase any shares of Company
Common Stock.
FIRST PENSION LITIGATION
ROUSEAU ACTION
Rousseau et al. v. Rancho Vista National Bank et al., is an action brought
in the San Diego Superior Court on October 23, 1995 by a class of investors who
invested pension funds with First Pension, a pension plan administrator,
alleging claims against various banks who dealt with First Pension (the "Rouseau
Action"). The plaintiffs have stated claims for fraud and deceit, aiding and
abetting fraud and deceit, breach of fiduciary duty, constructive fraud and
aiding and abetting constructive fraud against a number of financial
institutions (the "Bank Defendants"), including SCB as successor to Monarch and
NBSC. NBSC and certain of its officers were named as defendants, based on the
fact that First Pension deposited investor pension funds into an account at NBSC
of which NBSC agreed to be custodian. The plaintiffs allege losses of over $130
million due to the combined alleged wrongdoing of the Bank Defendants. No
specific damage claim was alleged against NBSC.
EVANS ACTION
Evans v. Home Bank et al., is a suit brought by the receiver for First
Pension and related entities in the Central District of California based on the
same allegations as in the Rousseau Action (the "Evans Action"). The receiver
alleges that NBSC and Monarch improperly delegated their respective fiduciary
duties as a custodian of pension funds to First Pension and failed to ensure
that all pension assets were transferred to the successor custodian. Plaintiffs
have not alleged a specific damage claim against NBSC or Monarch.
ZWICK ACTION
Beverly Zwick v. Monarch Bank et al., is a class action brought in the San
Diego Superior Court (the "Zwick Action"). The plaintiffs are a class of
investors whose funds were deposited by First Pension in custodial accounts held
at Monarch. The plaintiffs stated claims for negligence, fraud and aiding and
abetting constructive fraud against Monarch and the Company. Plaintiffs claim
that Monarch knew or should have known that the now incarcerated principals of
First Pension were periodically stealing funds from the custodial accounts
through transferring authorized withdrawals to bogus accounts from which the
funds were eventually stolen. The damages alleged by the plaintiffs exceed
$2,000,000.
SETTLEMENT
On February 13, 1998, the Company entered into a Settlement Agreement and
Mutual Release, pursuant to which the Company and SCB, as successors to Monarch
and NBSC, were released from all claims raised in the Rousseau Action, the Evans
Action and the Zwick Action and the Company will pay $1.1 million to be
allocated among the various plaintiffs. Before this settlement becomes final,
the
22
<PAGE>
settlement agreement must be approved by the courts in the various actions. The
impact of the settlement has been included in the 1997 consolidated financial
statements. See "Item 8. Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SCB MERGER
A special meeting of shareholders of the Company was held on October 10,
1997 (the "SCB Meeting") to consider and vote upon (i) a proposal to approve the
principal terms of a proposed merger of SCB with and into the Company; and (ii)
to consider and vote upon an amendment to the Company's Bylaws (the "Amendment")
to change the authorized number of Directors from a minimum of seven (7) and a
maximum of thirteen (13) to a minimum of nine (9) and a maximum of sixteen (16).
The total number of shares of Company Common Stock outstanding as of the record
date for the SCB Meeting was 7,071,973 shares, each having one vote. The total
number of shares of Company Common Stock represented at the SCB Meeting by valid
proxy and in person was 5,253,756, which number represented a quorum. 5,234,711
shares of Company Common Stock voted for approval of the principal terms of the
SCB Merger, and 1,645 shares of Company Common Stock voted against approval of
the principal terms of the SCB Merger. 16,556 shares of Company Common Stock
abstained. In addition, 5,220,884 shares of Company Common Stock voted for
approval of the Amendment, and 1,546 shares of Company Common Stock voted
against approval of the Amendment. 31,326 shares of Company Common Stock
abstained.
SMB ACQUISITION
A special meeting of shareholders of the Company was held on December 23,
1997 (the "SMB Meeting") to consider and vote upon a proposal to approve the
principal terms of a proposed merger of SMB with Western (the "SMB Merger"). The
total number of shares of Company Common Stock outstanding as of the record date
for the SMB Meeting was 10,657,262 shares, each having one vote. The total
number of shares of Company Common Stock represented at the SMB Meeting by valid
proxy and in person was 7,830,918, which number represented a quorum. 7,810,142
shares of Company Common Stock were voted for approval of the principal terms of
the SMB Merger, and 3,513 shares of Company Common Stock were voted against
approval of the principal terms of the SMB Merger. 17,263 shares of Company
Common Stock abstained.
PART II
ITEM 5. MARKET FOR COMPANY COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
MARKETPLACE DESIGNATION AND SALES PRICE INFORMATION
The Company Common Stock trades on the Nasdaq National
Market-Registered Trademark- under the symbol "WEBC." Prior to June 3, 1997,
trading in the Company's Common Stock occurred solely "over the counter," and
was not extensive. Consequently, the prices listed before that date represent
quotations by dealers making a market in Company Common Stock and reflect
inter-dealer prices, without adjustments for mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions. Prior to June 3, 1997,
trading in Company Common Stock was limited in volume and may not be a reliable
indicator of its market value. On June 3, 1997, Company Common Stock was
designated for quotation on the Nasdaq National Market-Registered Trademark- and
on that date the Company effected the 8.5-to-1.0 Reverse Stock Split. The prices
of Company Common Stock prior to June 3, 1997 in the following table have been
adjusted for the Reverse Stock Split. The prices listed below for periods
subsequent to June 3, 1997 are as reported by the Nasdaq National
Market-Registered Trademark-.
The number of record holders of Company Common Stock as of March 13, 1998
was approximately 2,190.
23
<PAGE>
The following table summarizes those trades of Company Common Stock of which
management is aware, setting forth the approximate high and low trade prices for
each quarterly period ended since January 1, 1996:
<TABLE>
<CAPTION>
APPROXIMATE SALES
PRICES
QUARTER ENDED --------------------
(LAST TRADING DAY) HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31, 1996............................................................. $ 11.05 $ 8.93
June 30, 1996.............................................................. 17.00 8.50
September 30, 1996......................................................... 14.88 8.50
December 31, 1996.......................................................... 29.75 13.86
March 31, 1997............................................................. 34.00 19.13
June 30, 1997.............................................................. 37.19 28.63
September 30, 1997......................................................... 33.25 28.63
December 31, 1997.......................................................... 33.88 29.88
</TABLE>
On March 13, 1998, the approximate high and low trade price for Company
Common Stock was $39.25 and $38.88, respectively.
DIVIDENDS
Holders of Company Common Stock are entitled to receive dividends declared
by the Board of Directors of the Company out of funds legally available therefor
under the laws of the State of California and certain federal laws and
regulations governing the banking and financial services business. See "Item I.
Business--Supervision and Regulation--DIVIDENDS." In addition, the right of
holders of Company Common Stock to receive dividends declared by the Company
will be subject to the rights of holders of any preferred stock of the Company
that may be issued after the date hereof.
The Company's ability to pay dividends is also limited by the Third
Amendment to Revolving Credit Agreement, dated as of January 26, 1998, between
the Company and The Northern Trust Company (the "Credit Agreement") which
provides that the Company may not declare or pay any dividend other than
dividends payable in Company Common Stock or in the ordinary course of business
not to exceed 50 percent of net income per fiscal quarter of the Company before
goodwill amortization and any restructuring charges incurred in connection with
any merger, consolidation or other restructuring contemplated by the Agreement
and Plan of Merger, dated as of July 30, 1997 and Restated as of November 20,
1997, by and among the Company, Western and Santa Monica Bank or similar
transactions.
The Company had not paid any dividends since its formation on May 20, 1983;
however, on August 20, 1997, the Board of Directors of the Company approved the
institution of a quarterly dividend. A dividend of $0.15 per share of Company
Common Stock was paid on December 10, 1997 to shareholders of record on November
10, 1997. In addition, the Company declared a dividend of $0.15 per share of
Company Common Stock payable on March 27, 1998 to shareholders of record on
February 27, 1997. See "Item I. Business--Capital Transactions--DIVIDENDS."
Because the Company must comply with the CGCL, banking regulations and, if
in effect at the applicable time, the Credit Agreement when paying dividends,
there can be no assurance that the Company will continue to pay dividends at
this level, if at all. See "Item 1. Business--Supervision and
Regulation--DIVIDENDS" and "Item 6 & 7. Selected Financial Data and Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Balance Sheet Analysis--LIQUIDITY."
RECENT SALES OF UNREGISTERED SECURITIES
For a discussion of recent sales of unregistered Company Common Stock, see
"Item I. Business-- Capital Transactions--CAPITAL RAISING TRANSACTIONS."
24
<PAGE>
ITEMS 6, 7 AND 7A. SELECTED FINANCIAL DATA, MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS;
AND QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET
RISK
OVERVIEW
The Company serves as the holding company for the Banks. SCB was acquired by
the Company in 1997, and thereafter the Company merged NBSC, into which Monarch
had previously been merged, into SCB in connection with transactions that were
accounted for under the pooling-of-interests method of accounting. The Company
acquired Santa Monica Bank in January 1998 through the merger of Santa Monica
Bank with and into Western, with Western being the surviving corporation. In
connection with the SMB Acquisition, Western changed its name to "Santa Monica
Bank." However, because the financial data presented below is as of and for the
years and periods ended on or prior to December 31, 1997, the financial data of
Santa Monica Bank is not included herein unless otherwise indicated. The Company
acquired Western on September 30, 1996 in a transaction which was accounted for
using the purchase method of accounting. Consequently, the results of operations
contained herein include Western only from the date of the Western Acquisition.
On June 4, 1997 the Company consummated the CCB Merger, which resulted in
the merger of Monarch, a then wholly-owned subsidiary of the Company, with and
into NBSC with NBSC being the surviving association as a wholly-owned subsidiary
of the Company. References to NBSC refer to the merged entity except where
indicated. In connection with the CCB Merger, the Company effected the Reverse
Stock Split. Accordingly, all accompanying financial data has been restated to
give effect to the Reverse Stock Split.
On October 10, 1997, the Company consummated the SCB Merger, as a result of
which SCB became a wholly-owned subsidiary of the Company. NBSC and SCB executed
an Agreement and Plan of Merger, dated as of October 10, 1997, pursuant to which
NBSC merged with and into SCB with SCB being the surviving corporation (the
"Bank Merger"). The Bank Merger was consummated on December 15, 1997. References
to SCB refer to the merged entity except where indicated.
Each of the CCB Merger and the SCB Merger were accounted for using the
pooling-of-interests method of accounting. Accordingly, all accompanying
financial information has been restated to combine the consolidated financial
information of CCB and SC Bancorp with that of the Company. The consolidated
financial information of CCB was combined with that of the Company in restated
consolidated financial statements filed in a Current Report on Form 8-K on July
15, 1997. The consolidated financial information of SC Bancorp was combined with
that of the Company in supplemental consolidated financial statements filed in a
Current Report on Form 8-K on October 24, 1997. For further information
regarding the acquisition history of the Company, see "Item 1.
Business--Strategic Evolution."
SELECTED FINANCIAL DATA
The following tables and data set forth statistical information relating to
the Company and its subsidiaries for each of the years in the five-year period
ended December 31, 1997. Such tables and data reflect the combination of the
Company with both CCB and SC Bancorp on June 4, 1997 and October 10, 1997,
respectively, each in a merger accounted for as a pooling-of-interests. The
following summary financial data was derived from the audited Consolidated
Financial Statements of the Company, which reflect the effect of both the CCB
Merger and the SCB Merger. This data should be read in conjunction with the
audited Consolidated Financial Statements as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31, 1997 and
related notes included elsewhere herein. See "Item 8. Financial Statements and
Supplementary Data." All share data has been adjusted to reflect the Reverse
Stock Split.
25
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1997 1996(1) 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENT OF OPERATIONS DATA:
Interest income......................................... $ 101,034 $ 74,237 $ 62,629 $ 53,079 $ 57,722
Interest expense........................................ 29,358 22,311 19,804 13,388 18,677
------------ ------------ ------------ ------------ ------------
Net interest income..................................... 71,676 51,926 42,825 39,691 39,045
Provision for loan and lease losses..................... 2,800 1,018 8,564 3,510 17,919
Non-interest income (other than gains or losses on
securities and sale of loans and other assets
transactions)......................................... 9,266 8,929 8,373 8,256 8,757
Gains (losses) on securities transactions............... 342 281 (692) (24) 7,114
Gain on sale of loans and other assets, net............. 78 665 145 215 --
Other non-interest expense.............................. 62,977 47,268 40,952 37,879 40,770
Lower of cost or market adjustment on loans............. -- -- 756 -- --
Goodwill amortization................................... 2,538 1,004 821 211 167
OREO expense (income)................................... 242 (134) 3,080 3,145 4,888
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes............................ 12,805 12,645 (3,522) 3,393 (8,828)
Income tax expense (benefit)............................ 9,643 3,656 (1,733) 1,680 (1,979)
------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative effect of a change in
accounting principle.................................. 3,162 8,989 (1,789) 1,713 (6,849)
Cumulative effect of change in accounting principle..... -- -- -- -- (41)
------------ ------------ ------------ ------------ ------------
Net income (loss)..................................... $ 3,162 $ 8,989 $ (1,789) $ 1,713 $ (6,890)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
PER SHARE DATA (2)(3):
Basic net income (loss) per share....................... $ 0.30 $ 1.11 $ (0.28) $ 0.34 $ (1.68)
Diluted net income (loss) per share..................... $ 0.29 $ 1.09 $ (0.28) $ 0.33 $ (1.68)
Cash dividends declared................................. $ 0.30 -- -- -- --
Dividend payout ratio................................... 100.0% -- -- -- --
Book value per share.................................... $ 12.18 $ 12.36 $ 10.64 $ 10.52 $ 12.59
Shares used to compute diluted net income (loss) per
share................................................. 10,731,581 8,248,398 6,486,936 5,150,707 4,093,434
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Assets.................................................. $ 1,383,510 $ 1,338,913 $ 866,385 $ 759,194 $ 799,558
Loans and leases net of deferred fees and unearned
income (4)............................................ 880,734 817,358 543,042 439,241 460,975
Allowance for loan and lease losses..................... 15,894 15,757 13,130 12,115 19,077
Securities.............................................. 207,514 332,818 184,978 220,095 248,879
Goodwill................................................ 30,430 32,968 4,131 2,464 2,616
Deposits................................................ 1,226,793 1,177,014 774,057 675,971 731,829
Borrowings.............................................. 12,751 20,290 7,366 15,161 10,168
Shareholders' equity.................................... 129,655 129,047 77,628 62,274 51,572
------------ ------------ ------------ ------------ ------------
ASSET QUALITY:
Nonaccrual loans and leases............................. $ 7,488 $ 16,157 $ 17,303 $ 16,814 $ 27,996
OREO.................................................... 6,261 7,082 4,388 9,130 9,715
------------ ------------ ------------ ------------ ------------
Total nonaccrual loans and leases and OREO............ $ 13,749 $ 23,239 $ 21,691 $ 25,944 $ 37,711
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
PERFORMANCE RATIOS:
Return on average assets................................ 0.23% 0.90% (0.21)% 0.22% (0.79)%
Return on average shareholders' equity.................. 2.37% 9.78% (2.59)% 2.65% (12.54)%
Net interest spread..................................... 4.79% 4.64% 4.62% 4.91% 4.20%
Net interest margin..................................... 5.99% 5.88% 5.78% 5.74% 4.93%
Average shareholders' equity to average assets.......... 9.82% 9.25% 8.31% 8.20% 6.26%
ASSET QUALITY RATIOS:
Nonaccrual loans and leases to gross loans and leases... 0.85% 1.97% 3.18% 3.81% 6.05%
Nonaccrual loans and leases and OREO to total assets.... 0.99% 1.74% 2.50% 3.42% 4.72%
Allowance for loan and lease losses to total loans and
leases................................................ 1.80% 1.92% 2.41% 2.75% 4.12%
Allowance for loan and lease losses to nonaccrual loans
and leases............................................ 212% 98% 76% 72% 68%
Net charge-offs to average loans and leases............. 0.31% 0.59% 1.68% 2.43% 2.50%
</TABLE>
- ------------------------------
(1) Includes the accounts and operating results of Western since the September
30, 1996 acquisition date.
(2) Excludes stock options as common stock equivalents in 1995 and 1993 as the
effect thereof was antidilutive.
(3) The Company adopted SFAS No. 128 on December 31, 1997. Diluted net income
per share for all prior periods has been restated to reflect adoption of
SFAS No. 128. See Note 1 of Notes to Consolidated Financial Statements
contained in "Item 8. Financial Statements and Supplementary Data."
(4) Does not include loans available for sale.
26
<PAGE>
BALANCE SHEET ANALYSIS
OVERVIEW
The Company had total assets of approximately $1.4 billion at December 31,
1997 as compared to total assets of approximately $1.3 billion at December 31,
1996. At January 31, 1998, the Company had total assets of approximately $2.1
billion after giving effect to the SMB Acquisition. Historical amounts have been
restated for the CCB Merger and the SCB Merger through the use of
pooling-of-interests accounting. See "Item 1. Business--Strategic Evolution."
The Company's total deposits increased from approximately $1.18 billion at
December 31, 1996 to approximately $1.23 billion at December 31, 1997 and, after
giving effect to the SMB Acquisition, to approximately $1.78 billion at January
31, 1998. Common Shareholders' Equity has increased from approximately $129.0
million at December 31, 1996 to $129.7 million at December 31, 1997 and to
$281.1 million at January 31, 1998.
On July 30, 1997, the Company, Western and Santa Monica Bank entered into a
definitive agreement for the merger of Santa Monica Bank with a subsidiary of
the Company, subject to approval by the banking regulators and shareholders of
both companies. On January 27, 1998, the Company consummated the SMB Acquisition
through the merger of Santa Monica Bank with and into Western. As part of the
SMB Acquisition, the name of Western was changed to "Santa Monica Bank." Upon
the SMB Acquisition becoming effective, each share of SMB Common Stock issued
and outstanding at the time was converted into the right to receive either (i)
$28.00 in cash or (ii) 0.875 shares of Company Common Stock. Of the 7,084,244
shares of SMB Common Stock outstanding at the time of the acquisition,
approximately 57.3 percent elected to receive the Cash Consideration, resulting
in a payment of $113,722,700 in the aggregate, and 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.
The SMB Acquisition will be accounted for using the purchase method of
accounting. At December 31, 1997, based on unaudited data heretofore made
available to the Company SMB had total assets of $678 million, deposits of $593
million, shareholders' equity of $81 million and approximately 7.1 million
shares of SMB Common Stock outstanding. For the year ended December 31, 1997,
SMB reported net income and net income per share of approximately $10.9 million
and $1.54, respectively.
Following is an analysis of the Company's assets and liabilities as of
December 31, 1997. Because the SMB Acquisition was consummated on January 27,
1998, the following analysis does not include a discussion of SMB unless
otherwise indicated.
CAPITAL ACTIVITIES
In August 1997 the Company instituted a quarterly dividend and thereafter
declared a dividend of $0.15 per share payable on December 10, 1997 to
shareholders of record on November 10, 1997. In November 1997 the Company
declared a dividend of $0.15 payable on March 27, 1998 to shareholders of record
February 27, 1998. For a more detailed description of the Company's dividends,
See "Item 1. Business--Capital Transactions--DIVIDENDS" and "Item 5. Market For
Registration's Common Stock and Related Security Holder Matters--Dividends."
On October 10, 1997, the Company consummated the SCB Merger, pursuant to
which, approximately 3,555,500 shares of Company Common Stock (prior to
adjustment for fractional shares) were issued as consideration. (For further
information on the SCB Merger, see "Item 1. Business--Strategic Evolution-- SCB
MERGER" and Note 2 of Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data.")
27
<PAGE>
On June 4, 1997, the Company consummated the CCB Merger, pursuant to which,
3,043,226 shares of Company Common Stock were issued as consideration. In
addition, on June 3, 1997, in connection with the CCB Merger, the Company
completed an 8.5 to 1 Reverse Stock Split. (For further information on the CCB
Merger, see "Item 1. Business--Strategic Evolution--CCB MERGER" and Note 2 of
Notes to Consolidated Financial Statements contained in "Item 8. Financial
Statements and Supplementary Data.") All share amounts herein have been restated
to give effect to the Reverse Stock Split. See "Item 1. Business-- Capital
Transactions--REVERSE STOCK SPLIT."
On September 30, 1996, the Company acquired all of the issued and
outstanding shares of Western. The Company funded the purchase price with the
issuance of 3,076,045 shares of Company Common Stock in the 1996 Private
Placement from which the Company raised approximately $42.2 million, net of
approximately $0.9 million in issuance costs, and from the proceeds of a three
year loan of $26.5 million from The Northern Trust Company. A $15.5 million
dividend was declared by Western concurrently with the completion of the Western
Acquisition and paid to the Company, which was used to reduce the $26.5 million
note to $11 million. See "Item 1. Business--Strategic Evolution--WESTERN
ACQUISITION," "Item 1. Business--Capital Transactions--CAPITAL RAISING
TRANSACTIONS," and Note 2 of Notes to Consolidated Financial Statements
contained in "Item 8. Financial Statements and Supplementary Data."
In the third quarter of 1995, the Company issued and sold 339,635 shares of
Company Common Stock pursuant to the Rights Offering. The net proceeds from the
Rights Offering were $3.5 million which increased the Company's capital. See
"Item 1. Business--Capital Transactions--CAPITAL RAISING TRANSACTIONS." On March
31, 1995, the Company completed the 1995 Private Placement in which 534,958
shares of Company Common Stock were issued from which it raised approximately
$6.1 million. Proceeds from the offering were used: (i) to pay approximately
$470 thousand in offering expenses; (ii) to increase the Company's investment in
Monarch by $3.6 million; and (iii) $54 thousand to retire Company debt.
Approximately $2.1 million in cash from such proceeds was retained by the
Company for future operating needs or investments. The capital increase for
Monarch was sufficient to comply fully with the terms of certain regulatory
orders to increase its leverage capital ratio to 7.0 percent or more. See "Item
1. Business--Capital Transactions--CAPITAL RAISING TRANSACTIONS."
In November 1995, CCB sold 474,000 shares of CCB Common Stock, no par value,
in the CCB Private Placement at $6.75 per share for the purpose of contributing
most of the proceeds into NBSC as additional capital. Of the total proceeds of
$3.2 million, CCB invested $2.9 million in NBSC as paid in capital in December
1995. The increased capital allowed CCB and NBSC to meet certain regulatory
commitments to increase capital, provided an additional source of funds that
could be used to fund earning assets, and to allow for possible future growth
opportunities. See "Item 1. Business--Capital Transactions--CAPITAL RAISING
TRANSACTIONS" and Notes 2 and 9 of Notes to Consolidated Financial Statements
contained in "Item 8. Financial Statements and Supplementary Data."
CASH LIQUIDITY
The Company defines "Cash Liquidity" at the Banks as cash and cash
equivalents and securities available for sale less pledged securities and
reserve requirement divided by total deposits, treasury, tax and loan borrowings
and other borrowings less securities pledged for deposit balances. During 1997,
the Banks consistently maintained cash liquidity of approximately 25 percent or
greater, which was a product of low demand for loans and high underwriting
standards established during the latter part of a major recession. The Banks
were also hesitant to commit liquid funds to mid- to long-term investments
during a period when the yield curve was relatively flat such as existed during
most of 1997, and in anticipation of increased funding needs as the loan
portfolios of the Banks grow.
The primary sources of liquidity of the Company on a stand alone basis (the
"Parent Company") are the receipt of dividends from the Banks, the ability to
raise capital (See "--CAPITAL ACTIVITIES") and a revolving line of credit (See
"--BORROWINGS"). The availability of dividends from the Banks is limited by
28
<PAGE>
various statutes and regulations of state and federal law. (See Note 9 of Notes
to Consolidated Financial Statements contained in "Item 8. Financial Statements
and Supplementary Data" and "Item 1. Business-- Supervision and
Regulation--DIVIDENDS"). California law restricts the amount available for cash
dividends by state-chartered banks to the lesser of retained earnings or the
bank's net income for its last three fiscal years (less any distributions to
shareholders made during such period). In the event a bank has no retained
earnings or net income for its last three fiscal years, cash dividends may be
paid in an amount not exceeding the net income for such bank's last preceding
fiscal year only after obtaining the prior approval of the DFI. In conjunction
with the acquisition of SMB on January 27, 1998, the Company received approval
to take additional dividends from SCB and SMB. In January 1998, dividends of $9
million and $45 million were taken from SCB and SMB, respectively.
INVESTMENT PORTFOLIO
The fair value of securities available for sale decreased approximately $118
million from $320.3 million at December 31, 1996 to $201.9 million at December
31, 1997. This decrease is largely attributable to increased loan production and
an increase in federal funds investments.
The fair value of securities available for sale at the dates indicated are
summarized in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government securities............................... $ 107,536 $ 168,353 $ 45,452
U.S. Agency securities or insured obligations............ 53,515 92,393 65,783
Mortgage-backed securities............................... 39,633 48,290 54,353
Other debt securities.................................... 1,220 1,860 416
---------- ---------- ----------
Total debt securities.................................. 201,904 310,896 166,004
Mutual funds............................................. -- 9,078 9,240
Other equity securities.................................. -- 283 250
---------- ---------- ----------
Total.................................................. $ 201,904 $ 320,257 $ 175,494
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
In 1997, to bring all Banks under the Company's asset/liability management
philosophy, the Banks reclassified their entire held-to-maturity portfolio to
available-for-sale. At that time, the Banks collectively held approximately $2.9
million in municipal, treasury note, collateralized mortgage obligations
("CMOs") and agency securities as held-to-maturity.
The following table shows the maturities of debt securities available for
sale at December 31, 1997 (Dollars in thousands):
<TABLE>
<CAPTION>
1 YEAR THRU 5 YEARS THRU
TOTAL 1 YEAR OR LESS 5 YEARS 10 YEARS
---------------------- ------------------------ ------------------------ ------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ----- ----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Government securities... $ 107,536 5.87% $ 62,128 5.90% $ 45,408 5.83% $ -- --
US Agency or insured
obligations.............. 53,515 6.09% 20,457 5.77% 32,448 6.29% -- --
Mortgage-backed
Securities............... 39,633 6.56% 12,168 7.05% 16,149 6.42% 6,146 6.29%
Other debt securities...... 1,220 4.31% -- -- 365 3.81% 404 4.27%
--------- ----------- ----------- -----------
Total.................... $ 201,904 6.05% $ 94,753 6.02% $ 94,370 6.08% $ 6,550 6.17%
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Amortized cost........... $ 202,064 $ 94,837 $ 94,496 $ 6,615
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
<CAPTION>
OVER 10 YEARS
------------------------
AMOUNT YIELD
----------- -----
<S> <C> <C>
US Government securities... -- --
US Agency or insured
obligations.............. 610 6.09%
Mortgage-backed
Securities............... 5,170 6.16%
Other debt securities...... 451 4.76%
-----------
Total.................... $ 6,231 6.05%
-----------
-----------
Amortized cost........... $ 6,116
-----------
-----------
</TABLE>
29
<PAGE>
The following table shows the carrying amounts of the securities held to
maturity at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government securities....................................... $ -- $ 1,147 $ 485
U.S. Agency securities........................................... -- 3,989 4,500
Mortgage-backed securities....................................... -- 1,921 1,676
--------- --------- ---------
$ -- $ 7,057 $ 6,661
--------- --------- ---------
--------- --------- ---------
</TABLE>
At December 31, 1997, the Company did not have investments in securities
issued by any one non-federal issuer which exceeded ten percent of shareholders'
equity.
The Banks may hold derivative securities as part of their investment
portfolios. At December 31, 1997, the Bank's held three CMOs with an amortized
cost of approximately $1.042 million and a current market value of approximately
$1.052 million. The weighted average yield of these investments was 7.19 percent
and the weighted average life was 1.88 years as of December 31, 1997. All three
CMOs have been tested no less than annually using the Federal Financial
Institutions Examination Council ("FFIEC") "High Risk Security Test" and each of
the securities has passed the annual tests. This stress test is used by bank
regulators to assess the relative risks of investments in CMOs. A security that
passes this test is not considered to be "high-risk;" a security that fails the
test may be subject to additional regulatory scrutiny, and under the most severe
case, the bank could be asked to sell the security.
The Banks do not have securities trading accounts and do not intend to trade
securities. For further information, see Note 4 of Notes to Consolidated
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
LOAN AND LEASE PORTFOLIO
The Company, through the Banks, concentrates its lending activities in three
principal areas
(1) REAL ESTATE LOANS. Real estate loans are comprised of construction
loans, miniperm loans collateralized by first or junior trust deeds on specific
properties and equity lines of credit. The properties collateralizing real
estate loans are principally located in the Company's primary market areas of
Los Angeles, Orange and San Diego counties and the contiguous communities. The
construction loans are comprised of loans on residential and income producing
properties generally have terms of less than two years and typically bear an
interest rate that floats with the prime rate or other established index. The
miniperm loans finance the purchase and/or ownership of income producing
properties. Miniperm loans are generally made with an amortization schedule
ranging from fifteen to thirty years with a lump sum balloon payment due in one
to ten years. Equity lines of credit are revolving lines of credit
collateralized by junior trust deeds on real properties. They bear a rate of
interest that floats with the prime rate, LIBOR, or other established index and
have maturities of five to seven years. The Company also makes a small number of
loans on 1-4 family residential properties and 5 or more unit residential
properties. From time to time, the Company purchases participation interests in
loans made by other institutions. These loans are subject to the same
underwriting criteria and approval process as loans made directly by the
Company. The Banks' real estate portfolio is subject to certain risks, including
(i) a possible downturn in the Southern California economy such as that which
occurred during the early 1990's, (ii) interest rate increases due to inflation,
(iii) reduction in real estate values in Southern California, and (iv) continued
increase in competitive pricing and loan structure. The Banks strive to reduce
the exposure to such risks by (i) reviewing each loan request and renewal
individually, (ii) using a dual signature approval system,
30
<PAGE>
whereby both the marketing and credit administration departments must approve
each request individually, and (iii) following strict written loan policies.
Each loan request is reviewed on the basis of the Bank's ability to recover both
principal and interest in view of the inherent risks.
(2) COMMERCIAL LOANS. Commercial loans are made to finance operations, to
provide working capital or for specific purposes, such as to finance the
purchase of assets, equipment or inventory. Since a borrower's cash flow from
operations is generally the primary source of repayment, the Company's policies
provide specific guidelines regarding required debt coverage and other important
financial ratios. Commercial loans include lines of credit and commercial term
loans. Lines of credit are extended to businesses or individuals based on the
financial strength and integrity of the borrower and are generally (with some
exceptions) collateralized by short term assets such as accounts receivable and
inventory (monitored by the Company's asset based lending department), equipment
or real estate and generally have a maturity of one year or less. Such lines of
credit bear an interest rate that floats with the prime rate, LIBOR, or other
established index. Commercial term loans are typically made to finance the
acquisition of fixed assets, to refinance short term debt originally used to
purchase fixed assets or, in rare cases, to finance the purchase of businesses.
Commercial term loans generally have terms from one to five years. Commercial
term loans may be collateralized by the asset being acquired or other available
assets and bear interest which either floats with the prime rate, LIBOR, or
other established index or is fixed for the term of the loan. The Banks'
portfolio of commercial loans is subject to certain risks, including (i) a
possible downturn in the Southern California economy which could potentially be
brought on by large companies or industries leaving the state, (ii) possible
higher interest rates, and (iii) the possible deterioration of companies
financial capabilities over time. The Banks strive to reduce the exposure to
such risks through (i) a dual signature approval system, whereby both the
marketing and credit administration departments must approve each credit request
individually, and (ii) following strict written loan policies. In addition,
loans based on short term asset values are monitored on a monthly or quarterly
bases. In general, the Banks receive and review financial statements of
borrowing customers on an ongoing basis during the term of the relationship and
react to any deterioration noted.
(3) CONSUMER LOANS AND LEASES. Consumer loans include personal loans, auto
loans, boat loans, home improvement loans, equipment loans, revolving lines of
credit and other loans typically made by banks to individual borrowers. The
Company also makes leases on new and used automobiles. These leases may be
closed-end or commercial leases, have terms of one to five years and bear
interest at a fixed rate. The Banks' consumer loan portfolio is subject to
certain risks, including (i) the high amount of credit offered to consumers in
the market, (ii) the possibility of higher interest rates due to possible
inflation, and (iii) the consumer bankruptcy laws which allow consumers to
discharge certain debts. The Banks strive to reduce the exposure to such risks
through (i) the use of standardized credit scoring techniques which are
continually updated in light of any recent trends and (ii) the direct approval
of loans in excess of $100,000 by credit administration department using a dual
signature system of approval and strict adherence with written credit policies.
In addition to the dual signature method of loan approval and strict
adherence to written lending policies, all major loan commitments are reviewed
after approval, on a monthly basis, by an outside, independent loan review team.
31
<PAGE>
The following table sets forth the amount of loans and leases outstanding at
the end of the following periods including loans and leases available for sale,
according to the type of loan. The Company's lending activities are
predominantly in Southern California, and the Company has no foreign loans.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate construction............................. $ 65,982 $ 59,952 $ 31,403 $ 33,854 $ 45,615
Real estate mortgage................................. 377,293 313,620 188,842 170,731 184,965
Commercial........................................... 362,083 342,737 248,259 174,058 174,143
Leases............................................... 1,934 3,027 3,463 4,159 4,532
Installment and other................................ 76,052 100,456 72,837 58,115 53,430
---------- ---------- ---------- ---------- ----------
Gross loans and leases............................. 883,344 819,792 544,804 440,917 462,685
---------- ---------- ---------- ---------- ----------
Less:
Unearned lease income.............................. (226) (364) (399) (544) (562)
Deferred loan fees................................. (2,384) (2,070) (1,363) (1,132) (1,148)
Allowance for loan and lease losses................ (15,894) (15,757) (13,130) (12,115) (19,077)
---------- ---------- ---------- ---------- ----------
Net loans and leases............................. $ 864,840 $ 801,601 $ 529,912 $ 427,126 $ 441,898
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Gross loans increased $63.6 million from $819.8 million at December 31, 1996
to $883.3 million at December 31, 1997 and the allowance for loan and lease
losses increased $137 thousand from $15.8 million at December 31, 1996 to $15.9
million at December 31, 1997. The increase in loans and leases during 1997 is
attributable primarily to the continued growth of the Southern California
economy and the associated borrowing requirements of the Company's customers to
participate in that growth. The minimal growth in the allowance for loan and
lease losses during 1997 is attributable primarily to a significant reduction in
non-performing loans and leases during the period.
With certain exceptions, a bank is permitted under California law to make
loans to a single borrower in aggregate amounts up to 25 percent of the sum of
shareholders' equity (excluding goodwill and the effect of the unrealized gain
or loss on securities available for sale included in shareholders' equity),
allowance for loan and lease losses, capital reserves, if any, and debentures,
if any, for "secured loans" (as defined for regulatory purposes), and up to 15
percent of such sum for the aggregate of "unsecured loans" (as defined for
regulatory purposes). As of December 31, 1997 these consolidated lending limits
for the Banks were approximately $31.0 million for secured loans, and
approximately $18.6 million for unsecured loans. The Company sells
participations in loans between its subsidiaries and to outside parties where
necessary to stay within lending limits or otherwise to limit the Company's
exposure in particular credits. Where deemed appropriate to better utilize
available funds, the Company may purchase participations in loans. At December
31, 1997, there are no loans outstanding to a single borrower which exceed these
limits.
MATURITIES OF LOANS AND LEASES. As is customary in the banking industry,
loans that meet sound underwriting criteria can be renewed by mutual agreement
between the Company and the borrower.
32
<PAGE>
Because the Company is unable to estimate the extent to which its borrowers will
renew their loans, the table below is based on contractual maturities at
December 31, 1997:
<TABLE>
<CAPTION>
ONE YEAR
ONE YEAR OR THROUGH 5 OVER 5
LESS YEARS YEARS TOTAL
----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate construction.................... $ 50,774 $ 13,247 $ 1,961 $ 65,982
Real estate mortgage........................ 67,890 171,052 138,351 377,293
Commercial.................................. 191,780 119,114 51,189 362,083
Installment, leases, and other.............. 31,347 28,082 18,557 77,986
----------- ---------- ---------- ----------
Total................................... $ 341,791 $ 331,495 $ 210,058 $ 883,344
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Loan maturing after one year with:
Fixed interest rates...................... $ 145,539 $ 116,598
Variable interest rates................... 185,956 93,461
---------- ----------
Total................................... $ 331,495 $ 210,058
---------- ----------
---------- ----------
</TABLE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES. The following table
shows the Company's nonaccrual, past due and restructured loans and leases.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases:
Real estate construction.................................. $ -- $ 1,031 $ 4,545 $ 7,021 $ 6,505
Real estate mortgage...................................... 6,331 11,471 10,983 1,479 10,308
Commercial................................................ 844 2,454 1,572 7,862 10,838
Leases.................................................... -- -- 27 -- 26
Installment and other..................................... 313 1,201 176 452 319
--------- --------- --------- --------- ---------
Total................................................... $ 7,488 $ 16,157 $ 17,303 $ 16,814 $ 27,996
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total nonaccrual loans and leases as a percentage of gross
loans and leases.......................................... .85% 1.97% 3.18% 3.81% 6.05%
Allowance for loan and lease losses to nonaccrual loans and
leases.................................................... 212.26% 97.52% 75.88% 72.05% 68.14%
Loans past due 90 days or more on accrual status:
Real estate mortgage...................................... $ -- $ -- $ -- $ 199 $ 124
Commercial................................................ 23 193 -- 1,014 375
Installment and other..................................... 8 -- -- -- 6
--------- --------- --------- --------- ---------
Total................................................... $ 31 $ 193 $ -- $ 1,213 $ 505
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Restructured loans:
On accrual status......................................... $ 3,107 $ 1,887 $ 4,528 $ 3,262 $ --
On nonaccrual status(1)................................... 6,346 5,170 168 8,024 1,399
--------- --------- --------- --------- ---------
Total................................................... $ 9,453 $ 7,057 $ 4,696 $ 11,286 $ 1,399
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Included in nonaccrual loans above.
Nonaccrual loans decreased $8.7 million from $16.2 million at December 31,
1996 to $7.5 million at December 31, 1997. The decrease represents an
improvement of $6.6 million in Western's nonaccrual loans and leases due to two
real estate loans which were foreclosed upon, converted to OREO and
33
<PAGE>
subsequently sold during 1997. Nonaccrual loans and leases at SCB decreased by
approximately $2.1 million during the same period of time due in part to the
addition of a $2.8 million real estate loan, payments on nonaccrual loans by
borrowers, and the transfer of one real estate loan for $867 thousand to OREO.
Total nonaccrual loans and leases as a percentage of gross loans and leases
decreased from 1.97 percent at December 31, 1996 to .85 percent at December 31,
1997.
There are no commitments to lend additional funds to borrowers listed as
nonaccrual or past due 90 days or more.
The Company's policy concerning non-performing loans is to cease accruing
interest, and to charge off all accrued and unpaid interest on loans which are
past due as to principal and/or interest for at least 90 days, or at such
earlier time as management determines timely collection of the interest to be in
doubt. However, in certain circumstances loans which are past due 90 days or
more may continue accruing interest or interest may not be charged off when the
related loans are well secured or in the process of being collected. When the
Company receives cash on nonaccrual loans or leases, the Company's policy is to
record such receipts first as a reduction to the principal and then as interest
income. A non-performing loan or lease may be returned to accrual status if the
loan or lease performs for a period of six months.
The Company has not been active in areas that involve hazardous waste. Based
on portfolio reviews by the Company and credit reviews during regulatory
examinations, one loan with a principal balance of $2.8 million has been
identified being impacted by hazardous material. At this time the resolution of
this hazardous material issue is not expected to have a material impact on the
Company.
POTENTIAL PROBLEM LOANS AND IMPAIRED LOANS. "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 the contractual terms of the loan
agreement. The category of "impaired loans" is not coextensive with the category
of "nonaccrual loans," although the two categories overlap. "Nonaccrual loans"
include impaired loans and are those on which the accrual of interest is
discontinued when collectibility of principal or interest is uncertain or
payments of principal or interest have become contractually past due 90 days.
The Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired, if (i) it is probable that the Company will collect all amounts due in
accordance with the contractual terms of the loan or (ii) the loan is not a
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
34
<PAGE>
At December 31, 1997 and 1996, impaired loans and leases and the related
specific loan and lease loss allowances were as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------
ALLOWANCE
FOR LOAN
RECORDED AND LEASE NET
INVESTMENT LOSSES INVESTMENT
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances...................................................... $ 2,118 $ 679 $ 1,439
Without specific allowances................................................... 11,364 -- 11,364
----------- ----------- -----------
Total impaired loans and leases............................................. $ 13,482 $ 679 $ 12,803
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------
ALLOWANCE
FOR LOAN
RECORDED AND LEASE NET
INVESTMENT LOSSES INVESTMENT
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances...................................................... $ 9,938 $ 2,172 $ 7,766
Without specific allowances................................................... 11,096 -- 11,096
----------- ----------- -----------
Total impaired loans and leases............................................. $ 21,034 $ 2,172 $ 18,862
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Except as reflected above, management is not aware of any borrowers who are
experiencing severe financial difficulties, or who, in the normal course of
business, represent any identified loss potential. The Company monitors all
loans and completes a monthly internal watch list report, which is inclusive of
both loans past due and borrowers that have been identified for closer
monitoring.
LOAN CONCENTRATIONS. The Company's lending activities are predominantly in
Southern California. Other than this geographical concentration, the Company
considers the loan portfolios to be diverse, and there are no specific
concentrations to any one borrower or group of borrowers that are engaged in
similar activities which would cause them to be similarly impacted by economic
or other considerations.
