<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
AUGUST 7, 1998
------------------------------------------------
Date of Report (Date of Earliest Event Reported)
WESTERN BANCORP
------------------------------------------------------
(Exact Name of Registrant As Specified In Its Charter)
CALIFORNIA
----------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-13551 95-3863296
------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
4100 Newport Place, 9th Floor
Newport Beach, California 92660
--------------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
(949) 863-2444
----------------------------------------------------
(Registrant's Telephone Number, including Area Code)
1
<PAGE>
Item 5. Other Events.
On April 16, 1998, Western Bancorp ("Western") entered into an Agreement
and Plan of Merger, which was amended and restated as of June 24, 1998 and
July 16, 1998, by and among Western, Santa Monica Bank and Bank of Los
Angeles ("BKLA"), pursuant to which BKLA will merge with and into Santa
Monica Bank, a wholly-owned subsidiary of Western.
In connection therewith, Western hereby files, as filed with the Federal
Deposit Insurance Corporation, BKLA's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 as Exhibit 99.1 hereto.
Item 7. Financial Statements, Pro forma Financial Statements and Exhibits.
(c) Exhibits.
The following exhibit is filed with this Current Report on Form 8-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
99.1 BKLA's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998
</TABLE>
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: August 7, 1998
WESTERN BANCORP
By: /s/ ARNOLD C. HAHN
-----------------------------------
Name: Arnold C. Hahn
Title: Executive Vice President and
Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
99.1 BKLA's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998
</TABLE>
4
<PAGE>
EXHIBIT 99.1
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
FDIC Certificate Number 23790
BANK OF LOS ANGELES
State of Incorporation: California
IRS Employer ID No. 95-3612029
8901 Santa Monica Boulevard
West Hollywood, California 90069
310-843-1474
Securities registered under 12(b) of the Act
None
Securities Registered under 12(g) of the Act
Common Stock, no par value
Preferred stock, no par value
Indicate by check mark whether the bank (1) has filed all reports required to
be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Bank was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
---
Number of shares outstanding of no par value common stock as of June 30, 1998
are 4,856,200.
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
PART I - FINANCIAL INFORMATION NUMBER
Item 1. Financial statements
Balance sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of income. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of comprehensive income. . . . . . . . . . . . . . . . . . . . 6
Statements of changes in shareholders' equity . . . . . . . . . . . . . . 7
Statements of cash flows. . . . . . . . . . . . . . . . . . . . . . . . . 8
Notes to financial statements . . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Management's Discussion and Analysis
Results of operations for the six months ended June 30, 1998 and 1997 . . 12
Results of operations for the quarters ended June 30, 1998 and 1997 . . . 14
Statement of condition at June 30, 1998 and December 31, 1997 . . . . . . 16
Capital resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II - OTHER INFORMATION
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
<PAGE>
PART I, ITEM 1 - FINANCIAL INFORMATION, FINANCIAL STATEMENTS
Bank of Los Angeles
Balance Sheets
<TABLE>
<CAPTION>
At June 30, December 31,
1998 1997
---------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (unaudited)
ASSETS
Cash and due from banks $ 19,203 $ 20,521
Federal funds sold 14,000 29,555
--------- ---------
Total cash and cash equivalents 33,203 50,076
Interest bearing deposits with banks 1,479 2,125
Securities available for sale 1,491 12,295
Securities held to maturity (market
value of $87,243 at June 30, 1998 and
$48,247 at December 31, 1997) 87,188 48,138
Loans receivable 153,645 142,633
Less allowance for credit losses (2,683) (2,819)
--------- ---------
Loans, net 150,962 139,814
Accrued interest receivable 1,668 1,556
Premises and equipment, net 2,519 2,650
Real estate owned 1,545 1,475
Intangible assets 6,989 7,454
Other assets 2,724 6,450
--------- ---------
Total assets $ 289,768 $ 272,033
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing $ 86,876 $ 85,222
Interest bearing
Time certificates of deposit of $100,000 or more 31,699 30,167
Other 123,977 122,623
--------- ---------
Total deposits 242,552 238,012
Capital lease obligation 1,853 1,849
Borrowing from Federal Home Loan Bank 11,020 ---
Accrued interest payable and other liabilities 792 1,118
--------- ---------
Total liabilities 256,217 240,979
--------- ---------
--------- ---------
Shareholders' equity
Preferred stock; 25,000,000 shares; no shares issued
and outstanding --- ---
Common stock, no par value; authorized, 75,000,000
shares: issued and outstanding; 4,856,200 common
shares at June 30, 1998, 4,751,685 common shares
at December 31, 1997. 31,042 30,630
Retained earnings 2,509 472
Net unrealized holding loss on securities available
for sale --- (48)
--------- ---------
Total shareholders' equity 33,551 31,054
--------- ---------
Total liabilities and shareholders' equity $ 289,768 $ 272,033
--------- ---------
--------- ---------
</TABLE>
3
<PAGE>
Bank of Los Angeles
Statements of Income
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (unaudited)
<S> <C> <C>
Interest income
Loans receivable $ 7,667 $ 5,021
Securities 2,071 1,139
Federal funds sold 729 490
Deposits with financial institutions 38 1
---------- ----------
Total interest income 10,505 6,651
Interest expense
Deposit accounts 2,718 1,617
Capital lease obligation 127 129
