<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO TO
COMMISSION FILE NUMBER: 0-13551
------------------------
WESTERN BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3863296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
4100 NEWPORT PLACE, SUITE 900,
NEWPORT BEACH, CALIFORNIA 92660
(Address of principal executive offices)
Registrant's telephone number: (949) 863-2444
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 10, 1998: 17,923,437 shares of common stock, no par
value.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................. 3
Unaudited Condensed Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997................................................................. 3
Unaudited Condensed Consolidated Statements of Income for three month and nine
month periods ended September 30, 1998 and 1997................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1998 and 1997......................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements September 30,
1998.............................................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk......................... 24
PART II-OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 26
Item 2. Change in Securities.............................................................. 26
Item 3. Default Upon Senior Securities.................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders............................... 26
Item 5. Other Information................................................................. 26
Item 6. Exhibits and Reports on Form 8-K.................................................. 26
SIGNATURES................................................................................................. 28
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 (a) 1997
------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks............................................................. $ 120,125 $ 97,456
Federal funds sold.................................................................. 135,364 138,702
------------- ------------
Total cash and cash equivalents................................................... 255,489 236,158
SECURITIES:
FRB and FHLB stock.................................................................. 5,852 5,610
Securities available for sale (amortized cost of $208,834 and $202,064)............. 209,646 201,904
------------- ------------
Total securities.................................................................. 215,498 207,514
Net loans and leases................................................................ 1,295,767 864,840
Property, plant and equipment....................................................... 32,701 13,685
Other real estate owned............................................................. 4,916 6,261
Goodwill............................................................................ 142,916 30,430
Other assets........................................................................ 31,025 24,622
------------- ------------
Total assets...................................................................... $ 1,978,312 $1,383,510
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Non-interest bearing deposits....................................................... $ 609,694 $ 457,503
Interest bearing deposits........................................................... 1,046,475 769,290
------------- ------------
Total deposits.................................................................... 1,656,169 1,226,793
Borrowed funds...................................................................... 14,393 12,751
Accrued interest payable and other liabilities...................................... 13,878 14,311
------------- ------------
Total liabilities................................................................. 1,684,440 1,253,855
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized, none issued............. -- --
Common stock, no par value, 100,000,000 shares authorized, 15,708,087 and 10,648,317
shares issued and outstanding...................................................... 263,309 112,947
Retained earnings................................................................... 30,088 16,802
Accumulated other comprehensive income--unrealized net gains (losses) on securities
available for sale, net of tax..................................................... 475 (94)
------------- ------------
Total shareholders' equity........................................................ 293,872 129,655
------------- ------------
Total liabilities and shareholders' equity...................................... $ 1,978,312 $1,383,510
------------- ------------
------------- ------------
Number of common shares outstanding................................................. 15,708.1 10,648.3
Common shareholders' equity per share............................................... $ 18.71 $ 12.18
Tangible common shareholders' equity per share...................................... $ 9.61 $ 9.32
</TABLE>
- ------------------------
(a) Santa Monica Bank was acquired on January 27, 1998. Accordingly, the balance
sheet, share data and per share data as of December 31, 1997 does not
include Santa Monica Bank amounts. Due to the relatively large size of the
acquisition of Santa Monica Bank, any comparison of data as of and for the
periods ended September 30, 1998 to data as of or for prior dates or periods
may not be meaningful.
See "Notes to Unaudited Condensed Consolidated Financial Statements."
3
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 (b) 1997 (b) 1998 (b) 1997 (b)
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and
leases.............................. $ 87,028 $ 59,700 $ 30,357 $ 21,095
Interest on investment securities..... 10,164 12,345 3,198 3,845
Interest on federal funds sold........ 7,790 2,794 2,505 1,141
--------- --------- --------- ---------
Total interest income............... 104,982 74,839 36,060 26,081
INTEREST EXPENSE:
Interest expense on deposits.......... 26,853 20,916 9,091 7,180
Interest expense on borrowed funds.... 783 854 227 260
--------- --------- --------- ---------
Total interest expense.............. 27,636 21,770 9,318 7,440
--------- --------- --------- ---------
Net interest income:.................... 77,346 53,069 26,742 18,641
Less: provision for loan and lease
losses.............................. 450 2,125 150 725
--------- --------- --------- ---------
Net interest income after provision for
loan and lease losses.................. 76,896 50,944 26,592 17,916
NON-INTEREST INCOME:
Service charges, fees on deposit
accounts and other fees............. 7,905 5,295 2,801 1,794
Trust fees............................ 2,594 -- 979 --
Escrow fees........................... 748 551 217 214
Gain on sale of loans and other
assets.............................. -- 78 -- --
Securities gains...................... 432 342 277 --
Other income.......................... 835 1,164 382 394
--------- --------- --------- ---------
Total non-interest income........... 12,514 7,430 4,656 2,402
NON-INTEREST EXPENSE:
Salaries and benefits................. 25,817 19,172 8,092 6,457
Occupancy, furniture and equipment.... 8,016 5,756 2,688 1,867
Advertising and business
development......................... 669 941 103 345
Other real estate owned............... (192) 335 13 266
Professional services................. 2,702 2,779 1,045 1,026
Telephone, stationery and supplies.... 2,237 2,068 800 648
Goodwill amortization................. 7,170 1,903 2,609 637
Data processing....................... 1,736 1,202 610 411
Customer services cost................ 1,248 867 406 308
Merger costs.......................... -- 3,470 -- --
Other................................. 4,112 4,331 1,636 1,059
--------- --------- --------- ---------
Total non-interest expense.......... 53,515 42,824 18,002 13,024
--------- --------- --------- ---------
Income before income taxes............ 35,895 15,550 13,246 7,294
Income taxes.......................... 17,763 8,022 6,621 3,211
--------- --------- --------- ---------
Net income.......................... $ 18,132 $ 7,528 $ 6,625 $ 4,083
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares
outstanding:
Basic............................... 15,119.9 10,491.0 15,706.8 10,488.7
Diluted............................. 15,331.1 10,783.0 15,908.7 10,791.1
Net income per share:
Basic............................... $ 1.20 $ 0.72 $ 0.42 $ 0.39
Diluted............................. $ 1.18 $ 0.70 $ 0.42 $ 0.38
</TABLE>
- ------------------------
(b) Santa Monica Bank was acquired on January 27, 1998. Accordingly, Santa
Monica Bank's operating results are not included in the amounts for the 1997
periods and are included only since February of the 1998 periods. Due to the
relatively large size of the acquisition of Santa Monica Bank, any
comparison of data as of and for the periods ended September 30, 1998 to
data as of or for prior dates or periods may not be meaningful.