35
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The following table summarizes loan balances, loans charged off, the
provision for loan and lease losses charged to expense, the allowance, and loan
recoveries.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of the year................. $ 15,757 $ 13,130 $ 12,115 $ 19,077 $ 13,687
Loans and leases charged off:
Real estate mortgage............................. 1,600 1,632 5,335 5,318 4,503
Real estate construction......................... -- 1,017 739 3,695 1,394
Commercial....................................... 2,007 1,481 2,567 3,321 7,066
Leases........................................... -- 27 11 48 120
Installment and other............................ 558 518 925 511 969
---------- ---------- ---------- ---------- ----------
Total loans and leases charged off............. 4,165 4,675 9,577 12,893 14,052
---------- ---------- ---------- ---------- ----------
Recoveries on loans and leases charged off:
Real estate mortgage............................. 93 138 542 488 10
Real estate construction......................... 41 9 -- 228 2
Commercial....................................... 1,198 873 625 1,541 1,281
Leases........................................... -- -- 34 52 12
Installment and other............................ 170 103 210 112 218
---------- ---------- ---------- ---------- ----------
Total recoveries on loans and leases charged
off.......................................... 1,502 1,123 1,411 2,421 1,523
---------- ---------- ---------- ---------- ----------
Net loans and leases charged off............... 2,663 3,552 8,166 10,472 12,529
---------- ---------- ---------- ---------- ----------
Provision charged to operating expense............. 2,800 1,018 8,564 3,510 17,919
Addition to allowance due to:
Acquisition of Western........................... -- 5,041 -- -- --
Loan portfolio purchases......................... -- 120 617 -- --
---------- ---------- ---------- ---------- ----------
Balance at the end of the year....................... $ 15,894 $ 15,757 $ 13,130 $ 12,115 $ 19,077
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Loans:
Average loans and leases outstanding during year... $ 868,466 $ 601,115 $ 485,983 $ 431,429 $ 501,166
Gross loans and leases at end of year.............. $ 883,344 $ 819,792 $ 544,804 $ 440,917 $ 462,685
Ratios:
Net loans and leases charged off to average loans
and leases....................................... 0.31% 0.59% 1.68% 2.43% 2.50%
Allowance as a percent of end of year loans and
leases........................................... 1.80% 1.92% 2.41% 2.75% 4.12%
</TABLE>
The allowance for loan and lease losses increased from $15.8 million at
December 31, 1996 to $15.9 million at December 31, 1997. Net loans and leases
charged-off decreased $889 thousand from $3.6 million at December 31, 1996 to
$2.7 million at December 31, 1997, and the provision charged to operating
expense increased $1.8 million from $1.0 million at December 31, 1996 to $2.8
million at December 31, 1997, respectively.
The Company's local markets were severely affected by the recession in 1993
through 1995, and in several instances borrowers who had never reported
financial difficulties as well as borrowers whose loans were past due declared
bankruptcy. During 1996 the economy started a slow recovery which was evidenced
by the decrease in net charge-offs for 1996 and 1997.
36
<PAGE>
The allowance for loan and lease losses as a percentage of end of year loans
and leases has declined from 4.12 percent at December 31, 1993 to 1.80 percent
at December 31, 1997 along with a decline in the percentage of net loans and
leases charged off to average loans and leases from 2.50 percent at December 31,
1993 to 0.31 percent at December 31, 1997. While the allowance as a percentage
of end of year loans and leases has declined from 1.92 percent to 1.80 percent
from December 31, 1996 to 1997, respectively, the allowance for loan and lease
losses as a percentage of nonaccrual loans has increased from 98 percent to 212
percent from December 31, 1996 to December 31, 1997, respectively.
The following table reflects management's allocation of the allowance for
loan and lease losses by loan category and the ratio of loans and leases in each
category to total loans and leases at December 31 for each of the last five
years:
<TABLE>
<CAPTION>
ALLOWANCE AS OF DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate construction............................. $ 891 $ 726 $ 864 $ 2,576 $ 3,297
Real estate mortgage................................. 4,730 6,891 4,439 3,978 5,193
Commercial........................................... 6,580 4,118 4,246 3,192 5,311
Leases............................................... 47 47 47 88 85
Installment and other................................ 1,243 1,109 1,243 978 714
Not allocated........................................ 2,403 2,866 2,291 1,303 4,477
---------- ---------- ---------- ---------- ----------
Total............................................ $ 15,894 $ 15,757 $ 13,130 $ 12,115 $ 19,077
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
LOANS AND LEASES AT DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate construction............................. $ 65,982 $ 59,952 $ 31,403 $ 33,854 $ 45,615
Real estate mortgage................................. 377,293 313,620 188,842 170,731 184,965
Commercial........................................... 362,083 342,737 248,259 174,058 174,143
Leases............................................... 1,934 3,027 3,463 4,159 4,532
Installment and other................................ 76,052 100,456 72,837 58,115 53,430
---------- ---------- ---------- ---------- ----------
Total............................................ $ 883,344 $ 819,792 $ 544,804 $ 440,917 $ 462,685
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF LOANS AND LEASES
TO TOTAL LOANS AND LEASES AT
DECEMBER 31,
--------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate construction.................................... 7% 8% 6% 8% 10%
Real estate mortgage........................................ 43% 38% 35% 39% 40%
Commercial.................................................. 41% 42% 45% 39% 38%
Leases...................................................... 0% 0% 1% 1% 1%
Installment and other....................................... 9% 12% 13% 13% 11%
---- ---- ---- ---- ----
Total................................................... 100% 100% 100% 100% 100%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
The allowance for loan and lease losses allocated to the loan and lease
categories shown above is based on previous loan and lease loss experience, the
level of nonaccrual loans, management's review of classified loans, evaluation
of the current loan portfolio, and anticipated economic conditions. While the
allowance for loan and lease losses is allocated to specific loans and to
portfolio segments, the allowance is general in nature and is available for the
portfolio in its entirety.
37
<PAGE>
At December 31, 1997, the Company had identified impaired loans with a
recorded investment of approximately $13.5 million. An allowance of $679
thousand, representing the difference between the value of collateral supporting
these loans and their outstanding balance, is included in the allowance for loan
and lease losses. For further information on loans and leases, see Note 5 of
Notes to Consolidated Financial Statements contained in "Item 8. Financial
Statements and Supplementary Data."
The Company has an established monitoring system for its loans and leases in
order to identify impaired loans and potential problem loans and to permit
periodic evaluation of impairment and the adequacy of allowance for loan and
lease losses in a timely manner. All problem loans and leases are monitored on a
monthly basis making appropriate adjustments to grade classifications where
necessary. This monitoring system and allowance methodology includes a
loan-by-loan and lease-by-lease analysis for all classified loans and leases as
well as loss factors for the balance of the portfolio that are based on
migration analysis relative to both the classified and the unclassified portion
of the portfolio. This analysis includes such factors as historical loss
experience, current portfolio delinquencies, and risk levels of classified loans
and leases and particular loan and lease pool categories.
The Company is required under applicable law and regulations to review its
assets on a regular basis and to classify them as "pass," "special mention,"
"substandard," "doubtful," or "loss." An asset which possesses no apparent
weakness or deficiency is designated "pass." An asset which possesses weaknesses
or deficiencies deserving close attention is designated as "special mention." An
asset, or a portion thereof, is generally classified as "substandard" if it
possesses a well-defined weakness which could jeopardize the timely liquidation
of the asset or realization of the collateral at the asset's book value.
Substandard assets are characterized by the possibility that the institution
will sustain some loss if the deficiencies are not corrected. An asset, or
portion thereof, is classified as "doubtful" if a probable loss of principal
and/or interest exists but the amount of the loss, if any, is subject to the
outcome of future events, which are undeterminable at the time of
classification. If an asset, or portion thereof, is classified as "loss," the
Company charges off such amount.
On a quarterly basis, senior management and the board of directors of the
Company review the adequacy of the allowance for loan and lease losses. Special
Asset Credit Reports ("SAC Reports") are prepared and reviewed by senior
management for each loan and lease on the Company's classified asset listing.
SAC Reports include all pertinent details about the loan or lease, a write-up of
the current status, steps being taken to correct any problems, a detailed
workout plan and recommendations as to a classification of the loans and leases
as "pass," "special mention," "substandard," "doubtful," or "loss." Loans and
leases classified as "loss" are immediately charged against the allowance for
loan and lease losses.
Based on the foregoing discussion and all of the factors analyzed by
management in determining the adequacy of the allowance for loan and lease
losses, management believes that the allowance is adequate at December 31, 1997.
Management utilizes its best judgement in providing for possible loan and lease
losses and establishing the allowance for loan and lease losses. However, the
allowance is an estimate which is inherently uncertain and depends on the
outcome of future events. Although the Company believes that its allowance for
loan and lease losses is adequate, there can be no assurance that the allowance
will be adequate to cover future loan and lease losses.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of real estate acquired
through foreclosure or through the receipt of a deed in lieu of foreclosure.
These assets are recorded at the lower of the carrying value of the loan or the
fair value less selling costs of the related real estate. The excess carrying
value, if any, over the fair market value of the asset received is charged to
the allowance for loan and lease losses at the time of acquisition. Any
subsequent decline in the fair market value of the OREO is recognized as a
38
<PAGE>
charge to operations and a corresponding decrease to the OREO asset. Gains from
sales and operating expenses associated with OREO assets are included in
operations when realized.
The following table summarizes the Company's net OREO portfolio:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Other Real Estate Owned....... $6,261 $7,082 $4,388 $9,130 $9,715
Percent of Total Assets....... 0.45% 0.53% 0.51% 1.20% 1.22%
</TABLE>
DEPOSITS
In 1995, the Banks along with banks in Southern California, progressively
increased deposit rates which had been held low in 1994 due to the lack of
competition for deposits at a time when banks were still operating with low or
lower than normal loan demand. Starting in mid-1995 and continuing into 1997,
the Banks along with banks in Southern California, have generally become much
more aggressive in pricing time deposits, but have yet to make a significant
increase in the rate paid on interest-bearing transactional accounts.
The Company provides a range of deposit types to meet the needs of the local
communities. Time deposits, which are normally sensitive to competitive rate
changes, are generally used to expand or contract the overall liability position
needed to meet the various management ratios established for liquidity, capital,
loans to deposits, and other funding measurements. As a policy, the Company does
not accept or solicit brokered deposits.
The following table shows the average amount of interest bearing and
non-interest bearing deposits and rates as of December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 AVERAGE 1996 AVERAGE 1995 AVERAGE
------------------ ------------------ ------------------
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
deposits.................... $ 408,518 0.00% $ 300,665 0.00% $ 239,886 0.00%
Interest bearing demand
deposits.................... 394,340 2.67 167,018 2.71 106,921 1.86
Savings deposits.............. 118,565 3.15 179,805 2.65 181,626 2.57
Time deposits................. 273,157 5.12 231,361 5.23 219,462 5.70
---------- ---------- ----------
Total(1).................. $1,194,580 2.37% $ 878,849 2.43% $ 747,895 2.56%
---------- ------ ---------- ------ ---------- ------
---------- ------ ---------- ------ ---------- ------
</TABLE>
- ------------------------
(1) Includes non-interest bearing deposits for both amounts and rates. Rates
represent weighted averages.
The following table shows the contractual maturity schedule of time
certificates of deposit of $100,000 or more as of December 31, 1997 (dollars in
thousands):
<TABLE>
<S> <C>
3 months or less.................................................. $ 94,603
Over 3 months through 6 months.................................... 22,908
Over 6 months through 12 months................................... 16,407
Over 1 year....................................................... 4,647
---------
Total........................................................... $ 138,565
---------
---------
</TABLE>
Deposits increased approximately $50 million, or 4.2 percent, from $1.18
billion at December 31, 1996 to $1.23 billion at December 31, 1997. This growth
was primarily attributable to the increase in economic activity in Los Angeles,
Orange and San Diego counties. The increase in average deposits from 1995 to
1996 was due mainly to the acquisition of Western in the fourth quarter of 1996.
The increase in average
39
<PAGE>
deposits from 1996 to 1997 is due to both the increased economic activity
discussed above as well as Western's deposits included in the average balance
for the entire year.
BORROWINGS
On September 30, 1996, the Company borrowed $26.5 million from The Northern
Trust Company under a three year revolving credit agreement. Concurrent with the
acquisition of Western, the Company reduced the loan by $15.5 million as a
result of a dividend in the same amount from Western and retained a credit line
of $11.0 million. See "Item 1. Business--Strategic Evolution--WESTERN
ACQUISITION." In 1997 the credit line was increased to $13.0 million. The
balance at December 31, 1997 and 1996 was $7.1 million and $11.0 million,
respectively, and the interest rate was 7.02 percent and 6.75 percent,
respectively. The highest amount outstanding during 1997 and 1996 was $12.2
million and $26.5 million, respectively; the average balance outstanding during
1997 and 1996 was $9.6 million and $2.75 million, respectively; and the average
rate paid in 1997 and 1996 was 7.07 percent and 6.95 percent, respectively.
On January 26, 1998, the Company executed a third amendment to the revolving
credit agreement that, among other things, increased the line of credit from
$13.0 million to $17.5 million and adjusted certain of the financial covenants
in the revolving credit agreement to reflect the Company's larger size. The
revolving loan agreement expires on September 25, 1999.
CCB entered into a note with a shareholder in March 1996 bearing an interest
rate of 3 percent over the prime rate with interest only payable monthly for the
first year; thereafter, quarterly principal payments of $125,000 plus interest
payable monthly. The note would have matured on April 1, 1999. On March 17,
1997, the Company paid down $2.0 million on this note and paid the remaining
unpaid principal balance of $350,000 on April 1, 1997.
For further information, see Note 8 of the Notes to the Consolidated
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
LIQUIDITY, INTEREST RATE RISK AND MARKET RISK
Major sources of liquidity for the Banks include deposits, maturities and
sales of securities, and loan repayments. Deposits are a volatile source of
funds because of changing conditions in the interest rate markets and
competition. The ability to sell securities without significant loss is subject
to changing market conditions. Loan repayments are dependent on the financial
wherewithal of the Company's borrowers.
The Parent 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 and covenants in the Company's
debt instruments. See "Item 1. Business--Supervision and Regulation--BANK
HOLDING COMPANY REGULATION" and "Item 5. Market for Company Common Stock and
Related Security Holder Matters--Dividends."
Management believes that current levels and sources of liquidity are
sufficient to meet the Company's and the Banks' commitments. Management utilizes
its best judgement in determining levels and sources of liquidity. However,
liquidity requirements of the Company are inherently uncertain and depend on the
outcome of future events. Consequently, there can be no assurance that the
current levels and sources of liquidity will be sufficient to meet the Company's
and the Banks' requirements. For further information on commitments, see Notes
11 and 14 of Notes to Consolidated Financial Statements contained in "Item 8.
Financial Statements and Supplementary Data."
In a rising interest rate environment, when rate sensitive assets ("RSA")
exceed rate sensitive liabilities ("RSL"), assets reprice to higher interest
rates faster than liabilities reprice, resulting in a net interest margin that
tends to rise. When RSL exceed RSA, net interest margin will tend to fall in the
same interest rate environment. The opposite effect on the net interest margin
occurs in a decreasing interest rate environment. As a rule, the Company works
to keep the cumulative difference between RSA and RSL
40
<PAGE>
as low as possible over a one year cycle. The following table for the Company
breaks down RSA and RSL at December 31, 1997 based on the earliest possible
repricing dates for variable rate instruments, or for fixed rate assets and
liabilities, on scheduled maturities. In the past few years, various models and
rate sensitive studies have focused on the interest rate risk characteristics of
interest-bearing transactional accounts. Based on historical reviews and
documentation, it appears that these accounts do not have the same degree of
short-term interest rate sensitivity associated with loans that are tied to any
immediate change in prime rate or to short-term investments such as Federal
funds sold. The following table makes certain assumptions as to the interest
rate sensitivity of savings accounts that have limited rate fluctuation during
the past three years, as to money market accounts which are based on a tiered
rate structure depending on the account deposit level, and as to NOW accounts
that have had very little price fluctuation in the past three years:
<TABLE>
<CAPTION>
90 DAYS OR
LESS 90-365 DAYS 1-5 YEARS 5+ YEARS TOTAL
-------------- ----------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal funds sold........................... $ 138,702 $ -- $ -- $ -- $ 138,702
Securities................................... 40,373 87,538 72,770 1,223 201,904
FRB and FHLB stocks.......................... -- -- -- 5,610 5,610
Loans and leases............................. 563,269 77,039 167,208 75,828 883,344
-------------- ----------- ----------- ---------- ------------
Total RSA................................ 742,344 164,577 239,978 82,661 1,229,560
Savings...................................... -- -- 94,233 23,558 117,791
Interest-bearing demand deposits............. -- 141,359 141,360 -- 282,719
NOW accounts................................. -- -- 80,305 20,076 100,381
Time certificates of deposit of $100,000 or
more....................................... 94,603 39,315 4,396 251 138,565
Time certificates of deposit less than
$100,000................................... 64,955 53,881 10,928 70 129,834
Borrowings................................... 12,751 -- -- -- 12,751
-------------- ----------- ----------- ---------- ------------
Total RSL................................ 172,309 234,555 331,222 43,955 782,041
-------------- ----------- ----------- ---------- ------------
Net RSA-RSL............................ $ 570,035 $ (69,978) $ (91,244) $ 38,706 $ 447,519
-------------- ----------- ----------- ---------- ------------
-------------- ----------- ----------- ---------- ------------
Cumulative RSA-RSL........................... $ 500,057 $ 408,813 $ 447,519
----------- ----------- ----------
----------- ----------- ----------
Cumulative as a percentage of total assets... 41.20% 36.14% 29.55% 32.35% 32.35%
-------------- ----------- ----------- ---------- ------------
-------------- ----------- ----------- ---------- ------------
</TABLE>
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1997. Market risk sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments. For discussion of the fair value of financal
instruments as of December 31, 1997, see Note 15 of the Notes to Consolidated
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
41
<PAGE>
EXPECTED MATURITY DATA AT DECEMBER 31, 1997 (1)
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE AT DECEMBER 31, 1997
--------------------------------------------------------------------------------------
THERE- TOTAL FAIR
1998 1999 2000 2001 2002 AFTER BALANCE VALUE
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Loans Receivable
FIXED RATE:
Construction............... $ 5,784 $ 525 $ 85 $ 79 $ 73 $ 873 $ 7,419 7,269
Average interest rate.... 9.59% 9.66% 9.24% 9.24% 9.24% 9.24% 9.61%
Real Estate--Residential... 5,923 5,503 3,648 2,594 1,238 3,815 22,721 22,744
Average interest rate.... 7.51% 8.52% 8.22% 8.42% 7.97% 7.62% 8.28%
Real Estate--Commercial.... 29,930 19,420 17,497 29,371 13,987 44,113 154,318 147,567
Average interest rate.... 7.56% 9.19% 9.26% 9.18% 8.75% 8.90% 8.81%
Commercial................. 37,355 29,164 6,264 4,162 5,590 7,805 90,340 91,377
Average interest rate.... 7.19% 8.41% 9.38% 9.06% 8.82% 8.71% 8.33%
Installment and other...... 19,873 13,316 7,928 5,042 3,035 8,231 57,425 55,287
Average interest rate.... 8.72% 9.53% 9.41% 9.40% 9.50% 9.54% 9.49%
VARIABLE RATE:
Construction............... 46,478 11,542 54 49 44 396 58,563 57,294
Averages interest rate... 9.69% 9.38% 8.50% 8.50% 8.50% 8.50% 9.82%
Real Estate--Residential... 11,636 7,845 5,880 4,539 2,319 7,001 39,220 39,108
Average interest rate.... 8.90% 8.86% 8.99% 8.95% 8.58% 8.30% 8.96%
Real Estate--Commercial.... 64,454 36,199 23,965 12,638 10,603 13,175 161,034 157,864
Average interest rate.... 8.99% 9.40% 9.16% 9.27% 9.15% 9.23% 9.45%
Commercial................. 179,814 39,251 20,755 10,538 6,874 14,511 271,743 265,525
Average interest rate.... 9.40% 9.31% 9.43% 9.09% 9.04% 8.83% 9.54%
Installment and other...... 18,470 1,129 425 323 136 78 20,561 19,145
Average interest rate.... 8.84% 9.05% 9.60% 8.74% 9.60% 9.00% 8.95%
Federal Funds Sold........... 138,702 -- -- -- -- -- 138,702 138,702
Average interest rate.... 5.87% -- -- -- -- -- 5.87%
FRB and FHLB Stock........... -- -- -- -- -- 5,610 5,610 5,610
Average interest rate.... -- -- -- -- -- 6.33% 6.33%
Investment Securities........ 100,293 57,749 23,083 15,498 655 4,786 202,064 201,904
Average interest rate.... 5.70% 5.85% 6.19% 6.12% 7.05% 6.05% 5.84%
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-sensitive
assets..................... $ 658,712 $ 221,643 $ 109,584 $ 84,833 $ 44,554 $ 110,394 $1,229,720 $1,209,396
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
INTEREST-SENSITIVE
LIABILITIES:
Deposits:
NOW........................ $ -- $ 30,115 $ 30,114 $ 10,038 $ 10,038 $ 20,076 $ 100,381 $ 100,381
Average interest rate.... -- 1.26% 1.26% 1.26% 1.26% 1.26% 1.26%
Savings.................... -- 35,337 35,337 11,779 11,780 23,558 117,791 117,791
Average interest rate.... -- 3.14% 3.14% 3.14% 3.14% 3.14% 3.14%
Money-market............... 141,359 70,680 70,680 -- -- -- 282,719 282,719
Average interest rate.... 3.13% 3.13% 3.13% -- -- -- 3.13%
Certificates--Fixed........ 239,505 9,251 4,337 702 723 434 254,952 256,228
Average interest rate.... 5.17% 5.38% 5.90% 5.18% 5.52% 5.78% 5.19%
Certificates--Variable..... 13,249 114 84 -- -- -- 13,447 13,492
Average interest rate.... 5.13% 5.49% 5.31% -- -- -- 5.13%
Borrowings:
Other...................... 5,671 7,080 -- -- -- -- 12,751 12,751
Average interest rate.... 5.30% 7.02% -- -- -- -- 6.26%
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-sensitive
liabilities................ $ 399,784 $ 152,577 $ 140,552 $ 22,519 $ 22,541 $ 44,068 $ 782,041 $ 783,362
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) The Company used certain assumptions to estimate fair values and expected
maturities. For loans, expected maturities are contractual maturities
adjusted for estimated prepayments of principal based on market indicators.
Investment securities, except for mortgage backed securities, are at quoted
market rates and stated maturities. Expected maturities of mortgage backed
securities are based upon cashflow projections for principal prepayments.
For loan fair value computations, the Company used a discounted cashflow
model with discount rates based upon prevailing market rates for similar
types of loans, incorporating adjustments for credit risk. For deposit
liabilities, fair values were calculated using discounted cashflow models
based on market interest rates for different product types and maturity
dates for which the deposits are held.
42
<PAGE>
RESULTS OF OPERATIONS
Banking is a business that depends largely on rate differentials. In
general, the difference between the interest rate paid by the Banks on their
deposits and their other borrowings and the interest rate received by the Banks
on loans extended to their customers and securities held in the Banks'
portfolios comprise the major portion of the Banks' earnings. These rates are
highly sensitive to many factors that are beyond the control of the Banks.
Accordingly, the earnings and growth of the Banks are subject to, among others,
the influence of local, domestic and foreign economic conditions, including
recession, unemployment and inflation.
NET INCOME
Consolidated net income for the year ended December 31, 1997 was $3,162,000,
or $0.29 per diluted
share. This compares with consolidated net income of $8,989,000, or $1.09 per
diluted share, for the year ended December 31, 1996 and a net loss for the year
ended December 31, 1995 of $1,789,000 or $0.28 per diluted share. The decline in
earnings from 1996 to 1997 is primarily the result of the costs incurred in
connection with the CCB Merger and the SCB Merger. The net loss for the year
ended December 31, 1995 was due primarily to the credit problems associated with
the downturn in the California economy. As the table below indicates, the
provision for loan and lease losses, the lower of cost or market adjustment on
loans and OREO expense was substantially higher in 1995 than the subsequent
years:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for loan and lease losses.............................. $ 2,800 $ 1,018 $ 8,564
Lower of cost or market adjustment on loans...................... -- -- 756
OREO expense (income)............................................ $ 242 $ (134) $ 3,080
</TABLE>
Credit quality at the Company has improved substantially since December 31,
1995 due largely to an improved economy in Southern California and management's
focus on credit quality.
Due to the acquisition activity of the Company during 1997, there was a
significant amount of merger costs which are one-time in nature and are not part
of ongoing operating results. See "Item 1. Business-- Strategic Evolution" and
Note 2 of Notes to Consolidated Financial Statements contained in "Item 8.
Financial Statements and Supplementary Data." In addition, since the Western
Acquisition was consummated using the purchase method of accounting, expenses
include goodwill amortization which is also a non-operating expense. As the
following table indicates, on an operating basis, the financial results
43
<PAGE>
of the Company have improved significantly for the year ended December 31, 1997
over the year ended December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1997 1996
---------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
INCOME:
Net income.......................................................... $ 3,162 $ 8,989
ADJUSTMENTS TO NET INCOME TO DERIVE OPERATING INCOME:
Merger costs...................................................... 14,201 --
Merger costs tax benefit.......................................... (2,382) --
---------- ---------
After tax merger costs............................................ 11,819 --
Goodwill amortization............................................. 2,538 1,004
Gain on sale of loans, net of tax................................. (46) (389)
---------- ---------
OPERATING INCOME................................................ $ 17,473 $ 9,604
---------- ---------
---------- ---------
PER SHARE INFORMATION:
Number of shares (weighted average)................................. 10,523.9 8,095.7
Diluted shares...................................................... 10,731.6 8,248.4
Basic net income per share.......................................... $ 0.30 $ 1.11
Diluted net income per share........................................ $ 0.29 $ 1.09
OPERATING PER SHARE EARNINGS:
Basic net income per share........................................ $ 1.66 $ 1.19
Diluted net income per share...................................... $ 1.63 $ 1.16
PROFITABLILITY MEASURES:
Return on average assets............................................ 0.23% 0.90%
Return on average equity............................................ 2.37% 9.78%
OPERATING PROFITABILITY MEASURES:
Return on average tangible assets................................. 1.32% 0.98%
Return on average equity.......................................... 13.1% 10.5%
Efficiency ratio.................................................. 60.2% 77.0%
</TABLE>
The improvement in operating earnings is a result of the Company's focus on
making its operations more efficient and leveraging management and back room
operations. As the consolidation of operations of the entities acquired in 1997
and the SMB Acquisition are completed in 1998, it is expected that the operating
results will continue to improve. However, there can be no assurance that the
Company will be able to successfully consolidate the operations of the entities
acquired or that any reductions in operating costs will result therefrom.
The Company continues to pursue acquisition opportunities and, if
successful, will continue to have merger costs which will affect reported net
income.
NET INTEREST INCOME
The Company's consolidated earnings depend primarily upon the difference
between the income the Banks receive from their loan portfolios and investment
securities, and their cost of funds, including principally interest paid on
savings and time deposits. Interest rates charged on the Banks' loans are
influenced principally by the demand for such loans, the supply of money for
lending purposes, and competitive factors. These factors are, in turn, affected
by general economic conditions and other factors beyond the Banks' control, such
as federal economic and tax policies, the general supply of money in the
economy, governmental budgetary actions, and the actions of the Federal Reserve
Board. See "Item 1. Business--Competition" and "Item 1. Business--Supervision
and Regulation."
44
<PAGE>
The following table provides information on net interest income for the past
three fiscal years, setting forth average balances of interest-earning assets
and interest-bearing liabilities, the income earned and expense recorded thereon
and the resulting average yield-cost ratios:
<TABLE>
<CAPTION>
INTEREST RATES AND INTEREST RATE DIFFERENTIAL
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996
----------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INCOME/ AVERAGE BALANCE INCOME/ YIELD/
(1) EXPENSE YIELD/ COST (1) EXPENSE COST
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks.. $ -- $ -- -- % $ 53 $ 3 5.66%
Securities held to maturity........... 5,830 355 6.09% 8,011 516 6.44%
Securities available for sale......... 264,242 15,359 5.81% 218,504 12,346 5.65%
Federal funds sold.................... 84,106 4,681 5.57% 54,852 2,998 5.47%
Loans and leases (net)(2)............. 841,880 80,639 9.58% 601,115 58,374 9.71%
---------- ---------- --- ---------- ---------- ---
Interest earning assets............. 1,196,058 $ 101,034 8.45% 882,535 $ 74,237 8.41%
---------- ----------
NON INTEREST-EARNING ASSETS:
Cash and due from banks............... 93,432 69,198
Premises and equipment (net).......... 14,164 11,916
Other real estate owned............... 8,373 5,580
Goodwill.............................. 31,657 7,419
Other assets.......................... 12,272 17,442
---------- ----------
Total assets........................ $1,355,956 $ 994,090
---------- ----------
---------- ----------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits...... $ 394,340 $ 10,547 2.67% $ 167,018 $ 4,525 2.71%
Savings deposits...................... 118,565 3,730 3.15% 179,805 4,759 2.65%
Time deposits......................... 273,157 13,999 5.12% 231,361 12,098 5.23%
Federal funds purchased............... 2,964 168 5.67% 462 26 5.63%
Notes payable......................... 9,947 728 7.32% 5,207 469 9.01%
Other borrowings...................... 3,836 186 4.85% 8,145 434 5.33%
---------- ---------- --- ---------- ---------- ---
Interest bearing liabilities.......... 802,809 $ 29,358 3.66% 591,998 $ 22,311 3.77%
---------- ----------
NON INTEREST-BEARING LIABILITIES AND
EQUITY:
Non-interest bearing demand........... $ 408,518 $ 300,665
Non-interest bearing liabilities...... 11,474 9,516
Shareholders' equity.................... 133,155 91,911
---------- ----------
Total liabilities & shareholders'
equity................................ $1,355,956 $ 994,090
---------- ----------
---------- ----------
Net interest income..................... $ 71,676 $ 51,926
---------- ----------
---------- ----------
Net interest margin on interest-earning
assets(3)............................. 5.99% 5.88%
--- ---
--- ---
Net interest spread..................... 4.79% 4.64%
--- ---
--- ---
<CAPTION>
1995
----------------------------------
AVERAGE AVERAGE
BALANCE INCOME/ YIELD/
(1) EXPENSE COST
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks.. $ 1,016 $ 43 4.23%
Securities held to maturity........... 62,092 3,564 5.74%
Securities available for sale......... 142,898 7,162 5.01%
Federal funds sold.................... 48,995 2,846 5.81%
Loans and leases (net)(2)............. 485,983 49,014 10.09%
---------- ---------- -----
Interest earning assets............. 740,984 $ 62,629 8.45%
----------
NON INTEREST-EARNING ASSETS:
Cash and due from banks............... 57,584
Premises and equipment (net).......... 11,879
Other real estate owned............... 9,818
Goodwill.............................. --
Other assets.......................... 11,878
----------
Total assets........................ $ 832,143
----------
----------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits...... $ 106,921 $ 1,984 1.86%
Savings deposits...................... 181,626 4,672 2.57%
Time deposits......................... 219,462 12,511 5.70%
Federal funds purchased............... 303 18 5.94%
Notes payable......................... 2,483 268 10.79%
Other borrowings...................... 6,281 351 5.59%
---------- ---------- -----
Interest bearing liabilities.......... 517,076 $ 19,804 3.83%
----------
NON INTEREST-BEARING LIABILITIES AND
EQUITY:
Non-interest bearing demand........... $ 239,886
Non-interest bearing liabilities...... 6,022
Shareholders' equity.................... 69,159
----------
Total liabilities & shareholders'
equity................................ $ 832,143
----------
----------
Net interest income..................... $ 42,825
----------
----------
Net interest margin on interest-earning
assets(3)............................. 5.78%
-----
-----
Net interest spread..................... 4.62%
-----
-----
</TABLE>
- ------------------------------
(1) Average balances are primarily computed on daily balances during the period.
When such balances are not available, averages are computed on a monthly
basis. Average balances include the effect of discounts and premiums on
loans, investment securities, deposits and borrowings acquired in
acquisitions, as well as deferred loan fees.
(2) Nonaccrual loans are included in the average balances for the periods;
however, interest on such loans has been excluded in computing the average
yields for the periods.
(3) The net interest margin on interest-earning assets for a period is net
interest income divided by average interest-earning assets.
45
<PAGE>
The following table sets forth changes in interest income and interest
expense, and the amount of change attributable to variances in volume, rates and
the combination of volume and rates. The Company has no tax-exempt assets.
<TABLE>
<CAPTION>
INTEREST RATES AND INTEREST RATE DIFFERENTIALS
(IN THOUSANDS)
----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 COMPARED TO 1996 1996 COMPARED TO 1995
---------------------------------------------- ----------------------------------------------
CHANGE DUE TO CHANGE DUE TO
TOTAL --------------------------------- TOTAL ---------------------------------
INCREASE VOLUME & INCREASE VOLUME &
(DECREASE) VOLUME RATE RATE (DECREASE) VOLUME RATE RATE
----------- --------- --------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on
loans..................... $ 22,265 $ 23,381 $ (797) $ (319) $ 9,360 $ 11,612 $ (1,820) $ (432)
Interest-bearing deposits
with banks................ (3) (3) -- -- (40) (41) 15 (14)
Securities held to
maturity.................. (161) (140) (28) 7 (3,048) (3,104) 435 (379)
Securities available for
sale...................... 3,013 2,584 354 75 5,184 3,789 912 483
Federal funds sold.......... 1,683 1,599 55 29 152 340 (168) (20)
----------- --------- --------- ----- ----------- --------- --------- -----
Total interest income... 26,797 27,421 (416) (208) 11,608 12,596 (626) (362)
----------- --------- --------- ----- ----------- --------- --------- -----
INTEREST EXPENSE:
Interest-bearing demand
deposits.................. 6,022 6,159 (58) (79) 2,541 1,115 913 513
Savings deposits............ (1,029) (1,621) 898 (306) 87 (47) 135 (1)
Time deposits............... 1,901 2,186 (241) (44) (413) 678 (1,035) (56)
Federal funds purchased..... 142 141 -- 1 8 9 (1) --
Notes payable............... 259 427 (88) (80) 201 294 (44) (49)
Other borrowings............ (248) (230) (39) 21 83 104 (16) (5)
----------- --------- --------- ----- ----------- --------- --------- -----
Total interest expense.... 7,047 7,062 472 (487) 2,507 2,153 (48) 402
----------- --------- --------- ----- ----------- --------- --------- -----
Net interest income..... $ 19,750 $ 20,359 $ (888) $ 279 $ 9,101 $ 10,443 $ (578) $ (764)
----------- --------- --------- ----- ----------- --------- --------- -----
----------- --------- --------- ----- ----------- --------- --------- -----
</TABLE>
INTEREST INCOME
Interest income increased by $26.8 million for the year ended December 31,
1997 compared to 1996 and $11.6 million for the year ended December 31, 1996
compared to 1995. The increase for 1997 compared to 1996 is due largely to the
increase in average earning assets resulting from the acquisition of Western.
Average earning assets for Western are only included in the 1996 average totals
for three months. Interest income also improved as a result of a significant
decline in non-performing assets from $23.2 million at December 31, 1996 to
$13.7 million at December 31, 1997. The increase in interest income from the
year ended December 31, 1995 to the year ended December 31, 1996 is also a
result of the increase in average earning assets as a result of the Western
Acquisition. Due to the use of purchase accounting for the Western Acquisition,
Western's average balances are not included with the Company until October 1,
1996.
INTEREST EXPENSE
Interest expense increased by $7.0 million for the year ended December 31,
1997 compared with the year ended December 31, 1996 and increased by $2.5
million for the year ended December 31, 1996 compared to the year ended December
31, 1995. The increase in interest expense in both 1997 and 1996 compared to the
respective prior years is due mostly to the increase in average interest-bearing
deposits as a result of the Western Acquisition. Due to the use of purchase
accounting for the Western Acquisition, Western's average balances are not
included with the Company until October 1, 1996.
46
<PAGE>
NON-INTEREST INCOME
The following table sets forth the details of non-interest income for the
years ended December 31, 1997 and December 31, 1996. Western was acquired on
October 1, 1996. Therefore, 1996 only includes three months of non-interest
income from Western, while 1997 includes a full year of non-interest income for
Western. The amount for the Parent Company and SCB includes the same entities
for both years.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- --------------------------------------- INCREASE
PARENT PARENT (DECREASE)
COMPANY AND COMPANY AND BEFORE
CONSOLIDATED WESTERN SCB CONSOLIDATED WESTERN SCB WESTERN
------------- ----------- ----------- ------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts......................... $ 3,240 $ 409 $ 2,831 $ 3,218 $ 189 $ 3,029 $ (198)
Escrow fees........................ 827 -- 827 781 -- 781 46
Other fee income................... 3,466 256 3,210 3,486 126 3,360 (150)
Other income....................... 1,733 386 1,347 1,444 23 1,421 (74)
------ ----------- ----------- ------ ----- ----------- -----
Operating non-interest income.... 9,266 1,051 8,215 8,929 338 8,591 (376)
Gain on sale of loans.............. 78 -- 78 665 -- 665 (587)
Gain on sale of securities
available for sale............... 342 107 235 281 267 14 221
------ ----------- ----------- ------ ----- ----------- -----
Total non-interest income........ $ 9,686 $ 1,158 $ 8,528 $ 9,875 $ 605 $ 9,270 $ (742)
------ ----------- ----------- ------ ----- ----------- -----
------ ----------- ----------- ------ ----- ----------- -----
</TABLE>
Annualized 1996 operating non-interest income for Western would be
approximately $1.4 million, as compared with approximately $1.1 million in 1997.
This reduction at Western is due mostly to more customers paying for service
charges with balances and Western no longer servicing a portfolio of loans in
1997.
Without Western, operating non-interest income declined approximately $376
thousand from $8.6 million to $8.2 million. Most of this difference can be
attributed to rental income and related income on other real estate owned of
approximately $387 thousand in 1996 which did not reoccur in 1997.
The following table shows the details of non-interest income for the years
ended December 31, 1996 and December 31, 1995. Western was acquired on October
1, 1996. Therefore, 1996 includes three months of non-interest income from
Western, while 1995 does not include any non-interest income for Western. The
amount for the Parent Company and SCB includes the same entities for both years.
<TABLE>
<CAPTION>
1996
--------------------------------------- INCREASE
PARENT (DECREASE)
COMPANY AND 1995 BEFORE
CONSOLIDATED WESTERN SCB CONSOLIDATED WESTERN
------------- ----------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts................. $ 3,218 $ 189 $ 3,029 $ 2,923 $ 106
Escrow fees......................................... 781 -- 781 308 473
Other fee income.................................... 3,486 126 3,360 3,320 40
Other income........................................ 1,444 23 1,421 1,822 (401)
------ ----- ----------- ------ -----------
Operating non-interest income..................... 8,929 338 8,591 8,373 218
Gain on sale of loans............................... 665 -- 665 145 520
Gain (loss) on sale of securities available for
sale.............................................. 281 267 14 (692) 706
------ ----- ----------- ------ -----------
Total non-interest income......................... $ 9,875 $ 605 $ 9,270 $ 7,826 $ 1,444
------ ----- ----------- ------ -----------
------ ----- ----------- ------ -----------
</TABLE>
47
<PAGE>
Without Western, operating non-interest income increased by approximately
$218 thousand. Escrow fees increased by $473 thousand as the Company emphasized
this business. In 1995, other income included a legal settlement of
approximately $252 thousand which did not reoccur in 1996. The remainder of the
$401 thousand reduction in other income is a result of several smaller amounts.
NON-INTEREST EXPENSE
The following table shows the details of non-interest expense for the years
ended December 31, 1997 and December 31, 1996. Western was acquired on October
1, 1996. Therefore, 1996 only includes three months of non-interest expense for
Western, while 1997 includes a full year of non-interest expense for Western.
The amount for the Parent Company and SCB includes the same entities for both
years.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- --------------------------------------- INCREASE
PARENT PARENT (DECREASE)
COMPANY AND COMPANY AND BEFORE
CONSOLIDATED WESTERN SCB CONSOLIDATED WESTERN SCB WESTERN
------------- ----------- ----------- ------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits.......... $ 25,023 $ 5,520 $ 19,503 $ 23,016 $ 2,025 $ 20,991 ($ 1,488)
Occupancy...................... 7,843 1,254 6,589 7,649 373 7,276 (687)
Advertising and business
development.................. 1,225 228 997 1,342 27 1,315 (318)
Other real estate owned........ 242 (24) 266 (134) (158) 24 242
Insurance...................... 742 154 588 514 41 473 115
Legal expense.................. 2,379 227 2,152 3,396 48 3,348 (1,196)
Other professional services.... 1,327 215 1,112 2,658 253 2,405 (1,293)
Telephone, stationery and
supplies..................... 2,735 392 2,343 2,201 143 2,058 285
Data processing................ 1,667 667 1,000 1,064 186 878 122
Customer services costs........ 1,263 651 612 510 210 300 312
Loan related expenses.......... 612 149 463 614 12 602 (139)
Regulatory assessments......... 533 82 451 791 39 752 (301)
Other.......................... 3,427 903 2,524 3,513 109 3,404 (880)
------------- ----------- ----------- ------------- ----------- ----------- -----------
Operating non-interest
expense.................... 49,018 10,418 38,600 47,134 3,308 43,826 (5,226)
Goodwill amortization.......... 2,538 1,997 541 1,004 499 505 36
Merger related costs........... 14,201 -- 14,201 -- -- -- 14,201
------------- ----------- ----------- ------------- ----------- ----------- -----------
Non-interest expense........... $ 65,757 $ 12,415 $ 53,342 $ 48,138 $ 3,807 $ 44,331 $ 9,011
------------- ----------- ----------- ------------- ----------- ----------- -----------
------------- ----------- ----------- ------------- ----------- ----------- -----------
</TABLE>
Annualized 1996 operating non-interest expense for Western would be
approximately $13.2 million, as compared with approximately $10.4 million in
1997. This reduction at Western is due mostly to the implementation of various
efficiency efforts at Western.
Without Western, operating non-interest expense declined approximately $5.2
million from $43.8 million to $38.6 million. Expenses declined in most
categories as management of the Company focused on more efficient operations and
cost reductions from the acquisitions completed in 1997.
The following table shows the details of non-interest expense for the years
ended December 31, 1996 and December 31, 1995. Western was acquired on October
1, 1996. Therefore, 1996 includes three months
48
<PAGE>
of non-interest expense for Western, while 1996 does not include any
non-interest income for Western. The amount for the Parent Company and SCB
includes the same entities for both years.
<TABLE>
<CAPTION>
1996
-------------------------------------- INCREASE
PARENT (DECREASE)
COMPANY AND 1995 BEFORE
CONSOLIDATED WESTERN SCB CONSOLIDATED WESTERN
------------ ----------- ----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and benefits............................... $ 23,016 $ 2,025 $ 20,991 $ 19,575 $ 1,416
Occupancy........................................... 7,649 373 7,276 7,878 (602)
Advertising and business development................ 1,342 27 1,315 1,199 116
Other real estate owned............................. (134) (158) 24 3,080 (3,056)
Insurance........................................... 514 41 473 670 (197)
Legal expense....................................... 3,396 48 3,348 2,217 1,131
Other professional services......................... 2,658 253 2,405 959 1,446
Telephone, stationery and supplies.................. 2,201 143 2,058 2,337 (279)
Data processing..................................... 1,064 186 878 822 56
Customer services costs............................. 510 210 300 184 116
Loan related expenses............................... 614 12 602 649 (47)
Regulatory assessments.............................. 791 39 752 1,434 (682)
Other............................................... 3,513 109 3,404 3,784 (380)
------------ ----------- ----------- ------------ -----------
Operating non-interest expense.................... 47,134 3,308 43,826 44,788 (962)
Goodwill amortization............................... 1,004 499 505 821 (316)
Merger related costs................................ -- -- -- -- --
------------ ----------- ----------- ------------ -----------
Non-interest expense.............................. $ 48,138 $ 3,807 $ 44,331 $ 45,609 ($ 1,278)
------------ ----------- ----------- ------------ -----------
------------ ----------- ----------- ------------ -----------
</TABLE>
Operating non-interest expense without Western declined by approximately
$962 thousand in 1996 versus 1995. Other real estate expense declined by
approximately $3.1 million, as certain credit problems that occurred in 1995 did
not recur in 1996. Legal expenses in 1996 include approximately $950 thousand,
which was charged to expense to provide for potential losses related to on-going
litigation matters. Salary and benefits increased by approximately $1.4 million
in 1996 over 1996 mostly due increased activity in the escrow division, the
business development group and opening of two new branches in Fountain Valley
and Laguna Beach.