Federal Home Loan Bank advances 163 ---
---------- ----------
Total interest expense 3,008 1,746
---------- ----------
Net interest income before provision for credit losses 7,497 4,905
Provision for credit losses --- 410
---------- ----------
Net interest income after provision for credit losses 7,497 4,495
---------- ----------
Service charges and fees 981 629
Gain on sale of securities 49 ---
---------- ----------
Total non-interest income 1,030 629
Non-interest expense
Employee compensation and benefits 2,770 2,269
Occupancy 1,033 810
Professional services 362 221
Goodwill and core deposit premium amortization 237 102
Other 872 687
---------- ----------
Total non-interest expense 5,274 4,089
---------- ----------
Income before income tax expense 3,253 1,035
Income tax expense 1,216 ---
---------- ----------
Net income $ 2,037 $ 1,035
---------- ----------
---------- ----------
Earnings per common share $ 0.43 $ 0.36
---------- ----------
---------- ----------
Earnings per common share -- assuming dilution $ 0.38 $ 0.32
---------- ----------
---------- ----------
Weighted average common shares 4,776,564 2,878,822
---------- ----------
---------- ----------
Weighted average common shares -- diluted 5,368,751 3,277,093
---------- ----------
---------- ----------
</TABLE>
4
<PAGE>
Bank of Los Angeles
Statements of Income
<TABLE>
<CAPTION>
For the Quarter
Ended June 30,
----------------------
1998 1997
------- ------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (unaudited)
<S> <C> <C>
Interest income
Loans receivable $ 3,904 $ 3,126
Securities 1,186 738
Federal funds sold 285 251
Deposits with financial institutions 14 1
---------- ----------
Total interest income 5,389 4,116
Interest expense
Deposit accounts 1,367 941
Capital lease obligation 63 64
Federal Home Loan Bank advances 127 ---
---------- ----------
Total interest expense 1,557 1,005
---------- ----------
Net interest income before provision for
credit losses 3,832 3,111
Provision for credit losses --- 325
---------- ----------
Net interest income after provision for
credit losses 3,832 2,786
---------- ----------
Service charges and fees 508 368
Gain on sale of securities 35 ---
---------- ----------
Total non-interest income 543 368
Non-interest expense
Employee compensation and benefits 1,337 1,419
Occupancy 509 487
Professional services 215 104
Goodwill amortization 115 72
Other 416 430
---------- ----------
Total non-interest expense 2,592 2,512
---------- ----------
Income before income tax expense 1,783 642
Income tax expense 685 ---
---------- ----------
Net income $ 1,098 $ 642
---------- ----------
---------- ----------
Earnings per common share $ 0.23 $ 0.18
---------- ----------
---------- ----------
Earnings per common share -- assuming dilution $ 0.20 $ 0.16
---------- ----------
---------- ----------
Weighted average common shares 4,794,340 3,548,893
---------- ----------
---------- ----------
Weighted average common shares -- diluted 5,419,505 3,953,002
---------- ----------
---------- ----------
</TABLE>
5
<PAGE>
Bank of Los Angeles
Statements of Comprehensive Income
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
----------------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (unaudited)
<S> <C> <C>
Net income $ 2,037 $ 1,035
Unrealized losses on securities
Unrealized gains (losses) arising during period;
$48,000 gain for the three months ended June 30, 1998,
adjusted for taxes, $5,000 loss for the six months ended
June 30, 1997, unadjusted for taxes. 28 (5)
Less reclassification adjustment for gains included in
net income; gain of $49,000 for the six months ended
June 30, 1998, adjusted for taxes. (29) ---
----------- -----------
Comprehensive income $ 2,036 $ 1,030
----------- -----------
----------- -----------
Comprehensive income per common share $ 0.43 $ 0.36
----------- -----------
----------- -----------
Comprehensive income per common share -- assuming dilution $ 0.38 $ 0.31
----------- -----------
----------- -----------
Weighted average common shares 4,776,564 2,878,822
----------- -----------
----------- -----------
Weighted average common shares -- diluted 5,368,751 3,277,093
----------- -----------
<CAPTION>
For the Quarter
Ended June 30,
----------------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (unaudited)
<S> <C> <C>
Net income $ 1,098 $ 642
Unrealized losses on securities
Unrealized gains (losses) arising during period;
none the quarter ended June 30, 1998,
$175,000 gain for the quarter ended
June 30, 1997, unadjusted for taxes. --- 175
Less reclassification adjustment for gains
included in net income; gain of $35,000 for
the quarter ended June 30, 1998, adjusted
for taxes. (20) ---
---------- ----------
Comprehensive income $ 1,078 $ 817
---------- ----------
---------- ----------
Comprehensive income per common share $ 0.22 $ 0.23
---------- ----------
---------- ----------
Comprehensive income per common share --
assuming dilution $ 0.20 $ 0.21
---------- ----------
---------- ----------
Weighted average common shares 4,794,340 3,548,893
---------- ----------
---------- ----------
Weighted average common shares -- diluted 5,419,505 3,953,002
---------- ----------
---------- ----------
</TABLE>
6
<PAGE>
Bank of Los Angeles
Statement of Changes in Shareholders' Equity
For the Six Months Ended June 30, 1998 and For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Retained Other Total
-------------------------- Earnings/ Comprehensive Shareholders'
(DOLLARS IN THOUSANDS) Shares Amount (Deficit) Income Equity
------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 2,195,075 $ 16,111 $ (3,259) $ (220) $ 12,632
Issuance of common stock
April 1, 1997, net cost of $213 1,367,493 5,926 --- --- 5,926
Issuance of common stock
December 31, 1997, net cost of $247 1,155,326 8,466 --- --- 8,466
Stock options exercised 1,300 5 --- --- 5
Warrants exercised 32,491 122 --- --- 122
Net change in unrealized loss on securities