See "Notes to Unaudited Condensed Consolidated Financial Statements."
4
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 18,132 $ 7,528
Adjustments to reconcile net income to net cash provided by operations:
(Gain) on sale of securities available for sale........................................ (432) (342)
(Gain) on sale of premises and equipment............................................... (30) (6)
(Gain) on sale of other real estate owned.............................................. (360) (178)
Provision for loan and lease losses.................................................... 450 2,125
Goodwill amortization.................................................................. 7,170 1,903
Depreciation........................................................................... 3,105 1,946
(Gain) on sale of loans and other assets............................................... -- (78)
Amortization of (discounts) premiums on investment securities.......................... (1,364) 106
Net increase (decrease) in accrued interest payable and other liabilities.............. (6,421) (416)
Net (increase) decrease in other assets................................................ (2,530) 7,044
----------- ----------
Net cash provided by operating activities............................................ 17,720 19,632
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities available for sale........................... 50,745 8,465
Principal payments received on investment securities available for sale.................. 154,213 156,585
Principal payments received on investment securities held to maturity.................... -- 1,905
Purchase of investment securities available for sale..................................... (120,764) (77,119)
Purchase of FRB or FHLB stock............................................................ (171) (94)
Proceeds from sale of premises and equipment............................................. 229 109
(Increase) decrease in net loans and leases.............................................. (47,680) (63,241)
Proceeds from sale of loans.............................................................. -- 1,299
Recoveries of loans and investment in leases............................................. 4,098 1,022
Additions to premises and equipment...................................................... (5,992) (709)
Proceeds from sale of other real estate owned............................................ 4,837 344
Change in assets and liabilities due to the acquisition of Santa Monica Bank ("SMB"):
Increase in investments available for sale............................................. (89,238) --
Increase in loans...................................................................... (387,609) --
Increase in other real estate owned.................................................... (3,318) --
Increase in other assets............................................................... (4,277) --
Increase in premises and equipment..................................................... (16,328) --
Increase in deposits................................................................... 584,095 --
Increase in borrowed funds............................................................. 1,960 --
Increase in other liabilities.......................................................... 5,988 --
Goodwill............................................................................... (119,656) --
----------- ----------
Net cash provided by investing activities............................................ 11,132 28,566
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
----------- ----------
(IN THOUSANDS)
CASH FLOW FROM FINANCING ACTIVITIES:
<S> <C> <C>
Cash received from exercise of options................................................... $ 301 $ 499
Proceeds from issuance of common stock................................................... 150,071 --
Common stock repurchased and retired..................................................... (11) (515)
Dividends paid........................................................................... (4,845) (2,680)
Net (decrease) increase in deposits...................................................... (154,719) 22,394
Additional (repayment of) borrowings..................................................... (318) 3,356
----------- ----------
Net cash (used in) provided by financing activities.................................. (9,521) 23,054
Net increase in cash and cash equivalents................................................ 19,331 71,252
Cash and cash equivalents at the beginning of the period................................. 236,158 118,719
----------- ----------
Cash and cash equivalents at the end of the period....................................... $ 255,489 $ 189,971
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Dividends declared in prior period and paid in current period............................ $ 2,221 $ --
Property acquired through foreclosure.................................................... -- 8,879
Loans to facilitate the sale of OREO..................................................... 256 4,292
Increase (decrease) in unrealized gain on securities available for sale, net of tax...... 569 802
Cash paid for interest................................................................... 27,750 21,781
Cash paid for taxes...................................................................... 5,507 1,568
ACQUISITION OF SMB:
Fair value of assets acquired............................................................ $ 794,782 $ --
Common stock issued to former shareholders of SMB........................................ (84,900) --
Cash paid................................................................................ (117,839) --
----------- ----------
Liabilities assumed.................................................................. $ 592,043 $ --
----------- ----------
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
6
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1--BASIS OF PRESENTATION
Western Bancorp (the "Company") is the holding company for Southern
California Bank ("SCB"), Santa Monica Bank ("SMB" and together with SCB, the
"Banks") and Venture Partners, Inc. The unaudited condensed consolidated
financial statements of the Company included herein reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary to present a fair statement of the results for the interim
periods indicated. Certain reclassifications have been made to the unaudited
condensed consolidated financial statements for 1997 to conform to the 1998
presentation. Certain information and note disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission"). The
results of operations for the three and nine months ended September 30, 1998 are
not necessarily indicative of the results of operations to be expected for the
remainder of the year.