As a result of the CCB Merger and the SCB Merger, the Company incurred
certain merger related costs. These costs are described below:
<TABLE>
<CAPTION>
PAID IN ACCRUED AT
CCB MERGER SCB MERGER TOTAL 1997 DECEMBER 31, 1997
------------- ----------- --------- ---------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment banking fees..................... $ 1,400 $ 3,520 $ 4,920 $ (4,920) $ --
Other professional services................. 697 1,960 2,657 (2,483) 174
Compensation related expense................ 1,055 2,769 3,824 (2,303) 1,521
Conversion costs............................ 252 753 1,005 (225) 780
Branch closure expense...................... -- 790 790 -- 790
Termination of interest rate swap........... -- 446 446 (446) --
Other....................................... -- 559 559 (359) 200
------ ----------- --------- ---------- ------
Total merger related costs.............. $ 3,404 $ 10,797 $ 14,201 $ (10,736) $ 3,465
------ ----------- --------- ---------- ------
------ ----------- --------- ---------- ------
</TABLE>
49
<PAGE>
INCOME TAXES
The Company's effective income tax (tax benefit) rates were 75.3 percent,
28.9 percent, and (49.2) percent for the years ending December 31, 1997, 1996
and 1995, respectively. The difference from the expected rate of 35 percent in
1997 is largely the result of non-deductible merger costs. The difference from
the expected rate of 35 percent in 1996 relates to state income taxes and the
non-deductibility of goodwill for tax purposes, offset by a reduction in the
deferred tax valuation allowance. The difference from the expected rate of 34
percent in 1995 results from state income taxes and the reduction in the
deferred tax asset valuation allowance. At December 31, 1997, the Company had a
net deferred tax asset of approximately $7.8 million. Management has determined
that realization of the deferred tax asset is more likely than not based on
current and expected taxable income. For further information on income taxes,
see Note 10 of Notes to Consolidated Financial Statements contained in "Item 8.
Financial Statements and Supplementary Data."
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data" for information on current
accounting pronouncements and their impact on the Company's consolidated
financial statements.
YEAR 2000 RISKS AND PREPAREDNESS
Many existing computer programs use only two digits to identify a year in a
data field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects the Parent Company and the Banks in that the financial
services business is highly dependent on computer applications in a variety of
ways, including the following: (i) the Company and the Banks rely on computer
systems in almost all aspects of their business, including the processing of
deposits, loans and other services and products offered to customers of the
Banks, the failure of which in connection with the Year 2000 could cause
systemic disruptions and failures in the products and services offered by the
Banks; (ii) other banks, clearing houses, and vendors whose products and
services the Banks use are at risk of systemic disruptions and potential
failures in the event that such entities have not adequately addressed their
Year 2000 issues prior to the Year 2000; (iii) the creditworthiness of borrowers
of the Banks might be diminished by significant disruptions of their business as
result of their own or others' failure adequately to address the Year 2000 issue
prior to the Year 2000; and (iv) Federal Banking Agencies have issued
interagency guidance on the business-wide risk posed to financial institutions
by the Year 2000 problem pursuant to which the Federal Banking Agencies may take
supervisory action against financial institutions that fail appropriately to
address Year 2000 issues prior to the Year 2000, including formal and informal
enforcement actions, the denial of applications to the Federal Banking Agencies,
civil money penalties, and a reduction in the management component rating or the
institution's composite rating.
In order to address the Year 2000 issues facing the Company, management of
the Company has initiated a program to prepare the Parent Company's and the
Banks' computer systems and applications for the Year 2000 (the "Year 2000
Plan"). The primary focus of the Year 2000 Plan is to convert the Parent Company
and each of the Banks to the target systems identified and believed to be Year
2000 compliant. The Company expects to incur internal staff costs as well as
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare for conversion and Year 2000 system
preparations. Testing and conversion of primary system applications and hardware
is expected to cost approximately $1,100,000, to be expended during fiscal years
1998 and 1999. This cost estimate does not include costs associated with
infrastructure and facilities enhancements required in connection with
operational consolidations due to the CCB Merger, the SCB Merger and the SMB
Acquisition. A significant portion of the cost to the Company in connection with
becoming Year 2000 compliant is
50
<PAGE>
expected to be the redeployment of existing technology and operations resources
rather than incremental costs to the Company.
As a part of the Year 2000 Plan, the Company is not only undertaking the
infrastructure and facilities enhancement and testing necessary to ensure that
the Company is adequately prepared for the Year 2000, but also the Company is
communicating with its vendors upon whose services the Banks rely to ensure Year
2000 compliance. Pursuant to the Year 2000 Plan, the Company expects to complete
substantially testing its own systems and the computer-related interactive
vendor systems by December 31, 1998 and to complete all testing by June 1999. In
addition, as part of the credit review process, the Banks are communicating with
their major borrowers in an effort to ensure that such borrowers have taken
appropriate steps to address their Year 2000 issues and will not be materially
affected by any Year 2000 problems. The Company also is preparing contingency
plans to protect the Company in the event that the Company is unable to attain
Year 2000 compliance in certain applications according to the Year 2000 Plan.
Although the Company believes that its Year 2000 Plan and other steps being
taken are adequate to ensure that the Parent Company and the Banks will not be
materially affected by the Year 2000 problem, there can be no assurance that the
Year 2000 Plan and the Company's other Year 2000 remedial and contingency plans
will protect fully the Company or the Banks from the risks associated with the
Year 2000. The analysis of, and preparation for, the Year 2000 and related
problems necessarily rely on a variety of assumptions about future events, and
there can be no assurance that management of the Company has accurately
predicted such future events or that the remedial and contingency plans of the
Company will adequately address such future events. In the event that the
business of any of the Parent Company, the Banks, vendors of the Banks or
customers of the Banks is disrupted as a result of the Year 2000 problem, such
disruption could have a material adverse effect on the Parent Company and the
Banks.
51
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Reports................................................................................ 53
Consolidated Balance Sheets.................................................................................. 58
Consolidated Statements of Operations........................................................................ 59
Consolidated Statements of Changes in Shareholders' Equity................................................... 60
Consolidated Statements of Cash Flows........................................................................ 61
Notes to Consolidated Financial Statements................................................................... 63
</TABLE>
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Western Bancorp:
We have audited the accompanying consolidated balance sheets of Western
Bancorp and subsidiaries (the "Company") (formerly Monarch Bancorp) as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We did not audit the 1996 consolidated financial statements of California
Commercial Bankshares, acquired by the Company on June 4, 1997 in a
pooling-of-interests, which statements reflect total assets constituting 26.3%
and net interest income and net income constituting 38.4% and 42.2%,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for California Commercial
Bankshares, is based solely on the report of the other auditors.
We did not audit the 1996 consolidated financial statements of SC Bancorp,
acquired by the Company on October 10, 1997 in a pooling-of-interests, which
statements reflect total assets constituting 35.6% and net interest income and
net income constituting 45.1% and 49.6%, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for SC Bancorp, is based solely on the report of the other
auditors.
The Western Bancorp consolidated statements of operations, changes in
shareholders' equity and cash flows for the year ended December 31, 1995, prior
to their restatement for the 1997 pooling-of-interests transactions described in
Notes 1 and 2 of the Notes to the consolidated financial statements, were
audited by other auditors whose report dated February 29, 1996, expressed an
unqualified opinion on those statements. The separate consolidated financial
statements of California Commercial Bankshares also included in the 1995
consolidated financial statements were audited by other auditors whose report
dated January 24, 1997, and March 17, 1997, as to Notes 7 and 13, expressed an
unqualified opinion on those statements. The separate consolidated financial
statements of SC Bancorp also included in the 1995 consolidated financial
statements were audited by other auditors whose report dated January 24, 1997,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Western Bancorp and subsidiaries as
of December 31, 1997 and 1996, and the results of their operations and their
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
We also audited the combination of the accompanying consolidated statements
of operations, changes in shareholders' equity and cash flows for the year ended
December 31, 1995, after restatement for the 1997 pooling-of-interests
transactions; in our opinion, such consolidated financial statements have been
53
<PAGE>
properly combined on the basis described in Notes 1 and 2 of the Notes to the
accompanying consolidated financial statements.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 30, 1998
54
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
SC Bancorp:
We have audited the consolidated balance sheets of SC Bancorp and its
subsidiary as of December 31, 1996, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1996 (such consolidated financial
statements are not included herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of SC Bancorp and its subsidiary
at December 31, 1996, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
January 24, 1997
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and shareholders of
California Commercial Bankshares:
We have audited the consolidated balance sheets of California Commercial
Bankshares and subsidiaries (the "Company") as of December 31, 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1996
(such consolidated financial statements are not included herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of California Commercial
Bankshares and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
January 24, 1997
(March 17, 1997 as to Notes 7 and 13)
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
Monarch Bancorp
We have audited the consolidated statements of operations, changes in
shareholders' equity, and cash flows of Monarch Bancorp and Subsidiaries for the
year ended December 31, 1995. These financial statements, which are not
presented separately herein, are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Monarch
Bancorp and Subsidiaries for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
DAYTON & ASSOCIATES
February 29, 1996
Laguna Hills, California
57
<PAGE>
WESTERN BANCORP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 3).................. $ 97,456 $ 96,202
Federal funds sold................................ 138,702 22,517
------------ ------------
Total cash and cash equivalents............. 236,158 118,719
Federal Reserve Bank and Federal Home Loan Bank
stock, at cost.................................. 5,610 5,504
Securities held to maturity (fair value of $7,032)
(Note 4)........................................ -- 7,057
Securities available for sale (amortized cost of
$202,064 and $321,767) (Note 4)................. 201,904 320,257
------------ ------------
Total securities............................ 207,514 332,818
Loans and leases held for investment, net (Notes
5, 8 and 12).................................... 864,481 800,367
Loans and leases available for sale, net.......... 359 1,234
Premises and equipment (Note 6)................... 13,685 14,955
Other real estate owned........................... 6,261 7,082
Deferred tax asset, net (Note 10)................. 7,849 8,735
Taxes receivable (Note 10)........................ 2,809 3,769
Goodwill (Note 2)................................. 30,430 32,968
Accrued interest receivable....................... 8,204 9,664
Other assets...................................... 5,760 8,602
------------ ------------
Total assets................................ $ 1,383,510 $ 1,338,913
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 7):
Noninterest bearing............................. $ 457,503 $ 422,854
Interest-bearing demand......................... 383,100 379,615
Savings......................................... 117,791 105,391
Time certificates of deposit of $100,000 or
more.......................................... 138,565 135,314
Time certificates of deposit less than
$100,000...................................... 129,834 133,840
------------ ------------
Total deposits.............................. 1,226,793 1,177,014
Borrowings (Note 8)............................... 12,751 20,290
Accrued interest payable.......................... 2,427 2,258
Other liabilities................................. 11,884 10,304
------------ ------------
Total liabilities........................... 1,253,855 1,209,866
Commitments and contingencies (Notes 11 and 14)
Shareholders' equity (Notes 8, 9, 13, 16, 18 and
20):
Preferred stock no par value, 5 million shares
authorized, none issued....................... -- --
Common stock no par value, 100,000,000 shares
authorized 10,648,317 and 10,438,677 issued
and outstanding in 1997 and 1996.............. 112,947 111,326
Retained earnings............................... 16,802 18,583
Unrealized loss on investment securities
available for sale, net of taxes.............. (94 ) (862 )
------------ ------------
Total shareholders' equity.................. 129,655 129,047
------------ ------------
Total liabilities and shareholders'
equity.................................... $ 1,383,510 $ 1,338,913
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
58
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans..................................................... $ 80,639 $ 58,374 $ 49,014
Interest on interest bearing deposits in other banks........................... -- 3 43
Interest on investment securities.............................................. 15,714 12,862 10,726
Interest on Federal funds sold................................................. 4,681 2,998 2,846
---------- --------- ---------
Total interest income...................................................... 101,034 74,237 62,629
---------- --------- ---------
Interest expense:
Deposits....................................................................... 28,276 21,382 19,167
Notes payable.................................................................. 728 469 268
Other interest-bearing liabilities............................................. 354 460 369
---------- --------- ---------
Total interest expense..................................................... 29,358 22,311 19,804
---------- --------- ---------
Net interest income.............................................................. 71,676 51,926 42,825
Provision for loan and lease losses (Note 5)..................................... 2,800 1,018 8,564
---------- --------- ---------
Net interest income after provision for loan and lease losses.................... 68,876 50,908 34,261
---------- --------- ---------
Non-interest income:
Service charges, commissions and fees.......................................... 7,533 7,485 6,551
Gain (loss) on sale of securities available for sale (Note 4).................. 342 281 (692)
Gain on sale of loans.......................................................... 78 665 145
Other.......................................................................... 1,733 1,444 1,822
---------- --------- ---------
Total non-interest income.................................................. 9,686 9,875 7,826
---------- --------- ---------
Non-interest expense:
Salaries and benefits.......................................................... 25,023 23,016 19,575
Occupancy...................................................................... 7,843 7,649 7,878
Advertising and business development........................................... 1,225 1,342 1,199
Other real estate owned........................................................ 242 (134) 3,080
Professional services.......................................................... 3,706 6,054 3,176
Telephone, stationery and supplies............................................. 2,735 2,201 2,337
Lower of cost or market adjustment on loans available for sale................. -- -- 756
Goodwill amortization (Note 2)................................................. 2,538 1,004 821
Data processing for company.................................................... 1,667 1,064 822
Customer services cost......................................................... 1,263 510 184
Regulatory assessments......................................................... 533 791 1,434
Merger related costs (Note 2).................................................. 14,201 -- --
Other.......................................................................... 4,781 4,641 4,347
---------- --------- ---------
Total non-interest expense................................................. 65,757 48,138 45,609
---------- --------- ---------
Income (loss) before income taxes................................................ 12,805 12,645 (3,522)
Income taxes (benefit) (Note 10)................................................. 9,643 3,656 (1,733)
---------- --------- ---------
Net income (loss).......................................................... $ 3,162 $ 8,989 $ (1,789)
---------- --------- ---------
---------- --------- ---------
Per share information (Notes 1 and 21):
Weighted-average number of common shares outstanding........................... 10,524 8,096 6,487
Basic net income (loss) per share.............................................. $ 0.30 $ 1.11 $ (0.28)
Diluted common shares outstanding.............................................. 10,732 8,248 6,599
Diluted net income (loss) per share............................................ $ 0.29 $ 1.09 $ (0.28)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
59
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED GAIN
(LOSS) ON
COMMON STOCK RETAINED SECURITIES
-------------------- EARNINGS AVAILABLE FOR DEFERRED CHARGE TOTAL
SHARES AMOUNT (DEFICIT) SALE, NET RELATED TO KSOP EQUITY
--------- --------- ----------- --------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 as previously
reported.................................... 93 $ 7,368 $ (6,137) $ (356) $ (173) $ 702
Adjustment for the CCB pooling-of-interests... 2,423 11,257 9,789 (1,318) -- 19,728
Adjustment for the SCB pooling-of-interests... 3,403 37,643 7,731 (3,530) -- 41,844
--------- --------- ----------- ------- ----- ---------
Balance at December 31, 1994, as restated..... 5,919 $ 56,268 $ 11,383 $ (5,204) $ (173) $ 62,274
Repayment on KSOP debt...................... -- -- -- -- 41 41
Unrealized appreciation on investment
securities available for sale, net........ -- -- -- 4,665 -- 4,665
Stock options exercised..................... 26 27 -- -- -- 27
Tax benefit of stock options exercised (Note
18)....................................... -- 78 -- -- -- 78
Issuance of common stock (Note 9)........... 1,349 12,332 -- -- -- 12,332
Net loss.................................... -- -- (1,789) -- -- (1,789)
--------- --------- ----------- ------- ----- ---------
Balance at December 31, 1995.................. 7,294 $ 68,705 $ 9,594 $ (539) $ (132) $ 77,628
Repayment on KSOP debt...................... -- -- -- -- 132 132
Unrealized depreciation on investment
securities available for sale, net........ -- -- -- (323) -- (323)
Stock options exercised (Note 18)........... 69 361 -- -- -- 361
Tax benefit of stock options exercised (Note
18)....................................... -- 51 -- -- -- 51
Issuance of common stock (Note 9)........... 3,076 42,213 -- -- -- 42,213
Repurchase of shares........................ -- (4) -- -- -- (4)
Net income.................................. -- -- 8,989 -- -- 8,989
--------- --------- ----------- ------- ----- ---------
Balance at December 31, 1996.................. 10,439 $ 111,326 $ 18,583 $ (862) $ -- $ 129,047
Unrealized appreciation on investment
securities available for sale, net........ -- -- -- 768 -- 768
Stock options exercised (Note 18)........... 70 522 -- -- -- 522
Warrants exercised (Note 18)................ 29 193 -- -- -- 193
Shares issued for SCB Options related to the
SCB Merger................................ 138 -- -- -- -- --
Tax benefit of stock options exercised (Note
18)....................................... -- 1,755 -- -- -- 1,755
Repurchase of shares........................ (28) (849) -- -- -- (849)
Net income.................................. -- -- 3,162 -- -- 3,162
Dividends declared at $0.30 per share....... -- -- (4,943) -- -- (4,943)
--------- --------- ----------- ------- ----- ---------
Balance at December 31, 1997.................. 10,648 $ 112,947 $ 16,802 $ (94) $ -- $ 129,655
--------- --------- ----------- ------- ----- ---------
--------- --------- ----------- ------- ----- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
60
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)........................................................ $ 3,162 $ 8,989 $ (1,789)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Provision for loan and lease losses...................................... 2,800 1,018 8,564
Benefit (provision) for deferred income taxes............................ 304 992 (3,385)
Provision for losses on other real estate owned.......................... 129 767 335
Depreciation and amortization............................................ 2,484 2,519 2,693
Amortization of discounts and premiums on
investment securities, net............................................. 111 1,094 2,962
Goodwill amortization.................................................... 2,538 1,004 821
Loans originated for sale................................................ -- -- (9,620)
Lower of cost or market adjustment on loans available for sale........... -- -- 756
Proceeds from sale of loans originated for sale.......................... 875 3,466 --
(Gain) loss on sale of other real estate owned........................... (551) (1,260) 1,545
Gain on sale of loans originated for sale................................ -- (665) (145)
(Gain) loss on sale of securities available for sale..................... (342) (281) 692
Net increase (decrease) in other liabilities............................. (472) 1,197 357
Net (increase) decrease in other assets.................................. 5,262 (195) 557
---------- ----------- -----------
Net cash provided by operating activities............................ 16,300 18,645 4,343
---------- ----------- -----------
Cash flows from investing activities:
Net decrease in interest-bearing deposits at other banks................. -- 198 1,184
Securities held to maturity:
Proceeds from maturities of mortgage backed securities................. -- -- 6,481
Proceeds from maturities of other securities........................... 4,127 5,267 4,443
Purchases of other securities.......................................... -- (4,880) (5,704)
Securities available for sale:
Proceeds from maturities of mortgage backed securities................. 10,543 8,734 927
Purchases of mortgage backed securities................................ -- -- (1,390)
Proceeds from maturities of other securities........................... 181,088 72,825 23,656
Proceeds from sales of other securities................................ 8,546 33,315 48,020
Purchases of other securities.......................................... (77,313) (127,100) (36,151)
Purchases of FRB and FHLB stocks......................................... (106) (2,468) (2,823)
Net increase in loans and leases......................................... (78,361) (82,615) (112,008)
Recoveries of loans and investment in leases............................. 1,502 1,123 1,411
Additions to other real estate owned..................................... (86) (284) --
Proceeds from sales of other real estate owned........................... 11,274 8,524 11,989
Additions to premises and equipment, net of proceeds
from sales............................................................. $ (1,214) $ (1,173) $ (2,296)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
61
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase in assets and liabilities due to the acquisition
of Western Bank:
Securities available for sale.......................................... $ -- $ (134,394) $ --
Securities held to maturity............................................ -- (988) --
Loans and leases....................................................... -- (198,418) --
Deferred taxes......................................................... -- (3,663) --
Other assets........................................................... -- (11,729) --
Premises and equipment................................................. -- (5,099) --
Deposits............................................................... -- 353,111 --
Other liabilities...................................................... -- 3,932 --
Goodwill............................................................... -- (29,841) --
---------- ----------- -----------
Net cash provided by (used in) investing activities.................. 60,000 (115,623) (62,261)
---------- ----------- -----------
Cash flow from financing activities:
Net increase in deposits................................................. 49,779 49,846 98,086
Increase (decrease) in borrowings........................................ (7,539) 12,908 (7,369)
Purchase of treasury shares.............................................. (849) (4) --
Dividends paid........................................................... (2,722) -- --
Proceeds from issuance of common stock and exercise of options and
warrants, net of issuance costs........................................ 2,470 42,625 12,437
---------- ----------- -----------
Net cash provided by financing activities.............................. 41,139 105,375 103,154
Net increase in cash and cash equivalents.................................. 117,439 8,397 45,236
Cash and cash equivalents at the beginning of the year..................... 118,719 110,322 65,086
---------- ----------- -----------
Cash and cash equivalents at the end of the year........................... $ 236,158 $ 118,719 $ 110,322
---------- ----------- -----------
---------- ----------- -----------
Supplemental disclosure of cash flow information:
Property acquired through foreclosure.................................... $ 10,031 $ 4,758 $ 9,117
Loans to facilitate the sale of other real estate owned.................. $ 6,422 $ 2,936 $ 3,386
Transfer of securities held-to-maturity to available-for-sale............ $ 2,933 -- $ 51,991
Tax benefits for exercise of non-qualified stock options................. $ 1,755 $ 51 $ 78
Cash paid for
Interest............................................................... $ 29,189 $ 22,151 $ 19,235
Taxes.................................................................. $ 5,597 $ 4,789 $ 1,492
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
62
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
WESTERN BANCORP--ACQUISITIONS
Western Bank ("Western") was acquired by Western Bancorp (the "Company") on
September 30, 1996. The acquisition was accounted for as a purchase.
Accordingly, results of operations presented herein include Western only from
the date of acquisition. On June 4, 1997, California Commercial Bankshares
("CCB") merged with and into the Company (the "CCB Merger"), and in connection
therewith, National Bank of Southern California ("NBSC"), a wholly-owned
subsidiary of CCB prior to the CCB Merger, merged with Monarch Bank, a
wholly-owned subsidiary of the Company prior to such merger ("Monarch"). On
October 10, 1997, SC Bancorp merged (the "SCB Merger") with and into the
Company. Southern California Bank ("SCB") was a wholly-owned subsidiary of SC
Bancorp prior to the SCB Merger. The SCB Merger and the CCB Merger were each
accounted for by the pooling-of-interests method of accounting, and,
accordingly, the financial information for all periods presented herein has been
restated to present the combined consolidated financial condition and results of
operations of the Company, CCB and SC Bancorp as if the CCB Merger and the SCB
Merger had been in effect for all periods presented. On December 15, 1997, NBSC
merged into SCB, leaving the Company with two banking subsidiaries: Western and
SCB. Further details pertaining to the CCB Merger and the SCB Merger are
presented in Note 2 of Notes to Consolidated Financial Statements.
BASIS OF PRESENTATION
The accounting and reporting policies of the Company and its wholly-owned
subsidiaries, SCB, Western (together, the "Banks"), Venture Partners, Inc. and
M. B. Mortgage Company, Inc. (inactive) are in accordance with generally
accepted accounting principles and conform to general practices within the
banking industry. All significant inter-company balances and transactions have
been eliminated.
On June 3, 1997, the Company completed an 8.5-to-1 reverse stock split (the
"Reverse Stock Split"). All share amounts herein have been restated to give
effect to the Reverse Stock Split.
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the 1997 presentation.
NATURE OF OPERATION
The Company conducts business through the Banks. SCB is a full service bank
with twenty-one banking offices, and Western is a full service bank with five
banking offices, in each case, as of December 31, 1997. (SCB is in the process
of closing and merging five banking offices, and with the merger of Santa Monica
Bank into Western (see Note 20), the surving corporation, Western renamed "Santa
Monica Bank" ("SMB") will have thirteen banking offices.) The Banks are subject
to the laws of the State of California and federal regulations governing the
financial services industry. The Company is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended, and is subject to
regulation and supervision by the Federal Reserve Board. The areas served by the
Banks are San Diego, Orange and Los Angeles counties.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
63
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates subject to change
include the allowance for loan and lease losses, the carrying value of other
real estate owned, and the carrying value of the deferred tax asset.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include the
balance sheet captions "Cash and due from banks" and "Federal funds sold."
SECURITIES
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and carried at amortized cost.
Securities that are purchased and held principally for the purpose of selling
them in the near term are classified as "trading" and carried at fair value,
with unrealized gains and losses included in earnings. Securities not classified
as either "held to maturity" or "trading" are classified as "available for sale"
and carried at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity. When a
debt security is transferred into the "held to maturity" category from the
"available for sale" category, the unrealized gain or loss at the transfer date
continues to be reported as a separate component of shareholders' equity and is
amortized over the remaining life of the related security as a yield adjustment.
If a decline in the fair market value of a security below the amortized cost
basis is judged by management to be other than temporary, the cost basis of the
security is written down to fair value and the amount of the writedown is
included in earnings. The Company's investments in Federal Reserve Bank and
Federal Home Loan Bank Stock are carried at cost as these equity securities are
not readily marketable.
Premiums and discounts on securities are recognized in the statements of
income using a method that approximates the level-yield method over the lives of
the securities. Gains and losses on securities are recognized when realized with
the cost basis of securities sold determined on a specific identification basis.
INTEREST ON LOANS
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest income is ordinarily discontinued
when a loan becomes 90 days past due as to principal or interest; however,
management may elect to continue the accrual when the estimated net realizable
value of collateral is sufficient to cover the principal balance and the accrued
interest. When the loan is determined to be uncollectible, the unpaid principal
is charged to the allowance for loan losses.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are
capitalized at origination and the net amount deferred is taken into interest
income over the contractual lives of the loans using the interest method.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained at a level believed by
management to be adequate to meet reasonably foreseeable loan and lease losses
on the basis of many factors including the risk characteristics of the
portfolio, underlying collateral, current and anticipated economic conditions
that
64
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
may affect the borrower's ability to pay, specific problem loans and trends in
loan delinquencies and charge-offs. Losses on loans and leases are provided for
under the allowance method of accounting. The allowance is increased by
provisions charged to income and reduced by loan and lease charge-offs, net of
recoveries. Loans and leases, including impaired loans, are charged off in whole
or in part when, in management's opinion, collectibility is not probable.
While management uses available information to establish the allowance for
loan and lease losses, future additions to the allowance may be necessary if
economic developments differ substantially from the assumptions used in making
the evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowances for loan
and lease losses. Such agencies may require the Banks to recognize additions to
the allowance based on judgments different from those of management.
The Company's policy concerning non-performing loans is to cease accruing
interest, and to charge off all accrued and unpaid interest on loans which are
past due as to principal and/or interest for at least 90 days, or at such
earlier time as management determines timely collection of the interest to be in
doubt. However, in certain circumstances loans which are past due 90 days or
more may continue accruing interest or interest may not be charged off when the
related loans are well secured or in the process of being collected. When the
Company receives cash on nonaccrual loans or leases, the Company's policy is to
record such receipts first as a reduction to the principal and then as interest
income. A non-performing loan or lease may be returned to accrual status if the
loan or lease performs for a period of at least six months.
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 "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and are those on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or payments of principal or interest have become contractually past
due 90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility while not classifying the loan
as 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 loan. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
65
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
LOANS HELD FOR SALE
Loans held for sale are recorded at the lower of cost or estimated fair
market value, determined on an aggregate basis, and include loan origination
costs and related fees. Any transfers of loans held for sale to the investment
portfolio are recorded at the lower of cost or estimated fair market value on
the transfer date. Gains or losses resulting from sales of loans are recorded at
the time of sale and are determined by the difference between the net sales
proceeds and the carrying value of the loans sold.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of real estate acquired
through foreclosure. These assets are recorded initially at the lower of the
carrying value of the receivable or the fair value less selling costs of the
related real estate. The excess carrying value, if any, over the fair market
value of the asset received is charged to the allowance for loan losses at the
time of acquisition. Any subsequent decline in the fair market value of the OREO
is recognized as a charge to operations and a corresponding decrease in the OREO
asset. Gains from sales and operating expenses associated with OREO assets are
included in operations when realized.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization which are charged to expense on a straight-line basis over the
estimated useful lives of the assets or the terms of the leases if shorter.
GOODWILL
Goodwill is amortized to expense using the straight-line method over its
estimated useful life, not to exceed fifteen years. On an ongoing basis,
management reviews the valuation and amortization of goodwill. During this
review, management estimates the value of the Company's goodwill, taking into
consideration any events and circumstances that might have diminished its value.
INTEREST RATE SWAP AGREEMENTS
SCB entered into two interest rate swap agreements in the management of its
interest rate exposure with notional principal amounts of $50 million and $25
million, respectively. Revenue or expense associated with these agreements,
which are intended to modify the interest-rate characteristics of interest-
bearing assets, are accounted for on a settlement accounting basis and are
recognized as an adjustment to interest income, based on the interest rates
currently in effect for such contracts. SCB uses hedge accounting treatment
which requires identification of the asset or liability to be hedged and linking
the swap to the specified asset or liability. The notional amount of interest
rate swaps are not reflected in the Consolidated Financial Statements, but are
disclosed in Note 14 of the Notes to Consolidated Financial Statements. In
January 1997, the swap with the notional principal amount of $25 million
matured, and as part of the SCB Merger, and to be consistent with the
asset/liability management philosophy of the Company, the remaining swap was
terminated in the fourth quarter of 1997.
66
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
NET INCOME (LOSS) PER SHARE
Basic net income per share of common stock is based on the weighted-average
number of common shares outstanding during the year. Diluted net income per
share is based on the weighted-average number of common shares outstanding
during the year plus common stock equivalents (stock options and warrants) using
the treasury stock method.
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Such statement requires disclosure of
basic and diluted earnings per share rather than primary net income per share
and fully diluted income per share. All periods presented have been restated to
reflect the new disclosure standard.
EFFECT OF NEW ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which
establishes financial accounting and reporting standards for stock-based
employee compensation plans. This statement encourages all entities to adopt a
new method of accounting to measure compensation cost of all employee stock
compensation plans based on the estimated fair value of the award at the date it
is granted. Companies are, however, allowed to continue to measure compensation
cost for those plans using the intrinsic value-based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net income and
earnings per share as if this statement had been adopted. The Company elected to
continue accounting for stock options under the intrinsic value method and has
provided the pro forma disclosure.
The Company adopted Statement of Financial Accounting Standards No. 125
("SFAS 125"), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," on January 1, 1997. This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Adoption did not have a material impact on the Company's financial
condition and results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Financial
Information About Capital Structure" ("SFAS 129"). SFAS 129 supersedes capital
structure disclosure requirements found in previous accounting
67
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
pronouncements and consolidates them into one statement for ease of retrieval
and greater visibility for non-public entities. These disclosures are required
for financial statements for periods ending after December 15, 1997. As SFAS 129
makes no changes to previous accounting pronouncements as those pronouncements
applied to the Company, adoption of SFAS 129 had no impact on the Company's
results of operations and financial condition.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
inclusion of comprehensive income, either in a separate statement for
comprehensive income, or as part of a combined statement of income and
comprehensive income in a full-set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances,
excluding those resulting from investments by and distributions to owners. SFAS
130 requires that comprehensive income is to be presented beginning with net
income, adding the elements of comprehensive income not included in the
determination of net income, to arrive at comprehensive income. SFAS 130 also
requires that an enterprise display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
SFAS 130 is effective for the Company on January 1, 1998. SFAS 130 requires
the presentation of information already contained in the Company's financial
statements and therefore is not expected to have an impact on the Company's
financial position or results of operation.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the reporting of information
about operating segments by public business enterprises in their annual and
interim financial reports issued to shareholders.
SFAS 131 requires that a public business enterprise report financial and
descriptive information, including profit or loss, certain specific revenue and
expense items, and segment assets, about its reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 is effective for the Company's financial statements beginning
January 1, 1998. Management has concluded that the Company operates in one
segment--banking. Accordingly, adoption is not expected to have an effect on the
Company's financial position, results of operations, or existing disclosures.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and other
Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes disclosure
requirements for pensions and other postretirement benefits and requires
additional disclosure on changes in benefit obligations and fair values of plan
assets in order to facilitate financial analysis. SFAS 132 is effective for
fiscal years beginning after December 15, 1997 with earlier application
encouraged. The adoption of SFAS 132 will have no impact on the Company's
results of operations and financial condition as this statement relates to
disclosure requirements. The Company adopted SFAS 132 on January 1, 1998.
68
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS
WESTERN BANK
On September 30, 1996, the Company completed the acquisition of Western in
which Western became a wholly-owned subsidiary of the Company. The Company paid
$17.25 per share, or approximately $61.1 million, for the 3,543,156 outstanding
shares of common stock of Western and an additional $5.5 million related to the
outstanding stock options of Western. The net consideration for the acquisition
of Western was thus approximately $66.6 million. The acquisition was accounted
for under the purchase method of accounting which resulted in approximately $30
million of goodwill being recorded.
The Company funded the purchase price with the issuance of 3,076,045 shares
of common stock of the Company ("Company Common Stock") in a private placement
pursuant to which the Company raised approximately $42.2 million, net of
approximately $1 million in issuance costs, and from the proceeds of a three
year loan of $26.5 million from The Northern Trust Company. A $15.5 million
dividend was declared by Western concurrently with the completion of the
acquisition and paid to the Company; the proceeds of such dividend were used to
reduce the $26.5 million note to $11 million.
The following table presents unaudited pro forma results of operations of
the Company for the years ended December 31, 1996 and 1995 as if the acquisition
of Western had been effective at the beginning of each year presented. The
unaudited pro forma combined summary of operations is intended for informational
purposes only and is not necessarily indicative of the future operating results
of the Company or of the operating results of the Company that would have
occurred had the Western acquisition been in effect for the years presented.
UNAUDITED PRO FORMA COMBINED SUMMARY OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Interest income........................................................ $ 95,587 $ 89,487
Interest expense....................................................... 29,577 27,737
--------- ---------
Net interest income.................................................. 66,010 61,750
Provision for loan and lease losses.................................... 1,821 9,274
--------- ---------
Net interest income after provision for loan and lease losses........ 64,189 52,476
Non-interest income.................................................... 10,999 11,331
Non-interest expense................................................... 60,576 62,336
--------- ---------
Income before taxes.................................................. 14,612 1,471
Income tax expense..................................................... 5,095 1,209
--------- ---------
Net income........................................................... $ 9,517 $ 262
--------- ---------
--------- ---------
Net income per share:
Basic................................................................ $ 0.92 $ 0.03
Diluted.............................................................. $ 0.90 $ 0.03
Weighted average shares outstanding:
Basic................................................................ 10,398.5 9,563.0
Diluted.............................................................. 10,551.2 9,674.5
</TABLE>
69
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
WESTERN BANCORP--CCB MERGER
On June 4, 1997, CCB merged with and into the Company in a transaction
accounted for using the pooling-of-interests method of accounting. In the CCB
Merger, 3,043,226 shares of Company Common Stock were issued to holders of
common stock of CCB based on a 1-for-1 exchange ratio (after the Reverse Stock
Split) and all of the outstanding shares of common stock of CCB were canceled.
The financial information for all periods presented has been restated to present
the combined consolidated financial condition and results of operations of the
Company and CCB as if the CCB Merger had been in effect for all periods
presented. At the date of the CCB Merger, the Company charged to expense merger
costs of $3.0 million (after tax), representing investment banking, filing and
professional fees; employee compensation and severance; and costs of computer
conversions.
Separately reported net interest income and net income for CCB and the
Company for the quarter ended March 31, 1997, were $5,089,000 and $939,000, and
$5,871,000 and $893,000, respectively. On a combined basis, giving effect to the
CCB merger as a pooling-of-interests, the Company's restated net interest income
and net income were $10,960,000 and $1,832,000, respectively, for the quarter
ended March 31, 1997. These amounts are unaudited.
WESTERN BANCORP--SCB MERGER
SC Bancorp merged with and into the Company in a transaction accounted for
using the pooling-of-interests method of accounting on October 10, 1997. In the
SCB Merger approximately 3,555,500 shares of Company Common Stock (prior to
adjustment for fractional shares) were issued based on a 0.4556-for-1 exchange
ratio and all of the outstanding shares of common stock of SC Bancorp were
cancelled. The financial information for all periods presented herein has been
restated to present the combined consolidated financial condition and results of
operations of the Company and SC Bancorp as if the SCB Merger had been in effect
for all periods presented. Management charged to expense merger costs of $8.8
million (after tax), representing investment banking, filing and professional
fees; compensation and severance costs; termination of an interest rate swap;
branch closure expense; and costs of computer conversions.
Separately reported net interest income and net income for SC Bancorp and
the Company for the nine months ended September 30, 1997, were $18,842,000 and
$4,014,000, and $34,066,000 and $3,514,000, respectively. On a combined basis,
giving effect to both the CCB Merger and the SCB Merger as pooling-of-interests,
the Company's restated net interest income and net income were $52,908,000 and
$7,528,000, respectively, for the nine months ended September 30, 1997. These
amounts are unaudited.
70
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
MERGER RELATED COSTS
As a result of the CCB Merger and the SCB Merger, the Company incurred
certain merger related costs. These costs are described below:
<TABLE>
<CAPTION>
ACCRUED AT
PAID IN DECEMBER 31,
CCB MERGER SCB MERGER TOTAL 1997 1997
------------- ----------- --------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment banking fees......................... $ 1,400 $ 3,520 $ 4,920 $ (4,920) $ --
Other professional services..................... 697 1,960 2,657 (2,483) 174
Compensation related expense.................... 1,055 2,769 3,824 (2,303) 1,521
Conversion costs................................ 252 753 1,005 (225) 780
Branch closure expense.......................... -- 790 790 -- 790
Termination of interest rate swap............... -- 446 446 (446) --
Other........................................... -- 559 559 (359) 200
------ ----------- --------- ---------- ------
Total merger related costs.................... $ 3,404 $ 10,797 $ 14,201 $ (10,736) $ 3,465
------ ----------- --------- ---------- ------
------ ----------- --------- ---------- ------
</TABLE>
The following table presents certain financial data reported separately by
each company and on a combined basis for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net interest income:
The Company (before mergers with CCB and SC Bancorp)................... $ 8,545 $ 3,343
CCB.................................................................... 19,964 17,453
SC Bancorp............................................................. 23,417 22,029
Combined............................................................... 51,926 42,825
Net income (loss):
The Company (before mergers with CCB and SC Bancorp)................... $ 738 $ 683
CCB.................................................................... 3,796 (3,341)
SC Bancorp............................................................. 4,455 869
Combined............................................................... 8,989 (1,789)
Issuances of common stock:
The Company (before mergers with CCB and SC Bancorp)................... $ 42,213 $ 9,132
CCB.................................................................... 332 3,290
SC Bancorp............................................................. 80 15
Combined............................................................... 42,625 12,437
</TABLE>
NOTE 3--RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain average reserve balances with the
Federal Reserve Bank based on a percentage of deposits. The total average amount
of those reserve balances for the year ended December 31, 1997 was approximately
$32 million.
71
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES
Investment securities at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Securities available for sale:
US government securities................... $ 107,248 $ 288 $ -- $ 107,536
US agency securities or insured
obligations.............................. 53,599 61 (145) 53,515
Mortgage-backed securities................. 40,048 97 (512) 39,633
State and political subdivisions........... 1,169 51 -- 1,220
---------- ----- ----------- ----------
Total debt securities.................... $ 202,064 $ 497 $ (657) $ 201,904
---------- ----- ----------- ----------
---------- ----- ----------- ----------
1996
Securities held to maturity:
US government securities................... $ 1,147 $ 13 $ -- $ 1,160
US agency securities....................... 3,989 2 (1) 3,990
Mortgage-backed securities................. 1,921 -- (39) 1,882
---------- ----- ----------- ----------
Total debt securities.................... $ 7,057 $ 15 $ (40) $ 7,032
---------- ----- ----------- ----------
---------- ----- ----------- ----------
Securities available for sale:
US government securities................... $ 168,411 $ 53 $ (111) $ 168,353
US agency securities or insured
obligations.............................. 92,914 17 (538) 92,393
Mortgage-backed securities................. 49,474 34 (1,218) 48,290
State and political subdivisions........... 413 -- (2) 411
Other debt securities...................... 1,390 68 (9) 1,449
---------- ----- ----------- ----------
Total debt securities.................... 312,602 172 (1,878) 310,896
Mutual funds............................... 9,042 36 -- 9,078
Other equity securities.................... 123 160 -- 283
---------- ----- ----------- ----------
Total.................................... $ 321,767 $ 368 $ (1,878) $ 320,257
---------- ----- ----------- ----------
---------- ----- ----------- ----------
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Mortgage-backed securities
included in available for sale portfolios which are not due at a single maturity
date are allocated over several maturity groupings based on anticipated
72
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES (CONTINUED)
maturities of the underlying assets. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less............................................. $ 94,837 $ 94,753
Due after one year through five years............................... 94,496 94,370
Due after five years through ten years.............................. 6,615 6,550
Due after ten years................................................. 6,116 6,231
---------- ----------
$ 202,064 $ 201,904
---------- ----------
---------- ----------
</TABLE>
Gross gains and losses on sale of available for sale securities were
$342,000 and $0, respectively, for 1997, and $281,000 and $0, respectively, for
1996. Gross gains and losses were $0 and $692,000, respectively, for 1995.
Investment securities available for sale with a carrying amount of
approximately $19.2 million and $49.5 million, were pledged as collateral to
secure public deposits at December 31, 1997 and 1996, respectively.
In December 1997, in conjunction with the merger between NBSC and SCB, SCB
and Western reclassified their entire held-to-maturity investment portfolio to
the available-for-sale category. The held-to-maturity investment securities were
transferred to available for sale at their fair market values. The amortized
cost of the securities transferred was $2.9 million and the related unrealized
net gain recorded was $35,000.