available for sale --- --- --- 172 172
Net income --- --- 3,731 --- 2,041
--------- -------- --------- ------- ---------
Balance, December 31, 1997 4,751,685 30,630 472 (48) 31,054
Stock options exercised (unaudited) 8,625 52 --- --- 52
Warrants exercised (unaudited) 95,890 360 --- --- 360
Net income (unaudited) --- --- 2,037 --- 2,037
Net change in unrealized loss on securities
available for sale (unaudited) --- --- --- 48 48
--------- -------- --------- ------- ---------
Balance, June 30, 1998 (unaudited) 4,856,200 $ 31,042 $ 2,509 $ --- $ 33,551
--------- -------- ------- ------- ---------
--------- -------- ------- ------- ---------
</TABLE>
7
<PAGE>
Bank of Los Angeles
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1998 1997
-------- -------
(DOLLARS IN THOUSANDS) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 10,480 $ 6,000
Fees and commissions received 981 629
Interest paid (2,881) (1,726)
Cash paid to suppliers and employees (5,672) (3,917)
Taxes paid (114) ---
--------- ---------
Net cash provided by operating activities 2,794 986
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and pay downs of
securities available for sale 1,216 8,068
Proceeds from maturities and pay downs of
securities held to maturity 42,238 1,500
Proceeds from sales of securities available for sale 10,267 ---
Net decrease in interest bearing deposits with banks 646 ---
Purchases of securities available for sale (631) (10,014)
Purchases of securities held to maturity (81,288) (26,918)
Net decrease (increase) decrease in loans receivable (10,683) (38,777)
Income tax refund received 884 ---
Proceeds from the sale of fixed assets --- ---
Acquisition of premises and equipment (194) (412)
--------- ---------
Net cash provided (used) by investing activities (37,545) (66,553)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of capital stock 412 5,929
Net increase in deposits, net of rejected debits 6,442 55,195
Increase in borrowing from Federal Home Loan Bank 11,020 ---
Principle payments under capital lease obligation 4 4
--------- ---------
Net cash provided (used) in financing activities 17,878 61,128
NET DECREASE IN CASH AND CASH EQUIVALENTS (16,873) (4,439)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 50,076 30,139
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,203 $ 25,700
--------- ---------
--------- ---------
</TABLE>
8
<PAGE>
Bank of Los Angeles
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------
1998 1997
(DOLLARS IN THOUSANDS) (unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 2,037 $ 1,035
Adjustments for non-cash items:
Depreciation, amortization and accretion 445 396
Provisions (credit) for credit losses --- 410
Gain on sale of securities available for sale (49) ---
Deferred salary for loan originations (348) ---
(Decrease) increase in deferred loan income (137) 85
Decrease (increase) in accrued interest receivable 112 (737)
Increase in accrued income taxes 1,102 ---
Decrease (increase) in other assets (42) (99)
(Decrease) increase in interest payable and other
liabilities (326) (104)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,794 $ 986
--------- --------
--------- --------
Supplemental disclosure of non-cash transactions:
Change in unrealized gain (loss) on securities
available for sale $ 48 $ (5)
--------- --------
--------- --------
Transfer of real estate owned from loans receivable 70 ---
--------- --------
--------- --------
Transfer of bargain lease from fixed assets to other assets --- 1,559
--------- --------
--------- --------
</TABLE>
9
<PAGE>
Bank of Los Angeles
Notes to Financial Statements
Pending Merger with Western Bancorp
On April 17, 1998, BKLA entered into a definitive agreement to be
purchased by Western Bancorp ("Western") in which each share of BKLA stock
will be exchanged for 0.4224 shares of Western stock. The acquisition is
anticipated to be accounted for by pooling of interests and is expected to
close October 1, 1998. BKLA will be merged into Western's subsidiary, Santa
Monica Bank, which operates branches in Santa Monica, Malibu, Marina Del
Rey, Beverly Hills, Century City, Westwood and Encino. A financial data
summary for Western Bancorp is presented below at or for the six months ended
June 30, 1998. Data presented is in thousands except share data.
<TABLE>
<CAPTION>
<S> <C>
RECAP OF EARNINGS
Interest income $ 68,922
Interest expense 18,318
-----------
Net interest income 50,604
Provision for credit losses 300
Non-interest income 7,858
Non-interest expense 35,513
-----------
Net income before taxes 22,649
Income tax provision (credit) 11,507
-----------
Net income $ 11,142
-----------
-----------
PER COMMON SHARE DATA
Earnings $ 0.78
Earnings -- diluted $ 0.77
Book value $ 18.41
Tangible book value $ 9.15
SHARES OUTSTANDING
Common shares outstanding 15,703,800
Common shares issue date weighted 14,821,500
Effect of dilutive securities 218,500
Common shares -- diluted 15,040,000
BALANCE SHEET DATA, END OF PERIOD
Total assets $ 2,016,749
Total deposits 1,697,352
Total loans 1,249,930
Non-accrual loans and real estate owned 18,655
Allowance for credit losses 24,681
Total shareholders' equity $ 289,146
</TABLE>
Acquisitions of American West Bank and Culver National Bank
On April 1, 1997, BKLA acquired American West Bank ("AWB"), which had
$67,291,000 in total assets and two branch offices. On December 31, 1997,
BKLA acquired Culver National Bank ("CNB"), which had $60,277,000 in total
assets and one branch office. The acquisitions of both AWB and CNB were
accounted for as purchases.
10
<PAGE>
Adoption of Recently Issued Accounting Pronouncement
In June, 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. This statement divides comprehensive income into net
income and other comprehensive income. BKLA has adopted the two statement
approach and reports the statement of income and the statement of
comprehensive income separately.