The preparation of unaudited condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates subject to change include the allowance for loan and lease
losses, the carrying value of other real estate owned, and the deferred tax
asset.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report filed on Form 10-K for the
year ended December 31, 1997 and the financial statements and notes thereto
included in SMB's Annual Report for the year ended December 31, 1997 which was
included as an exhibit to a Current Report on Form 8-K/A filed by the Company on
April 9, 1998. As described more fully below, SMB was acquired by the Company on
January 27, 1998.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("SFAS 133"). This standard requires that all derivative
instruments be recorded in the statement of financial position at fair value;
the accounting for the gain or loss due to the changes in fair value of the
derivative instrument depends on whether the derivative instrument qualifies as
a hedge. If the derivative instrument does not qualify as a hedge, the gains or
losses are reported in earnings when they occur. However, if the derivative
instrument qualifies as a hedge, the accounting varies based on the type of risk
being hedged. SFAS 133 will apply to the Company starting January 1, 2000.
Management is currently evaluating the financial statement impact, if any, of
adopting SFAS 133.
NOTE 2--COMPLETED ACQUISITIONS
On January 27, 1998, the Company acquired Santa Monica Bank through the
merger of Santa Monica Bank with and into Western Bank, a banking subsidiary of
the Company (the "SMB Acquisition"). As part of the SMB Acquisition, the name of
Western Bank was changed to "Santa Monica Bank" (the surviving entity is
referred to herein as "SMB"). Upon the SMB Acquisition becoming effective, each
share of common stock 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
7
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 2--COMPLETED ACQUISITIONS (CONTINUED)
of Common Stock of the Company (the "Stock Consideration"). Of the 7,084,244
shares of SMB Common Stock outstanding at the time of the SMB Acquisition,
approximately 57.3 percent elected to receive the Cash Consideration, resulting
in a payment of $113,722,700 in the aggregate, and approximately 42.7 percent
received the Stock Consideration resulting in the issuance of approximately
2,653,000 shares of common stock of the Company. In order to fund a part of the
Cash Consideration payments, the Company issued an additional 2,327,550 shares
of Company Common Stock to certain private investors for $65,171,400 in the
aggregate. Accordingly, in the aggregate, approximately 4,980,550 shares of
Company Common Stock were issued in connection with the SMB Acquisition. The
total value of the consideration paid in the SMB Acquisition was approximately
$198.4 million in Company Common Stock and cash.
On April 17, 1998 the Company announced it signed a definitive agreement to
acquire (the "BKLA Acquisition") the Bank of Los Angeles ("BKLA"). Shareholders
of BKLA received 0.4224 shares of Company Common Stock for each share of common
stock of BKLA ("BKLA Common Stock"). The BKLA Acquisition closed on October 23,
1998 and will use the pooling-of-interests method of accounting. As a result of
this acquisition, approximately 2,214,500 shares of Company Common Stock were
issued to former holders of BKLA Common Stock and holders of options to purchase
common stock of BKLA. Warrants to purchase BKLA Common Stock were converted to
Warrants to purchase approximately 156,000 shares of Company Common Stock at an
exercise price of $8.88 per share.
NOTE 3--PENDING ACQUISITIONS
On October 6, 1998 the Company signed a definitive agreement to merge (the
"PNB Merger") with PNB Financial Group, Inc. ("PNB"). PNB operates through its
subsidiary Pacific National Bank ("Pacific"). As of September 30, 1998, PNB had
$275 million in assets and three banking branches located in Newport Beach,
Orange and Beverly Hills, California. Pacific is primarily focused in the areas
of commercial banking, including lending to small businesses, construction
lending and issuing loans insured by the Small Business Administration. In
addition, PNB has a residential mortgage origination business with offices in
Irvine, Santa Ana, Dublin and San Diego, California and an office in Phoenix,
Arizona. Through the first nine months of 1998, PNB originated approximately
$1.1 billion in mortgage loans. PNB sells substantially all of its mortgage
loans in the secondary market with servicing released and holds no volatile
servicing assets. Shareholders of PNB will receive 1.0 shares of Company Common
Stock for each share of common stock of PNB ("PNB Common Stock"). The PNB
Acquisition will use the pooling-of-interests method of accounting and is
expected to close in late 1998 or the first quarter of 1999. PNB has
approximately 2,780,000 shares of common stock and 266,000 options to purchase
shares of PNB Common Stock outstanding.
NOTE 4--TERMINATED ACQUISITIONS
On July 24, 1998, the Company executed an Agreement and Plan on Merger (the
"Peninsula Merger Agreement") with Portola Merger Sub ("Merger Sub") and
Peninsula Bank of San Diego ("Peninsula") pursuant to which Western would
acquire Peninsula through the merger of Merger Sub with and into Peninsula (the
"Peninsula Acquisition"). On October 30, 1998, pursuant to the Peninsula Merger
Agreement, the Board of Directors of Peninsula elected to terminate the merger
based on the performance of Company Common Stock versus the KBW bank stock
index.