The Banks may hold derivative securities as part of their investment
portfolios. At December 31, 1997, the Bank's held three collateralized mortgage
obligations ("CMOs") with an amortized cost of approximately $1.042 million and
a current market value of approximately $1.052 million. The weighted average
yield of these investments was 7.19% and the weighted average life was 1.88
years as of December 31, 1997. All three CMOs have been tested no less than
annually using the Federal Financial Institutions Examination Council ("FFIEC")
"High Risk Security Test" and each of the securities has passed the annual
tests. This stress test is used by bank regulators to assess the relative risks
of investments in CMOs. A security that passes this test is not considered to be
"high-risk;" a security that fails the test may be subject to additional
regulatory scrutiny, and under the most severe case, the bank could be asked to
sell the security.
73
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES
LOANS AND LEASES
Most of the loans and leases made by the Company are to customers located in
San Diego, Orange and Los Angeles counties. Mortgage and construction loans are
collateralized by real estate trust deeds. The Company generally requires
security in the form of assets, including real estate, for commercial and
installment loans. The ability of the Company's customers to honor their loan
agreements is dependent upon the general economy of the Company's market areas
and the financial strength of the customer. The distribution of the Company's
held for investment loan and lease portfolio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate construction.............................................. $ 65,982 $ 59,952
Real estate mortgage.................................................. 376,934 312,386
Commercial............................................................ 362,083 342,737
Leases................................................................ 1,934 3,027
Installment and other................................................. 76,052 100,456
---------- ----------
Gross loans and leases............................................ 882,985 818,558
Less:.................................................................
Unearned lease income............................................... (226) (364)
Deferred loan fees, net............................................. (2,384) (2,070)
Allowance for loan and lease losses................................. (15,894) (15,757)
---------- ----------
Net loans and leases held for investment.......................... $ 864,481 $ 800,367
---------- ----------
---------- ----------
</TABLE>
74
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses for the three years ended
December 31, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan and lease losses:
Balance at the beginning of the period..................... $ 15,757 $ 13,130 $ 12,115
Loans and leases charged off:
Real estate mortgage and construction...................... 1,600 2,649 6,074
Commercial................................................. 2,007 1,481 2,567
Installment and other...................................... 558 518 925
Leases..................................................... -- 27 11
--------- --------- ---------
Total loans and leases charged off....................... 4,165 4,675 9,577
Recoveries on loans and leases charged off:
Real estate mortgage and construction...................... 134 147 542
Commercial................................................. 1,198 873 625
Installment and other...................................... 170 103 210
Leases..................................................... -- -- 34
--------- --------- ---------
Total recoveries on loans and leases charged off......... 1,502 1,123 1,411
--------- --------- ---------
Net loans and leases charged off......................... 2,663 3,552 8,166
Provision charged to operating expense....................... 2,800 1,018 8,564
Other additions due to:
Acquisition of Western..................................... -- 5,041 --
Loan portfolio purchases................................... -- 120 617
--------- --------- ---------
Balance at the end of the period............................. $ 15,894 $ 15,757 $ 13,130
--------- --------- ---------
--------- --------- ---------
</TABLE>
CREDIT QUALITY
A summary of loans on which the accrual of interest has been discontinued as
of December 31 follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans and leases:
Real estate construction.................................... $ -- $ 1,031 $ 4,545
Real estate mortgage........................................ 6,331 11,471 10,983
Commercial.................................................. 844 2,454 1,572
Leases...................................................... -- -- 27
Installment and other....................................... 313 1,201 176
--------- --------- ---------
Total..................................................... $ 7,488 $ 16,157 $ 17,303
--------- --------- ---------
--------- --------- ---------
</TABLE>
75
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
If interest on nonaccrual loans and leases had been recognized at the
original interest rates, interest income would have increased approximately
$570,000, $859,000 and $849,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
The Company has no commitments to lend additional funds to borrowers whose
loans were classified as nonaccrual.
At December 31, 1997 and 1996, impaired loans and the related specific loan
loss allowances were as follows:
<TABLE>
<CAPTION>
1997
------------------------------------------------
RECORDED ALLOWANCE FOR LOAN
INVESTMENT AND LEASE LOSSES NET INVESTMENT
----------- ------------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances..................... $ 2,118 $ 679 $ 1,439
Without specific allowances.................. 11,364 -- 11,364
----------- ----- -------
Total impaired loans and leases............ $ 13,482 $ 679 $ 12,803
----------- ----- -------
----------- ----- -------
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------
ALLOWANCE FOR
RECORDED LOAN AND LEASE
INVESTMENT LOSSES NET INVESTMENT
----------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances..................... $ 9,938 $ 2,172 $ 7,766
Without specific allowances.................. 11,096 -- 11,096
----------- ------ -------
Total impaired loans and leases............ $ 21,034 $ 2,172 $ 18,862
----------- ------ -------
----------- ------ -------
</TABLE>
The average recorded investment in impaired loans and leases for the years
ended December 31, 1997, 1996 and 1995 was approximately $17,459,000,
$13,098,000 and $17,583,000, respectively. Interest income on impaired loans and
leases of approximately $654,000, $589,000 and $593,000 was recognized for cash
payments in 1997, 1996 and 1995, respectively.
NOTE 6--PROPERTY AND EQUIPMENT
The components of premises and equipment at December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and building..................................................... $ 11,195 $ 11,106
Furniture, fixtures and equipment..................................... 14,273 13,628
Leasehold improvements................................................ 5,135 5,013
--------- ---------
Total property and equipment........................................ 30,603 29,747
Less accumulated depreciation and amortization........................ (16,918) (14,792)
--------- ---------
Total property and equipment, net................................... $ 13,685 $ 14,955
--------- ---------
--------- ---------
</TABLE>
76
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEPOSITS
At December 31, 1997, the scheduled contractual maturities of certificates
of deposit are as follows (In thousands):
<TABLE>
<S> <C>
1998.............................................................. $ 252,754
1999.............................................................. 9,365
2000.............................................................. 4,421
2001.............................................................. 702
2002 and thereafter............................................... 1,157
---------
$ 268,399
---------
---------
</TABLE>
NOTE 8--BORROWINGS
At December 31, 1997 and 1996, borrowings were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes payable......................................................... $ 7,080 $ 13,350
Federal funds purchased............................................... -- 1,852
Treasury, tax and loan note........................................... 5,671 5,088
--------- ---------
$ 12,751 $ 20,290
--------- ---------
--------- ---------
</TABLE>
On September 30, 1996, the Company borrowed $26.5 million from The Northern
Trust Company under a three year revolving credit agreement. Concurrently with
the acquisition of Western, the Company reduced the loan by $15.5 million as a
result of a dividend in the same amount from Western and retained a credit line
of $11 million. In 1997 the credit line was increased to $13 million. The
balance at December 31, 1997 and 1996 was $7.1 million and $11.0 million,
respectively, and the interest rate was 7.02% and 6.75%, respectively. The
highest amount outstanding during 1997 and 1996 was $12.2 million and $26.5
million, respectively; the average balance outstanding during 1997 and 1996 was
$9.6 million and $2.75 million, respectively; and the average rate paid in 1997
and 1996 was 7.07% and 6.95%, respectively. The revolving credit agreement
expires on September 25, 1999. In January 1998, the Company executed a third
amendment to the revolving credit agreement increasing the credit line to $17.5
million and modifying certain covenants to reflect the Company's larger size.
The loan agreement contains covenants which impose certain restrictions on
activities of the Company and its financial condition. Such covenants include
minimum net worth ratios, maximum debt ratios, a minimum return on average
assets, a dividend limitation and minimum and maximum credit quality ratios. As
of December 31, 1997 and 1996, the Company, and where applicable, its
subsidiaries, were in compliance with each of such covenants or the Company has
obtained the appropriate waivers from The Northern Trust Company. Shares of
common stock of Western, with a carrying value of approximately $58 million,
have been pledged as collateral against the note payable to The Northern Trust
Company.
In December 1988 CCB obtained a $3 million term loan from another financial
institution for the purpose of providing additional capital to NBSC. The credit
agreement for this loan was amended pursuant to a Second Amendment to the Credit
Agreement, dated August 25, 1994 (the "Second Amendment"). Interest was payable
monthly on the unpaid principal balance of the loan and required prepayment of
40% of the proceeds of any stock offering or placement of debt or equity. The
Second
77
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--BORROWINGS (CONTINUED)
Amendment was supported by a Support Agreement (the "Support Agreement") between
a shareholder and director of CCB (the "Shareholder") and CCB whereby the
Shareholder guaranteed the payment of the loan.
To compensate the Shareholder for signing the Support Agreement and
subsequently paying off the lending institution, CCB signed a Holding Company
Support Agreement (the "Holding Company Support Agreement") whereby CCB agreed
to: (1) pay to the Shareholder a fee equal to 1% of the unpaid principal amount
of the note on each anniversary date and (2) issue to the Shareholder on or
prior to March 31, 1997, and thereafter on each anniversary date, warrants to
purchase 25,000 shares of Company Common Stock at an exercise price per share
equal to 80% of the book value per share of the Company on December 31, 1996 and
subsequent year end periods. The Shareholder paid off the outstanding balance of
$2,350,000 to the lending institution in March of 1996, and CCB entered into a
new note with the shareholder (the "New Note"). The New Note bore an interest
rate of 3% over prime rate with interest only payable monthly for the first
year; and thereafter, quarterly principal payable of $125,000 plus interest
payable monthly. Any remaining principal and interest would have been due on
April 1, 1999. On March 17, 1997, CCB paid down $2,000,000 on this note, and
based on the $350,000 remaining balance of the note, CCB issued to the
Shareholder pursuant to the Holding Company Support Agreement, a number of
warrants to purchase 3,723 shares of the CCB's common stock at an exercise price
of $6.60 per share, which number of warrants was proportional to the outstanding
balance on the New Note at that time. CCB also paid the Shareholder a fee equal
to 1% of the unpaid principal balance on March 17, 1997. The remaining unpaid
principal balance of $350,000 was subject to the original terms of the note and
was paid on April 1, 1997.
Under an agreement with the Federal Home Loan Bank of San Francisco, SCB may
obtain an extension of credit of up to 55% of total assets collateralized by
real estate loans. At December 31, 1997, SCB had pledged loans amounting to
$11,150,000 and had available credit of $6,629,000. No amounts were outstanding
on this line of credit at December 31, 1997 and 1996.
Under separate agreements with three commercial banks, SCB may borrow an
aggregate of up to $48 million through federal funds lines of credit. Western
also may borrow an aggregate of up to $22.0 million through federal funds lines
of credit. Federal funds arrangements are subject to the terms of the individual
arrangements and may be terminated at the discretion of the correspondent bank.
$0 and $1,852,000 were outstanding on these lines of credit at December 31, 1997
and 1996, respectively.
SCB participates in the Treasury, Tax and Loan Note program. SCB has a limit of
$6.0 million at the Federal Reserve Bank. Treasury, Tax and Loan balances
fluctuate based on the amounts deposited by customers and the amounts called for
payment by the Federal Reserve Bank. At December 31, 1997 the interest rate on
the Treasury, Tax and Loan Note was 5.28 percent.
NOTE 9--SHAREHOLDERS' EQUITY
EQUITY TRANSACTIONS
The Company declared a cash dividend of $0.15 per share payable on December
10, 1997 to shareholders of record on November 10, 1997 and $0.15 per share
payable on March 27, 1998 to shareholders of record on February 27, 1998.
78
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SHAREHOLDERS' EQUITY (CONTINUED)
As part of the September 30, 1996 acquisition of Western, the Company sold
approximately 3,076,000 shares of Company Common Stock in a private placement
for net proceeds of approximately $42,213,000. Pursuant to this equity
transaction, the Company issued to parties related to Belle Plaine Financial,
L.L.C., 92,275 warrants to acquire Company Common Stock at $16.83 per share. The
warrants expire on September 30, 2006.
During 1995, the Company completed two capital raising transactions. Under a
private placement which closed in March 1995, the Company issued approximately
535,000 shares of Company Common Stock for net proceeds of approximately
$5,669,000. In September 1995, pursuant to a shareholders' rights and public
offering, the Company issued approximately 340,000 shares of Company Common
Stock for net proceeds of approximately $3,464,000. Pursuant to the September
1995 equity transaction, the Company issued to parties related to Belle Plaine
Financial, L.L.C., 48,400 warrants to acquire Company Common Stock at $13.77 per
share. The warrants expire on September 30, 2005.
In November 1995, CCB sold 474,000 shares of its common stock through
private placement at $6.75 per share for the purpose of contributing most of the
proceeds into NBSC as additional capital. Of the total proceeds of $3,200,000,
CCB contributed $2,900,000 into NBSC's capital in December 1995.
SCB declared three cash dividends during 1997. On each of January 23, March
27, and July 24, 1997, SCB declared a $0.05 per share cash dividend, payable to
its shareholders of record at the close of business on February 6, May 2, and
August 4, 1997, respectively. The dividends were paid on February 20, May 20,
and August 20, 1997, respectively, totaling $374,000, $375,000, and $375,000,
respectively.
RESTRICTIONS ON PAYMENTS OF DIVIDENDS
Holders of Company Common Stock are entitled to receive dividends declared
by the Board of Directors out of funds legally available therefor under the laws
of the State of California and certain federal laws and regulations governing
the banking and financial services business. The Company's ability to pay
dividends is also limited by the Third Amendment to Revolving Credit Agreement,
dated as of January 26, 1998, between the Company and The Northern Trust
Company, which provides that the Company may not declare or pay any dividend
other than dividends payable in Company Common Stock or in the ordinary course
of business not to exceed 50 percent of net income per fiscal quarter of the
Company before goodwill amortization and any restructuring charges incurred in
connection with any merger, consolidation or other restructuring contemplated by
the Agreement and Plan of Merger, dated as of July 30, 1997 and Restated as of
November 20, 1997, by and among the Company, Western and Santa Monica Bank or
similar transactions. In addition, the Banks are subject to certain restrictions
under the laws of the State of California and certain federal laws and
regulations governing banks which limit their ability to transfer funds to the
Company through inter-company loans, advances, or cash dividends.
79
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal....................................................... $ 6,296 $ 2,002 $ 704
State......................................................... 3,043 488 228
--------- --------- ---------
Total....................................................... 9,339 2,490 932
--------- --------- ---------
Deferred expense (benefit):
Federal....................................................... 471 725 (1,461)
State......................................................... (167) 441 (1,204)
--------- --------- ---------
Total....................................................... 304 1,166 (2,665)
--------- --------- ---------
Total income taxes........................................ $ 9,643 $ 3,656 $ (1,733)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Tax benefits associated with the exercise of nonqualified stock options of
$1,755,000, $51,000 and $78,000 for 1997, 1996 and 1995, respectively, are
reflected in the Consolidated Statements of Changes in Shareholders' Equity.
The provision for income taxes differs from that which would result from
applying the U.S. statutory rate of 35% in 1997 and 1996 and 34% in 1995 as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense (benefit) at statutory rate.......... $ 4,482 $ 4,425 $ (1,198)
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefits................... 1,870 613 (219)
Amortization of goodwill...................................... 739 210 196
Non-deductible merger expenses................................ 2,750 -- --
Change in valuation allowance................................. -- (1,576) (413)
Other, net.................................................... (198) (16) (99)
--------- --------- ---------
Total income tax expense (benefit).............................. $ 9,643 $ 3,656 $ (1,733)
--------- --------- ---------
--------- --------- ---------
</TABLE>
80
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1997 and 1996
are presented below.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Unrealized loss on investment securities................................ $ 66 $ 648
Unrealized loss on loans................................................ -- 265
Loans, principally due to allowance for losses.......................... 2,355 2,613
Other real estate owned................................................. 226 788
Interest on nonaccrual loans............................................ 354 239
Net operating loss carryovers........................................... 378 392
Purchase accounting adjustments......................................... 1,109 1,022
Deferred compensation................................................... 1,267 1,190
Depreciation............................................................ 767 987
Contingencies........................................................... 895 382
Other................................................................... 1,007 1,145
--------- ---------
Total deferred tax assets................................................. 8,424 9,671
Valuation allowance..................................................... -- --
--------- ---------
Net deferred tax assets................................................... 8,424 9,671
--------- ---------
Deferred tax liabilities:
FHLB stock dividends.................................................... (289) (215)
Leases.................................................................. (179) (183)
Other................................................................... (107) (538)
--------- ---------
Total deferred tax liabilities.......................................... (575) (936)
--------- ---------
Net deferred tax asset................................................ $ 7,849 $ 8,735
--------- ---------
--------- ---------
</TABLE>
Realization of the net deferred tax assets may be based on utilization of
carrybacks to prior taxable periods, anticipation of future taxable income and
the utilization of tax planning strategies. Management believes that it is more
likely than not that the deferred tax assets will be fully realized. Therefore
no valuation allowance for deferred tax assets has been recorded at December 31,
1996 and 1997.
On December 31, 1997 the Company had $2,621,000 and $873,000 of Federal and
California net operating loss carryovers, respectively, and $333,000 in tax
credit carryforwards. During 1995, the Company entered into a recapitalization
plan which resulted in a change in ownership for purposes of Section 382 of the
Internal Revenue Code of 1986, as amended ("IRC"). IRC Section 382 imposes
restrictions on the utilizations of certain tax loss and credit carryforwards
which resulted in $1,741,000 of the Federal net operating loss carryovers and
$333,000 of tax credit carryovers no longer being available for utilization.
Management believes that the remaining $880,000 and $873,000 of the Federal
and California net operating losses, respectively, will be realized. The net
operating loss carryovers have various expiration dates through the year 2010.
81
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company and the Banks conduct operations from leased facilities under
operating leases which expire on various dates and which contain certain renewal
options.
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT (IN
THOUSANDS)
-----------
<S> <C>
Year ended December 31:
1998............................................................................ $ 2,262
1999............................................................................ 2,348
2000............................................................................ 2,334
2001............................................................................ 2,163
2002............................................................................ 1,623
Thereafter...................................................................... 5,699
-----------
Total......................................................................... $ 16,429
-----------
-----------
</TABLE>
Rental expense was $2,938,000 in 1997, $2,617,000 in 1996 and $2,603,000 in
1995. Rental expense for 1996 includes that for Western since the date of its
acquisition.
Sublease rental income for the years ended December 31, 1997, 1996 and 1995
totaled approximately $194,000, $155,000 and $187,000, respectively.
LITIGATION
GENERAL. From time to time, the Company and the Banks are party to claims
and legal proceedings arising in the ordinary course of business. Management of
the Company evaluates the Company's and/or the Banks' exposure to the cases
individually and in the aggregate and provides for potential losses on such
litigation if the amount of the loss is determinable and if the incurrence of
the loss is probable.
Set forth below is a brief summary of the status of certain pending legal
proceedings to which the Company and/or the Banks are subject. Management
believes that the reserves which it has established for these matters are
adequate at this time. However, litigation is inherently uncertain and no
assurance can be given that this or any other litigation will not result in any
loss which might be material to the Company and/or the Banks.
PDI LITIGATION. NBSC v. Vincent E. Galewick, Performance Development, Inc.
et al. (the "PDI Litigation"), is an interpleader action filed by NBSC on August
22, 1995 in the Orange County Superior Court. The dispute arose from a demand by
the California Department of Corporations under California Government Code
Section 7480 on August 17, 1995 for the identification of account names and
account number associated with Vincent Galewick and Performance Development,
Inc. (collectively "PDI"). As a result of receipt of a declaration by the
California Department of Corporations under California Financial Code Section
952, NBSC froze $12,301,113 in PDI's accounts. On August 21, 1995, a temporary
restraining
82
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
order was issued restraining PDI and others from transferring funds. NBSC was
thereafter threatened by various parties with lawsuits for refusal to release
the funds, and an attack was made on the applicability of the temporary
restraining order to the funds. NBSC deposited the funds with the Orange County
Superior Court and filed the interpleader action to allow the court to determine
the disposition of the funds. In response, the defendants filed a cross
complaint against NBSC alleging $25 million (the original claim alleged $45
million and was reduced during discovery) in damages due to lost opportunities,
breach of contract, loss of goodwill and damage to their reputation due to the
inability to use the $12,301,113. Additional claims for an unspecified amount of
punitive damages, consequential damages and incidental damages have been
alleged. Discovery has not yet been completed. Trial is anticipated to take
place in the fourth quarter of 1998.
FIP LITIGATION. Financial Institution Partners, L.P. v. California
Commercial Bankshares et al., is an action filed by Financial Institution
Partners, L.P. (collectively with its purported assignee, Hovde Capital, Inc.,
"FIP") on December 19, 1996 in the United States District Court for the Central
District of California. The dispute arose from the purchase by FIP in December
1995 of 288,888 shares of common stock of CCB (the "Initial Shares") in a
private placement at $6.75 per share ($1,949,994 in the aggregate), and FIP's
agreement to purchase an additional 266,659 shares of common stock of CCB on or
prior to May 5, 1996, subject to satisfaction of certain closing conditions,
including the receipt of required regulatory approval, if any.
FIP informed CCB on April 30, 1996 that it had been informed that no
regulatory approval was required for the purchase of additional shares of common
stock of CCB. Nevertheless, FIP did not purchase any additional shares of CCB
Common Stock pursuant to the agreement and has alleged, among other things, that
CCB failed to cooperate fully in the due diligence review of CCB that FIP
alleges was a condition precedent to its purchase of those additional shares. On
June 11, 1996, FIP requested that CCB either (a) amend the agreement to allow
FIP until December 31, 1996 to purchase additional shares of common stock of CCB
at an increased purchase price based upon the earnings of CCB from June 1, 1996
through November 30, 1996, or (b) repurchase the Initial Shares for an amount
equal to the purchase price, plus $6.00 per share, plus 9 percent interest, plus
FIP's legal, accounting and due diligence expenses. On June 28, 1996, CCB
informed FIP that its rights to purchase additional shares had expired under the
terms of the parties' agreement and declined either to amend the agreement or
repurchase the Initial Shares.
On December 19, 1996, FIP filed a complaint in the United States District
Court for the Central District of California against CCB, NBSC and certain of
their respective officers and directors alleging claims for breach of contract
(declaratory relief and specific performance), violation of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, intentional misrepresentation,
negligent misrepresentation, suppression of fact and breach of contract
(rescission, restitution and damages). On August 20, 1997, FIP filed a Third
Amended Complaint adding the Company as a defendant and alleging additional
claims for breach of contact (right of first refusal) and civil violation of
Penal Code Section 496. The complaint seeks rescission of FIP's purchase of the
Initial Shares, consequential damages in excess of $1,650,000 and punitive
damages. In the alternative, FIP seeks a declaratory judgment requiring CCB to
sell an additional 266,659 shares to FIP at $6.75 per share if FIP determines it
wishes to purchase such shares and requiring CCB and the Company to comply with
the terms of the agreement, which FIP contends provides it with a right of first
refusal as to any offers by defendants of shares of common stock of CCB in an
amount necessary to maintain FIP's agreed beneficial ownership interest in CCB.
FIP's complaint does not specify
83
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
which company's stock it believes it currently has a right of refusal to
purchase, or whether the number of shares it believes it has a right, or right
of first refusal, to purchase is subject to adjustment as a result of the CCB
Merger.
On September 19, 1997, the Company filed an answer to the complaint. The
Company believes that FIP's claims are without merit, that FIP has not been
damaged but in fact has earned a substantial profit from its purchase of the
Initial Shares, that FIP breached its agreement with CCB, and that FIP has no
contractual right or right of first refusal to purchase any shares of Company
Common Stock.
FIRST PENSION LITIGATION.
ROUSEAU ACTION. Rousseau et al. v. Rancho Vista National Bank et al., is an
action brought in the San Diego Superior Court on October 23, 1995 by a class of
investors who invested pension funds with First Pension, a pension plan
administrator, alleging claims against various banks who dealt with First
Pension (the "Rouseau Action"). The plaintiffs have stated claims for fraud and
deceit, aiding and abetting fraud and deceit, breach of fiduciary duty,
constructive fraud and aiding and abetting constructive fraud against a number
of financial institutions (the "Bank Defendants"), including SCB as successor to
Monarch and NBSC. NBSC and certain of its officers were named as defendants,
based on the fact that First Pension deposited investor pension funds into an
account at NBSC of which NBSC agreed to be custodian. The plaintiffs allege
losses of over $130 million due to the combined alleged wrongdoing of the Bank
Defendants. No specific damage claim was alleged against NBSC.
EVANS ACTION. Evans v. Home Bank et al., is a suit brought by the receiver
for First Pension and related entities in the Central District of California
based on the same allegations as in the Rousseau Action (the "Evans Action").
The receiver alleges that NBSC and Monarch improperly delegated their respective
fiduciary duties as a custodian of pension funds to First Pension and failed to
ensure that all pension assets were transferred to the successor custodian.
Plaintiffs have not alleged a specific damage claim against NBSC or Monarch.
ZWICK ACTION. Beverly Zwick v. Monarch Bank et al., is a class action
brought in the San Diego Superior Court (the "Zwick Action"). The plaintiffs are
a class of investors whose funds were deposited by First Pension in custodial
accounts held at Monarch. The plaintiffs stated claims for negligence, fraud and
aiding and abetting constructive fraud against Monarch and the Company.
Plaintiffs claim that Monarch knew or should have known that the now
incarcerated principals of First Pension were periodically stealing funds from
the custodial accounts through transferring authorized withdrawals to bogus
accounts from which the funds were eventually stolen. The damages alleged by the
plaintiffs exceed $2,000,000.
SETTLEMENT. On February 13, 1998, the Company entered into a Settlement
Agreement and Mutual Release, pursuant to which the Company and SCB, as
successors to Monarch and NBSC, were released from all claims raised in the
Rousseau Action, the Evans Action and the Zwick Action and the Company will pay
$1.1 million to be allocated among the various plaintiffs. Before this
settlement becomes final, the settlement agreement must be approved by the
courts in the various actions. The impact of the settlement has been included in
the 1997 consolidated financial statements.
84
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--RELATED PARTY TRANSACTIONS
The Company had loans outstanding to principal officers and directors and
their affiliated companies which were made substantially on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other borrowers and do not involve more than the
normal risks of collectibility. An analysis of the activity with respect to such
loans to related parties is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Balance, January 1....................................................... $ 4,514 $ 4,141
Additions due to acquisitions............................................ -- 184
New loans................................................................ 1,073 2,303
Repayments............................................................... (4,458) (2,114)
--------- ---------
Balance, December 31................................................... $ 1,129 $ 4,514
--------- ---------
--------- ---------
</TABLE>
In addition to the $1,129,000 of related party loans outstanding at December
31, 1997, there were $382,000 in undisbursed commitments. Included in the
repayments of $4,458,000 during 1997 is a decrease of $3,405,000 due to a
reduction in the number of related parties due to the CCB Merger and the SCB
Merger. In addition, principal officers and directors in the aggregate had $3.1
million in deposits with the Banks at December 31, 1997.
Certain of the Company's life insurance policies have been contracted based
on competitive bids through Rice Brown Financial. The principal of Rice Brown
Financial is a director of the Company.
On January 1, 1996, the Company engaged one of its directors as a financial
advisor. The engagement agreement provides for a monthly fee of $3,000 plus
expenses beginning January 1, 1996. The agreement may be terminated by either
the Company or the director upon 30 days written notice.
Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. are entities
related to a director of the Company. Belle Plaine Partners, Inc. serves as
financial advisor to the Company under an engagement letter dated May 17, 1995.
The agreement may be terminated by either party upon 30 days written notice. In
that capacity, Belle Plaine Partners, Inc. was paid fees of approximately $1.4
million for evaluating and identifying potential acquisitions including the
acquisition of Western which closed September 30, 1996. The Company also paid
Belle Plaine Partners, Inc. fees of approximately $1.35 million and $1.8 million
in connection with the CCB Merger and SCB Merger, respectively, by the Company,
and expects to pay approximately $2.7 million in connection with the acquisition
of Santa Monica Bank by the Company. Belle Plaine Financial, L.L.C. was engaged
by the Company to raise capital to consummate the acquisition of Western. Belle
Plaine Financial, L.L.C. was paid $863,000 for its services and was reimbursed
for expenses incurred in the course of that engagement. In addition Belle Plaine
Financial, L.L.C. assisted in the raising of capital for the Company in
connection with the acquisition of Santa Monica Bank by the Company for which it
did not receive a fee.
As part of the cost of raising equity in September of 1995, 48,400 warrants
were issued to parties related to Belle Plaine Partners, Inc., including 40,425
to directors of the Company. The exercise price of $13.77 was 20% higher than
the price at which the equity was raised. As part of the cost of the equity
raised in 1996 for the Western acquisition, 92,275 warrants were issued to
parties related to Belle Plaine Partners,
85
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--RELATED PARTY TRANSACTIONS (CONTINUED)
Inc., including 33,557 to the Company's largest shareholder and 28,089 to a
director of the Company. The exercise price of $16.83 was 20% higher than the
price at which the equity was raised.
NOTE 13--BENEFITS PLANS
On May 16, 1995, the Board of Directors of the Company approved the 1995
Directors Deferred Compensation Plan which was approved by shareholders on July
17, 1995. The plan is effective for fees earned on and after July 1, 1995. No
compensation has been awarded under the plan.
During 1992 the Company adopted an employee stock ownership and salary
deferral plan ("KSOP"). The Company's contributions to the KSOP totaled
approximately $20,000 in 1995. No contributions were made in 1997 and 1996. In
September of 1996 the Company froze the KSOP plan and recorded a related expense
of approximately $189,000 for repayment of a loan and other expenses. The loan
was classified in other liabilities as of December 31, 1996 and was paid off in
January of 1997.
The Banks have 401(k) plans covering substantially all employees. Amounts
contributed by the Banks and charged to expense were approximately $271,000,
$250,000, and $247,000 in 1997, 1996 and 1995, respectively. The Company intends
to merge the Banks' 401(k) plans into a single plan in the first quarter of
1998.
In 1987, CCB purchased cost recovery life insurance with aggregate death
benefits in the amount of $2,473,000 on the lives of the senior management
participants. The Company, as successor to CCB is the sole owner and beneficiary
of such policies, which were purchased to fund CCB's obligation under separate
deferred compensation arrangements. The cash surrender values and obligation
under deferred compensation agreements at December 31, 1997 and 1996 of
$1,415,000 and $1,296,000, respectively, and $568,000 and $529,000,
respectively, have been included in other assets and in other liabilities,
respectively, in the accompanying consolidated balance sheets.
The Company, as successor to SC Bancorp, has established deferred
compensation plans which permit certain directors and management employees to
defer portions of their compensation and earn interest at a predetermined amount
above a specified interest rate index on the deferred amounts. Expense incurred
on deferred balances was approximately $220,000, $177,000 and $648,000 in 1997,
1996 and 1995, respectively. The deferred compensation liability at December 31,
1997 and 1996 was approximately $1.9 million and $2.1 million, respectively, of
which $938,000 and $1.2 million, respectively, represented principal, and was
classified with other liabilities in the accompanying consolidated balance
sheets. Approximately $932,000 and $948,000 represented accrued interest payable
at December 31, 1997 and 1996, respectively, and was also classified as other
liabilities in the accompanying consolidated balance sheets. In conjunction with
the plans, the Company purchased life insurance policies on the participants
with the Company as beneficiary. The cash surrender values of the life insurance
policies were included in other assets in the accompanying consolidated balance
sheets and totaled approximately $3.9 million and $3.5 million at December 31,
1997 and 1996, respectively.
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
LENDING COMMITMENTS
The Banks are parties to financial instruments with off-balance sheet risk
in the normal course of business in meeting the financial needs of their
customers. These financial instruments consist primarily of
86
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
commitments to extend credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
balance sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Banks have in particular classes of financial
instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The same
credit policies are used in making commitments and conditional obligations as
those used for on-balance sheet instruments.
The Company had the following commitments to extend credit at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Loan commitments...................................................... $ 304,081 $ 240,563
Standby letters of credit............................................. 13,893 13,145
---------- ----------
$ 317,974 $ 253,708
---------- ----------
---------- ----------
</TABLE>
In addition to the amounts above, approximately $7,450,000 and $5,089,000 in
consumer credit card and overdraft commitments were outstanding as of December
31, 1997 and 1996. Loan commitment arrangements represent commercial lines of
credit with variable interest rates determined at the time funds are drawn by
adding an interest spread to an agreed upon index. Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any
condition established in the contract; they generally have fixed expiration
dates or other termination clauses and may require a fee. The total commitment
amount generally represents future cash requirements. However, many commitments
expire without being used. Standby letters of credit are conditional commitments
issued by the Company to guarantee performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
INTEREST RATE SWAPS
SCB entered into two interest rate swap agreements with notional principal
amounts of $50 million and $25 million, respectively. These agreements were
intended to mitigate interest rate fluctuations on SCB's floating rate loan
portfolio. In January 1997 the swap with the notional principal amount of $25
million matured. Due to the merger of SCB with the Company in the fourth quarter
of 1997 and to apply the Company's asset liability management philosophy, the
Company terminated the $50 million swap. For the years ended December 31, 1997,
1996, and 1995, net interest expense of $410,000, $563,000, and $929,000 from
the swap agreements is included in interest income on loans in the consolidated
statements of operations. The costs associated with the termination of the $50
million notional principal swap is $446,000 and is included in other merger
costs for the year ended December 31, 1997.
87
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no readily discernible
market value exists for a large portion of the financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature,
involve uncertainties and matters of judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in the estimates.
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash and due from banks, and federal funds sold, are
considered to approximate fair value. The fair value of investment securities is
generally based on quoted market prices. The fair value of loans is estimated
using a combination of techniques, including discounting estimated future cash
flows and quoted market prices of similar instruments, where available, taking
into consideration the varying degrees of credit risk. The carrying amounts of
accrued interest receivable are considered to approximate fair value.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand is considered
to approximate fair value. For fixed maturity deposits, fair value is estimated
by discounting estimated future cash flows using currently offered rates for
deposits of similar remaining maturities. The fair value of notes payable is
based on rates currently available to the Company for debt with similar terms
and remaining maturities. As notes payable reprice daily, the carrying value
approximates fair value. The carrying amounts of other short-term borrowings and
accrued interest payable are considered to approximate fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of credit
is estimated using the fees currently charged to enter into similar agreements.
The fair value of these financial instruments is not material.
88
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of financial instruments at December 31, 1997 and
1996 is summarized as follows:
<TABLE>
<CAPTION>
CARRYING
VALUE FAIR VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1997
Financial Assets:
Cash and due from banks....................................... $ 97,456 $ 97,456
Federal funds sold............................................ 138,702 138,702
Securities.................................................... 207,514 207,514
Loans and leases, net......................................... 864,840 863,180
Accrued interest receivable................................... 8,204 8,204
Financial Liabilities:
Deposits...................................................... $ 1,226,793 $ 1,228,114
Notes payable................................................. 12,751 12,751
Accrued interest payable...................................... 2,427 2,427
DECEMBER 31, 1996
Financial Assets:
Cash and due from banks....................................... $ 96,202 $ 96,202
Federal funds sold............................................ 22,517 22,517
Securities.................................................... 332,818 332,793
Loans and leases, net......................................... 801,601 803,312
Accrued interest receivable................................... 9,664 9,664
Financial Liabilities:
Deposits...................................................... $ 1,177,014 $ 1,177,345
Notes payable................................................. 20,290 20,290
Accrued interest payable...................................... 2,258 2,258
Off-Balance Sheet Financial Instrument:
Interest rate swap agreements in a net payable position....... $ -- $ (900)
</TABLE>
NOTE 16--REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by Federal and State of California banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items, as
calculated under regulatory accounting practices, must be met. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. The Company and
the Banks are considered well-capitalized at December 31, 1997.
89
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum ratios based on average
and risk weighted assets as set forth below. Actual capital ratios for the
Company and the Banks as of December 31, 1997 are also shown in the table:
<TABLE>
<CAPTION>
REQUIREMENT ACTUAL
------------------------ ----------------------------------
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED WESTERN SCB CONSOLIDATED
----------- ----------- --------- --------- ------------
(GREATER THAN OR EQUAL
TO)
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital
ratio......................... 4.00% 6.00% 10.85% 10.41% 9.66%
Total risk-based capital........ 8.00% 10.00% 12.10% 11.66% 10.91%
Tier 1 leverage capital ratio... 4.00% 5.00% 7.43% 8.22% 7.33%
</TABLE>
90
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash and due from banks................................................................. $ 458 $ 7,401
Other real estate owned................................................................. 83 83
Investments in subsidiaries (Note 8).................................................... 138,615 134,389
Securities available for sale........................................................... -- 262
Other assets............................................................................ 1,954 1,253
---------- ----------
Total assets.......................................................................... $ 141,110 $ 143,388
---------- ----------
---------- ----------
Liabilities:
Notes payable........................................................................... $ 7,080 $ 13,350
Other liabilities....................................................................... 4,375 991
---------- ----------
Total liabilities..................................................................... 11,455 14,341
Shareholders' equity...................................................................... 129,655 129,047
---------- ----------
Total liabilities and shareholders' equity............................................ $ 141,110 $ 143,388
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Interest income.................................................................... $ 79 $ 301 $ 236
Management fees.................................................................... 291 58 --
Gain on sale of securities available for sale...................................... 229 -- --
Dividend income from subsidiaries.................................................. 10,500 -- --
--------- --------- ---------
Total income..................................................................... 11,099 359 236
--------- --------- ---------
Interest expense................................................................... 730 465 260
Merger costs....................................................................... 9,537 -- --
Other expense...................................................................... 2,624 1,757 461
--------- --------- ---------
Total expense.................................................................... 12,891 2,222 721
--------- --------- ---------
Loss before taxes and equity in undistributed subsidiary earnings................ (1,792) (1,863) (485)
Income tax benefit................................................................. (1,857) (846) (47)
--------- --------- ---------
Income (loss) before equity in undistributed earnings of subsidiaries.............. 65 (1,017) (438)
Equity in undistributed income (loss) of subsidiaries.............................. 3,097 10,006 (1,351)
--------- --------- ---------
Net income (loss).................................................................. $ 3,162 $ 8,989 $ (1,789)
--------- --------- ---------
--------- --------- ---------
</TABLE>
91
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Net income (loss)........................................................... $ 3,162 $ 8,989 $ (1,789)
Gain on sale of investments................................................. (229) -- --
Change in other assets...................................................... (701) (1,034) 78
Change in other liabilities................................................. 1,163 982 (91)
Equity in undistributed subsidiary (earnings) losses........................ (3,097) (10,006) 1,351
---------- ---------- ----------
Cash flows provided (used) by operating activities........................ 298 (1,069) (451)
---------- ---------- ----------
Acquisition of Western, including acquisition costs......................... -- (53,154) --
Proceeds from sale of securities available for sale......................... 332 4,924 --
Increase in investment in subsidiaries...................................... -- -- (7,900)
Other investing activities.................................................. (202) 126 (8,939)
---------- ---------- ----------
Cash flows provided (used) by investing activities........................ 130 (48,104) (16,839)
---------- ---------- ----------
Net proceeds from issuance of common stock, net of issuance costs, and from
exercise of common stock options and warrants............................. 2,470 42,625 12,973
Repurchases of common stock................................................. (849) -- --
Dividends paid.............................................................. (2,722) -- --
Issuance (repayments) of debt............................................... (6,270) 11,000 --
Other financing activities.................................................. -- (137) (589)
---------- ---------- ----------
Cash flows provided (used) by financing activities........................ (7,371) 53,488 12,384
---------- ---------- ----------
Net increase (decrease) in cash............................................. (6,943) 4,315 (4,906)
Cash beginning of year...................................................... 7,401 3,086 7,992
---------- ---------- ----------
Cash end of year............................................................ $ 458 $ 7,401 $ 3,086
---------- ---------- ----------
---------- ---------- ----------
Cash paid for interest...................................................... $ 730 $ 465 $ 260
Cash paid for income taxes.................................................. $ 2,750 $ -- $ --
</TABLE>
92
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS
At the time of the CCB Merger, all outstanding stock options of CCB were
converted into stock options of the Company at an exchange rate of one-to-one.
At the time of the SCB Merger, all outstanding stock options of SC Bancorp were
converted into shares of Company Common Stock based upon the difference between
$14.25 and the exercise price of each SC Bancorp option divided by $31.28.
246,401 options were converted into shares as a result of the SCB Merger. The
following disclosures reflect the combination of the Company, CCB and SC Bancorp
stock option data.
The Company has a stock option plan (the "Plan") pursuant to which the
Company's Board of Directors may grant stock options to officers, directors and
key employees. The Plan authorizes grants of options to purchase shares of
authorized but unissued Company Common Stock. Stock options are granted with an
exercise price greater than or equal to the stock's fair market value at the
date of grant. Qualified stock options have 5-year terms and vest over a three
year period from the date of grant. The Company's non-qualified stock options
("NQSO") have 5-year and 10-year terms and vest over a three year period from
the date of grant. As of December 31, 1997, of the 404,410 options then
authorized for grant, there were 76,201 options available for grant under the
Plan. SCB's NQSO had 10-year terms and vested over a five year period from the
date of grant. All of SC Bancorp's NQSO vested at the SCB Merger and were
converted into shares of Company Common Stock. In addition, during 1997 the
Company issued 19,803 options outside of the Plan to certain officers and
directors of the Company at an exercise price less than the Company Common
Stock's fair market value at the date of grant resulting in compensation expense
of $254,000 included in merger costs. The following table summarizes the
activity relating to the Company's stock options for the years indicated.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
NO. OF WEIGHTED-AVG. NO. OF WEIGHTED-AVG. NO. OF WEIGHTED-AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January 1..... 581,699 $ 11.25 491,036 $ 9.59 415,240 $ 10.00
Options granted.................... 186,444 30.99 214,052 14.38 221,616 7.42
Options exercised.................. (74,492) 8.25 (80,042) 5.74 (45,616) 5.64
Options forfeited.................. (10,486) 12.78 (1,699) 13.77 -- --
Options converted to shares related
to the SCB Merger................ (246,401) 13.70 -- -- -- --
Options expired.................... (117) 13.77 (16,648) 13.50 (36,129) 14.18
Options cancelled.................. -- -- (25,000) 5.83 (64,075) 11.12
--------- ------ --------- ------ --------- ------
Options outstanding, December
31............................. 436,647 $ 18.79 581,699 $ 11.25 491,036 $ 9.59
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
Options exercisable, December
31............................. 122,152 245,705 232,551
--------- --------- ---------
--------- --------- ---------
Weighted-average grant date fair
value of options granted during
the year......................... $ 9.56 $ 9.28 $ 5.94
------ ------ ------
------ ------ ------
</TABLE>
The fair market value of options granted during 1997, 1996 and 1995 was
estimated using the Black-Scholes option-pricing model. The following
assumptions were incorporated into the valuation calculation: (i) an option
contract life of 2 1/2 to 10 years, (ii) a stock price volatility of 40% based
on daily market
93
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
prices for the preceding five year period, (iii) dividends of $0.60 per share
per annum, and (iv) a risk-free interest rate of 5.2% to 7.9%.