11
<PAGE>
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net income
Net income for the six months ended June 30, 1998 was $2,037,000 or
$0.43 per common share and $0.38 per common share assuming dilution. Net
income for the six months ended June 30, 1997 was $1,035,000 or $0.36 per
common share and $0.32 per common share assuming dilution. Return on average
common equity was 12.7% and 12.9% for the six months ended June 30, 1998 and
1997, respectively. Return on average assets was 1.5% and 1.3% for the six
months ended June 30, 1998 and 1997, respectively.
Income tax expense
Income tax expense for the six months ended June 30, 1998 was
$1,216,000. Income tax expense for the six months ended June 30, 1997 was not
recognized due to the availability in 1997 of tax operating losses of prior
years carried forward to offset taxable income in 1997.
Net interest income
On April 1, 1997, BKLA acquired AWB which was accounted for as a
purchase. Consequently, interest income and interest expense from assets and
liabilities acquired in the AWB purchase are included in the results of
operations from April 1, 1997 to June 30, 1997. On December 31, 1997, BKLA
acquired CNB, which was accounted for as a purchase. Interest income and
interest expense of CNB are not included in the results of operations for the
six months ended June 30, 1997. Increases in interest income and interest
expense for the six months ended June 30, 1998 compared to the six months
ended June 30, 1997 are due primarily to the purchases of AWB and CNB.
Total interest income was $10,505,000 for the six months ended June 30,
1998, an increase of $3,854,000 or 57.9%, compared to $6,651,000 for the six
months ended June 30, 1997. The average rate earned on interest earning
assets was 8.7% and 9.2% for the six months ended June 30, 1998 and 1997,
respectively. Interest income on loans receivable was $7,667,000 for the six
months ended June 30, 1998, an increase of $2,646,000 or 52.7%, compared to
$5,021,000 for the six months ended June 30, 1997. The average rate earned on
loans receivable was 10.6% and 11.2% for the six months ended June 30, 1998
and 1997, respectively. Decreased yield on loans receivable is due to
$11,000,000 in fixed rate loans originated for the six months ended June 30,
1998 at the average rate of 8.3%. Interest income on securities was
$2,071,000 for the six months ended June 30, 1998, an increase of $932,000 or
81.8%, compared to $1,139,000 for the six months ended June 30, 1997. The
average rate earned on securities was 6.0% and 6.2% for the six months ended
June 30, 1998, and 1997, respectively. Interest income on federal funds sold
was $729,000 for the six months ended June 30, 1998, an increase of $239,000
or 48.8%, compared to $490,000 for the six months ended June 30, 1997. The
average rate earned on federal funds sold was 5.4% for both six months ended
June 30, 1998 and 1997. Interest income on deposits with other financial
institutions was $38,000 and $1,000 for the six months ended June 30, 1998
and 1997, respectively.
Total interest expense was $3,008,000 for the six months ended June 30,
1998, an increase of $1,262,000 or 72.3%, compared to $1,746,000 for the six
months ended June 30, 1997. The interest paid on total interest bearing
liabilities was 3.8% and 3.7% for the six months ended June 30, 1998 and
1997, respectively. Interest expense on deposits was $2,718,000 for the six
months ended June 30, 1998, an increase of $1,101,000 or 68.1%, compared to
$1,617,000 for the six months ended June 30, 1997. The interest rate paid on
interest bearing deposits was 3.6% and 3.5% for the six months ended June 30,
1998 and 1997, respectively. Interest
12
<PAGE>
expense on capital lease obligation was $127,000 and $129,000 for the six
months ended June 30, 1998 and 1997, respectively. The rate paid on capital
lease obligation was 14.1% for the six months ended June 30, 1998 and 1997.
Interest expense on borrowings from the Federal Home Loan Bank ("FHLB") was
$163,000 for the six months ended June 30, 1998. The rate paid on FHLB
borrowings was 6.3% for the six months ended June 30, 1998.
Net interest income was $7,497,000 for the six months ended June 30,
1998, an increase of $3,002,000 or 66.8%, compared to $4,905,000 for the six
months ended June 30, 1997. The net interest margin was 4.8% and 5.4% for the
six months ended June 30, 1998 and 1997, respectively. The net interest
income earned on earning assets was $6.2% and 6.8% for the six months ended
June 30, 1998 and 1997.
Provision for credit losses
No provision for credit losses was made in 1998. Provision for credit
losses was $410,000 for the six months ended June 30, 1997. See "Allowance
for Credit Losses" on page 18 for discussion on determination of provision.
Non-interest income and expense
Total non-interest income was $1,030,000 for the six months ended June
30, 1998, an increase of $401,000 or 63.8%, compared to $629,000 for the six
months ended June 30, 1997. Service charges and fees were $981,000 for the
six months ended June 30, 1998, an increase of $352,000 or 56.0%, compared to
$629,000 for the six months ended June 30, 1997. Increased service charges
and fees for 1998 compared to 1997 are due to a larger deposit base on which
service charges are earned. Gain on sale of securities was $49,000 for the
six months ended June 30, 1998. No gain on sales of securities was realized
in the six months ended June 30, 1997.
Total non-interest expense was $5,274,000 for the six months ended June
30, 1998, an increase of $1,185,000 or 29.0%, compared to $4,089,000 for the
six months ended June 30, 1997. Employee compensation and benefits was
$2,770,000 for the six months ended June 30, 1998, an increase of $501,000 or
22.1%, compared to $2,269,000 for the six months ended June 30, 1997. The
increase in employee compensation and benefits was primarily due to
additional employees in 1998 as a result of bank acquisitions in 1997.