8
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 5--UNAUDITED SUMMARY PRO FORMA DATA
The following tables show unaudited summary pro forma balance sheet and
income statement information for the SMB Acquisition consummated on January 27,
1998, the BKLA Acquisition consummated on October 23, 1998, and the pending PNB
Merger. Purchase accounting is used for the pro forma information presented for
the SMB Acquisition, and pooling-of-interests accounting is used for the pro
forma information presented for the BKLA Acquisition and the PNB Merger. SMB is
already included in the balance sheet as of September 30, 1998. The pro forma
income statement information for the nine month periods ended September 30, 1998
and September 30, 1997 includes operating results of SMB as if the SMB
Acquisition was consummated at the beginning of those periods. Results for the
Company for the nine month period ended September 30, 1998 already include the
results of SMB for the months of February through September 1998. January 1998
results for Santa Monica Bank and an additional month of amortization of
purchase accounting entries are included in the pro forma results for the nine
months ended September 30, 1998 shown below. The balance sheet and income
statement adjustments shown below are based on management's estimates, for pro
forma presentation, of costs and, in the case of the SMB Acquisition, the fair
value adjustments associated with this transaction. The Company's cost estimates
are forward-looking. Readers are cautioned that the type and amount of actual
costs incurred could vary materially from these estimates if future developments
differ from the underlying assumptions used by management in determining the
current estimate of these costs.
The unaudited summary pro forma balance sheet information is not necessarily
indicative of the actual financial position that would have existed had the BKLA
Acquisition or the PNB Merger been consummated on September 30, 1998 or December
31, 1997, or that may exist in the future. The unaudited summary pro forma
income statement information is not necessarily indicative of the results that
would have occurred had either the SMB Acquisition, the BKLA Acquisition, or the
PNB Merger been consummated on the dates indicated or that may be achieved in
the future. Assuming the consummation of the PNB Merger, the actual financial
position and results of operations will differ, perhaps significantly, from the
pro forma amounts reflected herein because of a variety of factors, including
changes in value and changes in operating results between the dates of the pro
forma financial data and the dates on which the BKLA Acquisition took place and
the PNB Merger takes place.
9
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 5--UNAUDITED SUMMARY PRO FORMA DATA (CONTINUED)
UNAUDITED SUMMARY PRO FORMA BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------
THE PRO FORMA PRO FORMA
COMPANY BKLA ADJUSTMENTS COMBINED PNB ADJUSTMENTS COMBINED
----------- --------- ----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............... $ 1,978,312 $ 294,715 $ 3,076 $ 2,276,103 $ 275,017 $ 1,890 $ 2,553,010
Securities................. 215,498 95,313 310,811 6,093 316,904
Loans and leases, net...... 1,295,767 147,802 1,443,569 230,218 1,673,787
Goodwill................... 142,916 5,391 148,307 -- 148,307
Deposits................... 1,656,169 240,697 1,896,866 215,456 2,112,322
Shareholders' equity....... 293,872 34,739 (7,279) 321,332 31,506 (5,345) 347,493
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------------------------------------------------------
THE PRO FORMA PRO FORMA
COMPANY BKLA ADJUSTMENTS COMBINED PNB ADJUSTMENTS COMBINED
----------- --------- ----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............... $ 1,383,510 $ 272,033 $ 3,076 $ 1,658,619 $ 242,874 $ 1,890 $ 1,903,383
Securities................. 207,514 60,433 267,947 6,910 274,857
Loans and leases, net...... 864,840 139,814 1,004,654 213,478 1,218,132
Goodwill................... 30,430 5,939 36,369 -- 36,369
Deposits................... 1,226,793 238,012 1,464,805 211,090 1,675,895
Shareholders' equity....... 129,655 31,054 (7,279) 153,430 23,998 (5,345) 172,083
</TABLE>
10
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 5--UNAUDITED SUMMARY PRO FORMA DATA (CONTINUED)
UNAUDITED SUMMARY PRO FORMA INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------------------------
THE SMB PRO FORMA PRO FORMA
COMPANY BKLA (JANUARY) ADJUSTMENTS COMBINED PNB COMBINED
----------- --------- ----------- ------------- ----------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income.................. $ 77,346 $ 11,202 $ 2,970 $ (235) $ 91,283 $ 10,903 $ 102,186
Provision for loan and lease
losses.............................. 450 -- 80 -- 530 575 1,105
Non-interest income.................. 12,514 1,496 614 -- 14,624 17,837 32,461
Non-interest expense................. 53,515 7,737 2,350 677 64,279 18,622 82,901
Net income........................... 18,132 3,001 691 (810) 21,014 5,536 26,550
Basic net income per share........... $ 1.20 $ 0.62 -- -- $ 1.19 $ 2.04 $ 1.30
Diluted net income per share......... $ 1.18 $ 0.56 -- -- $ 1.16 $ 1.93 $ 1.26
Weighted average shares outstanding:
Basic.............................. 15,120 4,819 17,721 2,708 20,429
Diluted............................ 15,331 5,358 18,160 2,876 21,036
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------------------------
THE PRO FORMA PRO FORMA
COMPANY BKLA SMB ADJUSTMENTS COMBINED PNB COMBINED
----------- --------- --------- ----------- ----------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income.................... $ 53,069 $ 7,796 $ 25,561 $ (2,112) $ 84,314 $ 8,909 $ 93,223
Provision for loan and lease losses.... 2,125 410 -- -- 2,535 765 3,300
Non-interest income.................... 7,430 1,021 5,330 -- 13,781 11,815 25,596
Non-interest expense................... 42,824 6,366 18,531 6,091 73,812 14,289 88,101
Net income............................. 7,528 2,041 8,022 (7,282) 10,309 3,329 13,638
Basic net income per share............. $ 0.72 $ 0.66 -- -- $ 0.61 $ 1.32 $ 0.71
Diluted net income per share........... $ 0.70 $ 0.57 -- -- $ 0.60 $ 1.23 $ 0.68
Weighted average shares outstanding:
Basic................................ 10,491 3,112 16,786 2,522 19,308
Diluted.............................. 10,783 3,579 17,275 2,700 19,975
</TABLE>
11
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 6--STATEMENT OF COMPREHENSIVE INCOME