The table below provides the range of exercise prices, weighted-average
exercise prices and weighted-average remaining contractual lives for options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED-AVG.
NUMBER REMAINING WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- --------------------------------------- ----------- --------------- ------------- ----------- -------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
<S> <C> <C> <C> <C> <C>
$5.25 to $6.50......................... 128,584 6.5 years $ 5.62 83,916 $ 5.66
$13.77 to $14.02....................... 121,619 7.9 years 14.01 33,777 13.99
$19.64 to $25.50....................... 19,803 8.9 years 19.77 2,156 20.86
$29.88 to $33.00....................... 166,641 5.0 years 32.32 2,303 32.60
----------- -----------
$5.25 to $33.00........................ 436,647 6.4 years $ 18.79 122,152 $ 8.74
----------- -----------
----------- -----------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in
accounting for its Plan. Accordingly, no compensation cost has been recognized
for its stock option plans in the consolidated financial statements. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method of SFAS No. 123, the Company's net income and earnings per share for 1997
and 1996 would have been reduced to the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income:
As reported................................................... $ 3,162 $ 8,989 $ (1,789)
Pro forma..................................................... 2,411 8,663 (1,988)
Basic net income per share
As reported................................................... 0.30 1.11 (0.28)
Pro forma..................................................... 0.23 1.07 (0.31)
Diluted net income per share
As reported................................................... 0.29 1.09 (0.28)
Pro forma..................................................... 0.22 1.05 (0.31)
</TABLE>
The pro forma amounts shown above may not be representative of the effects
on reported net income for future periods.
At December 31, 1997, 1996 and 1995, there were also exercisable warrants
outstanding of 140,675, 140,675 and 48,400, respectively, and the weighted
average exercise price of those warrants exercisable was $15.81, $15.81 and
$13.77, respectively. Of the warrants outstanding on December 31, 1997, 48,400
expire on September 30, 2000 and 92,275 expire on September 30, 2001.
94
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31,
1997 1997 1997 1997
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................................ $ 23,965 $ 24,793 $ 26,081 $ 26,195
Interest expense........................................... 7,015 7,315 7,439 7,589
----------- ----------- ----------- -----------
Net interest income........................................ 16,950 17,478 18,642 18,606
Provision for loan and lease losses........................ 725 675 725 675
----------- ----------- ----------- -----------
Net interest income after provision for loan and lease
losses................................................... 16,225 16,803 17,917 17,931
Other income............................................... 2,600 2,614 2,157 2,315
Merger costs............................................... (66) (3,404) -- (10,731)
Goodwill amortization...................................... (636) (634) (635) (633)
Other expenses............................................. (12,716) (12,530) (12,145) (11,627)
----------- ----------- ----------- -----------
Income (loss) before income taxes.......................... 5,407 2,849 7,294 (2,745)
Income taxes............................................... 2,431 2,380 3,211 1,621
----------- ----------- ----------- -----------
Net income (loss).......................................... $ 2,976 $ 469 $ 4,083 $ (4,366)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares outstanding:
Basic.................................................... 10,487.0 10,497.9 10,488.7 10,621.0
Diluted.................................................. 10,757.7 10,798.7 10,791.1 10,835.0
Net income (loss) per share:
Basic.................................................... $ 0.28 $ 0.04 $ 0.39 $ (0.41)
Diluted.................................................. $ 0.28 $ 0.04 $ 0.38 $ (0.41)
Dividends per common share declared and paid............... $ -- $ -- $ -- $ 0.15
Common stock price range:
High..................................................... $ 34.00 $ 37.19 $ 33.25 $ 33.88
Low...................................................... $ 19.13 $ 28.63 $ 28.63 $ 29.88
</TABLE>
95
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31,
1996 1996 1996 1996
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................................ $ 16,134 $ 16,961 $ 17,094 $ 24,048
Interest expense........................................... 4,948 4,865 5,132 7,366
----------- ----------- ----------- -----------
Net interest income........................................ 11,186 12,096 11,962 16,682
Provision for loan and lease losses........................ 630 (295) 60 623
----------- ----------- ----------- -----------
Net interest income after provision for loan and lease
losses................................................... 10,556 12,391 11,902 16,059
Other income............................................... 2,172 3,188 1,648 2,867
Merger costs............................................... -- -- -- --
Goodwill amortization...................................... (114) (121) (135) (634)
Other expenses............................................. (10,371) (11,394) (10,240) (15,129)
----------- ----------- ----------- -----------
Income before income taxes................................. 2,243 4,064 3,175 3,163
Income taxes (benefit)..................................... 926 1,639 1,319 (228)
----------- ----------- ----------- -----------
Net income................................................. $ 1,317 $ 2,425 $ 1,856 $ 3,391
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares outstanding:
Basic.................................................... 7,309.9 7,317.4 7,322.7 10,415.6
Diluted.................................................. 7,401.0 7,433.4 7,424.2 10,647.9
Net income per share:
Basic.................................................... $ 0.18 $ 0.33 $ 0.25 $ 0.33
Diluted.................................................. $ 0.18 $ 0.33 $ 0.25 $ 0.32
Dividends per common share declared and paid............... $ -- $ -- $ -- $ --
Common stock price range:
High..................................................... $ 11.05 $ 17.00 $ 14.88 $ 29.75
Low...................................................... $ 8.93 $ 8.50 $ 8.50 $ 13.86
</TABLE>
NOTE 20--ACQUISITION OF SANTA MONICA BANK
On July 30, 1997, the Company and Santa Monica Bank entered into a
definitive agreement for the merger of Santa Monica Bank with a subsidiary of
the Company, subject to approval by the banking regulators and shareholders of
both companies.
On January 27, 1998, the Company consummated the SMB Acquisition through the
merger of Santa Monica Bank with and into Western. The name of Western was
changed to "Santa Monica Bank." As a result of the SMB Acquisition,
approximately 4,973,550 shares of Company Common Stock were issued to certain
holders of common stock of Santa Monica Bank and to certain private investors.
Upon the SMB Acquisition becoming effective, each share of SMB Common Stock
issued and outstanding at the time was converted into the right to receive
either (i) $28.00 in cash or (ii) 0.875 shares of Company Common Stock. Of the
7,084,244 shares of SMB Common Stock outstanding at the time of
96
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--ACQUISITION OF SANTA MONICA BANK (CONTINUED)
the SMB Acquisition, approximately 57.3% elected to receive cash and
approximately 42.7% elected to receive Company Common Stock.
The SMB Acquisition will be accounted for using the purchase method of
accounting. At December 31, 1997, Santa Monica Bank had total assets, deposits,
shareholders' equity and number of shares of SMB Common Stock outstanding of
$678 million, $593 million, $81 million and 7.1 million, respectively. For the
year ended December 31, 1997, Santa Monica Bank reported net income and net
income per share of approximately $10.9 million and $1.54, respectively; these
amounts were not audited in connection with the preparation of these financial
statements.
NOTE 21--NET INCOME PER SHARE
The following is a summary of the calculation of basic and diluted net
income per share for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)............................................................... $ 3,162 $ 8,989 $ (1,789)
--------- --------- -------------
--------- --------- -------------
Weighted average shares outstanding............................................. 10,524 8,096 6,487
Basic net income (loss) per share............................................... $ 0.30 $ 1.11 $ (0.28 )
Weighted average shares outstanding............................................. 10,524 8,096 6,487
Effect of dilutive stock options and warrants................................... 208 152 --(1)
--------- --------- -------------
Diluted shares outstanding...................................................... 10,732 8,248 6,487
--------- --------- -------------
--------- --------- -------------
Diluted net income (loss) per share............................................. $ 0.29 $ 1.09 $ (0.28 )
--------- --------- -------------
--------- --------- -------------
</TABLE>
- ------------------------
(1) Stock options and warrants would be antidilutive in 1995 and therefore are
not used for diluted net income per share. Diluted shares outstanding would
have been 6,599.
97
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Board of Directors of the Company appointed KPMG Peat Marwick LLP as its
auditors and replaced Dayton & Associates, which is now Vavrinek, Trine, Day &
Co. Dayton & Associates' report dated February 29, 1996 on the Company's
consolidated financial statements for the year ended December 31, 1995 did not
include an adverse opinion or disclaimer opinion nor was it qualified as to
audit scope or accounting principles.
During the Company's fiscal years ended December 31, 1994 and December 31,
1995, and subsequent interim period, there were no disagreements with Dayton &
Associates on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which if not resolved to
Dayton & Associates' satisfaction, would have caused them to make reference to
the subject matter of the disagreement in connection with their Report.
During the Company's fiscal years ended December 31, 1994 and December 31,
1995, and subsequent interim period:
(a) Dayton & Associates has not advised the Company that there do not exist
the internal controls necessary for the Company to develop reliable financial
statements;
(b) Dayton & Associates has not advised the Company that information had
come to their attention that has led them to no longer be able to rely on
management's representations, or that has made Dayton & Associates unwilling to
be associated with the financial statements prepared by management;
(c) Dayton & Associates has not advised the Company that they needed to
expand significantly the scope of their audit, or that information has come to
their attention during such time period that if further investigated may (i)
materially impact the fairness or reliability of either the previously issued
audit report or the underlying financial statements, or the financial statements
to be issued covering the fiscal period subsequent to the date of the most
recent financial statements covered by an audit report or (ii) cause Dayton &
Associates to be unwilling to rely on management's representations or be
associated with the Company's financial statements; and
(d) Dayton & Associates has not advised the Company that information has
come to their attention of the type described in subparagraph (c) above, the
issue not being resolved to their satisfaction prior to its dismissal.
The Company has not, during its fiscal years ended December 31, 1994 and
December 31, 1995, and the subsequent interim periods, consulted with KPMG Peat
Marwick LLP regarding the application of accounting principles to a specifc
transaction or the type of audit opinion that might be rendered on the Company's
financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
At the Company's 1997 Annual Meeting held June 2, 1997, the following
individuals were elected to the Company's Board of Directors: Rice E. Brown,
Joseph J. Digange, John M. Eggemeyer, John W. Rose, Hugh S. Smith, Jr., Matthew
P. Wagner, and Dale E. Walter. Upon consummation of the CCB Merger, William H.
Jacoby, Robert L. McKay and Mark H. Stuenkel were appointed to the Board of
Directors of the Company. Upon consummation of the SCB Merger, Harold A.
Beisswenger, Larry D. Hartwig, William C. Greenbeck and Donald E. Wood were
appointed to the Board of Directors of the Company. Upon consummation of the SMB
Acquisition, Aubrey L. Austin was appointed to the Board of Directors of the
Company.
98
<PAGE>
The following table sets forth as to each individual nominated by the Board
of Directors to stand for election to the Board of Directors of the Company at
the 1998 Annual Meeting of Shareholders, such person's age, such person's
position with the Company and the period during which such person has served as
a director of the Company.
<TABLE>
<CAPTION>
DIRECTOR
OF
COMPANY
NAME AGE POSITION WITH COMPANY SINCE
- --------------------------------- --- ----------------------------------------------------------------- -------
<S> <C> <C> <C>
Aubrey L. Austin................. 51 Director; Chairman, President and Chief Executive Officer of SMB 1998
Rice E. Brown.................... 60 Director 1988
John M. Eggemeyer................ 52 Director 1997
William C. Greenbeck............. 50 Director 1997
Robert L. McKay.................. 67 Director 1997
Hugh S. Smith, Jr................ 67 Chairman and Director 1996
Mark H. Stuenkel................. 45 Director; President and Chief Executive Officer of SCB 1997
Matthew P. Wagner................ 41 Director, President and Chief Executive Officer 1996
Dale E. Walter................... 63 Director 1996
</TABLE>
AUBREY L. AUSTIN currently serves as Chairman, President and Chief Executive
Officer of SMB. Mr. Austin joined Santa Monica Bank in 1977. In January 1990 Mr.
Austin was named President of Santa Monica Bank and in August 1993 was appointed
to the additional position of Chief Executive Officer. Mr. Austin also served on
the Board of Directors of Santa Monica Bank since 1985.
RICE E. BROWN, MSFS is a registered investment advisor, registered principal
and President of the firm Rice Brown Financial Services Inc. which has been in
business for over 35 years. His primary focus is in the area of money management
using fee asset basis and estate planning. He is also the former President of
the National Association of Life Underwriters, a Washington, D.C. based
professional money management group.
JOHN M. EGGEMEYER is an investor and advisor to financial institutions. From
1992 to 1994, Mr. Eggemeyer was a principal of Mabon Securities Corp., an
investment bank. From 1990 to the present, Mr. Eggemeyer has been the President
of Belle Plaine Partners, Inc. He is also the President of Castle Creek Capital
L.L.C., a registered bank holding company, and Belle Plaine Financial L.L.C., a
registered broker/dealer. He currently serves as a Director for each of the
following companies: The Enterprise Fund, Rancho Santa Fe National Bank, TCF
National Bank-Illinois, and TCF Financial Corporation.
WILLIAM C. GREENBECK, a developer and manager of industrial and commercial
real property, has been a Managing General Partner of Downey Land Limited since
1975. Mr. Greenbeck served as a Director and Secretary of SC Bancorp from 1981
to 1997; he also served on the Board of SCB from 1982 to 1997 and from 1984
served as its Secretary.
ROBERT L. MCKAY has been a private investor in Orange County, California
since 1981 where he oversees his investments in venture capital and real estate.
From 1966 to 1981, Mr. McKay was President of Taco Bell, Inc. From 1992 to 1997,
Mr. McKay served as a Director of CCB.
HUGH S. SMITH, JR. currently serves as the Chairman of the Board of the
Company and on the Board of Directors of each of the Banks. From September 1996
to December 1997, Mr. Smith also served as Chief Executive Officer of the
Company. Prior to September 30, 1996, Mr. Smith was Chairman of the Board and
Chief Executive Officer of Western, a position he held for 23 years.
MARK H. STUENKEL currently serves as President and Chief Executive Officer
of SCB and is a member of the Board of Directors of SCB. Mr. Stuenkel joined
NBSC as a Senior Credit Officer in 1982. In 1988, he
99
<PAGE>
was named President of NBSC and in 1997 was named to the additional position of
Chief Executive Officer. Mr. Stuenkel also served as Senior Vice President of
CCB from 1982 to 1991 and as Executive Vice President from 1991 to 1997. Prior
to joining CCB and NBSC in 1982, Mr. Stuenkel held various positions with
Security Pacific National Bank.
MATTHEW P. WAGNER is the President and Chief Executive Officer of the
Company. Mr. Wagner also serves on the Board of Directors of each of the Banks.
In October 1996, Mr. Wagner was elected President and Chief Executive Officer of
Western, positions he held until January 1998. In February 1997, Mr. Wagner was
appointed to the post of President of the Company, and in December 1997 he was
appointed Chief Executive Officer of the Company. Prior to joining the Company
in 1996, Mr. Wagner was an Executive Vice President with U.S. Bancorp in
Minneapolis, Minnesota since 1991 and Senior Vice President since 1985.
DALE E. WALTER has over 35 years of banking experience having served as
Chief Executive Officer of several Southern California independent banks: Mr.
Walter served as President and Chief Executive Officer of the Bank of Industry
from 1980 to June 1992; as Chairman and Chief Executive Officer of Commerce
Bancorp from January 1993 to July 1994; and as President and Chief Executive
Officer of Guardian Bank from October 1994 to February 1995. From February 1996
to the present, Mr. Walter has operated a wholesale golf travel company. Mr.
Walter currently serves as a Director of First Community Bank of the Desert.
COMMITTEES OF THE BOARD OF DIRECTORS
During 1997, the Board of Directors of the Company held sixteen (16)
meetings. All Directors attended at least 75% of the Board meetings of the
Company during the time they were directors of the Company.
The Audit Committee of the Board of Directors currently consists Rice E.
Brown, John M. Eggemeyer, Robert L. McKay, John W. Rose, and Dale E. Walter. The
Audit Committee recommends to the Board of Directors for its approval a
certified public accounting firm to conduct the Company's annual audit. The
Audit Committee will also (i) confer from time to time with the Company's
certified public accountants regarding their audit work and the details thereof,
(ii) review management letters of the Company's certified public accounting
firm, (iii) meet and consult with the Company's executive and financial officers
to discuss accounting policies, (iv) review staffing of the Company's accounting
and financial departments and make recommendations to the Board of Directors
relating to these departments, and (v) provide assistance and recommendations to
the Board of Directors with respect to the general financial needs, policies and
practices of the Company. The Audit Committee had three (3) meetings in 1997.
The Executive Committee of the Board of Directors currently consists of John
M. Eggemeyer, William C. Greenbeck, Hugh S. Smith, Jr., Matthew P. Wagner and
Dale E. Walter. There were no formal meetings of the Executive Committee in
1997.
100
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth as to each of the persons who currently
serves as an Executive Officer of the Company, such person's age, such person's
current position with the Company, and the period during which the person has
served in such position:
<TABLE>
<CAPTION>
YEAR
HIRED
BY
NAME AGE POSITION WITH COMPANY COMPANY
- --------------------------------- --- ----------------------------------------------------------------- -------
<S> <C> <C> <C>
Robert M. Borgman................ 50 Executive Vice President 1997
And Chief Credit Officer
Suzanne R. Brennan............... 47 Executive Vice President-- 1997
Operations
Julius G. Christensen............ 32 Executive Vice President, 1997
General Counsel and Secretary
Arnold C. Hahn................... 46 Executive Vice President and 1996
Chief Financial Officer
Matthew P. Wagner................ 41 President and Chief Executive Officer 1996
</TABLE>
ROBERT M. BORGMAN is currently the Chief Credit Officer of the Company. Mr.
Borgman also serves on the Board of Directors of each of the Banks. Prior to
joining the Company in August 1997, Mr. Borgman was the founder and President
and Chief Executive Officer of National Business Finance, Inc., a national
commercial finance and factoring organization headquartered in Denver, Colorado
from 1987 to 1997. During the period from 1978 to 1987, Mr. Borgman held the
position of Senior Vice President and Manager of Commercial Lending at First
Interstate Bank of Denver.
SUZANNE R. BRENNAN has served as Executive Vice President--Operations of the
Company since July 1997. Prior to joining the Company, Ms. Brennan was the
Senior Vice President of Corporate Trust Operations at U.S. Bancorp in
Minneapolis, Minnesota from October 1994. From November 1986 to October 1994,
Ms. Brennan managed securities processing for U.S. Bancorp. She also has
managerial operations experience with the Federal Reserve Bank of Minneapolis
and the University of Minnesota.
JULIUS G. CHRISTENSEN has served as Executive Vice President and General
Counsel of the Company since September 1997 and as Secretary of the Company
since October 1997. Mr. Christensen also serves on the Board of Directors of
each of the Banks. Prior to joining the Company, Mr. Christensen spent 2 years
in practice with the law firm of Sullivan & Cromwell engaged in merger and
acquisitions and securities law practice. From 1992 to 1995, Mr. Christensen was
a candidate for a Juris Doctorate degree from Harvard Law School.
ARNOLD C. HAHN has served as Executive Vice President and Chief Financial
Officer of the Company since November 1996. Mr. Hahn also serves on the Board of
Directors of each of the Banks. Mr. Hahn served as Secretary of the Company from
November 1996 to October 1997. Prior to joining the Company, Mr. Hahn spent 6
years as a Senior Vice President of Finance for U.S. Bancorp in Minneapolis,
Minnesota. Prior to joining U.S. Bancorp, Mr. Hahn was a partner with Ernst &
Young.
MATTHEW P. WAGNER is the President and Chief Executive Officer of the
Company. Mr. Wagner also serves on the Board of Directors of the Company and
each of the Banks. In October 1996, Mr. Wagner was elected President and Chief
Executive Officer of Western, positions he held until January 1998. In February
1997, Mr. Wagner was appointed to the post of President of the Company, and in
December 1997 he was appointed to the additional post of Chief Executive Officer
of the Company. Prior to joining the Company in 1996, Mr. Wagner was Executive
Vice President with U.S. Bancorp in Minneapolis, Minnesota since 1991 and Senior
Vice President since 1985.
101
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table reflects all compensation paid to Mr.Hugh S. Smith, Jr.,
the Company's former Chief Executive Officer, Mr. Matthew P. Wagner, the
Company's current Chief Executive Officer, and other four (4) other most highly
compensated executive officers receiving a total annual salary and bonus of
$100,000 or more.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------
AWARDS
ANNUAL COMPENSATION ----------------------------------
--------------------------------------------- (G)
(E) (F) SECURITIES
OTHER RESTRICTED UNDERLYING
(A) (B) (C) (D) ANNUAL STOCK OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMP ($)(1) AWARD(S) SARS
- -------------------------------- --------- ----------- ----------- ------------------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Hugh S. Smith, Jr.(2) .......... 1997 187,000 40,000 23,529
Chairman and Former Chief 1996 188,260 50,000
Executive Officer 1995 186,292 100,000
Matthew P. Wagner .............. 1997 175,000 175,000 21,000
President and Chief Executive 1996 43,750 100,000 58,823
Officer
Aubrey L. Austin(4) ............ 1997 237,756 119,597
President and Chief Executive 1996 237,748 96,162
Officer of SMB 1995 224,200 17,840
Mark H. Stuenkel(5) ............ 1997 163,414 83,738 32,647
President and Chief Executive 1996 161,027 76,125
Officer of SCB 1995 144,333 --
Arnold C. Hahn ................. 1997 150,000 120,000 15,000
Executive Vice President and 1996 25,029 100,000 15,882
Chief Financial Officer
Suzanne R. Brennan ............. 1997 63,179 40,000 9,188
Executive Vice
President--Operations
<CAPTION>
PAYOUTS
-------
(I)
(H) ALL
(A) LTIP OTHER
NAME AND PRINCIPAL POSITION PAYOUTS COMP ($)
- -------------------------------- ------- -----------
<S> <C> <C>
Hugh S. Smith, Jr.(2) ..........
Chairman and Former Chief
Executive Officer
Matthew P. Wagner .............. 200,000(3)
President and Chief Executive
Officer
Aubrey L. Austin(4) ............ 4,500
President and Chief Executive 3,517
Officer of SMB
Mark H. Stuenkel(5) ............ 1,318
President and Chief Executive 1,062
Officer of SCB
Arnold C. Hahn .................
Executive Vice President and
Chief Financial Officer
Suzanne R. Brennan .............
Executive Vice
President--Operations
</TABLE>
- ------------------------
(1) None of the named officers had other annual compensation in excess of
$50,000 or 10 percent of the total annual salary and bonus reported for any
of the years shown.
(2) Mr. Smith's compensation for 1996 and 1995 includes amounts received from
Western prior to the Western Acquisition on September 30, 1996.
(3) The amount reflects reimbursement of costs incurred in connection with Mr.
Wagner's relocation to California.
(4) Mr. Austin joined the Company on January 27, 1998 as Chairman, President and
Chief Executive Officer of SMB. Mr. Austin's compensation reflects amounts
paid to him by Santa Monica Bank prior to the SMB Acquisition. Other Annual
Compensation includes Santa Monica Bank's matching 401(k) contribution. All
Other Compensation represents amounts contributed by Santa Monica Bank to
the Profit Sharing Plan and allocated to Mr. Austin's vested or unvested
account under such plan.
(5) Mr. Stuenkel joined the Company as President and Chief Executive Officer of
NBSC on June 4, 1997 as part of the CCB Merger. His compensation includes
amounts received from CCB prior to the CCB Merger. Other Annual Compensation
includes the CCB's matching 401(k) contribution. All Other Compensation for
Mr. Stuenkel represents the executives' portion of amount contributed to
CCB's Stock Bonus Plan, which was 100 percent funded by the CCB. The
contributions were made at the discretion of the Board of Directors of CCB.
The distributions are made at the earlier of 2 years after termination,
retirement, death or disability. Mr. Stuenkel's 1996 compensation included
$16,000 of vacation pay.
102
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS EXERCISE OR PRICE APPRECIATION
UNDERLYING GRANTED TO BASE FOR TERM OF OPTION
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARES) DATE 5% ($) 10% ($)
- -------------------------------------- ------------- --------------- --------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Matthew P. Wagner..................... 21,000 11.3% $ 32.375 12/23/2002 187,837 415,070
Mark H. Stuenkel(1)................... 17,647 17.5% $ 19.64 6/4/2007 501,393 1,003,680
15,000 $ 32.375 12/23/2002 134,169 296,479
Arnold C. Hahn........................ 15,000 8.0% $ 32.375 12/23/2002 134,169 296,479
Robert M. Borgman..................... 5,000 6.4% $ 32.00 8/19/2002- 65,362 156,676
7,000 $ 32.375 8/19/2007 62,612 138,357
12/23/2002
Suzanne R. Brennan.................... 2,188 4.9% $ 32.00 8/19/2002 19,344 42,745
7,000 $ 32.375 12/23/2002 62,612 138,357
Julius G. Christensen................. 3,000 4.3% $ 29.875 10/10/2002 24,762 54,717
5,000 $ 32.375 12/23/2002 44,723 98,826
</TABLE>
No stock options were granted to Hugh S. Smith, Jr. or Aubrey L. Austin in
1997.
- ------------------------
(1) On June 4, 1997, the effective date of the CCB Merger, Mr. Stuenkel was
granted 17,647 options at an exercise price of $19.64, the market price of
Company Common Stock on December 19, 1996, the day the Company executed the
definitive agreement pursuant to which the CCB Merger was effected. On June
4, 1997, the market price of Company Common Stock was $29.50, resulting in a
value to Mr. Stuenkel of $173,999 at 0% market appreciation.
103
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN- THE-MONEY
VALUE FY-END OPTIONS/SARS AT FY-END
SHARES ACQUIRED REALIZED EXERCISABLE/ ($) EXERCISABLE/
NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------------- ----------- ------------------ -----------------------
<S> <C> <C> <C> <C>
Hugh S. Smith, Jr..................... 7,130 129,231 713/15,686 13,533/297,720
Aubrey L. Austin...................... N/A N/A 0/0 0/0
Mark H. Stuenkel...................... 7,500 138,600 32,916/35,981 882,324/333,490
Arnold C. Hahn........................ 0 5,294/25,588 100,480/210,335
Matthew P. Wagner..................... 0 19,608/60,215 372,160/757,426
Robert M. Borgman..................... 0 0/12,000 0/9,375
Suzanne R. Brennan.................... 0 0/9,188 0/6,563
Julius G. Christensen................. 0 0/8,000 0/12,500
</TABLE>
COMPENSATION OF DIRECTORS
The Board of Directors of the Company approved the following fees to be paid
to outside directors of the Company:
<TABLE>
<S> <C>
Annual Retainer: $5,000 and options equal to $15,000 divided by
the market price of Company Common Stock at
the time of grant
Regular Meeting Fee: $750
Special Meeting Fee: $300
Committee Meeting Fee: $300
</TABLE>
During 1997, directors fees were paid and options granted according to the
above schedule.
On May 16, 1995, the Board of Directors approved the 1995 Directors Deferred
Compensation Plan which was approved by shareholders on July 17, 1995. The plan
is effective for fees earned on and after July 1, 1995. No compensation has been
awarded under the plan.
EMPLOYMENT ARRANGEMENTS
The company has entered into or assumed through acquisitions certain
employment contracts, including the following:
MARK H. STUENKEL
In 1988 NBSC entered into an Executive Salary Continuation Agreement with
Mr. Stuenkel (the "Salary Continuation Agreement") the terms of which the
Company agreed to honor as part of the CCB Merger. Pursuant to the Salary
Continuation Agreement, Mr. Stuenkel is entitled to receive benefits upon his
retirement, death or disability or upon termination of service with SCB prior
thereto unless Mr. Stuenkel's employment with SCB is terminated either (i)
voluntarily by Mr. Stuenkel, other than for "good reason" (as defined in the
Salary Continuation Agreement) or (ii) by SCB for "cause" (as defined in his
Salary Continuation Agreement), in which case no benefits or payments will be
paid pursuant to the Salary Continuation Agreement. Mr. Stuenkel's retirement
benefits are fully vested in the Salary Continuation Agreement.
Under the terms of the Salary Continuation Agreement, Mr. Stuenkel or his
estate will be entitled to receive $62,500 annually, for a period of fifteen
years after his retirement from SCB or upon his death. If
104
<PAGE>
Mr. Stuenkel's employment with SCB is terminated because of disability prior to
retirement, Mr. Stuenkel (or his estate) will be entitled to receive his
benefits under the Salary Continuation Agreement upon retirement or death or to
elect to receive a disability benefit in an amount equal to the present value of
Mr. Stuenkel's retirement benefits under his Salary Continuation Agreement. The
Salary Continuation Agreement also had provisions which became effective upon
the occurrence of a Change in Control (as defined therein) of CCB or NBSC. In
such event, the Salary Continuation Agreement provided that it would become an
employment agreement with a three-year term. The CCB Merger constituted a Change
of Control; therefore, the Salary Continuation Agreement became an employment
Agreement with a three-year term pursuant to which, during such period of
employment Mr. Stuenkel is entitled to receive $165,000 per year as annual base
salary, as well as regular bonuses and other benefits. Such amount is in
addition to the amounts that he would be paid under the Salary Continuation
Agreement upon retirement. The Salary Continuation Agreement also provides for
Mr. Stuenkel to receive salary and bonus increases annually and all non-cash
forms of compensation and benefits which he received prior to the Change in
Control during such term.
If Mr. Stuenkel either terminates his employment for "good reason" or is
terminated by SCB for any reason other than "cause," then SCB is required to pay
cash compensation to Mr. Stuenkel during his remaining term; provided that Mr.
Stuenkel will receive no less than two times the annual compensation to which he
otherwise would be entitled. Moreover, all employee benefit plans and programs
in which Mr. Stuenkel is entitled to participate will continue for the remainder
of Mr. Stuenkel's term and Mr. Stuenkel will continue to be entitled to receive
his retirement, death and disability benefits as provided in the Salary
Continuation Agreement.
AUBREY L. AUSTIN
In connnection with the SMB Acquisition, the Company, SMB and Mr. Austin
entered into an Employment Agreement, dated as of December 31, 1997, pursuant to
which SMB agreed to employ Mr. Austin as Chairman, President and Chief Executive
Officer of SMB for a period of three years. SMB agreed to pay Mr. Austin a base
salary equal to the base annual salary paid to Mr. Austin as of July 30, 1997,
subject to increase annually at the discretion of SMB. Mr. Austin will also be
considered annually by SMB for a discretionary bonus in accordance with the
compensation policies and practices of SMB.
Mr. Austin's employment agreement also provides that if SMB should terminate
the Period of Employment (as defined therein) for other than Breach or Just
Cause (each as defined therein), or if Mr. Austin should terminate the Period of
Employment for Good Cause (as defined therein), SMB shall pay to Mr. Austin an
amount equal to the sum of (a) the result of multiplying (i) the base annualy
salary payable to Mr. Austin under the Employment Agreement as of the date of
termination of the Period of Employment by (ii) the number of years (and
fractions thereof) then remaining in the Period of Employment and (b) the result
of multiplying (i) the average of the bonuses payable to Mr. Austin pursuant to
his employment agreement during the three fiscal years immediately preceeding
the date of termination of the Period of Employment by (ii) the number of years
(and fractions thereof) then remaining in the Period of Employment.
If Mr. Austin is terminated for Breach or Just Cause, Mr. Austin agreed that
from January 27, 1998 until the second anniversary of the date of the
termination of the Period of Employment (the "Non-Competition Period") Mr.
Austin will not (i) engage in the banking business other than on behalf of SMB
within the Designated Area (as defined therein), (ii) directly or indirectly
own, manage, operate, control, be employed by, or provide management or
consulting services in any capacity to any firm, corporation or other entity
(other than SMB) engaged in the banking business in the Designated Area (as
defined therein) or (iii) directly or indirectly solicit or otherwise
intentionally cause any employee, officer, or member of the respective boards of
directors of SMB or the Company to engage in any action prohibited under (i) or
(ii); provided that the ownership by Mr. Austin as an investor of not more than
1 percent of the outstanding shares of stock of any corporation whose stock is
listed for trading on any securities
105
<PAGE>
exchange or is quoted on the automated quotation system of the National
Association of Securities Dealers, Inc., or the shares of any investment company
as defined in Section 3 of the Investment Act of 1940, as amended, shall not in
itself constitute a violation of Mr. Austin's obligations under his employment
agreement.
EXECUTIVE SEVERANCE PLAN
On March 19, 1998, the Company adopted the Company Executive Severance Plan
(the "Severance Plan") pursuant to which certain executives of the Company and
the Banks, including the named executive officers of the Company, will be
entitled to receive a severance payment from the Company if within 24 months
after a Change of Control (as defined in the Severance Plan") an eligible
executive's employment with the Company or one of its subsidiaries terminates
for any reason other than (i) death, (ii) disability, (iii) termination by the
Company or one of its subsidiaries for Just Cause (as defined in the Severance
Plan), (iv) retirement in accordance with the normal policy of the Company, (v)
voluntary termination by such executive for other than Good Reason (as defined
in the Severance Plan), or (vi) the sale by the Company of the Subsidiary which
employed the executive before such sale, if the executive has been offered
employment with the purchaser on substantially the same terms and conditions
under which such executive was employed prior to the sale. The amount of the
Severance Payment (as defined in the Severance Plan) under the Severance Plan
will be equal to such executive's Compensation (as defined in the Severance
Plan) multiplied by a multiplier ranging from 1 to 3 depending on the
executive's employee grade. In addition, if an executive becomes eligible for a
Severance Payment, such executive will also be entitled to welfare benefits for
the Severance Period (as defined in the Severance Plan) applicable to such
executive. In order to become eligible for Severance Payments under the
Severance Plan, the executive must execute and deliver a Release (as defined in
the Severance Plan).
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
It is the duty of the Board of Directors of the Company to administer the
Company's compensation program and various incentive plans, including its stock
option plan and annual bonus plan. In addition, the Board of Directors reviews
compensation levels of members of management, evaluates the performance of
management, considers management succession and related matters.
As discussed under "Business--Strategic Evolution" and "--Management
Changes," the Company has grown from approximately $60 million in assets at June
30, 1996 to close to $1.4 billion in assets at December 31, 1997, with much of
the growth taking place in fiscal 1997. In connection with this growth, most of
the senior management of the Company was hired (in connection with strategic
transactions or otherwise) during 1997, and the compensation package for each
such member of senior management was individually negotiated based in large part
on market conditions. In particular, the compensation of Mr. Stuenkel and Mr.
Austin was negotiated and approved by the Board of Directors in connection with
the CCB Merger and SMB Acquisition, respectively.
Because the composition of the Board of Directors changed substantially
during fiscal 1997, a substantial number of the compensation decisions were made
before the current Board of Directors was fully constituted. See "Item 10.
Directors and Executive Officers of the Company--Directors" for a discussion of
the Directors of the Company in office throughout the year. The Board of
Directors has reviewed the compensation for each of the five highest paid
officers for the period during 1997 for which such officers were employed by the
Company, and in the Board of Directors', opinion, the compensation of all
officers is reasonable in view of the Company's consolidated performance and the
contribution of those officers to that performance. In doing so, the Board of
Directors took into account, among other things, how compensation compares to
compensation paid by competing companies as well as the Company's performance
and economic conditions in the Company's service area. With its senior
management now in place, the current Board of Directors, many of whom became
directors during fiscal 1997, intends to
106
<PAGE>
establish a compensation committee which will administer the Company's
compensation policies commencing with the 1998 fiscal year. The compensation
committee will develop specific policies that will apply to the determination of
compensation for all executives, including the chief executive officer.
PERFORMANCE GRAPH
The Company Common Stock trades on the Nasdaq National
Market-Registered Trademark- under the symbol "WEBC." Prior to June 3, 1997,
trading in the Company's Common Stock occurred solely "over the counter," and
was not extensive. Consequently, sales price information prior to that date
consists largely of quotations by dealers making a market in Company Common
Stock and may not represent actual transactions. In addition, trading in Company
Common Stock prior to June 3, 1997 was limited in volume and may not be a
reliable indication of its market value. As a result, the sales price
information for Company Common Stock in the following graph for 1993 and 1994
reflects inter-dealer prices, without adjustments for mark-ups, mark-downs or
commissions and may not represent actual transactions. The sales price
information for 1995 and 1996 reflects the sales price of Company Common Stock
in certain private placements, which the Company believes is the most reliable
indicator of the value of Company Common Stock available at the time. See "Item
1. Business--Capital Transactions." The sales price information for 1997
reflects trades of Company Common Stock on the Nasdaq National
Market-Registered Trademark-.
The following graph shows the cumulative total return on Com pany Common
Stock with a comparable return on the indicated indices for the last five fiscal
years. The total return on Company Common Stock is determined based on the
change in the price of Company Common Stock and assumes reinvestment of all
dividends and an original investment of $100. The total return on the indicated
indices also assume reinvestment of dividends and an original investment in each
index of $100 on December 31, 1992.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
NASDAQ BANKS NASDAQ INDEX WEBC
<S> <C> <C> <C>
1992 100 100 100
1993 114 115 100
1994 114 112 100
1995 169 159 113
1996 223 195 138
1997 377 240 324
</TABLE>
107
<PAGE>
SECTION 16 REPORTING
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and the beneficial owners of more than ten percent of Company
Common Stock to file with the Securities and Exchange Commission reports of
initial ownership and reports of changes in ownership of Company Common Stock
and other equity securities of the Company. Because of the complexity of the
reporting rules, the Company has assumed responsibility for preparing and filing
all reports required to be filed under Section 16(a) by the directors and
executive officers. The Company believes that during the last fiscal year all
Section 16(a) filing requirements applicable to its directors and executive
officers were complied with, except for the failure to (a) file a Form 3 for
Larry D. Hartwig, a director of the Company as of October 10, 1997 and (b) file
a Form 4 for each director and executive officer who exercised stock options in
the fourth quarter of 1997. Once the omissions were discovered the relevant
forms were filed promptly.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The shares of Company Common Stock constitute the only outstanding class of
voting securities of the Company. As of March 13, 1998, there were 15,678,960
shares of Company Common Stock outstanding and entitled to vote and
approximately 2,190 shareholders of record.
The following table lists any known shareholders with beneficial ownership
of five percent or more of the outstanding Company Common Stock and the
beneficial ownership of Company Common Stock of all directors and executive
officers of the Company and all current executive officers and directors of the
Company as a group. Information with respect to beneficial ownership is based
upon the Company's records and data supplied to the Company by its shareholders
as of March 13, 1998. All shares are Company Common Stock, the only class of
security outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ----------------------------------------------------------------- ------------------------------ -----------------
<S> <C> <C>
Castle Creek Capital Partners Fund I--L.P.(2) ................... 2,289,889 14.6%
4370 LaJolla Village,
Suite 400
San Diego, California
Franklin Mutual Advisors, Inc.(3) ............................... 1,297,183 8.3%
51 John F. Kennedy Parkway
Short Hills, New Jersey
Wellington Management Company, LLP(4) ........................... 928,654 5.9%
75 State Street
Boston, Massachusetts
Hugh S. Smith, Jr.(5)(8) ........................................ 23,357 0.1%
1251 Westwood Boulevard
Los Angeles, California
Matthew P. Wagner(5)(9) ......................................... 48,886 0.3%
1251 Westwood Boulevard
Los Angeles, California
Mark H. Stuenkel(5)(10) ......................................... 58,415 0.4%
4100 Newport Place, Suite 900
Newport Beach, California
Aubrey L. Austin(5) ............................................. 21,640 0.1%
1251 4th Street
Santa Monica, California
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ----------------------------------------------------------------- ------------------------------ -----------------
<S> <C> <C>
John M. Eggemeyer(6)(11) ........................................ 2,388,232 15.1%
4370 LaJolla Village, Suite 400
San Diego, California
Rice E. Brown(6)(12) ............................................ 2,347 *
27127 Calle Arroyo,
Suite 1907
Laguna Niguel, California
Robert L. McKay(6)(13) .......................................... 766,337 4.9%
11551 Plantero Drive,
Santa Ana, California
William C. Greenbeck(6)(14) ..................................... 64,307 0.4%
9530 East Imperial Highway,
Downey, California
Dale E. Walter(6)(15) ........................................... 12,142 0.1%
50096 Calle Rosarita
La Quinta, California
Arnold C. Hahn(7)(16) ........................................... 12,272 0.1%
4100 Newport Place, Suite 900
Newport Beach, California
Directors and Executive Officers as a group...................... 3,446,722 21.8%
All nine (9) directors as a group(4)............................. 3,434,450 21.7%
</TABLE>
* less than 0.1%
- ------------------------
(1) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship,
or otherwise has or shares: (a) voting power, which includes the power to
vote, or to direct the voting power, of such security; and/or (b)
investment power, which includes the power to dispose, or to direct the
disposition of, such security. Beneficial owner also includes any person
who has the right to acquire beneficial ownership of such security as
defined above within 60 days of the record date for the 1998 Annual
Meeting. Ownership includes vested stock options and warrants.
(2) The Fund is the beneficial owner of 2,256,332 shares of Company Common
Stock and 33,557 warrants. Mr. Eggemeyer, a Director, is a principal of the
Fund.
(3) Shares of Company Common Stock beneficially owned by Franklin Mutual
Advisors, Inc. are held in various investment funds.
(4) Shares of Company Common Stock beneficially owned by Wellington Management
Company, LLP are held in various investment funds.
(5) Director and Executive Officer.
(6) Director.
(7) Executive Officer.
(8) Includes 713 shares of Company Common Stock which may be purchased on the
exercise of stock options.
(9) Includes 19,608 shares of Company Common Stock which may be purchased on
the exercise of stock options.
109
<PAGE>
(10) Includes 21,666 shares of Company Common Stock which may be purchased on
the exercise of stock options.
(11) Includes 588 shares of Company Common Stock which may be purchased on the
exercise of stock options, 57,755 shares of Company Common Stock which may
be purchased on the exercise of warrants and 2,256,332 shares and 33,557
warrants owned by the Fund of which Mr. Eggemeyer is a principal. Mr.
Eggemeyer disclaims any beneficial ownership of the shares of Company
Common Stock held by the Fund except to the extent of his interest in the
Fund.
(12) Includes 784 shares of Company Common Stock which may be purchased on the
exercise of stock options.
(13) Includes 455 shares of Company Common Stock which may be purchased on the
exercise of stock options.
(14) Includes 462 shares of Company Common Stock which may be purchased on the
exercise of stock options.
(15) Includes 784 shares of Company Common Stock which may be purchased on the
exercise of stock options.
(16) Includes 5,294 shares of Company Common Stock which may be purchased on
the exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BANKING TRANSACTIONS
Some of the directors and executive officers of the Company and its
subsidiaries, and the companies with which they are associated, are customers
of, and have had banking transactions with, the Banks in the ordinary course of
the Banks' business, and the Banks expect to have banking transactions with such
persons in the future.