Increased salary expense was partially offset from deferral of salary expense
attributed to successful loan originations. Occupancy expense was $1,033,000
for the six months ended June 30, 1998, an increase of $223,000 or 27.5%,
compared to $810,000 for the six months ended June 30, 1997. Increase in
occupancy expense was primarily due the additional to three additional
branches in 1998 from banks acquired in 1997. Professional services were
$362,000, an increase of $141,000 or 63.8%, for the six months ended June 30,
1997. Increase in professional services was primarily due to costs of
proposed merger with Western. Goodwill and core deposit premium amortization
was $237,000 for the six months ended June 30, 1998, an increase of $135,000
or 132.4%, compared to $102,000 for the six months ended June 30, 1997. The
increase in goodwill and core deposit premium amortization was due primarily
to goodwill recognized in the purchase accounting of CNB.
Other non-interest expense was $872,000 for the six months ended June
30, 1998, an increase of $185,000 or 26.9%, compared o $687,000 for the six
months ended June 30, 1997. Increase in other expense was primarily due costs
from operating three additional branches in 1998 from banks acquired in 1997.
The table below presents types of expenses included in other expenses.
13
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------
1998 1997
--------- --------
<S> <C> <C>
Promotional $ 98 $ 87
Office supplies 110 61
Postage 78 55
Telephone 68 49
Liability and deposit insurance 84 101
Messenger and armored car 124 98
Other 310 236
---- ----
$872 $687
---- ----
---- ----
</TABLE>
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 1998 AND 1997
Net income
Net income for the quarter ended June 30, 1998 was $1,098,000 or $0.23
per common share and $0.20 per common share assuming dilution. Net income for
the quarter ended June 30, 1997 was $642,000 or $0.18 per common share and
$0.16 per common share assuming dilution. Return on average common equity was
13.4% and 11.9% for the quarters ended June 30, 1998 and 1997, respectively.
Return on average common assets was 1.6% and 1.4% for the quarters ended June
30, 1998 and 1997, respectively.
Income tax expense
Income tax expense was $685,000 for the quarter ended June 30, 1998
compared to no income tax expense for the quarter ended June 30, 1997. Income
tax expense was not recognized 1997 due to the availability in 1997 of tax
operating losses of prior years carried forward to offset taxable income in
1997.
Net interest income
Increases in interest income and interest expense for the quarter ended
June 30, 1998 compared to the quarter ended June 30, 1997 are primarily due
to December 31, 1997 bank acquisition of CNB.
Total interest income was $5,389,000 for the quarter ended June 30,
1998, an increase of $1,273,000 or 30.9%, compared to $4,116,000 for the
quarter ended June 30, 1997. The average rate earned on interest earning
assets was 8.7% and 9.4% for the quarters ended June 30, 1998 and 1997,
respectively. Interest income on loans receivable was $3,904,000 for the
quarter ended June 30, 1998, an increase of $778,000 or 24.9%, compared to
$3,126,000 for the quarter ended June 30, 1997. The average rate earned on
loans receivable was 10.7% and 11.5% for the quarters ended June 30, 1998 and
1997, respectively. Decreased yield on loans receivable is due to
$11,000,000 in fixed rate loans originated for the six months ended June 30,
1998 at the average rate of 8.3%. Interest income on securities was
$1,186,000 for the quarter ended June 30, 1998, an increase of $778,000 or
24.9%, compared to $738,000 for the quarter ended June 30, 1997. The average
rate earned on securities was 5.9% and 6.1% for the quarter ended June 30,
1998, and 1997, respectively. Interest income on federal funds sold was
$285,000 for the quarter ended June 30, 1998, an increase of $34,000 or
13.5%, compared to $251,000 for the quarter ended June 30, 1997. The average
rate earned on federal funds sold was 5.5% and 5.6% for the quarters ended
June 30, 1998 and 1997, respectively. Interest income on deposits with other
financial institutions was $14,000 and $1,000 for the quarter ended June 30,
1998 and 1997, respectively.
Total interest expense was $1,557,000 for the quarter ended June 30,
1998, an increase of $552,000 or
14
<PAGE>
54.9%, compared to $1,005,000 for the quarter ended June 30, 1997. The
interest rate paid on total interest bearing liabilities was 3.9% and 3.7%
for the quarter ended June 30, 1998 and 1997, respectively. Interest expense
on deposits was $1,367,000 for the quarter ended June 30, 1998, an increase
of $426,000 or 45.3%, compared to $941,000 for the quarter ended June 30,
1997. The interest rate paid on interest bearing deposits was 3.7% and 3.5%
for the quarters ended June 30, 1998 and 1997, respectively. Interest expense
on capital lease obligation was $63,000 and $64,000 for the quarters ended
June 30, 1998 and 1997, respectively. The interest rate paid on capital lease
obligation was 14.1% for both quarters ended June 30, 1998 and 1997. Interest
expense on borrowings from the FHLB was $127,000 for the quarter ended June
30, 1998. The interest rate paid on FHLB borrowings was 6.3% for the quarter
ended June 30, 1998.
Net interest income was $3,832,000 for the quarter ended June 30, 1998,
an increase of $721,000 or 23.2%, compared to $3,111,000 for the quarter
ended June 30, 1997. The net interest margin was 4.8% and 5.4% for the
quarters ended June 30, 1998 and 1997, respectively. The net interest income
earned on earning assets was $6.2% and 7.1% for the quarters ended June 30,
1998 and 1997, respectively.