Effective with the quarter ending March 31, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires all items that are required to be
recognized under accounting standards as components of comprehensive income to
be reported in a financial statement that is displayed in equal prominence with
the other financial statements and to disclose as a part of shareholders' equity
accumulated comprehensive income. The Company has chosen, for purposes of its
interim financial reporting, to present a statement of comprehensive income in
the notes to the financial statements. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income generally includes
net income, foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on investments in certain debt and equity securities
(i.e., securities available for sale). The Company's statement of comprehensive
income for the periods presented is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income................................................................ $ 18,132 $ 7,528 $ 6,625 $ 4,083
Other comprehensive income, net of related income taxes:
Unrealized gains on securities:
Unrealized holding gains arising during the period...................... 644 803 439 610
Less reclassification of realized gains included in income.............. (75) (154) (34) --
--------- --------- --------- ---------
569 649 405 610
--------- --------- --------- ---------
Comprehensive income...................................................... $ 18,701 $ 8,177 $ 7,030 $ 4,693
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NOTE 7--NET INCOME PER SHARE
The following is a summary of the calculation of basic and diluted net
income per share for the three and nine month periods ended September 30, 1998
and 1997 in thousands, except per share amounts:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income.................................................... $ 18,132 $ 7,528 $ 6,625 $ 4,083
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding........................... 15,119.9 10,491.0 15,706.8 10,488.7
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic net income per share.................................... $ 1.20 $ 0.72 $ 0.42 $ 0.39
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding........................... 15,119.9 10,491.0 15,706.8 10,488.7
Effect of dilutive stock options and warrants................. 211.2 292.0 201.9 302.4
---------- ---------- ---------- ----------
Diluted shares outstanding.................................... 15,331.1 10,783.0 15,908.7 10,791.1
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net income per share.................................. $ 1.18 $ 0.70 $ 0.42 $ 0.38
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following tables and data set forth certain statistical information
relating to the Company as of September 30, 1998 and for the three and nine
month periods ended September 30, 1998 and September 30, 1997. This discussion
should be read in conjunction with the Unaudited Condensed Consolidated
Financial Statements as of September 30, 1998 and December 31, 1997 and for the
three and nine month periods ended September 30, 1998 and September 30, 1997.
When the Company uses or incorporates by reference in this Quarterly Report
on Form 10-Q (the "Quarterly Report") the words "anticipate," "estimate,"
"expect," "project," "intend," "commit," "believe" and similar expressions, the
Company intends to identify certain forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions, including those
described in this Quarterly Report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected,
projected, intended, committed or believed.
FINANCIAL CONDITION
On January 27, 1998, the Company consummated the SMB Acquisition in a
transaction accounted for using the purchase method of accounting. As a result
of the SMB Acquisition and the additional equity that was raised to help fund
the transaction, consolidated assets, total deposits and shareholders' equity
increased by approximately $795 million, $584 million and $150 million,
respectively (based on Santa Monica Bank's unaudited balance sheet at January
31, 1998). Due to the use of purchase accounting for the SMB Acquisition,
goodwill accounted for approximately $120 million of the total increase in
assets resulting from this transaction.
Adjusting for the increases related to the SMB Acquisition, since December
31, 1997 the Company's total assets have declined by approximately $200 million.
The major components of this decline in assets are a decrease in federal funds
sold and cash of approximately $155 million and a decrease in available-for-sale
securities of approximately $81 million offset partially by an increase in net
loans and leases of approximately $43 million. The net reduction in securities
is a result of approximately $57 million in securities sales and approximately
$124 million in maturities and principal payments which were offset partially by
purchases of approximately $151 million. The reduction in federal funds sold
occurred mostly as a result of the decrease in deposits discussed below.
Adjusting for the increases related to the SMB Acquisition, since December
31, 1997 the Company's total deposits have declined by approximately $155
million. Of this decline, approximately $121 million was in interest bearing
deposits. This decline results primarily from the decision by management of the
Company to close certain of its branches and to lower the rate paid on certain
of its higher cost deposits.
As a result of the increase in loans and decline in deposits, excluding the
effect of the SMB Acquisition, the Company's loan-to-deposit ratio has increased
to 79.8% as of September 30, 1998 from 71.8% as of December 31, 1997.
RESULTS OF OPERATIONS
Consolidated net income for the quarter ended September 30, 1998 was
$6,625,000 or $0.42 per diluted share. This compares with earnings of $4,083,000
or $0.38 per diluted share, for the quarter ended September 30, 1997. On an
operating basis, before the amortization of goodwill and after-tax merger
related costs, net income for the three month periods was $9,234,000 and
$4,720,000 in 1998 and 1997, respectively, or $0.58 and $0.44 per diluted share,
respectively, a growth of approximately 32%. Diluted operating net income per
share grew approximately 5% from $0.55 per diluted share in the second quarter
of 1998. Operating results for the 1998 period include those of Santa Monica
Bank, which was acquired on January 27, 1998.