In the opinion of management of the Company, all loans and commitments to
lend included in such transactions were made in compliance with applicable laws
on substantially the same terms, including interest rates and collateral, as
those prevailing for comparable transactions with other persons of similar
creditworthiness, and did not involve more than a normal risk of collectibility
or present other unfavorable features. The amount of all such loans and credit
extensions, to all executive officers, directors, and principal shareholders of
the Company, together with their associates, was $1.1 million on December 31,
1997, constituting approximately 0.9 percent of the Company's equity capital
accounts on that date.
INSURANCE CONTRACTS
Certain of the Company's life insurance policies have been contracted, based
on a competitive bid, through Rice Brown Financial; Mr. Brown is an insurance
broker and a director of the Company.
INVESTMENT BANKING SERVICES
Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. are entities
related to the Fund which held 14.6% percent of the outstanding Company Common
Stock. John M. Eggemeyer, a director of the Company, is a principal of the Fund,
Belle Plaine Partners, Inc. and Belle Plaine Financial L.L.C.
Belle Plaine Partners, Inc. serves as a financial advisor to the Company
under an engagement letter dated May 17, 1995. In that capacity, Belle Plaine
Partners, Inc. was paid fees of $3.2 million and $1.4 in 1997 and 1996,
respectively, for evaluating and identifying potential acquisitions, including
the Western Acquisition which closed on September 30, 1996, the CCB Merger which
closed on June 4, 1997, and the SCB Merger which closed on October 10, 1997.
110
<PAGE>
In addition, Belle Plaine Financial L.L.C. was paid approximately $863,000
in 1996 for services rendered in connection with certain capital raising
transactions related to the Company's strategic evolution. See "Item 1.
Business--Strategic Evolution."
THE 1998 PRIVATE PLACEMENT
In order to raise a portion of the capital necessary to fund the payment of
the Cash Consideration in the SMB Acquisition, in November 1997 the Company
entered into Standby Agreements with the 1998 Private Placement Investors,
pursuant to which the 1998 Private Placement Investors committed to purchase a
minimum of approximately 1,982,000 shares of Company Common Stock and to standby
to purchase up to approximately 2,311,500 additional shares of Company Common
Stock if requested to do so by the Company. The purchase price of the 1998
Private Placement Shares was $28.00 per share. The 1998 Private Placement
Investors agreed to pay the purchase price of the 1998 Private Placement Shares
prior to the effective time of the SMB Acquisition. In the 1998 Private
Placement, the Company issued a total of 2,327,550 shares of Company Common
Stock for $65,171,400 in the aggregate. The 1998 Private Placement Shares were
not registered under the Securities Act; however, pursuant to the Standby
Agreements, the Company agreed to file under the Securities Act a "shelf"
Registration Statement providing for the registration of the Private Placement
Shares no later than 120 days after the effective date of the SMB Acquisition.
See "Item 1. Business--Strategic Evolution."
Certain directors, executive officers and shareholders holding more than 5
percent of the outstanding Company Common Stock participated in the 1998 Private
Placement. The following table sets forth the number and the dollar value of
1998 Private Placement Shares purchased by each such person:
<TABLE>
<CAPTION>
1998 PRIVATE PLACEMENT INVESTOR SHARES DOLLARS
- ------------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Castle Creek Capital Partners Fund I-L.P.......................... 528,900 $ 14,809,200
Digange, Joseph J................................................. 4,450 124,600
Eggemeyer, John M................................................. 5,900 165,200
Franklin Mutual Advisers, Inc..................................... 528,900 14,809,200
Hahn, Arnold C.................................................... 4,700 131,600
Jacoby, William H................................................. 4,300 120,400
McKay Robert L.................................................... 41,500 1,162,000
Rose, John W...................................................... 5,900 165,200
Smith, Hugh S., Jr................................................ 5,900 165,200
Wagner, Matthew P................................................. 9,500 266,000
Walter, Dale E.................................................... 4,300 120,400
Wellington Management Company, LLP................................ 424,000 11,872,000
---------- -------------
TOTAL......................................................... 1,568,250 $ 43,911,000
---------- -------------
---------- -------------
</TABLE>
111
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ------ -----
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated as of November 20, 1997, by and among
Western Bancorp, Western Bank and Santa Monica Bank. (Appendix A to
Registration Statement No. 333-40611 filed on November 21, 1997 on Form
S-4/A and incorporated herein by reference)
2.2 Plan of Reorganization, dated as of April 29, 1997, by and between Western
Bancorp and SC Bancorp. (Exhibit A of Registration Statement No.
333-35271 filed on September 10, 1997 on Form S-4/A and incorporated
herein by reference)
2.3 Amended and Restated Agreement and Plan of Merger, dated as of December
19, 1996, by and between Monarch Bancorp and California Commercial
Bankshares. (Appendix C to Registration Statement No. 333-26915 filed on
May 12, 1997 on Form S-4/A and incorporated herein by reference)
2.4 Agreement and Plan of Merger, dated as of March 15, 1997, by and between
Monarch Bank and National Bank of Southern California. (Exhibit 2.3 of
the Company's Annual Report of Form 10-KSB for the fiscal year ended
December 31, 1996 and incorporated herein by reference)
3.1 Restated Articles of Incorporation of Western Bancorp.
3.2 Restated Bylaws of Western Bancorp. (Exhibit 3.2 of Registration Statement
No. 333-35271 filed on September 10, 1997 on Form S-4/A and incorporated
herein by reference)
4.1 Warrant Certificate No. 1, dated November 5, 1996, in favor of John M.
Eggemeyer. (Exhibit 4.7 of the Company's Annual Report of Form 10-KSB
for the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.2 Warrant Certificate No. 2, dated November 5, 1996, in favor of William J.
Ruh. (Exhibit 4.8 of the Company's Annual Report of Form 10-KSB for the
fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.3 Warrant Certificate No. 3, dated November 5, 1996, in favor of John W.
Rose. (Exhibit 4.9 of the Company's Annual Report of Form 10-KSB for the
fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.4 Warrant Certificate No. 4, dated November 5, 1996, in favor of Mark G.
Merlo. (Exhibit 4.10 of the Company's Annual Report of Form 10-KSB for
the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.5 Warrant Certificate No. 1, dated November 5, 1996, in favor of Castle
Creek Capital Partners Fund-I. (Exhibit 4.11 of the Company's Annual
Report of Form 10-KSB for the fiscal year ended December 31, 1996 and
incorporated herein by reference)
4.6 Warrant Certificate No. 2, dated November 5, 1996, in favor of John M.
Eggemeyer. (Exhibit 4.12 of the Company's Annual Report of Form 10-KSB
for the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.7 Warrant Certificate No. 3, dated November 5, 1996, in favor of William J.
Ruh. (Exhibit 4.13 of the Company's Annual Report of Form 10-KSB for the
fiscal year ended December 31, 1996 and incorporated herein by
reference)
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ------ -----
<C> <S> <C>
4.8 Warrant Certificate No. 4, dated November 5, 1996, in favor of Dan Davis.
(Exhibit 4.14 of the Company's Annual Report of Form 10-KSB for the
fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.9 Warrant Certificate No. 5, dated November 5, 1996, in favor of Mark G.
Merlo. (Exhibit 4.15 of the Company's Annual Report of Form 10-KSB for
the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.10 Warrant Certificate No. 6, dated November 5, 1996, in favor of William
Moody. (Exhibit 4.16 of the Company's Annual Report of Form 10-KSB for
the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.11 Warrant Certificate No. 7, dated November 5, 1996, in favor of HCM Castle
Creek, Inc. (Exhibit 4.17 of the Company's Annual Report of Form 10-KSB
for the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.12 Warrant Certificate No. 8, dated November 5, 1996, in favor of Castle
Creek Financial Investors, Inc. (Exhibit 4.18 of the Company's Annual
Report of Form 10-KSB for the fiscal year ended December 31, 1996 and
incorporated herein by reference)
4.13 Warrant Certificate No. 9, dated November 5, 1996, in favor of Whitecap
Capital, L.L.C. (Exhibit 4.19 of the Company's Annual Report of Form
10-KSB for the fiscal year ended December 31, 1996 and incorporated
herein by reference)
4.14 Warrant Certificate No. 10, dated November 5, 1996, in favor of
Cook-Caslte Creek, Inc. (Exhibit 4.20 of the Company's Annual Report of
Form 10-KSB for the fiscal year ended December 31, 1996 and incorporated
herein by reference)
4.15 Warrant Certificate No. 11, dated November 5, 1996, in favor of Castle
Creek Investors, L.L.C. (Exhibit 4.21 of the Company's Annual Report of
Form 10-KSB for the fiscal year ended December 31, 1996 and incorporated
herein by reference)
10.1 Monarch Bancorp 1983 Stock Option Plan; Form Incentive Stock Option
Agreement and Form Nonstatutory Stock Option Agreement. (Exhibit 10.2 of
Registration Statement No. 2-85442 filed on July 27, 1983 on Form S-1
and incorporated herein by reference)
10.2 Third Amendment to Revolving Credit Agreement, First Amendment to Pledge
Agreement and Waiver, dated January 26, 1997.
10.3 1993 Stock Option Plan as Amended May 15, 1996. (Exhibit 10.9 of the
Company's Annual Report of Form 10-KSB for the fiscal year ended
December 31, 1996 and incorporated herein by reference)
10.4 Form of Amendment to the 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)
10.5 Employment Agreement, dated as of July 9, 1997, by and between William H.
Jacoby and Western Bancorp.
10.6 Executive Salary Continuation Agreement, dated as of January 1, 1988,
between National Bank of Southern California and Mark H. Stuenkel.
10.7 Employment Agreement, dated as of December 31, 1997, by and among Western
Bank and Aubrey L. Austin.
10.8 Western Bancorp Executive Severance Policy.
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ------ -----
<C> <S> <C>
11.0 Computation of Earnings Per Common Share and Common Share Equivalent. (See
Note 21 of the Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data" of this Annual
Report on Form 10-K.)
16.0 Letter of Dayton & Associates on change of Certifying Accountant. (Exhibit
16.0 of the Company's Annual Report of Form 10-KSB for the fiscal year
ended December 31, 1996 and incorporated herein by reference)
21.0 Subsidiaries of Western Bancorp.
23.1 Consent of Dayton & Associates (Western Bancorp)
23.2 Consent of KPMG Peat Marwick LLP (Western Bancorp)
23.3 Consent of Deloitte & Touche LLP (California Commercial Bankshares)
23.4 Consent of Deloitte & Touche LLP (SC Bancorp)
27.1 Financial Data Schedule (Fiscal year end 1997)
27.2 Financial Data Schedule (Fiscal Year ends 1995 and 1996)
27.3 Financial Data Schedule (first, second and third quarters of 1997)
</TABLE>
REPORTS ON FORM 8-K
On October 3, 1997, the Company filed a Current Report on Form 8-K enclosing
(i) Santa Monica Bank's Annual Report for the fiscal year ended December 31,
1996; (ii) Santa Monica Bank's Current Reports on Form F-3, dated April 17, 1997
and August 8, 1997; (iii) Santa Monica Bank's Quarterly Reports on Form F-4,
dated April 19, 1997 and August 6, 1997; and (iv) Santa Monica Bank's Proxy
Statement to Security holders for fiscal year ended December 31, 1996.
On October 24, 1997, the Company filed a Current Report on Form 8-K
announcing (i) that the SCB Merger had been consummated on October 10, 1997;
(ii) the Company's third quarter earnings; and (iii) the Company's Supplemental
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations reflecting the SCB Merger.
On October 31, 1997, the Company filed a Current Report on Form 8-K
enclosing Santa Monica Bank's Quarterly Report on Form F-4 for the quarter ended
September 30, 1997.
On November 13, 1997, the Company filed a Current Report on Form 8-K
disclosing the Company's Supplemental Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the third quarter of 1997 reflecting the SCB Merger.
On December 29, 1997, the Company filed a Current Report on Form 8-K
announcing that on December 23, 1997 the shareholders of Santa Monica Bank and
the Company approved the SMB Acquisition.
114
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 19, 1998 By: /s/
-----------------------------------------
Matthew P. Wagner
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/
- ------------------------------ President and Chief March 19, 1998
Matthew P. Wagner Executive Officer
/s/
- ------------------------------ Executive Vice President March 19, 1998
Arnold C. Hahn Chief Financial Officer
/s/
- ------------------------------ Chairman and Director March 19, 1998
Hugh S. Smith, Jr.
/s/
- ------------------------------ Director March 19, 1998
Aubrey L. Austin
/s/
- ------------------------------ Director March 19, 1998
Harold A. Beisswenger
/s/
- ------------------------------ Director March 19, 1998
Rice E. Brown
/s/
- ------------------------------ Director March 19, 1998
Joseph J. Digange
</TABLE>
115
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/
- ------------------------------ Director March 19, 1998
Johm M. Eggemeyer
/s/
- ------------------------------ Director March 19, 1998
William C. Greenbeck
/s/
- ------------------------------ Director March 19, 1998
Larry D. Hartwig
/s/
- ------------------------------ Director March 19, 1998
William H. Jacoby
/s/
- ------------------------------ Director March 19, 1998
Robert L. McKay
/s/
- ------------------------------ Director March 19, 1998
John W. Rose
/s/
- ------------------------------ Director March 19, 1998
Mark H. Stuenkel
/s/
- ------------------------------ Director March 19, 1998
Dale E. Walter
/s/
- ------------------------------ Director March 19, 1998
Donald E. Wood
</TABLE>
116
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
MONARCH BANCORP
Matthew P. Wagner and Arnold C. Hahn hereby certify that:
1. They are the President and Secretary, respectively, of Monarch
Bancorp, a California Corporation.
2. The articles of incorporation of Monarch Bancorp, as amended to
the date of the filing of this certificate, including amendments set forth
herein but not separately filed (and with the omissions required by Section 910
of the California Corporations Code) are restated as follows:
ARTICLE ONE. The name of the Corporation shall be:
WESTERN BANCORP
ARTICLE TWO. The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may be organized under
the General Corporation Law of California other than the banking
business, the trust company business or the practice of a profession
permitted to be incorporated by the California Corporations Code.
ARTICLE THREE. (a) The Corporation is authorized to issue two classes
of shares designated "Preferred Stock" and "Common Stock,"
respectively. The number of shares of Preferred Stock authorized to
be issued is Five Million (5,000,000) and the number of shares of
Common Stock authorized to be issued is One Hundred Million
(100,000,000). Upon the restatement of this article to read as set
forth herein, each 8.5 outstanding shares of Common Stock are
converted into 1.0 share of Common Stock.
(b) The Preferred Stock may be divided into such number of
series as the Board of Directors may determine. The Board of
Directors is authorized to determine and alter the rights,
preferences, privileges and restrictions granted to or imposed
upon any wholly unissued series of Preferred Stock, and to fix
the number of shares of any
<PAGE>
series of Preferred Stock and the designation of any such
series of Preferred Stock. The Board of Directors, within
the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the
number of shares constituting any series, may increase or
decrease (but not below the number of shares of such series
then outstanding) the number of shares of any series
subsequent to the issue of shares of that series.
ARTICLE FIVE. DIRECTOR LIABILITY
The liability of the directors of the corporation for
monetary damages shall be eliminated to the fullest extent
permissible under California law.
ARTICLE SIX. INDEMNIFICATION
The Corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the Corporations Code)
for breach of duty to the corporation and its stockholders
through bylaw provisions or through agreements with agents,
or both, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations
Code, subject to the limits on such excess indemnification
set forth in Section 204 of the California Corporations
Code.
3. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 of the California Corporations Code. The total
number of outstanding shares of the Corporation entitled to vote is 4,043,885,
after giving effect to the reverse stock split provided for herein. The number
of shares voting in favor of the amendment equaled or exceeded the vote
required. The percentage vote required was more than 50%.
-2-
<PAGE>
We further declare under penalty of perjury under the law of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: June 2, 1997
/s/ Matthew P. Wagner
-------------------------------
Matthew P. Wagner
President
/s/ Arnold C. Hahn
-------------------------------
Arnold C. Hahn
Secretary
-3-
<PAGE>
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT,
FIRST AMENDMENT TO PLEDGE AGREEMENT AND WAIVER
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE
AGREEMENT AND WAIVER ("AMENDMENT") dated as of January 26, 1998 between WESTERN
BANCORP (formerly known as Monarch Bancorp), a California corporation (the
"BORROWER"), and THE NORTHERN TRUST COMPANY, an Illinois banking corporation
(the "LENDER").
WHEREAS, the Borrower and the Lender have entered into a Revolving Credit
Agreement dated as of September 25, 1996, an Amendment thereto dated as of
November 27, 1996 and a Second Amendment thereto dated as of June 11, 1997
(collectively, the "EXISTING AGREEMENT") pursuant to which the Lender has agreed
to make revolving credit loans to Borrower;
WHEREAS, Borrower and Lender have entered into a Pledge Agreement dated as
of September 25, 1996 (the "PLEDGE AGREEMENT") pursuant to which Borrower
pledged to Lender the stock of Western Bank, a California banking corporation
and a wholly owned subsidiary of the Borrower, as security for Borrower's
obligations to Lender under the Existing Agreement;
WHEREAS, the parties wish to amend the Existing Agreement to increase the
Commitment of the Lender thereunder and otherwise amend the Existing Agreement
and Pledge Agreement; and
WHEREAS, the Borrower was not in compliance with certain financial
covenants under the Existing Agreement and has requested Lender to waive such
non-compliance;
NOW, THEREFORE, the parties agree as follows:
Section 1. DEFINITIONS. Terms defined in the introductory paragraphs
hereof shall have their respective defined meanings when used in this Amendment,
and except as otherwise expressly provided herein, terms defined in the Existing
Agreement or Pledge Agreement shall have their respective defined meanings when
used in this Amendment. In addition, the following terms shall have the
following meanings (terms defined in the introductory paragraphs or this SECTION
1 in the singular to have correlative meanings when used in the plural and VICE
VERSA):
"EFFECTIVE DATE" means the first date, if any, which occurs before the
termination of this Amendment and on which the conditions precedent set forth in
SECTION 5 hereof shall have been satisfied.
"RESTATED NOTE" shall mean a Second Amended and Restated Revolving Credit
Note in the form of EXHIBIT A attached hereto.
Section 2. AMENDMENTS TO EXISTING AGREEMENT. The following amendments
are hereby made to the Existing Agreement with effect only from and after the
Effective Date:
<PAGE>
(a) SECTION 1.2. SECTION 1.2 of the Existing Agreement is
amended by deleting the dollar amount "$13,000,000" in the first sentence
thereof and inserting in place thereof "$35,000,000".
(b) SECTION 2.1(b). SECTION 2.1(b) of the Existing Agreement is
amended by adding the phrase "Subject to SECTION 9," at the beginning of the
sentence.
(c) SECTION 2.7. SECTION 2.7 of the Existing Agreement is
amended by deleting the percentage "1/4 of 1%" appearing therein and
substituting the percentage "1/8 of 1%" therefor.
(d) SECTION 3.1(a). SECTION 3.1(a) of the Existing Agreement is
amended by deleting it in its entirety and substituting the following therefor:
"(a) Borrower shall repay in full (i) on the Reduction Date
the outstanding principal amount of the Loans, if any, in excess of $17,500,000
and (ii) on the Termination Date, the entire outstanding principal amount of the
Loans."
(e) SECTION 4.2. SECTION 4.2 of the Existing Agreement is
amended by adding the phrase ", except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and subject to general principles of equity" to the
end of the last sentence thereof.
(f) SECTION 4.3. SECTION 4.3 of the Existing Agreement is hereby
amended by (i) deleting the dates "June 30, 1996", "December 31, 1995" and "June
30, 1996" appearing therein and substituting the dates "September 30, 1997",
"December 31, 1996" and "September 30, 1997" respectively, therefor and (ii)
deleting the dollar amount "$500,000" in the last sentence thereof and inserting
in place thereof "$3,000,000".
(g) SECTION 5.4(a). SECTION 5.4(a) of the Existing Agreement is
amended by deleting the dollar amount "$23,000,000" appearing therein and
substituting the dollar amount "$90,000,000" therefor.
(h) SECTION 5.4(b). SECTION 5.4(b) of the Existing Agreement is
hereby amended by deleting everything appearing after the phrase "Tangible Net
Worth" and before the period appearing therein.
(i) SECTION 5.4(e). SECTION 5.4(e) of the Existing Agreement is
amended by deleting the phrase "for the Borrower's 1996 fiscal year," and
substituting the phrase "for the Borrower's 1998 fiscal year" therefor and
deleting the phrase "the Merger (as hereinafter defined) in an aggregate amount
not to exceed $2,500,000" and inserting in place of the second deletion, the
phrase "any merger, consolidation or other restructuring contemplated by the
Merger Agreement or similar transactions only in an aggregate amount not to
exceed $25,000,000".
2
<PAGE>
(j) SECTION 5.7(ii). SECTION 5.7(ii) of the Existing Agreement
is amended by adding the phrase "or ordinary course dividends not to exceed 50%
of net income per fiscal quarter of the Borrower before goodwill amortization
and any restructuring charges incurred in connection with any merger,
consolidation or other restructuring contemplated by the Merger Agreement or
similar transactions only" to the end of the parenthetical thereof.
(k) SECTION 5.10(b). SECTION 5.10(b) of the Existing Agreement
is hereby amended by deleting the first sentence thereof and substituting the
following therefor:
"Borrower shall use the proceeds of the Revolving
Credit Loans for working capital purposes; provided,
however, upon the occurrence of the No Restructuring
Date (hereinafter defined), the Borrower shall use
Revolving Credit Loan proceeds up to the maximum amount
of $35,000,000 for working capital purposes (which for
avoidance of doubt, shall not include acquisitions of
any kind) or to consummate the merger as contemplated
by the Merger Agreement (hereinafter defined);
provided, further, however, that the outstanding
principal balance of the Revolving Credit Loans shall
be reduced to $17,500,000 on or before the Reduction
Date."
(l) SECTION 5.10(b). SECTION 5.10(b) of the Existing Agreement
is amended by adding the phrase "Except as contemplated by the Merger
Agreement," at the beginning of the second sentence thereof.
(m) SECTION 5.11. SECTION 5.11 of the Existing Agreement is
amended to add to the end thereof the phrase "; provided, however, in the event
the No Reorganization Date shall occur, the Borrower will at all times be at
least "adequately capitalized" as defined in the Act referred to above and
within sixty (60) days after the Merger Effective Date be and at all times
thereafter, be "well capitalized" as defined in such Act".
(n) SECTIONS 5.13 and 5.14. New SECTIONS 5.13 and 5.14 are
hereby added to the Existing Agreement as follows:
"5.13. COLLATERAL. The Borrower shall deliver to the
Lender, within one (1) calendar day of the Merger
Effective Date, any new, additional, substitute or
replacement shares of Western Bank after giving effect
to the transactions contemplated by the Merger
Agreement, together with stock powers, duly executed in
blank and such shares shall constitute Pledged Shares
(as defined in the Pledge Agreement) under the Pledge
Agreement.
3
<PAGE>
5.14. MERGER EFFECTIVE DATE. Within three (3) Banking
Days of the Merger Effective Date, the Borrower shall
deliver to the Lender the certificate contemplated by
the definition of Merger Effective Date.
Notwithstanding anything in SECTION 7.1 to the
contrary, Borrower's failure to comply with this
requirement shall constitute an immediate Event of
Default with no further action on the part of the
Lender required."
(o) SECTION 7.1(c). SECTION 7.1(c) of the Existing Agreement is
amended by (i) inserting the phrase "(after giving effect to any applicable cure
period)" after the phrase "event of default" appearing therein and (ii)
inserting the phrase "in an aggregate principal amount in excess of $1,000,000"
after the phrase "or other agreement" after the first time only that such phrase
appears therein.
(p) SECTION 7.1(h) of the Existing Agreement is amended by (i)
adding the phrase "and the Lender shall not have waived in writing any Event of
Default arising from such proceeding within five (5) Banking Days of the
commencement of such proceeding" immediately before the first semicolon
appearing therein, and (ii) deleting the dollar amount "$500,000" appearing
therein and inserting in place thereof the dollar amount "$3,000,000".
(q) SECTION 7.1(j). SECTION 7.1(j) of the Existing Agreement is
amended by deleting the phrase ", or Lender shall otherwise reasonably deem
itself insecure" therefrom and substituting the phrase "and Borrower shall not
have prepaid the Loans in an amount satisfactory to Lender or delivered
additional or substitute collateral acceptable to the Lender within five (5)
Banking Days after notice to the Borrower by Lender" therefor.
(r) SECTION 7.2(a). SECTION 7.2(a) of the Existing Agreement is
amended by deleting the phrase "Section 7.1(l)-(n)" appearing therein and
inserting in place thereof "Section 7.1(l)-(m)".
(s) DEFINITIONS. The definition of "Commitment" in SECTION
8.1(b) of the Existing Agreement is amended and restated in full to read as
provided below and the following additional definitions are hereby added in
alphabetical order:
"(b) The term Commitment" shall mean (i) $13,000,000 in the aggregate
until the Banking Day immediately preceding the Merger Effective Date; (ii)
$17,500,000 in the aggregate from the Banking Day immediately preceding the
Merger Effective Date until the Termination Date, except as further contemplated
in CLAUSE (iii) hereof; and (iii) $35,000,000 in the aggregate from the No
Reorganization Date until the Reduction Date only.
"Merger Agreement" means the Agreement and Plan of Merger dated as of the
30th day of July 1997 as Amended and Restated as of November 20, 1997 by and
among Borrower, Western Bank and Santa Monica Bank, as further amended, modified
or supplemented.
4
<PAGE>
"Merger Effective Date" means the date specified in a certificate of the
Secretary of the Borrower addressed to the Lender certifying that the Merger
Agreement or related document has been filed and accepted by the California
Secretary of State, but in no event shall such date be earlier than the filing
date or later effective date stamped on such document by the California
Secretary of State, a copy of which shall accompany such certificate to the
Lender.
"No Reorganization Date" means the date specified in a certificate of the
Secretary of the Borrower delivered to the Lender, which date shall not be more
than one day prior to the Merger Effective Date, certifying that the merger
described in the Merger Agreement will be an all-cash merger.
"Reduction Date" means September 30, 1998."
(t) SECTION 11. SECTION 11 of the Existing Agreement is amended
by adding the phrase "after an Event of Default or Unmatured Event of Default
shall have occurred and be continuing" after the phrase "At any time" appearing
therein.
(u) SECTION 13. The seventh sentence of SECTION 13 of the
Existing Agreement is amended by adding the phrase ", to the extent permitted by
applicable law" at the end thereof.
Section 3. WAIVER. The Borrower has advised the Lender that it is not
or has not been in compliance with SECTIONS 5.2(c) and (e) (FDIC Call Reports
and Reports to SEC and Shareholders), 5.4(e) (Return on Average Assets) and 5.7
(Dividends) of the Existing Agreement for fiscal periods ending on and before
December 31, 1997. As of and through December 31, 1997, the Lender waives on the
Effective Date pursuant to SECTION 7.2(b) of the Existing Agreement compliance
by the Borrower with SECTIONS 5.2(c) and (e), 5.4(e) and 5.7 of the Existing
Agreement The Lender's waiver of non-compliance with SECTIONS 5.2(c) and (e),
5.4(e) and 5.7 of the Existing Agreement is limited to the specific instance of
failure to comply which is described above and shall not be deemed a waiver of
or consent to any other failure to comply with the terms of SECTIONS 5.2(c) and
(e), 5.4(e) or 5.7 of the Existing Agreement or any other provisions of the
Existing Agreement. Such waiver shall not prejudice any right or remedies which
the Lender may have or be entitled to with respect to any such other breach of
SECTION 5.2(c) and (e), 5.4(e) or 5.7 or any other provision of the Existing
Agreement.
Section 4. AMENDMENTS TO PLEDGE AGREEMENT. The following amendments are
hereby made to the Pledge Agreement with effect only from and after the
Effective Date:
(a) DEFINITIONS. The definition of "Purchase Agreement" in
SECTION 1 of the Pledge Agreement is deleted and the following substituted
therefor:
"Merger Agreement" shall have the same meaning herein as in
the Loan Agreement."
(b) SECTION 3(c) OF THE PLEDGE AGREEMENT. SECTION 3(c) of the
Pledge Agreement is hereby amended by deleting the phrase "7 calendar days
following the date of the
5
<PAGE>
Merger" appearing therein and substituting the phrase "one (1) calendar day
following the Merger Effective Date" therefor.
Section 5. CONDITIONS TO EFFECTIVE DATE. The occurrence of the
Effective Date shall be subject to the satisfaction, on and as of the Effective
Date, of the following conditions precedent:
(a) The Borrower and the Lender shall have executed and
delivered this Amendment.
(b) No Event of Default or Unmatured Event of Default shall have
occurred and be continuing under the Existing Agreement and the representations
and warranties of the Borrower in SECTION 4 of the Existing Agreement and in
SECTION 9 hereof shall be true and correct on and as of the Effective Date
assuming for purposes hereof that the representations and warranties were made
as of the Effective Date except for representations and warranties which relate
to a specific date and the Borrower shall have provided to the Lender a
certificate of a senior officer of the Borrower to that effect.
(c) The Borrower shall have provided to the Lender, in form and
substance satisfactory to the Lender, a certificate attaching a true and correct
copy of its articles of incorporation or bylaws as in effect on the date hereof.
(d) The Borrower shall have executed and delivered to the Lender
the Restated Note. Lender agrees to return to the Borrower the Amended and
Restated Revolving Credit Note dated June 11, 1997 marked "replaced".
(e) The Borrower shall have delivered to Lender a copy of a
resolution of the Board of Directors of Borrower, authorizing or ratifying, the
execution, delivery and performance, respectively, of this Amendment, the
Restated Note and the other documents provided for in this Amendment, certified
by the secretary or an assistant secretary of Borrower, and further certifying
the names of the officer(s) of the Borrower authorized to sign this Amendment,
the Restated Note and the other documents provided for in this Amendment,
together with a sample of the true signature of each such person (Lender may
conclusively rely on such certificate until formally advised by a like
certificate of any changes therein).
(f) The Borrower shall have delivered to Lender a certificate
signed by the secretary or a senior officer of Borrower acceptable to Lender to
the effect that attached thereto are true and complete copies of (i) the Merger
Agreement, (ii) all governmental approvals, licenses, consents, registrations
and filings required for the execution, delivery and performance by Borrower of
this Amendment and the agreements, documents and instruments provided for herein
and for the consummation of the transaction contemplated by the Merger
Agreement.
(g) The Borrower shall have delivered to Lender an opinion of
counsel to Borrower in the form of EXHIBIT B attached hereto.
6
<PAGE>
(h) Borrower shall have paid a $10,000 fee to the Lender in
connection with Lender's issuance of a commitment letter specifying the terms
contained in this Amendment.
(i) The Borrower shall have delivered to Lender such other
documents and certificates as Lender may reasonably request.
Section 6. EFFECTIVE DATE NOTICE. Promptly following the occurrence of
the Effective Date, the Lender shall give notice to the Borrower of the
occurrence of the Effective Date, which notice shall be conclusive, and the
parties may rely thereon; provided, that such notice shall not waive or
otherwise limit any right or remedy of the Lender arising out of any failure of
any condition precedent set forth in SECTION 5 to be satisfied.
Section 7. TERMINATION. If the Effective Date shall not have occurred
on or before January 30, 1998, the Lender may terminate this Amendment by notice
in writing to the Borrower at any time before the occurrence of the Effective
Date; provided, that the Borrower's obligations under SECTION 14 shall survive
any such termination.
Section 8. RATIFICATION. The parties agree that neither the Existing
Agreement nor the Revolving Credit Note nor the Pledge Agreement has lapsed or
terminated; each is in full force and effect, and is and from and after the
Effective Date shall remain binding in accordance with its respective terms, as
amended hereby.
Section 9. REPRESENTATIONS AND WARRANTIES. The Borrower represents and
warrants to the Lender that:
(a) NO BREACH. The execution, delivery and performance of this
Amendment, the Existing Agreement and Pledge Agreement, each as amended hereby,
and the Restated Note will not conflict with or result in a breach of, or cause
the creation of a lien or require any consent (which consent has not already
been obtained) under the articles of incorporation or bylaws of the Borrower, or
any applicable law or regulation, or any order, injunction or decree of any
court or governmental authority or agency, or any agreement or instrument to
which the Borrower is a party or by which it or its property is bound.
(b) POWER AND ACTION: BINDING EFFECT. The Borrower has been duly
organized and is validly existing in good standing as a corporation under the
laws of the State of California and has all necessary power and authority to
execute, deliver and perform its obligations under this Amendment, the Existing
Agreement and Pledge Agreement, each as amended hereby, and the Restated Note;
the execution, delivery and performance by the Borrower of this Amendment, the
Existing Agreement and Pledge Agreement, each as amended hereby, and the
Restated Note have been duly authorized by all necessary action on its part; and
this Amendment, the Existing Agreement and Pledge Agreement, each as amended
hereby, and the Restated Note have been duly and validly executed and delivered
by the Borrower and constitute legal, valid and binding obligations, enforceable
in accordance with their respective terms, except to the extent that
enforceability may be limited by applicable bankruptcy, insolvency or similar
laws effecting creditors' rights generally and subject to general principles of
equity.
7
<PAGE>
(c) APPROVALS. Except as set forth on SCHEDULE 9(c) attached
hereto, no authorizations, approvals or consents of, and no filings or
registrations with, any governmental or regulatory authority or agency or any
other person are necessary for the execution, delivery or performance by the
Borrower of this Amendment, the Existing Agreement or Pledge Agreement, each as
amended hereby, or the Restated Note, or for the validity or enforceability
thereof.
Section 10. CERTAIN USAGES. From and after the Effective Date, each
reference to the Existing Agreement, Pledge Agreement or the Revolving Credit
Note in the Existing Agreement, the Pledge Agreement and the other agreements,
documents or instruments referred to or provided for in or delivered under the
Existing Agreement shall be deemed to refer to the Existing Agreement and Pledge
Agreement, each as amended hereby, and the Revolving Credit Note as amended by
the Restated Note, respectively.
Section 11. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon
and inure to the benefit of the Borrower, the Lender and their respective
successors and assigns, except that the Borrower may not transfer or assign any
of its rights or interest hereunder without the prior written consent of Lender.
Section 12. GOVERNING LAW. This Amendment shall be governed by, and
construed and interpreted in accordance with, the internal laws of the State of
Illinois.
Section 13. COUNTERPARTS. This Amendment and the Restated Note may be
executed in any number of counterparts and either party hereto may execute any
one or more of such counterparts, all of which shall constitute one and the same
instrument. Delivery of an executed counterpart of a signature page to this
Amendment or the Restated Note by telecopier shall be as effective as delivery
of a manually executed counterpart of this Amendment or Restated Note, as
applicable.
Section 14. EXPENSES. Whether or not the Effective Date shall occur,
without limiting the obligations of the Borrower under the Existing Agreement or
Pledge Agreement, the Borrower agrees to pay, or to reimburse on demand, all
reasonable costs and expenses incurred by the Lender in connection with the
negotiation, preparation, execution, delivery, modification, amendment or
enforcement of this Amendment, the Existing Agreement and the Pledge Agreement,
as amended hereby, the Restated Note and the other agreements, documents and
instruments referred to herein, including the reasonable fees and expenses of
Gardner, Carton & Douglas, special counsel to the Lender.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the day and year first above
written.
WESTERN BANCORP
(formerly known Monarch Bancorp)
By: /s/ Arnold C. Hahn
-------------------------------
Name: Arnold C. Hahn
Title: Executive Vice President and Chief
Financial Officer
THE NORTHERN TRUST COMPANY
By: /s/ Thomas E. Bernhardt
-------------------------------
Name: Thomas E. Bernhardt
Title: Vice President
9
<PAGE>
EXHIBIT A
SECOND AMENDED AND RESTATED REVOLVING CREDIT NOTE
(Bank Holding Company)
$35,000,000 Chicago, Illinois
January 26, 1998
FOR VALUE RECEIVED, on or before September 25, 1999, the scheduled maturity
date hereof, WESTERN BANCORP (formerly known as Monarch Bancorp), a California
corporation ("BORROWER"), promises to pay to the order of THE NORTHERN TRUST
COMPANY, an Illinois banking corporation (hereafter, together with any
subsequent holder hereof, called "LENDER"), at its main banking office at 50
South LaSalle Street, Chicago, Illinois 60675, or at such other place as Lender
may direct, the aggregate unpaid principal balance of each advance (a "LOAN" and
collectively the "LOANS") made by Lender to Borrower under the Revolving Credit
Agreement (hereinafter defined); provided, however, the Borrower agrees to pay
in full on or before the Reduction Date the outstanding principal balance of all
Loans in excess of $17,500,000, together with all accrued and unpaid interest
thereon. The total principal amount of Loans outstanding at any one time
hereunder shall not exceed THIRTY FIVE MILLION UNITED STATES DOLLARS
($35,000,000).
Lender is hereby authorized by Borrower at any time and from time to time
at Lender's sole option to attach a schedule (grid) to this Note and to endorse
thereon notations with respect to each Loan specifying the date and principal
amount thereof, and the date and amount of each payment of principal and
interest made by Borrower with respect to each such Loan. Lender's endorsements
as well as its records relating to Loans shall be rebuttably presumptive
evidence of the outstanding principal and interest on the Loans, and, in the
event of inconsistency, shall prevail over any records of Borrower and any
written confirmations of Loans given to Borrower.
Borrower agrees to pay interest on the unpaid principal amount from time to
time outstanding hereunder at on the dates and at the rate or rates as set forth
in the Revolving Credit Agreement (as hereinafter defined).
Payments of both principal and interest are to be made in immediately
available funds in lawful money of the United States of America.
This Note evidences indebtedness incurred under a Revolving Credit
Agreement dated as of September 25, 1996 executed by and between the Borrower
and Lender (together with all amendments, restatements and replacements thereto
or therefor, the "REVOLVING CREDIT AGREEMENT"), to which Revolving Credit
Agreement reference is hereby made for a statement of its terms and provisions,
including without limitation those under which this Note may be paid prior to
its due date or have its due date accelerated. Capitalized terms used but not
otherwise defined in this Note shall have the same meaning herein as in the
Revolving Credit Agreement. This Note amends and restates in full the Amended
and Restated Revolving Credit Note dated June 11, 1997 in the principal amount
of $13,000,000 issued by the Borrower under the
<PAGE>
Revolving Credit Agreement and evidences the indebtedness previously evidenced
thereby. This Note is secured by the collateral provided for in the Pledge
Agreement referred to in the Revolving Credit Agreement.
This Note and any document or instrument executed in connection herewith
shall be governed by and construed in accordance with the internal law of the
State of Illinois, and shall be deemed to have been executed in the State of
Illinois. Unless the context requires otherwise, wherever used herein the
singular shall include the plural and vice versa, and the use of one gender
shall also denote the other. This Note shall bind Borrower, its successors and
assigns, and shall inure to the benefit of Lender, its successors and assigns,
except that Borrower may not transfer or assign any of its rights or interest
hereunder without the prior written consent of Lender. Borrower agrees to pay
upon demand all expenses (including without limitation attorneys' fees, legal
costs and expenses, and time charges of attorneys who may be employees of
Lender, in each case whether in or out of court, in original or appellate
proceedings or in bankruptcy) incurred or paid by Lender or any holder hereof in
connection with the enforcement or preservation of its rights hereunder or under
any document or instrument executed in connection herewith. Borrower expressly
and irrevocably waives presentment, protest, demand and notice of any kind in
connection herewith, to the extent such waiver is permitted by applicable law.
WESTERN BANCORP
(formerly known as Monarch Bancorp)
By:
-------------------------------
Name: Arnold C. Hahn
Title: Executive Vice President and Chief
Financial Officer
-2-
<PAGE>
EXHIBIT C
LIST OF SUBSIDIARIES
1. Western Bank, a California corporation. Bank chartered by the State of
California.
2. Southern California Bank, a California corporation. Bank chartered by the
State of California.
3. M.B. Mortgage Company, Inc., a California corporation.
4. Venture Partners, Inc., a California corporation.
<PAGE>
SCHEDULE 9(c)
APPROVALS
1. Federal Reserve Bank of San Francisco, dated December 16, 1997.
2. Department of Financial Institutions, dated December 17, 1997.
3. Department of Financial Institutions, dated December 19, 1997.
4. Federal Reserve Bank of San Francisco, dated November 25, 1997.
5. Federal Deposit Insurance Corporation, dated December 16, 1997.
6. Federal Deposit Insurance Corporation, dated December 16, 1997.
7. Department of Financial Institutions, dated December 19, 1997.
8. Department of Financial Institutions, dated December 17, 1997.
<PAGE>
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement"), dated as of July 9, 1997,
by and between William H. Jacoby ("Jacoby"), Chairman of National Bank of
Southern California ("NBSC"), and Western Bancorp, a California corporation
("Western," formerly named Monarch Bancorp), is made with reference to the
Amended and Restated Agreement and Plan of Merger dated as of December 19, 1996
(the "Merger Agreement") by and between California Commercial Bankshares, the
parent of NBSC ("CCB"), and Western. Capitalized terms used herein but not
otherwise defined shall have the meanings assigned thereto in the Merger
Agreement.
Subject to the terms and conditions of this Agreement, Western wishes
to provide for Jacoby's continued services to NBSC during the period following
the Effective Time and Jacoby is willing to continue to serve as chairman of
NBSC and thereafter as consultant to Western. As of the Effective Time, this
Agreement replaces the executive salary continuation agreement, dated as of
January 2, 1988 (the "Prior Agreement"), between Jacoby and NBSC.
Now, therefore, for good and valuable consideration, the receipt,
sufficiency and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
1. DUTIES. From the Effective Time through June 30, 1998 (such date being
the "Employment Termination Date" and such period being the "Employment
Period"), Jacoby shall serve as Chairman of the Board of NBSC. In addition,
Jacoby shall serve as a
<PAGE>
director of Western until the annual meeting of shareholders of Western in the
second quarter of 1998. In his position as Chairman of the Board of NBSC, Jacoby
shall promote the welfare of NBSC, with an emphasis on business development and
customer retention. His specific duties shall be performed in accordance with a
plan to be mutually agreed by Jacoby, Mark H. Stuenkel (President of NBSC) and
Hugh S. Smith, Jr. (Chairman of Western). Thereafter, Jacoby shall act as
consultant to Western as set forth in Section 7 hereof.
2. TERM. This Agreement, which shall supersede the Prior Agreement, shall
not terminate until all payments hereunder have been made in full.