Provision for credit losses
No provision for credit losses was made in 1998. Provision for credit
losses was $325,000 for the quarter ended June 30, 1997. See "Allowance for
credit losses" on page 18 for discussion on determination of provision
Non-interest income and expense
Total non-interest income was $543,000 for the quarterended June 30,
1998, in increase of $175,000 or 47.5%, comapred to $368,000 for the quarter
ended June 30, 1997. Service charges and fees were $508,000 for the quarter
ended June 30, 1998, in increase of $140,000 or 38.0%, compared to $368,000
for the quarter ended June 30, 1997. Service charges and fees increased in
1998 due to a larger demand deposit base on which service charges were
earned. Gain on sale of securities was $35,000 for the quarter ended June 30,
1998. Gain on sale recognized was due to payments in transit indentified in
the quarter ended June 30, 1998 on securities sold in the quarter ended
March 31, 1998. No gain on sale of securities was recognized for the quarter
ended June 30, 1997.
Total non-interest expense was $2,592,000 for the quarter ended June 30,
1998, an increase of $80,000 or 3.2%, compared to $2,512,000 for the quarter
ended June 30, 1997. Employee compensation and benefits was $1,337,000 for
the quarter ended June 30, 1998, a decrease of $82,000 or 5.8%, compared to
$1,419,000 for the quarter ended June 30, 1997. Occupancy expense was
$509,000 for the quarter ended June 30, 1998, an increase of $22,000 or 4.5%,
compared to $487,000 for the quarter ended June 30, 1997. Professional
services were $215,000, an increase of $111,000 or 106.7%, for the quarter
ended June 30, 1997. Increase in professional services was primarily due to
costs of proposed merger with Western. Goodwill and core deposit premium
amortization was $115,000 for the quarter ended June 30,1 998, an increase of
$43,000 or 59.7%, compared to $72,000 for the quarter ended June 30, 1997.
Increased goodwill amortization was due to the CNB acquisition. Other
non-interest expense was $416,000 for the quarter ended June 30, 1998, a
decrease of $14,000 or 2.3%, compared o $430,000 for the quarter ended June
30, 1997. The table below presents types of expenses included in other
expenses.
15
<PAGE>
<TABLE>
<CAPTION>
For the Quarter Ended
June 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Promotional $ 39 $ 44
Office supplies 56 32
Postage 34 43
Telephone 36 29
Liability and deposit insurance 24 65
Messenger and armored car 61 71
Other 166 146
---- ----
$416 $430
---- ----
---- ----
</TABLE>
Comprehensive income
BKLA has adopted the two statement approach and reports the statement of
income and the statement of comprehensive income separately. For BKLA, the
difference between net income and comprehensive income was the change in
unrealized gains or losses on securities available for sale. Comprehensive
income for the six months ended June 30, 1998 was $2,036,000 or $0.43 per
common share and $0.38 per common share assuming dilution. Comprehensive
income for the six months ended June 30, 1997 was $1,030,000 or $0.36 per
common share and $0.31 per common share assuming dilution. Comprehensive
income for the quarter ended June 30, 1998 was $1,078,000 or $0.22 per common
share and $0.20 per common share assuming dilution. Comprehensive income for
the quarter ended June 30, 1997 was $817,000 or $0.23 per common share and
$0.21 per common share assuming dilution.
STATEMENT OF CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Investment securities
BKLA' investment securities are in bills and notes of the United States
Government, direct obligation bonds of Agencies and Corporations of the
United States, and mortgage backed obligations issued by Agencies and
Corporations of the United States. The following table presents securities at
amortized cost and fair value.
<TABLE>
<CAPTION>
At June 30, 1998 At December 31, 1997
---------------------- ------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity
Debt of the U.S. Treasury
and U.S. Government Agencies $56,937 $57,008 $42,928 $43,043
Mortgage backed securities 30,251 30,235 5,211 5,204
------- ------- ------- -------
87,188 87,243 48,139 48,247
Securities available for sale
Mortgage backed securities --- --- 11,480 11,432
Common stock 1,491 1,491 863 863
------- ------- ------- -------
1,491 1,491 12,343 12,295
------- ------- ------- -------
$88,679 $88,734 $60,482 $60,542
------- ------- ------- -------
------- ------- ------- -------
Unrealized gains and losses
Gains $ 81 $ ---
Losses (26) 48
------- -------
$ 55 $ (48)
------- -------
------- -------
</TABLE>
16
<PAGE>
The following table presents sales of securities and realized gain and
losses from the sale of securities available for sale.
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, For the Year
------------------------ Ended December
1998 1997 31, 1997
---------- -------- --------------
<S> <C> <C> <C>
Proceeds from sales of securities $10,267 $ --- $ 1,303
Gross realized gains and losses
Gains $ 108 $ --- $ ---
Losses (59) --- ---
------- ---- -------
$ 49 $ --- $ ---
------- ---- -------
------- ---- -------
</TABLE>
The following table presents maturities of investment securities at June
30, 1998.
<TABLE>
<CAPTION>
Weighted
Amortized Average
Cost Yield
--------- --------
<S> <C> <C>
Securities held to maturity
Debt of the U.S. Treasury and
U.S. Government Agencies
Less than one year $43,410 5.6%
One to three years 13,527 5.8%
Three to ten years --- ---
Over 10 years --- ---
-------
56,937 5.6%
Mortgage backed securities
Less than one year 6,915 5.9%
One to three years 23,228 0
Three to ten years 108 6.8%
Over 10 years --- ---
-------
30,251 6.0%
-------
$87,188 5.8%
-------
-------
</TABLE>
Non-performing assets
The following table presents, in thousands, classified assets, loans on
non-accrual and real estate owned.