13
<PAGE>
Consolidated net income for the nine months ended September 30, 1998 was
$18,132,000 or $1.18 per diluted share. This compares with net income of
$7,528,000 or $0.70 per diluted share, for the nine months ended September 30,
1997. On an operating basis, before the amortization of goodwill and before
after-tax merger related costs, net income for the nine month periods was
$25,302,000 and $12,510,000 in 1998 and 1997, respectively, or $1.65 and $1.16
per diluted share, respectively, a growth of approximately 42%. Operating
results for the 1998 period include those of SMB since February 1998.
During the third quarter, the Board of Directors of the Company approved the
declaration of a quarterly dividend of $0.15 per common share which was paid on
September 25, 1998 to shareholders of record on August 28, 1998.
Operating profits for the Company are dependent on loan growth, controlling
costs and continual efforts to prevent any unexpected loan and lease losses that
would require additions to the allowance for loan and lease losses ("ALLL"). The
demand for loans has increased in the Company's primary market areas, and the
Company plans to take advantage of this increased demand, while seeking to
maintain its credit quality standards. The Company's operating return on average
tangible assets improved from 1.15% in the first quarter of 1997 to 1.46% in the
fourth quarter of 1997 to 1.87% in the second quarter of 1998 to 1.96% in the
third quarter of 1998. This increase is attributable to improved credit quality,
a higher net interest margin and improvements in efficiency. As a result of the
Company's improving profitability, book value per share has increased from
$18.16 at March 31, 1998 to $18.71 at September 30, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE INFORMATION:
Number of shares (weighted average, in thousands)...... 15,119.9 10,491.0 15,706.8 10,488.7
Diluted shares (weighted average, in thousands)........ 15,331.1 10,783.0 15,908.7 10,791.1
Basic income per share................................. $ 1.20 $ 0.72 $ 0.42 $ 0.39
Diluted income per share............................... $ 1.18 $ 0.70 $ 0.42 $ 0.38
Before merger costs and goodwill amortization
Basic income per share............................... $ 1.67 $ 1.19 $ 0.59 $ 0.45
Diluted income per share............................. $ 1.65 $ 1.16 $ 0.58 $ 0.44
PROFITABILITY MEASURES:
Return on average assets............................... 1.24% 0.75% 1.30% 1.19%
Return on average equity............................... 9.0% 7.6% 8.9% 12.1%
Before merger costs and goodwill amortization
Return on average tangible assets.................... 1.85% 1.28% 1.96% 1.41%
Return on average equity............................. 12.5% 12.6% 12.5% 13.9%
Efficiency ratio..................................... 51.6% 61.9% 49.0% 58.9%
ADJUSTMENTS TO NET INCOME (IN THOUSANDS):
Net income............................................. $ 18,132 $ 7,528 $ 6,625 $ 4,083
Merger costs........................................... -- 3,470 -- --
Tax benefits......................................... -- 395 -- --
------------ ------------ ------------ ------------
After tax merger costs................................. -- 3,075 -- --
Goodwill amortization.................................. 7,170 1,907 2,609 637
------------ ------------ ------------ ------------
Adjusted net income.................................. $ 25,302 $ 12,510 $ 9,234 $ 4,720
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
REVENUES (IN THOUSANDS):
Net interest income.................................... $ 77,346 $ 53,069 $ 26,742 $ 18,641
Non-interest income.................................... 12,514 7,430 4,656 2,402
------------ ------------ ------------ ------------
Revenues............................................. $ 89,860 $ 60,499 $ 31,398 $ 21,043
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
ADJUSTMENTS TO EXPENSES (IN THOUSANDS):
Non-interest expense................................... $ 53,515 $ 42,824 $ 18,002 $ 13,024
Merger costs........................................... -- (3,470) -- --
Goodwill amortization.................................. (7,170) (1,907) (2,609) (637)
------------ ------------ ------------ ------------
Adjusted expenses.................................... $ 46,345 $ 37,447 $ 15,393 $ 12,387
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
14
<PAGE>
NET INTEREST INCOME
Net interest income is the difference between interest earned on assets and
interest paid on liabilities. Net interest margin is net interest income
expressed as a percentage of average interest-earning assets. The following
tables provide information concerning average interest-earning assets and
average interest-bearing liabilities and yields and rates thereon for the three
and nine months ended September 30, 1998 and September 30, 1997. Nonaccrual
loans are included in the average interest-earning assets amounts.