3. COMPENSATION. During the Employment Period, Jacoby will be entitled to
receive (i) a salary of (a) $190,000 per annum from the Effective Time through
December 31, 1997 and (b) $209,000 per annum from January 1, 1998 through the
Employment Termination Date, payable in accordance with NBSC's customary
practices, and (ii) the perquisites currently provided to him as chairman of
NBSC. Provided that prior to December 31, 1997 Jacoby has NOT voluntarily
terminated his employment hereunder or been terminated by NBSC for "Cause" as
defined in Section 4(c) hereof, then Jacoby will also be entitled to a bonus for
1997 based on job performance, the earnings of NBSC in relation to its budget
and otherwise comparable to the bonus paid for the 1997 plan year to other
executives of Western and its affiliates with similar duties, responsibilities
and job performance (expected to be approximately $109,725). In addition, on
July 1, 1998, Western shall pay to Jacoby, subject to the terms and conditions
set forth herein, the sum of $611,639 which may, by mutual agreement, be
deferred and
-2-
<PAGE>
paid at a future time and future value. Jacoby shall be entitled to supplemental
retirement payments of $80,000 per year from and after the date of Jacoby's 65th
birthday, payable monthly on the first day of each month following such birthday
for a period of 15 years (the aggregate of such payments not to exceed
$1,200,000).
4. TERMINATION OF SERVICE PRIOR TO RETIREMENT
(a) DEATH. In the event Jacoby should die before receiving the
full amount of the payments provided in Section 3, then subject to clause
(c) hereof, Western shall nevertheless pay such sums to Jacoby's
representative or the person entitled to receive such payments under
Jacoby's will or the laws of descent and distribution at the times due in
accordance with Section 3.
(b) DISABILITY. In the event Jacoby suffers a disability prior to the
Employment Termination Date, Western may terminate Jacoby's employment but,
subject to clause (c) hereof, Jacoby shall nevertheless be entitled to
receive the payments provided in Section 3 hereof. For purposes of this
Agreement, the term "disability" shall mean Jacoby's inability to perform
his duties whether by injury (physical or mental), illness, or otherwise,
incapacitating Jacoby for a continuous period exceeding 120 days and which
at any time after such 120-day period NBSC's Board of Directors shall
determine permanently renders Jacoby incapable of performing his services.
Any determination made in good faith by NBSC's Board of Directors shall be
conclusive and binding upon Jacoby.
(c) VOLUNTARY TERMINATION BY JACOBY; TERMINATION BY NBSC FOR "CAUSE."
In the event Jacoby's employment with NBSC is terminated prior to the
-3-
<PAGE>
Employment Termination Date either (i) voluntarily by Jacoby (including,
without limitation, by not accepting employment pursuant to this Agreement)
or (ii) by NBSC for "Cause" (as defined herein), then this Agreement
(except for the provisions of Section 6) and all of Western's and NBSC's
obligations hereunder shall terminate on the date of such termination and
no benefits or payments of any kind shall thereafter be made to Jacoby
pursuant to this Agreement. For purposes of this Agreement, "Cause" means:
(x) the willful and continued failure by Jacoby substantially to perform
Jacoby's duties with the NBSC (other than such failure resulting from
Jacoby's disability) after demand for substantial performance has been
delivered by NBSC's Board of Directors to Jacoby which specifically
identifies the manner in which Jacoby has not substantially preformed his
duties; (y) the willful engaging by Jacoby in gross misconduct materially
and demonstrably injurious to the Bank; or (z) upon Jacoby's dishonesty,
conviction of a serious crime or habitual intemperance.
(d) TERMINATION FOR "GOOD REASON." Notwithstanding anything to the
contrary contained herein, Jacoby will not be treated as having voluntarily
terminated his employment hereunder, if such termination was for "Good
Reason" (as defined below). For purposes hereof, the term "Good Reason"
shall mean: (i) a change in assignment to a geographical location which is
more than 50 miles from the location of the principal executive office of
NBSC at the time of entering into this Agreement; or (ii) material breach
by NBSC of the terms and conditions of this Agreement. Accordingly, any
such termination of employment by Jacoby
-4-
<PAGE>
for Good Reason shall not relieve NBSC of its obligations to make the
payments required by Section 3 hereof.
5. STOCK OPTION. Subject to Section 4 hereof, Western and NBSC confirm that
certain options held by Jacoby to acquire an additional 5,000 shares at $5.25
per share will vest on January 26, 1998 and that certain options held by Jacoby
to acquire an additional 3,333 shares at $6.50 per share will vest on June 27,
1998 (in each case in accordance with the stock option agreements under which
such options were issued).
6. COMPETITION. Neither Jacoby nor any corporation, partnership, trust or
other entity controlled by Jacoby shall:
(a) except for shares of publicly held companies not in excess of 1%
of the total outstanding in any one investee, on or before January 1, 1999
(and notwithstanding any early termination of Jacoby's employment under
Section 4), engage in, be employed by, acquire an equity interest in or
start, or otherwise provide any assistance to, directly or indirectly, any
insured depositary institution ("Insured Depositary Institution") in Orange
County in the State of California so long as NBSC or its successors or
assigns remain an Insured Depositary Institution;
(b) at any time following the Effective Time, disclose confidential
information regarding Western or its affiliates to any third party, except
as required by law, regulation or court order or pursuant to the request of
NBSC's (or Western's) Board of Directors; and
-5-
<PAGE>
(c) solicit, directly or indirectly, on its own behalf or on behalf of
any other person or entity, management personnel employed by Western or any
Western affiliate for employment with any other Insured Depositary
Institution;
PROVIDED, HOWEVER, that with respect to any of the matters covered in this
Section 6, to the extent that any restriction set forth in this Section 6 is
adjudicated to be invalid or unenforceable in any jurisdiction, the court
making such determination shall have the power to limit, construe or reduce
the duration, scope, activity or area of such provision to the extent
necessary to render such provision enforceable to the maximum extent
permitted by applicable law, such limited form to apply only with respect to
the operation of such provision in the particular jurisdiction in which such
adjudication is made.
7. CONSULTING. Western and Jacoby hereby agree that, effective as of July
1, 1998, Jacoby may be requested to provide consulting services to Western
through December 31, 1998 including advice on, among other things, pending
litigation. Jacoby shall be paid during the term of his engagement as consultant
$1,000 for each day actually spent by Jacoby (if any) in consulting hereunder,
plus reasonable out-of-pocket expenses, payable quarterly in arrears.
8. EFFECT OF TERMINATION. Except as otherwise agreed by the parties,
effective upon the Employment Termination Date Jacoby shall cease to be a
director of NBSC.
9. AMENDMENT OF SHAREHOLDER AGREEMENT. The parties hereto agree that
Section 5 of the Shareholder Agreement, dated as of December 19, 1996, by and
between Jacoby and Western shall be deleted and the following substituted in
place thereof: "Omitted."
-6-
<PAGE>
10. NOTICES. All notices, requests, claims, demands or other communications
hereunder shall be in writing and shall be deemed given when delivered
personally, upon receipt of a transmission confirmation if sent by telecopy or
like transmission and on the next business day when sent by a reputable
overnight courier service to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
If to Western:
30000 Town Center Drive
Laguna Niguel, California 92677
Telecopier: 714/495-3135
Attention: Arnold C. Hahn
If to Jacoby:
11. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by either of the parties hereto without
the prior written consent of the other party; PROVIDED, HOWEVER, that the
consent of Jacoby shall not be required in the event of a merger or
consolidation of Western (in which Western is not the surviving entity) or a
sale of all or substantially all of the assets of Western if, in any such
transactions, the surviving entity shall assume all of the obligations of
Western hereunder.
-7-
<PAGE>
(b) AMENDMENTS. This Agreement may not be changed orally, but only by
an agreement in writing signed by the party or parties against whom enforcement
of any waiver, change, modification or consent is sought or from whom discharge
is sought.
(c) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument.
(d) HEADINGS. All section headings herein are for convenience of
reference only; they are not part of this Agreement, and no construction or
reference shall be derived therefrom.
(e) CHOICE OF LAW. This Agreement shall be deemed a contract made
under, and for all purposes shall be construed in accordance with, the laws of
the State of California, without reference to its conflicts of law principles.
(f) PAYMENTS. All payments hereunder shall be net of applicable
withholding taxes and other related amounts, if any.
(g) EXPENSES. Each party shall be responsible for its own fees and
expenses in connection with the preparation and execution of this Agreement. In
any dispute arising out of or relating to this Agreement, the prevailing party
shall be entitled to reasonable attorney's fees in addition to other costs.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
WILLIAM H. JACOBY
----------------------------------------
WESTERN BANCORP
By: /s/ Hugh S. Smith, Jr.
-------------------------------------
Name: Hugh S. Smith, Jr.
Title: CHAIRMAN
Confirmed as to (i) replacement of the
Prior Agreement and (ii) Section 5
NATIONAL BANK OF SOUTHERN CALIFORNIA
By /s/ Mark H. Stuenkel
-------------------------------
Name: Mark H. Stuenkel
Title: Pres
-9-
<PAGE>
EXECUTIVE SALARY CONTINUATION AGREEMENT
This Executive Salary Continuation Agreement (the "Agreement") is dated
as of January 1, 1988, by and between National Bank of Southern California, a
national banking association (the "Bank") and Mark H. Stuenkel ("Executive").
R E C I T A L S
A. Executive is employed by the Bank as its Executive Vice President;
B. The Bank and California Commercial Bankshares, a California
corporation ("CCB") and the Bank's parent corporation, have determined that it
is in the Bank's best interests to grant the benefits described herein to
Executive as an inducement for Executive to remain in the employ of the Bank and
for increasing Executive's efforts during such employment; and
C. Executive desires to accept the benefits contained herein and to
continue in the employ of the Bank.
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
ARTICLE I
BENEFITS UPON RETIREMENT
1.1 PAYMENT OF BENEFITS. Subject to the terms and conditions set
forth herein, the Bank agrees that upon Executive's "Retirement" (as defined
below) from the Bank, that the Bank shall pay to Executive the sum of Fifty-Five
Thousand Dollars ($55,000) per year for a period of fifteen (15) years (the
"Retirement Payments"). The Retirement Payments shall be paid by the Bank
monthly on the first day of each month following Executive's Retirement until
the total is paid in full.
1.2 RETIREMENT. The term "Retirement" shall mean Executive's
cessation from active continuous daily employment from the Bank as of the first
day of the month following Executive's attainment of age sixty (60) or upon such
later date as mutually agreed upon by Executive and the Bank.
1.3 DEATH AFTER RETIREMENT. If Executive shall so retire but die
before receiving the full amount of the Retirement Payments which Executive is
entitled to hereunder, the Bank shall pay all remaining and unpaid Retirement
Payments until such payments are paid in full to Executive's representative, or
the person entitled to receive such payments under Executive's will or the laws
of descent and distribution.
-2-
<PAGE>
ARTICLE II
TERMINATION OF SERVICE PRIOR TO RETIREMENT
2.1 TERMINATION BY DEATH. In the event Executive should die (with the
exception of death by suicide within two (2) years of the date of this Agreement
in which case all benefits hereunder shall be forfeited) while actively employed
by the Bank but prior to Retirement, the Bank shall pay the sum of Fifty-Five
Thousand Dollars ($55,000) per year for a period of fifteen (15) years (the
"Death Benefits"). The Death Benefits shall be payable in equal monthly
installments on the first day of each month following Executive's death to
Executive's representative or the person entitled to receive such payments under
Executive's will or the laws of descent and distribution.
2.2 TERMINATION BY DISABILITY. In the event Executive's employment
with the Bank is terminated because of Executive's disability prior to
Retirement, Executive shall be entitled to receive, and shall be 100% vested in
(i) the Retirement Payments referred to in Section 1.1 and, if applicable,
Section 1.3 hereof, commencing on Executive's retirement age referred to in
Section 1.2 hereof, or (ii) if Executive should die before reaching such
retirement age, the
-3-
<PAGE>
Death Benefits referred to in Section 2.1 hereof. In lieu of the benefits
referred to in (i) and (ii) of the preceding sentence, Executive may elect to
receive a disability benefit (the "Disability Benefit") in an amount equal to
the then present value of the Retirement Payments referred to in Sections 1.1
and 1.3 hereof. In arriving at the present value of such payments there shall
be applied a discount factor equal to two points over the Federal Reserve
Discount Rate in effect on the date of termination of employment. Executive's
election to receive the Disability Benefit shall be made by written notice to
the Bank within one-hundred twenty (120) days after termination of Executive's
employment, and the monthly payments shall commence not later than ninety (90)
days after receipt of such notice by the Bank. For purposes of this Agreement,
the term "disability" shall mean Executive's inability to perform his duties
whether by injury (physical or mental), illness, or otherwise, incapacitating
Executive for a continuous period exceeding 120 days and which at any time after
such 120 day period the Bank's Board of Directors shall determine permanently
renders Executive incapable of performing his services. Any determination made
in good faith by its Board of Directors shall be conclusive and binding upon
Executive.
-4-
<PAGE>
2.3 VOLUNTARY TERMINATION BY EXECUTIVE; TERMINATION BY BANK FOR
"CAUSE". In the event Executive's employment with the Bank is terminated prior
to Retirement either (i) voluntarily by Executive other than for "Good Reason"
(as defined below) or (ii) by the Bank for "Cause" (as defined herein), then
this Agreement and all of Bank's obligations hereunder shall terminate on the
date of such termination and no benefits or payments of any kind shall be made
to Executive pursuant to this Agreement. For purposes of this Agreement,
"Cause" means: (a) The willful and continued failure by Executive substantially
to perform Executive's duties with the Bank (other than such failure resulting
from Executive's disability) after demand for substantial performance has been
delivered by the Bank's Board of Directors to Executive which specifically
identifies the manner in which Executive has not substantially performed his
duties; (b) The willful engaging by Executive in gross misconduct materially and
demonstrably injurious to the Bank; or (c) Upon Executive's dishonesty,
conviction of a serious crime or habitual intemperance. The term "Good Reason"
shall mean: (i) The assignment to Executive without Executive's express consent
of duties which constitute a material reduction in the importance of Executive's
current position, authority or responsibilities or any other material adverse
change in Executive's current position, authority and responsibilities or any
other material adverse
-5-
<PAGE>
change in Executive's current position, authority and responsibilities; or (ii)
a change in assignment to a geographical location which is more than fifty (50)
miles from the location of the principal executive office of the Bank at the
time of entering into this Agreement; or (iii) material breach by the Bank of
the terms and conditions of this Agreement.
2.4 OTHER TERMINATION OF SERVICE BY BANK. In the event Executive's
employment with the Bank is terminated by the Bank prior to Executive's
Retirement for any reason other than for Executive's death, disability, or for
Cause, or is terminated by Executive for "Good Reason," then Executive shall be
entitled to (i) the Retirement Payments referred to in Section 1.1 and, if
applicable, Section 1.3 hereof, commencing on Executive's retirement age
referred to in Section 1.2 hereof, or (ii) if Executive should die before
reaching such retirement age, the Death Benefits referred to in Section 2.1, but
in the case of either (i) or (ii), only to the extent that Executive's interest
in such benefits is vested at the time of the termination of Executive's
employment. Executive's interest shall vest up to a maximum of one hundred
percent (100%) at the rate of ten percent (10%) per year for each year of
employment that Executive has been employed by the Bank commencing as of January
1, 1988. A year of employment shall equal twelve (12) full months of continu-
-6-
<PAGE>
ous service by Executive to the Bank from and after January 1, 1988.
ARTICLE III
CHANGES IN LAW; CHANGE IN CONTROL;
ALIENABILITY
3.1 TERMINATION OF AGREEMENT BY REASON OF CHANGES IN LAW. The Bank is
entering into this Agreement upon the assumption that certain existing tax laws
will continue in substantially their current form for the term of this
Agreement. In the event any changes in Federal Law relating to the tax free
accumulation of earnings within a life insurance policy, the income tax free
payment of proceeds from life insurance policies or the deduction from income of
interest payments on certificates of deposit issued by banking institutions
shall be adopted and such change or changes shall have the effect of
substantially and adversely impacting the economic assumptions upon which this
Agreement and the funding mechanism utilized by the Bank were based, the Bank
shall have the option unilaterally to terminate this Agreement. Upon such
termination by the Bank of this Agreement, Executive shall be 100% vested in the
amount set forth in Schedule "A" for the particular year in which such
termination occurs. Such amount shall be paid to Executive in a lump sum within
three (3) months of such termination of this Agreement.
-7-
<PAGE>
3.2 CHANGE IN CONTROL. The following provisions will become effective
immediately upon the occurrence of a "Change in Control" (as hereinafter
defined):
(a) If, at the time of a Change in Control, Executive is employed by
the Bank pursuant to an employment agreement, the term remaining under such
employment agreement shall, if less than three years in duration, be extended
for a period of three (3) years from and after the date on which the Change in
Control occurs. If Executive is not employed pursuant to the terms of a current
employment agreement at the time of a Change in Control, this Agreement shall
then become an employment agreement having a term of three (3) years from and
after the date on which the Change of Control occurs.
(b) Executive will receive cash compensation at an annual rate equal
to (i) Executive's annualized base salary in effect immediately prior to the
Change in Control, plus (ii) an amount equal to any cash bonus award or awards
received by Executive for the year immediately prior to the Change in Control.
Such compensation shall be increased annually on Executive's normal salary
review date (i.e., January 1 of each year) by whichever of the following amounts
results in the greater compensation: (i) an increase of 10% of the compensation
in effect for the immediately preceding year or (ii) an
-8-
<PAGE>
increase based upon 80% of the percentage increase in the Consumer Price Index
of Urban Wage Earners and Clerical Workers (Revised Series), Los Angeles-Long
Beach-Anaheim Average from the month of December last preceding the Change in
Control over the December immediately preceding the effective date of adjustment
being calculated. In addition, Executive shall continue to receive all non-cash
forms of compensation, perquisites and benefits which Executive was receiving
prior to the Change in Control.
(c) In the case of any termination of Executive's employment by
Executive for Good Reason or by the Bank for any reason other than Cause, the
Bank shall:
(i) pay Executive cash compensation, determined as provided in
subparagraph (b) above, during Executive's remaining employment term (including
any extension thereof pursuant to subparagraph (a) above), without any reduction
for the amount of compensation Executive may receive from any other source
(whether or not from another bank or financial institution), PROVIDED, however,
the aggregate amount of such payments shall in no event be less than two times
the annual cash compensation being paid to Executive at the time of such
termination;
-9-
<PAGE>
(ii) maintain in full force and effect, for Executive's
continued benefit during the remainder of such term all employee benefit plans
and programs in which Executive was entitled to participate immediately prior to
such termination, provided that Executive's continued participation is possible
under the general terms and provisions of such plans and programs. If
Executive's participation in any such plan or program is barred, the Bank shall
arrange to provide Executive with benefits substantially similar to those which
Executive would otherwise have been entitled to receive under such plans and
programs; and
(iii) Executive shall continue to be entitled to the benefits
provided under Section 2.4 hereof.
(d) The other provisions of this Agreement which are not inconsistent
with the provisions of this Section 3.2 shall continue in full force and effect.
(e) As used herein, a "Change in Control" shall be deemed to have
occurred if:
(i) Excluding CCB's directors as of the date of this Agreement,
any person, or any two or more persons acting as a group, and all affiliates of
such person or
-10-
<PAGE>
persons, shall own beneficially more than 40% of CCB's outstanding common stock
(exclusive of shares held in the Company's treasury or by the Company's
subsidiaries) which shall have been acquired after the date of this Agreement
pursuant to a tender offer, exchange offer or series of purchases or other
acquisitions, or any combination of those transactions;
(ii) There shall be a change in the composition of CCB's or the
Bank's Board of Directors at any time within two years after any tender offer,
exchange offer, merger, consolidation, sale of assets or contested election or
any combination of those transactions (a "Transaction"), so that the persons who
are directors of CCB or the Bank immediately before the first Transaction cease
to constitute a majority of the Board of Directors of CCB or the Bank or any
corporation which may be the successor to CCB or the Bank in any such
transaction; or
(iii) CCB shall sell, transfer or otherwise dispose of
substantially all of its assets and properties including the stock of the Bank
or CCB shall cause the Bank to sell, transfer or otherwise dispose of
substantially all of its assets and properties.
-11-
<PAGE>
A Change in Control shall be deemed to take place upon the first
to occur of those events specified in the foregoing clauses (i), (ii) or (iii).
(f) Notwithstanding anything in this Agreement to the contrary, if and
to the extent (but only to the extent) that any payment made under this
Agreement shall constitute an "excess parachute payment" under Section 280G of
the Internal Revenue Code as in effect on January 1, 1987 (or, if at the time of
any such "excess parachute payment" said Section 280G shall have been amended to
provide more favorable treatment to Executive without materially adversely
affecting the Bank or CCB under said amended Section 280G), such payment shall
be reduced or extended over a longer period of time to the extent necessary to
reduce such "excess parachute payment" to zero.
3.3 ALIENABILITY. Neither Executive nor any other beneficiary under
this Agreement shall have the power or right to transfer, assign, anticipate,
hypothecate, mortgage, commute or subject any of the benefits hereunder to
seizure for the payment of any debts, judgments or obligations of Executive or
his beneficiaries. In the event of any attempted assignment or transfer by
Executive or any beneficiary of any benefit hereunder, all of Bank's liabilities
under this Agreement shall terminate.
-12-
<PAGE>
ARTICLE IV
BARK'S OBLIGATIONS HEREUNDER
4.1 FUNDING. The Bank reserves the right, at its sole and exclusive
discretion, either to fund the obligations of the Bank undertaken by this
Agreement or to refrain from funding the same, and to determine the extent,
nature and method of such funding. Should the Bank elect to fund this
Agreement, in whole or in part, through the medium of life insurance, or annuity
or both, the Bank shall be the owner and beneficiary of such policies. The Bank
reserves the absolute right, at its sole discretion, to terminate such life
insurance or annuities, as well as any other funding program at any time, in
whole or in part. At no time shall Executive be deemed to have any right, title
or interest in or to any specified asset or assets of the Bank, including but
not limited to any insurance or annuity contract or contracts or the proceeds
therefrom.
4.2 UNSECURED. This Agreement shall not be construed to give
Executive or his beneficiaries any greater rights than those of any other
unsecured creditor of the Bank. Any insurance policy or annuity purchased by
the Bank shall not be considered to be a security for the performance of the
obligations of this Agreement.
-13-
<PAGE>
ARTICLE V
EMPLOYMENT; PARTICIPATION IN OTHER PLANS
5.1 NOT AN EMPLOYMENT CONTRACT. Except as provided in Section 3.2(a)
hereof, this Agreement is not an employment contract. Nothing in this Agreement
shall affect in any manner whatsoever the right or power of the Bank, CCB or any
other parent corporation of the Bank, to terminate Executive's employment for
any reason or no reason, with or without cause.
5.2 FULL EFFORTS. During the time in which this Agreement is in
effect, Executive agrees to devote his full time and attention exclusively to
the business and affairs of the Bank, except during vacation, and to use his
best efforts to furnish faithful and satisfactory services to the Bank.
5.3 FRINGE BENEFITS. The benefits provided by this Agreement are
granted by the Bank as a fringe benefit to Executive and are not part of any
salary reduction plan or arrangement deferring any bonus or salary increase.
Executive has no option to take any current payment or bonus in lieu of the
benefits provided hereunder.
-14-
<PAGE>
5.4 PARTICIPATION IN OTHER PLANS. Nothing contained in this Agreement
shall be construed to alter, abridge or in any manner affect the rights and
privileges of Executive to participate in and be covered by any pension, profit
sharing, group insurance, bonus, or other similar employee plans which the Bank
may now or hereafter have.
ARTICLE VI
MISCELLANEOUS
6.1 EARLY TERMINATION OF BENEFITS. Notwithstanding any other
provisions of this Agreement, Bank may at any time terminate its obligation to
pay any Retirement Payments, Death Benefits, or Disability Benefits under
Articles I and II hereof, or the unpaid portion of any such benefit, by paying
to Executive or Executive's representative the present value of the unpaid
portion of such benefit calculated in the manner provided under Section 2.2
hereof. Any benefit which is prepaid pursuant to this provision shall be deemed
to be 100% vested for purposes of calculating the amount of such prepayment.
6.2 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, but
-15-
<PAGE>
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by either of the parties hereto without the prior written
consent of the other party; PROVIDED, HOWEVER, the consent of Executive shall
not be required in the event of a merger or consolidation of Bank (in which the
Bank is not the surviving entity) or a sale of all or substantially all of the
assets of Bank if, in any such transactions, the surviving entity shall (i) have
a net worth immediately following the transaction at least equal to the net
worth of Bank immediately prior to the transaction and (ii) shall assume all of
the obligations of Bank hereunder.
6.3 AMENDMENTS. This Agreement may not be changed orally, but only by
an agreement in writing signed by the party or parties against whom enforcement
of any waiver, change, modification or consent is sought or from whom discharge
is sought.
6.4 WAIVER. No action taken pursuant to this Agreement, including any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representation,
warranty, covenant or agreement contained in this Agreement or any exhibit
hereto. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach.
-16-
<PAGE>
6.5 NOTICES. All notices or other communications required or
permitted hereunder must be in writing and shall be deemed to have been duly
given if delivered personally, by telegram or telex, or mailed, postage prepaid,
by registered or certified first class (return receipt requested) addressed to
the party to be notified. Such notice shall be deemed to have been given as of
the date so delivered if delivered in person, at the time confirmed for delivery
if by telegram or telex, or ninety-six (96) hours after deposit in the mails as
provided above. For purposes of notice, the addresses of the parties hereto,
until changed, as hereinafter provided, shall be as set forth directly below.
Each party shall have the right to change its address to which notice to such
party is to be given by giving written notice thereof to all other parties to
this Agreement.
If to the Bank to: National Bank of Southern California
3951 South Plaza Drive
P. 0. Box 26170
Santa Ana, CA 92799-6170
Attn: Chief Executive Officer
If to Executive, to: Mark H. Stuenkel
6.6 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
and supersedes all prior oral and written agreements and understandings between
the parties hereto with respect to the subject matter hereof.
-17-
<PAGE>
6.7 GOVERNING LAW. This Agreement shall be construed as to both
validity and performance and enforced in accordance with and governed by the
laws of the state of California, without giving effect to the principles of
conflict of laws thereof.
6.8 SEVERABILITY. In the event that any provision of this Agreement
shall be unenforceable or inoperative as a matter of law, the remaining portions
or provisions shall remain in full force and effect.
6.9 COUNTERPARTS. This Agreement shall be executed in two or more
identical counterparts, each of which shall be deemed an original but all of
which shall constitute one in the same instrument.
6.10 CAPTIONS. Captions of the paragraphs of this Agreement are for
reference only and are not to be construed in any way as part of this Agreement.
6.11 ATTORNEYS' FEES. In the event that any party herein commences any
legal or equitable action or other proceeding, including without limitation, an
action for declaratory relief or any other form of relief, or to enforce,
interpret, reform, rescind or in any other manner affect the
-18-
<PAGE>
provisions of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees which may be set by the court in the same action,
including any appellate action which may be brought in connection with such
action, or in a separate action brought for that purpose, in addition to any
other relief to which the party may be entitled.
6.12 AGREEMENT TO PERFORM NECESSARY ACTS. Each of the parties hereto
agrees to execute and deliver such other and further documents and to perform
such other acts as may be necessary to effectuate the purposes of this Agreement
including, but not limited to, Executive agrees to sign any documents and
undergo any medical examination or tests which may be necessary for Bank to
acquire a life insurance or annuity policy on Executive's life.
[Signature Page Follows]
-19-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"Bank"
NATIONAL BANK OF SOUTHERN CALIFORNIA
By: /s/ William H. Jacoby
--------------------------------
William H. Jacoby, President
and Chief Executive Officer
"Executive"
/s/ Mark H. Stuenkel
--------------------------------
Mark H. Stuenkel
-20-
<PAGE>
MARK STUENKEL
------------
Accrued Salary
Plan Continuation
Year Liability
-------- ------------
<TABLE>
<S> <C> <C>
1988 = 1 3,625
2 7,630
3 12,054
4 16,942
5 22,341
6 28,306
7 34,895
8 42,175
9 50,216
10 59,100
11 68,913
12 79,755
13 91,731
14 104,962
15 119,578
16 135,725
17 153,563
18 173,268
19 195,037
20 219,065
21 245,651
22 274,999
23 307,421
24 343,237
25 382,803
26 426,513
</TABLE>
EXHIBIT A
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of December 31, 1997, by and among Western
Bancorp ("Western"), Western Bank and Aubrey L. Austin (the "Employee").
WHEREAS, Western Bank has entered into an Agreement and Plan of
Merger, dated as of July 30, 1997, and amended and restated as of November 20,
1997, by and among Western, Western Bank and Santa Monica Bank (the "Merger
Agreement"), as a result of which Western Bank will merge with Santa Monica
Bank, with Western Bank as the surviving corporation (hereinafter referred to as
"Employer"), which then will change its name to Santa Monica Bank, and Western
will own 100% of the shares of Employer's common stock; and
WHEREAS, in connection with the transactions contemplated by the
Merger Agreement, Employer and Employee consider it desirable to enter into this
employment agreement (the "Agreement") to provide for ongoing employment.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the parties hereto agree
as follows:
1. EMPLOYMENT.
(a) Employer hereby agrees to employ Employee, and Employee
agrees to serve as an employee of Employer during the Period of Employment, as
defined in Section 2, in such capacity as is set forth herein and initially as
Chairman of the Board ("Chairman"), President and Chief Executive Officer of
Employer with the duties and responsibilities as shall be specified in the
By-Laws of Employer. Employer acknowledges that Employee also shall be
appointed as a director of Western.
(b) If at any time during the Period of Employment, Employer
fails, without Employee's consent, to cause Employee to be elected or re-elected
as Chairman, President and Chief Executive Officer of Employer, or removes
Employee from such offices, or if at any time during the Period of Employment,
Employee shall fail to be vested by the Board of Directors of Employer with the
power and authority of Chairman, President and Chief Executive Officer of
Employer or Employee shall lose any significant duties or
<PAGE>
responsibilities attending such offices, Employee shall have the right by
written notice to Employer (a "Termination Notice") to terminate his services
hereunder, effective as of the thirtieth day following receipt by Employer of
the Termination Notice (or such earlier day as shall be individually agreed)
(the "Termination Effective Date"), in which event the Period of Employment, as
hereinafter defined, shall so terminate on the Termination Effective Date;
termination under these circumstances shall be deemed pursuant to paragraph (a)
of Section 6 hereof as a termination by Employee for "Good Reason" with all the
consequences that flow from such termination.
If Employee exercises Employee's right of termination under this
paragraph (b), Employee shall resign voluntarily as an employee of Employer and
as a Director of Employer and any affiliate on the Termination Effective Date.
2. PERIOD OF EMPLOYMENT.
The "Period of Employment" shall be the period commencing on the
Effective Date (as such term is defined in the Merger Agreement) and ending on
the third anniversary of the Effective Date.
3. DEVOTION TO EMPLOYER'S BUSINESS.
Employee shall devote Employee's full business time, attention and
best efforts to the affairs of Employer during the Period of Employment,
PROVIDED, HOWEVER, that Employee may engage in other activities, such as
activities involving professional, charitable, educational, religious and
similar types of organizations, speaking engagements, membership on the boards
of directors of other organizations (as Employer may from time to time agree
to), and similar types of activities to the extent that such other activities do
not inhibit or prohibit the performance of Employee's duties under this
Agreement, or conflict in any material way with the business of Employer.
4. CURRENT CASH COMPENSATION.
(a) BASE ANNUAL SALARY.
Employer will pay (or cause to be paid) to Employee during the
Period of Employment a base annual salary equal to the base annual salary paid
to Employee as
-2-
<PAGE>
of July 30, 1997, payable in accordance with Employer's standard payroll
procedures. It is agreed between the parties that Employer shall review the
base annual salary as of the Effective Date and annually thereafter and in light
of such review may, in the discretion of the Board of Directors of Employer (but
shall not be obligated to), increase such base annual salary in accordance with
standard policies and practices of Employer with respect to other executive
officers of Employer, and Employer may not decrease Employee's base annual
salary during the Period of Employment.
(b) DISCRETIONARY BONUS.
During the Period of Employment, Employee shall be considered
annually by the Human Resources Committee of the Board of Directors of Employer
for a discretionary bonus payment by Employer made in accordance with the
compensation policies and practices of Employer as presently in effect or as
they may be modified by Employer from time to time, taking into account the
performance of Employer and bonuses awarded to similar positions in Employer.
5. OTHER EMPLOYEE BENEFITS.
(a) VACATION AND SICK LEAVE.
Employee shall be entitled to paid annual vacation periods and to
sick leave in accordance with the policies of Employer as in effect as of the
date hereof or as may be modified by Employer from time to time as may be
applicable to officers of Employee's rank employed by Employer, but in no event
less than that provided to Employee at July 30, 1997.
(b) INCENTIVE STOCK PLAN.
Employee shall be eligible to participate in the Incentive Stock
Option Plan of Employer, as in effect as of the date hereof or as may be
modified by Employer from time to time, in such amounts and upon such terms as
may be prescribed by the Human Resources Committee of the Board of Directors of
Employer in its sole discretion consistent with established practices and
procedures for officers holding similar positions with Employer.
-3-
<PAGE>
(c) EMPLOYEE BENEFIT PLANS OR ARRANGEMENTS.
Subject to Section 6(a) hereof, Employee shall be entitled to
participate in all employee benefit plans of Employer, as presently in effect or
as they may be modified by Employer from time to time, under such terms as may
be applicable to officers of Employee's rank employed by Employer, including,
without limitation, plans providing retirement benefits, medical insurance, life
insurance, disability insurance, and accidental death or dismemberment
insurance.
Immediately upon termination of the Period of Employment, Employer
shall provide all requested assistance to allow Employee to elect continuation
coverage under all medical, dental, prescription medicines and other plans
through which coverage was provided to Employee by Employer under the
requirements of 29 U.S.C. Section 1161 ("COBRA") (Consolidated Omnibus Budget
Reconciliation Act) [Pub. L. 99-272]. The cost of all premiums assessed with
regard to continuation health care coverage under COBRA shall be paid by
Employer.
(d) EXPENSES.
Employee shall be reimbursed for reasonable travel and other
expenses incurred or paid by Employee in connection with the performance of his
services under this Agreement, upon presentation of expense statements or
vouchers or such other supporting information as may from time to time be
requested, in accordance with such policies of Employer as are in effect as of
the date hereof and as may be modified by Employer from time to time, under such
terms as may be applicable to officers of Employee's rank employed by Employer.
Reasonable other expenses shall include, but not be limited to, the costs of (or
dues and incidental expenses associated with) maintaining membership at the
Riviera Country Club and the Santa Monica Rotary Club.
(e) USE OF AUTOMOBILE.
Employer shall provide Employee with the use of an automobile
appropriate for a President and Chief Executive Officer with optional equipment
of Employee's selection for the Period of Employment and six months thereafter.
Employer shall pay all operating expenses of the automobile.
-4-
<PAGE>
Employer shall procure and maintain an automobile liability
insurance policy on the automobile in accordance with Employer's policy with
reference to automobile insurance for employees.
6. TERMINATION.
(a) TERMINATION BY EMPLOYER OTHER THAN FOR BREACH OR JUST
CAUSE.
If Employer should terminate the Period of Employment for other
than Breach or Just Cause, as herein defined, or if Employee should terminate
the Period of Employment for Good Reason, as herein defined, then after the date
of termination the provisions of Section 8 hereof no longer shall apply to
Employee, and, in addition to all other benefits, if any, payable as provided
for hereunder, Employer shall forthwith cause to be paid to Employee, at the
option of Employee, in a lump sum or in equal monthly payments for the balance
of the Period of Employment, an amount equal to the sum of (a) the result of
multiplying (i) the base annual salary payable to Employee pursuant to paragraph
(a) of Section 4 as of the date of termination of the Period of Employment by
(ii) the number of years (and fractions thereof) then remaining in the Period of
Employment and (b) the result of multiplying (i) the average of the bonuses
payable to Employee pursuant to paragraph (b) of Section 4 or otherwise during
the three fiscal years immediately preceding the date of the termination of the
Period of Employment by (ii) the number of years (and fractions thereof) then
remaining in the Period of Employment.
"Breach" and "Just Cause" shall mean the continuing failure by
Employee to perform substantially his duties with Employer (other than such
failure resulting from incapacity due to physical or mental illness) after a
demand for substantial performance has been delivered to Employee by the Board
of Directors of Western; conviction of a felony involving an act of moral
turpitude; absenteeism not related to illness, sick leave or vacations, but only
after notice from the Board of Directors followed by repetition of such
absenteeism; material act of dishonesty; conflicts of interest after notice in
writing from the Board of Directors and a reasonable opportunity to remove the
conflicts; or such other behavior that has a direct, substantial and adverse
effect on Employer so as to be injurious to Employer or to Western.
Notwithstanding the foregoing, Employee
-5-
<PAGE>
shall not be deemed to have been terminated for Breach or Just Cause unless and
until there shall have been delivered to him a copy of a resolution duly adopted
by the affirmative vote of not less than a majority of the entire incumbent
membership of the Board of Directors of Employer at a meeting of the Board of
Directors called and held (after reasonable notice to Employee and an
opportunity for Employee, together with Employee's counsel, to be heard before
the Board of Directors) for the purpose of determining whether in the good faith
opinion of the Board of Directors Employer has Just Cause to terminate
Employee's employment. Termination by Employee for "Good Reason" shall mean
termination by Employee under the following circumstances: (i) Employee
exercises his right to terminate this agreement pursuant to Section 1(b) hereof;
(ii) Employer requires Employee to be based anywhere other than the principal
offices of Employer in Santa Monica, California (except for travel as reasonably
required in the performance of his duties hereunder); (iii) Employer fails to
pay Employee the compensation provided for in this Agreement for more than ten
business days after receipt of written notice of such nonpayment from Employee;
(iv) Employer materially breaches this agreement after Employee has given
written notice to Employer of such breach and has given Employer thirty days to
rectify the matter complained of; or (v) Employee fails to be elected or
reelected as a director of Western.
(b) TERMINATION BY EMPLOYER FOR BREACH OR JUST CAUSE.
If Employer should terminate the Period of Employment for Breach
or Just Cause, Employee will be entitled to be paid the base annual salary
otherwise payable to Employee under paragraph (a) of Section 4 through the date
the resolution of the Board of Directors is delivered to Employee pursuant to
Section 6(a) above.
7. NON-DISCLOSURE.
Employee shall not, at any time during or following the Period of
Employment, disclose, use, transfer or sell, except in the course of employment
with Employer, any confidential information or proprietary data of Employer so
long as such information or proprietary data remains confidential and has not
been disclosed or is not otherwise in the public domain, except as required by
law or pursuant to legal process.
-6-
<PAGE>
8. NONCOMPETITION AGREEMENT.
(a) Subject to Section 6(a) hereof, if Employee is terminated
for Breach or Just Cause, Employee hereby agrees that from the Effective Date
until the second anniversary of the date of the termination of the Period of
Employment (the "Non-Competition Period"), Employee will not (i) engage in the
banking business other than on behalf of Employer within the Designated Area (as
hereinafter defined), (ii) directly or indirectly own, manage, operate, control,
be employed by, or provide management or consulting services in any capacity to
any firm, corporation, or other entity (other than Employer) engaged in the
banking business in the Designated Area, or (iii) directly or indirectly solicit
or otherwise intentionally cause any employee, officer, or member of the
respective Boards of Directors of Employer or Western to engage in any action
prohibited under (i) or (ii) of this Section 8(a); provided that the ownership
by Employee as an investor of not more than one percent of the outstanding
shares of stock of any corporation whose stock is listed for trading on any
securities exchange or is quoted on the automated quotation system of the
National Association of Securities Dealers, Inc., or the shares of any
investment company as defined in section 3 of the Investment Company Act of
1940, as amended, shall not in itself constitute a violation of Employee's
obligations under this Section 8(a).
(b) Employee acknowledges and agrees that irreparable injury
will result to Employer and Western in the event of a breach of any of the
provisions of this Section 8 (the "Designated Provisions") and that Employer and
Western will have no adequate remedy at law with respect thereto. Accordingly,
in the event of a material breach of any Designated Provision, and in addition
to any other legal or equitable remedy Employer or Western may have, Employer
and Western shall be entitled to the entry of a preliminary injunction and a
permanent injunction (including, without limitation, specific performance) by a
court of competent jurisdiction in Los Angeles, California, to restrain the
violation or breach thereof by Employee or any affiliates, agents, or any other
persons acting for or with Employee in any capacity whatsoever, and Employee
submits to the jurisdiction of such court in any such action.
(c) It is the desire and intent of the parties that the
provisions of this Section 8 shall be enforced to the fullest extent permissible
under the laws and public
-7-
<PAGE>
policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular provision of this Section 8 shall be adjudicated
to be invalid or unenforceable, such provision shall be deemed amended to delete
therefrom the portion thus adjudicated to be invalid or unenforceable, such
deletion to apply only with respect to the operation of such provision in the
particular jurisdiction in which such adjudication is made. In addition, should
any court determine that the provisions of this Section 8 shall be unenforceable
with respect to scope, duration, or geographic area, such court shall be
empowered to substitute, to the extent enforceable, provisions similar hereto or
other provisions so as to provide to Employer and Western, to the fullest extent
permitted by applicable law, the benefits intended by this Section 8.
(d) As used herein, "Designated Area" shall mean the California
counties of Orange and Los Angeles.
(e) This Section 8 shall be of no force or effect and shall not
survive the end of the Period of Employment, provided that the Period of
Employment has not been terminated earlier than the third anniversary of the
Effective Date for Breach or Just Cause as defined in Section 6(a).
9. REPRESENTATIONS AND WARRANTIES.
(a) Employee represents and warrants to Employer that his
execution, delivery, and performance of this Agreement will not result in or
constitute a breach of, or conflict with, any term, covenant, condition, or
provision of any commitment, contract, or other agreement or instrument,
including, without limitation, any other employment agreement to which Employee
is or has been a party.
(b) Employee shall indemnify, defend, and hold harmless
Employer and Western for, from and against any and all losses, claims, suits,
damages, expenses, or liabilities, including court costs and counsel fees, that
Employer or Western has incurred or to which Employer or Western may become
subject, insofar as such losses, claims, suites, damages, expenses, liabilities,
costs, or fees arise out of or are based upon any failure of any representation
or warranty of Employee in Section 9(a) hereof to be true and correct when made.
-8-
<PAGE>
10. INDEMNIFICATION OF EMPLOYEE.
Employer shall, to the maximum extent permitted by law, indemnify
and hold Employee harmless for any acts or decisions made in good faith while
performing services for Employer. To the same extent, Employer will pay, and
subject to any legal limitations, advance all expenses, including reasonable
attorney's fees and costs, of court-approved settlements actually and
necessarily incurred by Employee in connection with the defense of any action,
suit or proceeding and in connection with any appeal that has been brought
against Employee by reason of his service as an officer or agent of Employer.