<TABLE>
<CAPTION>
At June 30, At December
(DOLLARS IN THOUSANDS) 1998 31, 1997
---------- ------------
<S> <C> <C>
Assets not performing as originally contracted
Classified assets $4,351 $ 4,639
Non-accrual loans 3,062 4,265
Real estate owned 1,545 1,475
------ -------
$8,958 $10,379
------ -------
------ -------
</TABLE>
17
<PAGE>
Allowance for credit losses
The allowance for credit losses is established through provisions for
credit losses charged against income. Loans deemed to be uncollectible are
charged against the allowance for credit losses, and subsequent recoveries,
if any, are credited to the allowance. The allowance for credit losses is
maintained at a level believed adequate by management to absorb estimated
probable credit losses. Management's periodic evaluation of the adequacy of
the allowance is based on BKLA's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions,
and other relevant factors. This evaluation is inherently subjective as it
requires estimates, including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to
significant change.
Impaired loans at June 30, 1998 were $3,663,000, of which $557,000 was
estimated as the amount impaired by measuring either the present value of
expected future cash flows discounted at the loan's contracted interest rate
or the fair value of the collateral, if the loan was collateral dependent.
Impaired loans at December 31, 1997 were $4,490,000 of which $689,000 was
estimated as the amount impaired. The amount measured to be impaired is a
component of the allowance for credit losses.
Management's evaluation of the loan portfolio at June 30, 1998 estimated
that the allowance for credit losses was adequate at $2,060,000 when the
actual balance was $2,683,000. As a result, no provision for loan losses was
made for the three months ended March 31, 1998. Management's evaluation of
the loan portfolio at December 31, 1997 estimated that an adequate allowance
for credit losses was $2,412,000 when the balance was $2,819,000. Activity in
the allowance for credit losses is presented in the following table.
<TABLE>
<CAPTION>
For the Year
For the Six Ended
Months Ended December 31,
(DOLLARS IN THOUSANDS) June 30, 1998 1997
------------- -------------
<S> <C> <C>
Loans receivable $153,645 $142,633
Average loans $145,714 $101,433
Allowance for credit losses at beginning of period $ 2,819 $ 1,682
Provision for credit losses --- 410
Addition due to acquisitions --- 1,882
Charge-offs (261) (1,709)
Recoveries 125 554
-------- --------
Net charge-offs (136) (1,155)
-------- --------
Allowance for credit losses at end of period $ 2,683 $ 2,819
-------- --------
-------- --------
Recoveries to total charge-offs 47.9% 32.4%
Net charge-offs to average loans 0.1% 1.1%
Allowance for credit losses to loans receivable 1.7% 2.0%
</TABLE>
Loans
Total loans were $153,785,000 at June 30, 1998, an increase of
$10,876,000 or 7.6% compared to total loans of $142,909,000 at December 31,
1997. BKLA groups loans by collateral as to either real estate,
18
<PAGE>
commercial or consumer. Real estate loans are further identified as secured
by single family residences, multi-family residences, construction and
commercial which at June 30, 1998 were $10,670,000, $10,768,000, $8,839,000
and $65,289,000, respectively. Total real estate loans were $95,266.000 at
June 30,1998, an increase of $11,422,000 or 21.2%, compared to $81,856,000 at
December 31, 1997. Commercial loans were $45,788,000 at June 30, 1998, an
increase of $589,000 or 1.3%, compared to $45,199,000 at December 31, 1997.
Consumer loans were $12,731,000 at June 30, 1998, a decrease of $2,571,000 or
16.8% compared to $15,302,000 at December 31, 1997.
The following table presents loans by primary collateral for repayment
and the percentage each collateral type to total loans.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
Amount Percentage Amount Percentage
------ ---------- ------- ----------
<S> <C> <C> <C> <C>
Real estate loans
Single family $ 10,670 6.9% $ 8,979 6.3%
Multi-family 10,468 6.8% 9,694 6.8%
Construction 8,839 5.7% 9,336 6.5%
Commercial 65,289 42.5% 53,847 37.7%
-------- --------
Total real estate loans 95,266 61.9% 81,856 57.3%
Commercial loans 45,788 29.8.% 45,199 31.6%
Consumer loans 12,731 8.3% 15,302 10.7%
Other loans --- 0.0% 552 0.4%
Total loans 153,785 100.0% 142,909 100.0%
Less deferred income (140) (276)
Less allowance for credit loss (2,683) (2,819)
-------- --------
Net loans $150,962 $139,814
-------- --------
-------- --------
</TABLE>
Other assets
Other assets at June 30, 1998 were $2,724,000, a reduction of $3,863,000
compared to $6,587,000 at December 31, 1997. Other assets at December 31,
1997 were primarily deferred tax assets of $1,126,000, tax payments
receivable of $687,000 and rejected demand deposit debits of $2,788,000. The
deferred tax asset was reduced to zero at June 30, 1998 as a result of
accruals for the recognition of income tax expense for the six months ended
June 30, 1998. Income tax receivable was $687,000 due CNB tax payments made
in 1997 and prior tax years. The income tax refund received in the second
quarter of 1998 was $884,000. The additional $197,000 was applied to reduce
goodwill recognized in the purchase of CNB. Rejected demand deposit debits
was $886,000 at June 30, 1998, a decrease of $1,902,000 compared to December
31, 1997.
Deposits
Total deposits were $242,552,000 at June 30, 1998, an increase of
$4,540,000 or 1.9%, compared to $238,012,000 at December 31, 1997. Total
demand non-interest bearing deposits were $86,876,000 at June 30, 1998, an
increase of $1,654,000 or 1.9%, compared to $85,222,000 at December 31, 1997.
Interest bearing deposits were $155,676,000 at June 30, 1998, an increase of
$2,886,000 or 1.9%, compared to $152,790,000 at December 31, 1997.