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVERAGE BALANCE SHEETS
(In thousands)
AVERAGE ASSETS
Loans and leases, net of deferred fees and costs......... $ 1,228,407 $ 831,500 $ 1,289,639 $ 854,323
Investments.............................................. 239,824 283,393 224,065 261,352
Federal funds sold....................................... 189,400 67,363 180,661 80,823
------------ ------------ ------------ ------------
Average Interest-Earning Assets...................... 1,657,631 1,182,256 1,694,365 1,196,498
Goodwill................................................. 133,472 31,976 145,701 31,331
Other assets............................................. 169,768 127,017 175,936 131,378
------------ ------------ ------------ ------------
Average Total Assets................................. $ 1,960,871 $ 1,341,249 $ 2,016,002 $ 1,359,207
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest-bearing deposits............................ $ 600,581 $ 401,995 $ 630,491 $ 408,730
Interest-bearing deposits................................ 1,058,027 779,998 1,067,529 790,535
------------ ------------ ------------ ------------
Average Deposits..................................... 1,658,608 1,181,993 1,698,020 1,199,265
Other interest-bearing liabilities....................... 14,206 15,797 9,980 15,147
Other liabilities........................................ 17,594 10,701 14,247 10,396
------------ ------------ ------------ ------------
Average Liabilities.................................. 1,690,408 1,208,491 1,722,247 1,224,808
Shareholders' equity..................................... 270,463 132,758 293,755 134,399
------------ ------------ ------------ ------------
Average Liabilities and Shareholders' Equity............. $ 1,960,871 $ 1,341,249 $ 2,016,002 $ 1,359,207
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
YIELD ANALYSIS
(Dollars in millions)
Average interest-earning assets.................................... $ 1,657.6 $ 1,182.3 $ 1,694.4 $ 1,196.5
Yield.......................................................... 8.47% 8.46% 8.44% 8.65%
Average interest-bearing deposits.................................. $ 1,058.0 $ 780.0 $ 1,067.5 $ 790.5
Cost........................................................... 3.39% 3.59% 3.38% 3.60%
Average deposits................................................... $ 1,658.6 $ 1,182.0 $ 1,698.0 $ 1,199.3
Cost........................................................... 2.16% 2.37% 2.12% 2.38%
Average interest-bearing liabilities............................... $ 1,072.2 $ 795.8 $ 1,077.5 $ 805.7
Cost........................................................... 3.45% 3.66% 3.43% 3.66%
Interest spread.................................................... 5.02% 4.80% 5.01% 4.99%
Net interest margin................................................ 6.24% 6.00% 6.26% 6.18%
</TABLE>
15
<PAGE>
Interest income for the three and nine month periods ended September 30,
1998 was $36.1 million and $105.0 million, respectively, compared with $26.1
million and $74.8 million for the same periods in 1997, respectively. The
increase in interest income for the 1998 periods compared with the same periods
for 1997 was due mostly to the increase in interest-earning assets from the SMB
Acquisition.
The following table shows the average earning assets and interest income for
the third quarter of 1998 and 1997 and the amount of the increase attributable
to SMB since the SMB Acquisition (dollars in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED IMPACT OF CONSOLIDATED NET DECREASE
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Average interest-earning assets.......................... $1,694,365 $ 567,759 $1,196,498 $ (69,892)
Interest income.......................................... 36,060 11,933 26,081 (1,954)
Yield................................................ 8.44% 8.34% 8.65% --
</TABLE>
The following table shows the average interest-earning assets and interest
income for the first nine months of 1998 and 1997 and the amount of increase
attributable to SMB since the SMB Acquisition (dollars in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED IMPACT OF CONSOLIDATED NET DECREASE
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Average interest-earning assets.......................... $1,657,631 $ 567,971 $1,182,256 $ (92,596)
Interest income.......................................... 104,982 31,814 74,839 (1,671)
Yield................................................ 8.47% 8.45% 8.46%
</TABLE>
Without the increase due to the SMB Acquisition, average earning assets
declined by approximately $70 million and $93 million for the three and nine
months ended September 30, 1998, respectively, compared to the same periods of
1997. Without the increase due to the SMB Acquisition, interest income declined
by approximately $2 million and $1.7 million for the three and nine months ended
September 30, 1998, respectively, compared to the same periods of 1997. The
reduction in interest income for the three months ended September 30, 1998
versus the same period in 1997 is a result of both the decline in average
interest-earning assets and the decline in yield on average earning assets. The
reduction in interest income for the nine month periods ended September 30, 1998
compared to 1997 is a result of the decline in interest earning assets partially
offset by the increase in yield.
Interest expense for the three and nine month periods ended September 30,
1998 was $9.3 million and $27.6 million, respectively, compared with $7.4
million and $21.8 million for the same periods in 1997, respectively. The
increase in 1998 compared to 1997 was due mostly to the increase in
interest-bearing deposits from the SMB Acquisition.
The following table shows the average interest-bearing liabilities and
interest expense for the third quarter of 1998 and 1997 and the amount of
increase attributable to SMB (dollars in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED IMPACT OF CONSOLIDATED NET DECREASE
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Average interest-bearing liabilities..................... $1,077,509 $ 386,176 $ 805,682 $ (114,349)
Interest expense......................................... 9,318 3,202 7,440 (1,324)
Cost................................................. 3.43% 3.29% 3.66%
</TABLE>
16
<PAGE>
The following table shows the average interest-bearing liabilities and
interest expense for the first nine months of 1998 and 1997 and the amount of
increase attributable to SMB since the SMB Acquisition (dollars in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED IMPACT OF CONSOLIDATED NET DECREASE
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Average interest-bearing liabilities..................... $1,072,233 $ 386,067 $ 795,795 $ (109,629)
Interest expense......................................... 27,636 8,737 21,770 (2,871)
Cost................................................. 3.45% 3.41% 3.66%
</TABLE>
Without the increase due to the SMB Acquisition, average interest-bearing
liabilities declined by approximately $114 million and $110 million for the
three and nine months ending September 30, 1998 compared to the same periods of
1997. Without the increase due to the SMB Acquisition interest expense declined
by approximately $1 million and $3 million for the three and nine month periods
ended September 30, 1998 compared to the same periods of 1997. The decline in
interest-bearing deposits and the cost of the deposits for the three and nine
month periods was largely related to the downward pricing of higher cost time
deposits and management's decision to close certain of its branches.
ALLOWANCE FOR LOAN AND LEASE LOSSES
During the nine month period ended September 30, 1998, the ALLL increased by
approximately $5,009,000 from $15,894,000 at December 31, 1997 to $20,903,000 at
September 30, 1998 resulting from $450,000 of provision, $4,098,000 of net
charge-offs and $8,657,000 added from the SMB Acquisition. The ratio of the
allowance for loan and lease losses to total loans and leases was 1.59% at
September 30, 1998, down slightly from 1.80% at December 31, 1997. The decrease
resulted mainly from the charge-off of one real estate loan, acquired in the
merger with SC Bancorp, which was subsequently found to have environmental
problems that were not remedied during the quarter. Management continues to
pursue aggressively recovery of all or part of this loan.