Employer shall use its best efforts to obtain coverage for
Employee (provided it may be obtained at a reasonable cost) under any liability
insurance policy or policies now in force of hereafter obtained during the term
of this Agreement that cover other officers of Employer having comparable or
lesser status and responsibility.
11. GOVERNING LAW.
This Agreement is governed by and is to be construed and enforced
in accordance with the laws of the State of California. If under such law, any
portion of this Agreement is at any time deemed to be in conflict with any
applicable statute, rule, regulation or ordinance, such portion shall be deemed
to be modified or altered to conform thereto or, if that is not possible, to be
omitted from this Agreement; the invalidity of any such portion shall not affect
the force, effect and validity of the remaining portion hereof.
12. NOTICES.
All notices under this Agreement shall be in writing and shall be
deemed effective when delivered in person, or forty-eight (48) hours after
deposit thereof in the U.S. mails, postage prepaid, for delivery as registered
or certified mail, addressed, in the case of:
-9-
<PAGE>
(a) Employee, to:
Aubrey L. Austin
c/o Santa Monica Bank
1251 Fourth Street
Santa Monica, California 90401
(b) Employer, to:
Western Bancorp
1251 Westwood Blvd.
Los Angeles, California 90024
Attention: Matthew P. Wagner
In lieu of personal notice or notice by deposit in the U.S. mail,
a party may give notice by confirmed telegram, telex or fax.
13. MISCELLANEOUS.
(a) ENTIRE AGREEMENT.
This Agreement constitutes the entire understanding between
Employer and Employee relating to employment of Employee by Employer and
supersedes and cancels all prior written and oral agreements and understandings
with respect to the subject matter of this Agreement. This Agreement may be
amended but only by a subsequent written agreement of the parties. This
Agreement shall be binding upon and shall inure to the benefit of Employee,
Employee's heirs, executors, administrators and beneficiaries, and Employer and
its successors.
(b) WITHHOLDING TAXES.
All amounts payable to Employee under this Agreement shall be
subject to applicable withholding of income, wage and other taxes.
14. DEATH OF EMPLOYEE.
If Employee dies prior to the expiration of the Period of
Employment, any sums that may be due him from Employer under this Agreement as
of the date of death shall be paid to Employee's executors, administrators,
heirs, personal representatives, successors and assigns.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the year and day first above written.
WESTERN BANCORP
By: /s/ Julius G. Christensen
------------------------------
Name: Julius G. Christensen
Title: EVP, General Counsel and
Secretary
WESTERN BANK
By: /s/ Julius G. Christensen
------------------------------
Name: Julius G. Christensen
Title: EVP
/s/ Aubrey L. Austin
------------------------------
Aubrey L. Austin
-11-
<PAGE>
WESTERN BANCORP
4100 NEWPORT PLACE, SUITE 900
NEWPORT BEACH, CALIFORNIA 92660
March 19, 1998
To: Executives of Western Bancorp and Subsidiaries
From: Matthew P. Wagner
Subject: Western Bancorp Executive Severance Plan
Western Bancorp has adopted the Western Bancorp Executive Severance Plan
(the "Plan"), as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS
Whenever used in this Plan, the following capitalized terms shall have the
meanings set forth in this Section 1.1, certain other capitalized terms
being defined elsewhere in this Plan:
(a) "Board" means the Board of Directors of the Company.
(b) "Change in Control" shall mean the occurrence of any of the
following:
(i) Any "Person" or "Group" (as such terms are defined in
Section 13(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules and regulations promulgated
thereunder) is or becomes the "Beneficial Owner" (within the
meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company, or of any entity
resulting from a merger or consolidation involving the Company,
representing more than fifty percent (50%) of the combined voting
power of the then outstanding securities of the Company or such
entity.
(ii) The individuals who, as of the date hereof, are
members of the Board (the "Existing Directors"), cease, for any
reason, to constitute more than fifty percent (50%) of the number
of authorized directors of the Company as determined in the
manner prescribed in the
<PAGE>
Company's Articles of Incorporation and Bylaws; PROVIDED,
HOWEVER, that if the election, or nomination for election, by
the Company's stockholders of any new director was approved
by a vote of at least fifty percent (50%) of the Existing
Directors, such new director shall be considered an Existing
Director; PROVIDED FURTHER, HOWEVER, that no individual shall
be considered an Existing Director if such individual
initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11
promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies by or on behalf of anyone
other than the Board (a "Proxy Contest"), including by reason
of any agreement intended to avoid or settle any Election
Contest or Proxy Contest.
(iii) The consummation of (x) a merger, consolidation or
reorganization to which the Company is a party, whether or not
the Company is the Person surviving or resulting therefrom, or
(y) a sale, assignment, lease, conveyance or other disposition of
all or substantially all of the assets of the Company, in one
transaction or a series of related transactions, to any Person
other than the Company, where any such transaction or series of
related transactions as is referred to in clause (x) or clause
(y) above in this subparagraph (iii) (a "Transaction") does not
otherwise result in a "Change in Control" pursuant to
subparagraph (i) of this definition of "Change in Control";
PROVIDED, HOWEVER, that no such Transaction shall constitute a
"Change in Control" under this subparagraph (iii) if the Persons
who were the shareholders of the Company immediately before the
consummation of such Transaction are the Beneficial Owners,
immediately following the consummation of such Transaction, of
fifty percent (50%) or more of the combined voting power of the
then outstanding voting securities of the Person surviving or
resulting from any merger, consolidation or reorganization
referred to in clause (x) above in this subparagraph (iii) or the
Person to whom the assets of the Company are sold, assigned,
leased, conveyed or disposed of in any transaction or series of
related transactions referred in clause (y) above in this
subparagraph (iii).
-2-
<PAGE>
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Company" means Western Bancorp, a California corporation, and any
successor or assignee as provided in Article V.
(e) "Compensation" means your highest annual compensation for any calendar
year in the three calendar years ending with the calendar year which
includes the date of your termination of employment with the Company
and its Subsidiaries, with your compensation for any such calendar
year in which you do not complete twelve (12) months of service being
annualized on the basis of a twelve (12) month year. For purposes of
determining your "Compensation," your annual compensation for any
calendar year or portion thereof shall be limited to your base salary,
your nonaccountable automobile and other expense allowances, and your
bonus attributable to such calendar year regardless of when paid (or,
if you did not receive a bonus for a calendar year, your target
bonus), before reductions for any amounts excludable from your gross
income for federal income tax purposes pursuant to Section 125 or
Section 401(k) of the Code or under any nonqualified deferred
compensation plan. "Compensation" shall NOT include your income from
the grant or vesting of restricted stock, or from the grant, vesting,
or exercise of stock options.
(f) "Disability" means a physical or mental infirmity which substantially
impairs your ability to perform your material duties for a period of
at least one hundred eighty (180) consecutive calendar days, and, as a
result of such Disability, you have not returned to your full-time
regular employment prior to termination.
(g) "Employee Grade" means the grade within the compensation system to
which you are assigned by the Company.
(h) "Executive" means a regular full-time salaried or hourly employee of
the Company or its Subsidiaries in Employee Grades 1, 2, 3, A or B who
does not have an individual agreement with the Company or its
Subsidiaries regarding severance payments.
(i) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(j) "Good Reason" means any of the following events, provided that you
give the Company or its Subsidiary
-3-
<PAGE>
at least thirty (30) days prior written notice of your termination
with the Company or its Subsidiary:
(i) a reduction by the Employer in the your base salary as in effect
immediately before such reduction; or
(ii) a diminution in your duties and responsibilities, as in effect
immediately before the Change in Control, or an adverse change, after
the occurrence of a Change in Control, in your place in the Company's
organization chart or in the seniority of the individual to whom you
report; or
(iii) a material reduction in the your annual target bonus opportunity
(if any) (for this purpose, a reduction for any year of over ten
percent (10%) of your annual target bonus opportunity (if any)
measured by the preceding year shall be considered "material"); or
(iv) a material reduction in your Welfare Benefits (for this purpose,
a reduction for any one year of over ten percent (10%) of aggregate
Welfare Benefits shall be considered "material"); or
(v) the failure by the Company or its Subsidiaries to provide and
credit you with the number of accrued annual leave days to which you
are then entitled in accordance with the Company's normal annual leave
policy as in effect immediately before the Change in Control; or
(vi) the Employer's requiring you to be based more than twenty five
(25) miles from the location of your place of employment immediately
before the Change in Control, except for normal business travel in
connection with your duties with the Company or its Subsidiaries.
(k) "Just Cause" means:
(i) the willful and continued failure by you to perform
substantially your duties with the Company and its Subsidiaries, and
such willful and continued failure continues after a demand for
substantial performance is delivered to you by the Company or its
Subsidiaries which specifically identifies the manner in which you
have not substantially performed your duties; or
(ii) the willful engaging by you in conduct which is materially and
demonstrably injurious to the
-4-
<PAGE>
business or reputation of the Company or its Subsidiaries.
For purposes of determining whether "Just Cause" exists, no act or failure
to act on your part shall be considered "willful" unless done, or omitted
to be done, by you in bad faith and without reasonable belief that the
action or omission was in, or not opposed to, the best interests of the
Company and its Subsidiaries.
(l) "Multiplier" for each Employee Grade shall be the number set forth
opposite such Employee Grade below:
<TABLE>
<CAPTION>
Employee Grade Multiplier
-------------- ----------
<S> <C>
Grade One 3
Grade Two 2
Grade Three 2
Grade A 2
Grade B 1
</TABLE>
(m) "Person" shall have the meaning set forth in the definition of
"Change in Control."
(n) "Release" means the Separation and General Release Agreement in the
form attached hereto as Exhibit "A".
(o) "Severance Payment" means the payment of severance compensation as
provided in Article III.
(p) "Severance Period" means the number of whole months equal to the
product of 12 multiplied by the Multiplier for your Employee Grade,
beginning on the date of your termination of employment with the
Company and its Subsidiaries.
(q) "Subsidiary" means any corporation or other Person, a majority of the
voting power, equity securities or equity interest of which is owned
directly or indirectly by the Company.
(r) "WARN" means the Worker Adjustment and Retraining Notification
Act, 29 U.S.C. Section 2101 ET SEQ.
(s) "Welfare Benefits" means the medical, dental, disability and life
insurance coverages (including coverage under self-insured
arrangements or plans) which the Company or its Subsidiaries provide
to you or your dependents immediately before a Change in Control.
-5-
<PAGE>
ARTICLE II
INDEMNIFICATION AND GROSS-UP FOR EXCISE TAXES
2.1 INDEMNIFICATION AND GROSS-UP
The Company hereby indemnifies you and holds you harmless from and
against any and all liabilities, costs and expenses (including, without
limitation, attorney's fees and costs) you may incur as a result of the
excise tax imposed by Section 4999 of the Code or any similar provision of
state or local income tax law (the "Excise Tax"), to the end that you shall
be placed in the same tax position with respect to the Severance Payment
under this Plan and all other payments from the Company to you in the nature
of compensation as you would have been in if the Excise Tax had never been
enacted. In furtherance of such indemnification, the Company shall pay to
you a payment (the "Gross-Up Payment") in an amount such that, after payment
by you of all taxes, including income taxes and the Excise Tax imposed on the
Gross-Up Payment and any interest or penalties (other than interest and
penalties imposed by reason of your failure to file timely tax returns or to
pay taxes shown due on such returns and any tax liability, including interest
and penalties, unrelated to the Excise Tax or the Gross-Up Amount), you shall
be placed in the same tax position with respect to the Severance Payment
under this Plan and all other payments from the Company to you in the nature
of compensation as you would have been in if the Excise Tax had never been
enacted. At such time or times necessary to carry out the purposes of this
Article II in view of the withholding requirement of Section 4999(c)(1) of
the Code, the Company shall pay to you one or more Gross-Up Payments for the
Severance Payment and any other payments in the nature of compensation which
the Company determines are "excess parachute payments" under Section
280G(b)(1) of the Code ("Excess Parachute Payments"). If, through a
determination of the Internal Revenue Service or any state or local taxing
authority (a "Taxing Authority"), or a judgement of any court, you become
liable for an amount of Excise Tax not covered by the Gross-Up Payment
payable pursuant to the preceding sentence, the Company shall pay you an
additional Gross-Up Payment to make you whole for such additional Excise Tax;
PROVIDED, HOWEVER, that, pursuant to Section 2.3, the Company shall have the
right to require you to protest, contest, or appeal any such determination or
judgement. For purposes of this Article II, any amount which the Company is
required to withhold under Sections 3402 or 4999 of the Code or under any
other provision of law shall be deemed to have been paid to you.
-6-
<PAGE>
2.2 REPORTING
Upon payment to you of a Gross-Up Payment, the Company shall provide you
with a written statement showing the Company's computation of such Gross-Up
Payment and the Excess Parachute Payments and Excise Tax to which it relates,
and setting forth the Company's determination of the amount of gross income you
are required to recognize as a result of such payments and your liability for
the Excise Tax. You shall cause your federal, state, and local income tax
returns for the period in which you receive such Gross-Up Payment to be prepared
and filed in accordance with such statement, and, upon such filing, you shall
certify in writing to the Company that such returns have been so prepared and
filed. At your request, the Company shall furnish to you, at no cost to you,
assistance in preparing your federal, state, and local income tax returns for
the period in which you receive such Gross-Up Payment in accordance with such
statement. Notwithstanding the provisions of Section 2.1, the Company shall not
be obligated to indemnify you from and against any tax liability, cost or
expense (including, without limitation, any liability for the Excise Tax or
attorney's fees or costs) to the extent such tax liability, cost or expense is
attributable to your failure to comply with the provisions of this Section 2.2.
2.3 CONTROVERSIES
If any controversy arises between you and a Taxing Authority with respect
to the treatment on any return of the Gross-Up Amount, or of any payment you
receive from the Company as an Excess Parachute Payment, or with respect to any
return which a Taxing Authority asserts should show an Excess Parachute Payment,
including, without limitation, any audit, protest to an appeals authority of a
Taxing Authority or litigation (a "Controversy"), the Company shall have the
right to participate with you in the handling of such Controversy. The Company
shall have the right, solely with respect to a Controversy, to direct you to
protest or contest any proposed adjustment or deficiency, initiate an appeals
procedure within any Taxing Authority, commence any judicial proceeding, make
any settlement agreement, or file a claim for refund of tax, and you shall not
take any of such steps without the prior written approval of the Company, which
the Company shall not unreasonably withhold. If the Company elects, you shall
be represented in any Controversy by attorneys, accountants, and other advisors
selected by the Company, and the Company shall pay the fees, costs and expenses
of such attorneys, accountants, or advisors, and any tax liability you may incur
as a result of such payment. You shall promptly notify the Company of any
communication with a
-7-
<PAGE>
Taxing Authority, and you shall promptly furnish to the Company copies of any
written correspondence, notices, or documents received from a Taxing
Authority relating to a Controversy. You shall cooperate fully with the
Company in the handling of any Controversy by furnishing to the Company any
information or documentation relating to or bearing upon the Controversy;
PROVIDED, HOWEVER, that you shall not be obligated to furnish to the Company
copies of any portion of your tax returns which do not bear upon, and are not
affected by, the Controversy.
2.4 REFUNDS
You shall pay over to the Company, within ten (10) days after your receipt
thereof, any refund you receive from any Taxing Authority of all or any portion
of the Gross-Up Payment or the Excise Tax, together with any interest you
receive from such Taxing Authority on such refund. For purposes of this Section
2.4, a reduction in your tax liability attributable to the previous payment of
the Gross-Up Amount or the Excise Tax shall be deemed to be a refund. If you
would have received a refund of all or any portion of the Gross-Up Payment or
the Excise Tax, except that a Taxing Authority offset the amount of such refund
against other tax liabilities, interest, or penalties, you shall pay the amount
of such offset over to the Company, together with the amount of interest you
would have received from the Taxing Authority if such offset had been an actual
refund, within ten (10) days after receipt of notice from the Taxing Authority
of such offset.
ARTICLE III
SEVERANCE PAYMENTS
3.1 RIGHT TO SEVERANCE PAYMENT; RELEASE
Conditioned on the execution and delivery by you (or your beneficiary or
personal representative, if applicable) of the Release, you shall be entitled to
receive a Severance Payment from the Company in the amount provided in Section
3.2 if (a) you are an Executive, and (b) within twenty four (24) months after
the occurrence of a Change in Control, your employment with the Company and its
Subsidiaries terminates for any reason other than:
(a) Death,
(b) Disability,
(c) Termination by the Company or its Subsidiaries for Just Cause,
-8-
<PAGE>
(d) Retirement in accordance with the normal retirement policy of the
Company,
(e) Voluntary termination by you for other than Good Reason, or
(f) The sale by the Company of the Subsidiary which employed you before
such sale, if you have been offered employment with the purchaser of
such Subsidiary on substantially the same terms and conditions under
which such you worked for the Subsidiary before the sale.
If your employment with the Company or its Subsidiaries terminates before the
occurrence of a Change in Control for any reason other than one of those
enumerated immediately above, your employment will be deemed to have terminated
on the day after the occurrence of the Change in Control if (i) your employment
terminates within ninety (90) days before a Change in Control actually occurs,
or (ii) you reasonably demonstrate that the Company or its Subsidiaries
involuntarily terminated your employment, or gave you Good Reason, at the
request of a Person (other than the Company or its Subsidiaries) who has
indicated an intention or taken steps reasonably calculated to effect a Change
in Control, or otherwise in connection with, or in anticipation of, a Change in
Control which actually occurs.
3.2 AMOUNT OF SEVERANCE PAYMENT
If you become entitled to a Severance Payment under this Plan, the amount
of your Severance Payment, when added to any payments which the Company or its
Subsidiaries are required to make to you under WARN, shall equal the product of
your Compensation multiplied by the Multiplier for your Employee Grade.
3.3 NO MITIGATION
The Company acknowledges and agrees that you shall be entitled to receive
your entire Severance Payment regardless of any income which you may receive
from other sources following your termination on or after the Effective Time.
-9-
<PAGE>
3.4 PAYMENT OF SEVERANCE PAYMENT
The Severance Payment to which you are entitled shall be paid to you, in
cash and in full, not later than eight (8) calendar days after execution and
delivery by you (or your beneficiary or personal representative, if applicable)
of the Release Agreement, but in no event before the date on which such Release
becomes effective. If you should die before all amounts payable to you have
been paid, such unpaid amounts shall be paid to your beneficiary under this Plan
or, if you have not designated such a beneficiary in writing to the Company, to
the personal representative(s) of your estate.
3.5 WELFARE BENEFITS
If you are entitled to receive a Severance Payment under Section 3.1,
you will also be entitled to receive continued Welfare Benefits on the same
basis, including required employee contributions, if any, as in effect for
similarly-situated Executives in the employ of the Company or its
Subsidiaries, for your Severance Period. Notwithstanding the foregoing, your
right to any particular type of Welfare Benefit shall be subject to
cancellation by the Company if you or your dependents obtain alternative
coverage of a similar type during the Severance Period; provided, however,
that if any such alternative group health coverage excludes any pre-existing
condition that you or your dependents may have when coverage under such group
health plan would otherwise begin, coverage under this Section 3.5 shall
continue (but not beyond the Severance Period) with respect to such
pre-existing condition until such exclusion under such other group health
plan lapses or expires. You shall be obligated to notify the Company's Human
Resources Department of any such alternative coverage within thirty (30) days
of its first becoming applicable to you or your dependents. In the event you
are required to make an election under Sections 601 through 607 of ERISA
(commonly known as COBRA) to qualify for continuing health benefits coverage
described in this Section 3.5, the obligations of the Company and its
Subsidiaries under this Section 3.5 to continue your health benefits coverage
shall be conditioned upon your timely making such an election.
3.6 AUTOMOBILE
If you become entitled to receive a Severance Payment under Section 3.1,
and you then have the use of an automobile that is provided to you at the
expense of the Company or any Subsidiary, you shall have the right, for ninety
(90) days following your termination of employment, (a) to continue your use of
the automobile on the same basis on which you used it immediately before your
termination of employment, or (b) to purchase the automobile from the Company or
Subsidiary
-10-
<PAGE>
for its low wholesale bluebook value, or, if the Company or Subsidiary has
leased the automobile, to assume the lease, or (c) to take the actions
described in clauses (a) and (b) of this sentence.
3.7 OUTPLACEMENT SERVICES
If you become entitled to receive a Severance Payment under Section 3.1,
you will also become entitled to receive outplacement services in accordance
with the Company's usual practice.
3.8 WITHHOLDING OF TAXES
The Company may withhold from any amounts payable under this Plan all
federal, state, city or other taxes required by applicable law to be withheld by
the Company.
ARTICLE IV
OTHER RIGHTS AND BENEFITS NOT AFFECTED
4.1 OTHER BENEFITS
This Plan does not provide a pension for you, nor shall any payment
hereunder be characterized as deferred compensation. Except as set forth in
Section 4.2, neither the provisions of this Plan nor the Severance Payment
provided for hereunder shall reduce any amounts otherwise payable, or in any way
diminish your rights as an employee, whether existing now or hereafter, under
any written benefit, incentive, retirement, stock option, stock bonus or stock
purchase plan or any written employment agreement or other written plan or
arrangement not related to severance.
4.2 OTHER SEVERANCE PLANS SUPERSEDED
As of the Effective Time, this Plan will supersede any and all other
severance plans of the Company or its Subsidiaries to the extent they apply to
Executives (except for any individual severance agreement between you and the
Company and its Subsidiaries), and your participation in any other severance
plan of the Company and its Subsidiaries will be hereby terminated.
4.3 EMPLOYMENT STATUS
This Plan does not constitute a contract of employment or impose on you any
obligation to remain in the employ of the Company, nor does it impose on the
Company or any of its Subsidiaries any obligation to retain you in your present
or any other position, nor does it change the status of your
-11-
<PAGE>
employment as an employee at will. Nothing in this Plan shall in any way
affect the right of the Company or any of its Subsidiaries in its absolute
discretion to change or reduce your compensation at any time, or to change at
any time one or more benefit plans, including but not limited to pension
plans, dental plans, health care plans, savings plans, bonus plans, vacation
pay plans, disability plans, and the like.
ARTICLE V
SUCCESSOR TO COMPANY
The Company shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Company, expressly and
unconditionally to assume and agree to perform the Company's obligations under
this Plan, in the same manner and to the same extent that the Company would be
required to perform if no such succession or assignment had taken place. In
such event, the term "Company," as used in this Plan, shall mean (from and
after, but not before, the occurrence of such event) the Company as herein
before defined and any successor or assignee to the business or assets which by
reason hereof becomes bound by the terms and provisions of this Plan.
ARTICLE VI
CONFIDENTIALITY
6.1 NONDISCLOSURE OF CONFIDENTIAL MATERIAL
In the performance of your duties, you have previously had, and may in
the future have, access to confidential records and information, including,
but not limited to, development, marketing, purchasing, organizational,
strategic, financial, managerial, administrative, manufacturing, production,
distribution and sales information, data, specifications and processes
presently owned or at any time hereafter developed by the Company or its
agents or consultants or used presently or at any time hereafter in the
course of its business, that are not otherwise part of the public domain
(collectively, the "Confidential Material"). All such Confidential Material
is considered secret and has been and/or will be disclosed to you in
confidence. By your acceptance of your Severance Payment under this Plan,
you shall be deemed to have acknowledged that the Confidential Material
constitutes proprietary information of the Company which draws independent
economic value, actual or potential, from not being generally known to the
public or to other persons who could obtain economic value from its
disclosure or use, and that the Company has taken efforts reasonable under
the circumstances, of which this Section 6.1 is an
-12-
<PAGE>
example, to maintain its secrecy. Except in the performance of your duties to
the Company, you shall not, directly or indirectly for any reason whatsoever,
disclose or use any such Confidential Material, except that the foregoing
disclosure prohibition shall not apply as to Confidential Material that (i)
has been publicly disclosed or was within your possession prior to its being
furnished to you by the Company or becomes available to you on a
nonconfidential basis from a third party (in any of such cases, not due to a
breach by you of your obligations to the Company or by breach of any other
person of a confidential, fiduciary or confidential obligation, the breach of
which you know or reasonably should know), (ii) is required to be disclosed
by you pursuant to applicable law, and you provide notice to the Company of
such requirement as promptly as possible, or (iii) was independently acquired
or developed by you without violating any of the obligations under this Plan
and without relying on Confidential Material of the Company. All records,
files, drawings, documents, equipment and other tangible items, wherever
located, relating in any way to the Confidential Material or otherwise to the
Company's business, which you have prepared, used or encountered or shall in
the future prepare, use or encounter, shall be and remain the Company's sole
and exclusive property and shall be included in the Confidential Material.
Upon your termination of employment with the Company, or whenever requested
by the Company, you shall promptly deliver to the Company any and all of the
Confidential Material and copies thereof, not previously delivered to the
Company, that may be, or at any previous time has been, in your possession or
under your control.
6.2 NONSOLICITATION OF EMPLOYEES
By your acceptance of your Severance Payment under this Plan, you agree
that, for a period of two (2) years following your termination of employment
with the Company or its Subsidiaries, neither you nor any Person or entity in
which you have an interest shall solicit any person who was employed on the date
of your termination of employment by the Company or any of its Subsidiaries to
leave the employ of the Company or any of its Subsidiaries. Nothing in this
Section 6.2, however, shall prohibit you or any Person or entity in which you
have an interest from placing advertisements in periodicals of general
circulation soliciting applications for employment, or from employing any person
who answers any such advertisement. For purposes of this Section 6.2, you shall
not be deemed to have an interest in any corporation whose stock is publicly
traded merely because you are the owner of not more than two percent (2%) of the
outstanding shares of any class of stock of such corporation, provided you have
no active participation in the business of such corporation (other than voting
your stock) and you do not
-13-
<PAGE>
provide services to such corporation in any capacity (whether as an employee,
an independent contractor or consultant, a board member, or otherwise).
6.3 EQUITABLE RELIEF
By your acceptance of your Severance Payment under this Plan, you shall be
deemed to have acknowledged that violation of Sections 6.1 or 6.2 would cause
the Company irreparable damage for which the Company cannot be reasonably
compensated in damages in an action at law, and that therefore in the event of
any breach by you of Sections 6.1 or 6.2, the Company shall be entitled to make
application to a court of competent jurisdiction for equitable relief by way of
injunction or otherwise (without being required to post a bond). This provision
shall not, however, be construed as a waiver of any of the rights which the
Company may have for damages under this Plan or otherwise, and, except as
limited in Article VII, all of the Company's rights and remedies shall be
unrestricted.
ARTICLE VII
ARBITRATION
Except for equitable relief as provided in Section 6.3, arbitration in
accordance with the then most applicable rules of the American Arbitration
Association shall be the exclusive remedy for resolving any dispute or
controversy between you and the Company or any of its Subsidiaries, including,
but not limited to, any dispute regarding your employment or the termination of
your employment or any dispute regarding the application, interpretation or
validity of this Plan not otherwise resolved through the claims procedure set
forth in Section 8.10. The arbitrator shall be empowered to grant only such
relief as would be available in a court of law. In the event of any conflict
between this Plan and the rules of the American Arbitration Association, the
provisions of this Plan shall be determinative. If the parties are unable to
agree upon an arbitrator, they shall select a single arbitrator from a list
designated by the office of the American Arbitration Association having
responsibility for the city in which you primarily performed services for the
Company or its Subsidiaries immediately before your termination of employment of
seven arbitrators, all of whom shall be retired judges who are actively involved
in hearing private cases or members of the National Academy of Arbitrators, and
who, in either event, are residents of the area in which you primarily performed
services for the Company or its Subsidiaries immediately before your termination
of employment. If the parties are unable to agree upon an arbitrator from such
list, they shall each
-14-
<PAGE>
strike names alternatively from the list, with the first to strike being
determined by lot. After each party has used three strikes, the remaining
name on the list shall be the arbitrator. The fees and expenses of the
arbitrator shall initially be borne equally by the parties; PROVIDED,
HOWEVER, that each party shall initially be responsible for the fees and
expenses of its own representatives and witnesses. Unless mutually agreed
otherwise by the parties, any arbitration shall be conducted at a location
within fifty (50) miles from the location in which you primarily performed
services for the Company or any of its Subsidiaries immediately before your
termination of employment. If the parties cannot agree upon a location for
the arbitration, the arbitrator shall determine the location within such
fifty (50) mile radius. Judgment may be entered on the award of the
arbitrator in any court having jurisdiction. The prevailing party in the
arbitration proceeding, as determined by the arbitrator, and in any
enforcement or other court proceedings, shall be entitled to the extent
provided by law to reimbursement from the other party for all of the
prevailing party's costs (including but not limited to the arbitrator's
compensation), expenses and reasonable attorney's fees.
ARTICLE VIII
MISCELLANEOUS
8.1 APPLICABLE LAW
To the extent not preempted by the laws of the United States, the laws of
the State of California shall be the controlling law in all matters relating to
this Plan, regardless of the choice-of-law rules of the State of California or
any other jurisdiction.
8.2 CONSTRUCTION
No term or provision of this Plan shall be construed so as to require the
commission of any act contrary to law, and wherever there is any conflict
between any provision of this Plan and any present or future statute, law,
ordinance, or regulation, the latter shall prevail, but in such event the
affected provision of this Plan shall be curtailed and limited only to the
extent necessary to bring such provision within the requirements of the law.
8.3 SEVERABILITY
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of this Plan and
this Plan shall be construed
-15-
<PAGE>
and enforced as if the illegal or invalid provision had not been included.
8.4 HEADINGS
The Section headings in this Plan are inserted only as a matter of
convenience, and in no way define, limit, or extend or interpret the scope of
this Plan or of any particular Section.
8.5 ASSIGNABILITY
Your rights or interests under this Plan shall not be assignable or
transferrable (whether by pledge, grant of a security interest, or otherwise) by
you, your beneficiaries or legal representatives, except by will or by the laws
of descent and distribution.
8.6 TERM
This Plan shall continue in full force and effect until its terms and
provisions are completely carried out, unless terminated by the Board with at
least a two-thirds majority before the occurrence of a Change in Control;
provided, however, that no termination of this Plan shall be effective if made
while the Company (or any Person acting on the Company's behalf) is conducting
negotiations to effect a Change in Control, or within ninety (90) days before
the Company (or any Person acting on its behalf) executes a letter of intent
(whether or not binding) or a definitive agreement to effect a Change in
Control.
8.7 AMENDMENT
This Plan may be amended in any respect by resolution adopted by the Board
with at least a two-thirds majority until Change in Control occurs; provided,
however, that this Section 8.7 shall not be amended, and no amendment shall be
effective if made while the Company (or any Person acting on the Company's
behalf) is conducting negotiations to effect a Change in Control, or within
ninety (90) days before the Company (or any Person acting on its behalf)
executes a letter of intent (whether or not binding) or a definitive agreement
to effect a Change in Control. After a Change in Control occurs, this Plan
shall no longer be subject to amendment, change, substitution, deletion,
revocation or termination in any respect whatsoever. No agreement or
representations, written or oral, express or implied, with respect to the
subject matter hereof, have been made by the Company which are not expressly set
forth in this Plan.
-16-
<PAGE>
8.8 NOTICES
For purposes of this Plan, notices and all other communications provided
for herein shall be in writing and shall be deemed to have been duly given when
personally delivered, telecopied, or sent by certified or overnight mail, return
receipt requested, postage prepaid, addressed to the respective addresses, or
sent to the respective telecopier numbers, last given by each party to the
other, provided that all notices to the Company shall be directed to the
attention of the Board of Directors with a copy to the General Counsel. All
notices and communications shall be deemed to have been received on the date of
delivery thereof if personally delivered, upon return confirmation if
telecopied, on the third business day after the mailing thereof, or on the date
after sending by overnight mail, except that notice of change of address shall
be effective only upon actual receipt. No objection to the method of delivery
may be made if the written notice or other communication is actually received.
8.9 ADMINISTRATION
This Plan constitutes a welfare benefit plan within the meaning of
Section 3(1) of ERISA. This letter constitutes the governing document of the
Plan and the Summary Plan Description under ERISA. The Administrator of the
Plan, within the meaning of Section 3(16) of ERISA, and the Named Fiduciary
thereof, within the meaning of Section 402 of ERISA, is the Company. Attached
hereto as Exhibit "B" is a statement of your rights under ERISA.
8.10 CLAIMS
If you believe you are entitled to a benefit under this Plan, you may make
a claim for such benefit by filing with the Company a written statement setting
forth the amount and type of payment so claimed. The statement shall also set
forth the facts supporting the claim. The claim may be filed by mailing or
delivering it to the Secretary of the Company.
Within sixty (60) calendar days after receipt of such a claim, the Company
shall notify you in writing of its action on such claim and if such claim is not
allowed in full, shall state the following in a manner calculated to be
understood by you:
(a) The specific reason or reasons for the denial;
(b) Specific reference to pertinent provisions of this Plan on
which the denial is based;
-17-
<PAGE>
(c) A description of any additional material or information
necessary for you to be entitled to the benefits that have been
denied and an explanation of why such material or information is
necessary; and
(d) An explanation of this Plan's claim review procedure.
If you disagree with the action taken by the Company, you or your duly
authorized representative may apply to the Company for a review of such action.
Such application shall be made within one hundred twenty (120) calendar days
after receipt by you of the notice of the Company's action on your claim. The
application for review shall be filed in the same manner as the claim for
benefits. In connection with such review, you may inspect any documents or
records pertinent to the matter and may submit issues and comments in writing to
the Company. A decision by the Company shall be communicated to you within
sixty (60) calendar days after receipt of the application. The decision on
review shall be in writing and shall include specific reasons for the decision,
written in a manner calculated to be understood by you, and specific references
to the pertinent provisions of this Plan on which the decision is based.
Sincerely,
WESTERN BANCORP
By:
--------------------- Matthew P. Wagner
President and Chief
Executive Officer
-18-
<PAGE>
Exhibit 21.0
Subsidiaries of Western Bancorp
1. M.B. Mortgage Company, Inc., a California corporation
2. Santa Monica Bank, a California corporation
3. Southern California Bank, a California corporation
4. WBC Management Company, Inc., a California corporation
5. Venture Partners, Inc., a California corporation
6. SMB Development Company, a California Company
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent, as successor accountants of Dayton & Associates (said firm
being merged with and into Vavrinek, Trine, Day & Co. on September 1, 1996)
to the incorporation by reference of their Independent Auditors Report dated
February 29, 1996 regarding the consolidated balance sheets of Monarch
Bancorp and Subsidiaries as of December 31, 1995 and December 31, 1994, and
the related statements of operations, changes in capital, and cash flows for
each of the two years in the period ended December 31, 1995, in the Form 10-K
of Western Bancorp filed with the Securities and Exchange Commission, which
is to be incorporated by reference in the Form S-8 of Western Bancorp related
to its 401(k) Plan.
/s/ VAVRINEK, TRINE, DAY & Co., LLP
March 23, 1998
Laguna Hills, California
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Western Bancorp:
We consent to the incorporation by reference in the registration statement
(No. 333-44609) on Form S-8 of Western Bancorp related to its 401(K) Plan of
our report dated January 30, 1998, relating to the consolidated balance
sheets of Western Bancorp as of December 31, 1997 and 1996 and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the years in the two-year period ended December 31,
1997 which report appears in the December 31, 1997, annual report on Form
10-K of Western Bancorp.
Our report, dated January 30, 1998, contains explanatory paragraphs
indicating that: (i) We did not audit the 1996 consolidated financial
statements of California Commercial Bankshares. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for California Commercial
Bankshares in the 1996 consolidated financial statements of Western Bancorp,
is based on the report of the other auditors; (ii) We did not audit the 1996
consolidated financial statements of SC Bancorp. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for SC Bancorp in the
1996 consolidated financial statements of Western Bancorp, is based on the
report of the other auditors; (iii) The consolidated statements of
operations, changes in shareholders' equity and cash flows of Western Bancorp
(formerly Monarch Bancorp) for the year ended December 31, 1995, prior to
their restatement for the 1997 pooling-of-interests transactions described in
Notes 1 and 2 of notes to the consolidated financial statements, were audited
by other auditors; (iv) Separate consolidated financial statements of
California Commercial Bankshares also included in the 1995 consolidated
financial statements were audited by other auditors; (v) Separate
consolidated financial statements of SC Bancorp also included in the 1995
consolidated financial statements were audited by other auditors; and (iv) We
also audited the combination of the consolidated statements of operations,
changes in shareholders' equity and cash flows for the year ended December
31, 1995, after restatement for the 1997 pooling-of-interests transactions.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 23, 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 24, 1997 (March 17, 1997 as to Notes 8 and 16) on the
consolidated statements of financial condition of California Commercial
Bankshares and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 1996
(such consolidated financial statements are not included herein), appearing
in this Annual Report on Form 10-K of Western Bancorp, for the year ended
December 31, 1997.
Deloitte & Touche LLP
Los Angeles, California
March 23, 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 24, 1997 on the consolidated balance sheet of SC Bancorp
and subsidiary as of December 31, 1996, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1996 (such
consolidated financial statements are not included herein), appearing in this
Annual Report on Form 10-K of Western Bancorp, for the year ended December
31, 1997.
Deloitte & Touche LLP
Los Angeles, California
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 97,456
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 138,702
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 201,904
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 880,734
<ALLOWANCE> 15,894
<TOTAL-ASSETS> 1,383,510
<DEPOSITS> 1,226,793
<SHORT-TERM> 12,751
<LIABILITIES-OTHER> 14,311
<LONG-TERM> 0
0
0
<COMMON> 112,947
<OTHER-SE> 16,708
<TOTAL-LIABILITIES-AND-EQUITY> 1,383,510
<INTEREST-LOAN> 80,639
<INTEREST-INVEST> 15,714
<INTEREST-OTHER> 4,681
<INTEREST-TOTAL> 101,034
<INTEREST-DEPOSIT> 28,276
<INTEREST-EXPENSE> 29,358
<INTEREST-INCOME-NET> 71,676
<LOAN-LOSSES> 2,800
<SECURITIES-GAINS> 342
<EXPENSE-OTHER> 65,757
<INCOME-PRETAX> 12,805
<INCOME-PRE-EXTRAORDINARY> 3,162
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,162
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29
<YIELD-ACTUAL> 5.99
<LOANS-NON> 7,488
<LOANS-PAST> 31
<LOANS-TROUBLED> 9,453
<LOANS-PROBLEM> 13,482
<ALLOWANCE-OPEN> 15,757
<CHARGE-OFFS> 4,165
<RECOVERIES> 1,502
<ALLOWANCE-CLOSE> 15,894
<ALLOWANCE-DOMESTIC> 15,894
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 62,384 96,202
<INT-BEARING-DEPOSITS> 47,938 0
<FED-FUNDS-SOLD> 0 22,517
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 175,494 320,257
<INVESTMENTS-CARRYING> 6,661 7,057
<INVESTMENTS-MARKET> 6,693 7,032
<LOANS> 543,042 817,358
<ALLOWANCE> 13,130 15,757
<TOTAL-ASSETS> 866,385 1,338,913
<DEPOSITS> 774,057 1,177,014
<SHORT-TERM> 7,366 20,290
<LIABILITIES-OTHER> 7,334 12,562
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 68,705 111,326
<OTHER-SE> 8,923 17,721
<TOTAL-LIABILITIES-AND-EQUITY> 866,385 1,338,913
<INTEREST-LOAN> 49,014 58,374
<INTEREST-INVEST> 10,726 12,862
<INTEREST-OTHER> 2,889 3,001
<INTEREST-TOTAL> 62,629 74,237
<INTEREST-DEPOSIT> 19,167 21,382
<INTEREST-EXPENSE> 19,804 22,311
<INTEREST-INCOME-NET> 42,825 51,926
<LOAN-LOSSES> 8,564 1,018
<SECURITIES-GAINS> (692) 281
<EXPENSE-OTHER> 45,609 48,138
<INCOME-PRETAX> (3,522) 12,645
<INCOME-PRE-EXTRAORDINARY> (1,789) 8,989
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,789) 8,989
<EPS-PRIMARY> (0.28) 1.11
<EPS-DILUTED> (0.28) 1.09
<YIELD-ACTUAL> 5.78 5.88
<LOANS-NON> 17,303 16,157
<LOANS-PAST> 0 193
<LOANS-TROUBLED> 4,696 7,057
<LOANS-PROBLEM> 19,058 21,034
<ALLOWANCE-OPEN> 12,115 13,130
<CHARGE-OFFS> 9,577 4,675
<RECOVERIES> 1,411 1,123
<ALLOWANCE-CLOSE> 13,130 15,757
<ALLOWANCE-DOMESTIC> 13,130 15,757
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 95,968 95,295 105,962
<INT-BEARING-DEPOSITS> 0 0 9
<FED-FUNDS-SOLD> 88,426 73,304 84,000
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 277,526 271,848 233,379
<INVESTMENTS-CARRYING> 6,928 6,902 5,365
<INVESTMENTS-MARKET> 6,909 6,902 5,404
<LOANS> 816,370 851,147 875,020
<ALLOWANCE> 15,714 15,345 15,160
<TOTAL-ASSETS> 1,357,268 1,367,665 1,369,815
<DEPOSITS> 1,201,300 1,207,714 1,199,408
<SHORT-TERM> 13,830 18,194 23,733
<LIABILITIES-OTHER> 11,106 10,115 12,147
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 111,152 111,186 111,311
<OTHER-SE> 19,880 20,456 23,216
<TOTAL-LIABILITIES-AND-EQUITY> 1,357,268 1,367,665 1,369,815
<INTEREST-LOAN> 19,045 38,605 59,700
<INTEREST-INVEST> 4,308 8,500 12,343
<INTEREST-OTHER> 612 1,653 2,796
<INTEREST-TOTAL> 23,965 48,758 74,839
<INTEREST-DEPOSIT> 6,676 13,735 20,915
<INTEREST-EXPENSE> 7,015 14,330 21,769
<INTEREST-INCOME-NET> 16,950 34,428 53,070
<LOAN-LOSSES> 725 1,400 2,125
<SECURITIES-GAINS> 107 337 342
<EXPENSE-OTHER> 13,418 29,986 42,766
<INCOME-PRETAX> 5,407 8,256 15,550
<INCOME-PRE-EXTRAORDINARY> 2,976 3,445 7,528
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,976 3,445 7,528
<EPS-PRIMARY> 0.28 0.33 0.72
<EPS-DILUTED> 0.28 0.32 0.70
<YIELD-ACTUAL> 5.95 5.88 5.97
<LOANS-NON> 17,134 14,665 9,468
<LOANS-PAST> 472 422 1,267
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 19,259 18,530 14,960
<ALLOWANCE-OPEN> 15,757 15,757 15,757
<CHARGE-OFFS> 888 2,282 3,743
<RECOVERIES> 121 470 1,021
<ALLOWANCE-CLOSE> 15,715 15,345 15,160
<ALLOWANCE-DOMESTIC> 15,715 15,345 15,160
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