19
<PAGE>
Long term liabilities
In 1997, BKLA became a member of the Federal Home Loan Bank ("the
FHLB"), a federally chartered corporation. The FHLB provides credit to
members to facilitate lending on family residential loans. These borrowings
are for terms of seven to twenty years with the majority for ten years.
Repayment of principal is on 15 to 25 year amortization schedules with the
balance due at maturity. The FHLB requires that all borrowings are
collateralized with either family residential loans or investments in debt
securities issued by agencies of the United States government. At June 30,
1998, BKLA had borrowings from the FHLB of $11,020,000. The cost of the
borrowings was $163,000 or 6.3% for the six months ended June 30, 1998. At
December 31, 1997, BKLA had no borrowings from the FHLB.
Year 2000 Impact
Many computer systems will not properly recognize date sensitive
information when the date changes to the year 2000. Computer systems that do
not properly recognize the year 2000 could generate erroneous data or cause
the system to fail. Those computer systems will have to be modified or
preplaced prior to the year 2000 in order to remain functional. During 1997,
BKLA began the process of identifying and addressing the issues surrounding
the year 2000 and its impact on BKLA's operations. This process continued
into the second quarter of 1998. BKLA has conducted a comprehensive review of
its computers systems to identify applications that would be effected by the
year 2000.
The pending merger is expected to close October 1, 1998 and the year
2000 impact is not expected to apply to BKLA if the merger closes as
anticipated. If the merger is delayed or cancelled, BKLA is ready to
implement the systems and programming changes necessary to address the year
2000 issue and does not believe that the costs of such actions will have a
material effect on BKLA's results of operations or financial condition. There
can be no assurance, however, that the pending merger will occur or the cost
of implementing changes will not increase or BKLA's inability to implement
changes could have an adverse impact on results of operations or financial
condition.
CAPITAL RESOURCES
BKLA is subject to regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by regulators that could range from restrictions on
activities to dissolution. Measures established by regulators to ensure
capital adequacy require BKLA to maintain minimum amounts and ratios of total
capital to risk-weighted assets, Tier 1 capital to risk-weighted assets and
Tier 1 capital to average assets. Those amounts are presented in the table
below. At June 30, 1998, management believed that BKLA met all capital
adequacy requirements.
<TABLE>
<CAPTION>
Capital Needed to be:
-------------------------------------
Actual Capital Adequate Well Capitalized
------------------ ---------------- ----------------
(DOLLARS IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
Total capital to risk-weighted assets $28,867 15.7% $14,724 8.0% $18,404 10.0%
Tier 1 capital to risk-weighted assets $26,562 14.3% $ 7,361 4.0% $11,043 6.0%
Tier 1 capital to average assets $26,562 9.6% $11,046 4.0% $13,807 5.0%
As of December 31, 1997
Total capital to risk-weighted assets $25,885 14.6% $14,216 8.0% $17,770 10.0%
Tier 1 capital to risk-weighted assets $23,654 13.3% $ 7,108 4.0% $10,662 6.0%
Tier 1 capital to average assets $23,654 8.9% $10,583 4.0% $13,229 5.0%
</TABLE>
LIQUIDITY
BKLA's liquid assets are cash and due from banks, federal funds sold,
and securities held to maturity. Cash
20
<PAGE>
and due from banks are cash, the funds maintained to meet BKLA's reserve
requirements to the Federal Reserve Bank of San Francisco, and deposits from
customers for which BKLA has presented to other financial institutions for
credit. BKLA uses its federal funds sold balance to meet immediate liquidity
needs due to deposit fluctuations. BKLA manages its securities held to
maturity to fund loan growth and seasonal fluctuations in deposits. BKLA's
net liquid assets, volatile liabilities, and liquidity ratios are presented
in the table below.
<TABLE>
<CAPTION>
At June 30, At December 31,
1998 1997
----------- ---------------
<S> <C> <C>
NET LIQUID ASSETS
Liquid assets
Cash and due from banks, demand $ 19,203 $ 20,521
Interest bearing balances with depository institutions 1,479 2,125
Federal funds sold 14,000 29,555
Securities available for sale and held to maturity 88,679 60,433
-------- --------
Total 123,361 112,634
Less securities pledged at book value 15,188 3,497
-------- --------
NET LIQUID ASSETS $110,162 $109,137
-------- --------
-------- --------
Rate dependent liabilities
Time deposits greater than $100,000 $ 31,699 $ 30,167
-------- --------
Total $ 31,699 $ 30,167
-------- --------
-------- --------
Ratios and trends:
Net liquid assets to total deposits and FHLB advances 42.7% 45.9%
Net liquid assets to rate dependent deposits 341.3% 361.8%
Temporary investments to rate dependent liabilities(1) 207.6% 199.5%
Core deposits to total deposits(2) 86.9% 87.3%
Net loans to total assets 53.0% 52.4%
Brokered deposits to total deposits ---- ----
Net loans to deposits 63.3% 59.9%
</TABLE>
- -------------------
(1) Temporary investments are the total of time deposits with depository
institutions, federal funds sold and investment securities with less than
one year maturity.
(2) Core deposits are total deposits less time deposits greater than
$100,000.
21
<PAGE>
PART II -- OTHER INFORMATION
Signatures
Under the requirements of the Securities Exchange Act of 1934, BKLA has
duly caused this report to be signed on its behalf by the undersigned duly
authorized officers.
Bank of Los Angeles
/s/ JOHN J. FELDMAN 7/27/98
- ------------------------------------------------------ ----------
John J. Feldman, President and Chief Executive Officer Date
/s/ MARK BIDWELL 7/27/98
- ------------------------------------------------------ ----------
Mark Bidwell, Vice President Controller Date
22