During the three months ended September 30, 1998, approximately $4,396,000
of loans were charged to the Company's ALLL, and approximately $468,000 of loans
were recovered resulting in net charge-offs for the period of approximately
$3,928,000. For the nine months ended September 30, 1998, approximately
$5,419,000 of loans were charged to the Company's ALLL, and approximately
$1,321,000 of loans were recovered resulting in net charge-offs for the nine
month period of approximately $4,098,000 or 0.45% of average loans and leases on
an annualized basis.
Nonperforming assets decreased by approximately $1,419,000 during the
quarter ended September 30, 1998 from approximately $18,655,000 at June 30, 1998
to approximately $17,236,000 at September 30, 1998, due to a reduction of
approximately $1,389,000 in nonaccrual loans and a decrease in OREO of
approximately $30,000 during the period. Nonperforming assets decreased from
1.55% of total loans, leases and OREO at December 31, 1997 to 1.30% at September
30, 1998. The coverage of ALLL to nonperforming assets increased from 115.6% at
December 31, 1997 to 121.3% at September 30, 1998.
Based on current information available, including the Company's quarterly
migration analysis of loan and lease losses, the improved economic condition,
the continued improvement in credit quality in the loan portfolio and continued
adherence to established credit policies, management believes the ALLL is
adequate at September 30, 1998.
17
<PAGE>
NON-INTEREST INCOME
The following tables show the details of non-interest income for the three
month periods ended September 30, 1998 and 1997. Due to the purchase accounting
treatment of the SMB Acquisition, the 1997 numbers do not include SMB:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------
1998
--------------------------------------- 1997
THE COMPANY -------------
SMB WITHOUT SMB CONSOLIDATED CONSOLIDATED
--------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges and fees on deposit accounts and other
fees....................................................... $ 1,257 $ 1,544 $ 2,801 $ 1,794
Trust fees................................................... 979 -- 979 --
Escrow fees.................................................. -- 217 217 214
Securities gains............................................. 49 228 277 --
Other income................................................. 28 354 382 394
--------- ------ ------ ------
Total non-interest income................................ $ 2,313 $ 2,343 $ 4,656 $ 2,402
--------- ------ ------ ------
--------- ------ ------ ------
</TABLE>
The following tables show the details of non-interest income for the nine
month periods ended September 30, 1998 and September 30, 1997. Due to the
purchase accounting treatment of the SMB Acquisition, the 1997 numbers do not
include SMB:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------
1998
-------------------------------------- 1997
THE COMPANY -------------
SMB WITHOUT SMB CONSOLIDATED CONSOLIDATED
--------- ------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges and fees on deposit accounts and other
fees....................................................... $ 2,783 $ 5,122 $ 7,905 $ 5,295
Trust fees................................................... 2,594 -- 2,594 --
Escrow fees.................................................. -- 748 748 551
Gain on sale of loans and other assets....................... -- -- -- 78
Securities gains............................................. 49 383 432 342
Other income................................................. 121 714 835 1,164
--------- ------ ------------ ------
Total non-interest income................................ $ 5,547 $ 6,967 $ 12,514 $ 7,430
--------- ------ ------------ ------
--------- ------ ------------ ------
</TABLE>
Before giving effect to the SMB Acquisition, non-interest income decreased
by $59,000 for the three months ended September 30, 1998 compared to the same
period for 1997, due largely to a decrease in service charges and fees of
$250,000 offset by the gain on sale of securities in the amount of $228,000.
However, non-interest income has decreased $463,000 for the nine month period
ended September 30, 1998 compared to the same period of 1997. This decline is
due primarily to a decrease in other income of $450,000, offset partially by an
increase in escrow fees of $197,000. Trust fees are generated from the
approximately $710 million of assets held in trust by SMB as of September 30,
1998.
18
<PAGE>
NON INTEREST EXPENSE
The following table shows the details of non-interest expense for the three
month periods ended September 30, 1998 and 1997. Due to purchase accounting
treatment of the SMB Acquisition, the 1997 numbers do not include SMB:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
1998
-------------------------------------- 1997
THE COMPANY ------------
SMB WITHOUT SMB CONSOLIDATED CONSOLIDATED
--------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and benefits....................................... $ 2,872 $ 5,220 $ 8,092 $ 6,457
Occupancy, furniture and equipment.......................... 1,274 1,414 2,688 1,867
Advertising and business development........................ 166 (63) 103 345
Other real estate owned..................................... (48) 61 13 266
Professional services....................................... 166 879 1,045 1,026
Telephone, stationery and supplies.......................... 277 523 800 648
Data processing............................................. 103 507 610 411
Customer services cost...................................... 36 370 406 308
Other....................................................... 214 1,422 1,636 1,059
--------- ------------- ------------ ------------
Operating non-interest expense.............................. 5,060 10,333 15,393 12,387
Goodwill amortization..................................... 1,975 634 2,609 637
--------- ------------- ------------ ------------
Total non-interest expense................................ $ 7,035 $ 10,967 $ 18,002 $ 13,024
--------- ------------- ------------ ------------
--------- ------------- ------------ ------------
</TABLE>
The following tables show the details of non-interest expense for the nine
month periods ended September 30, 1998 and 1997. Due to purchase accounting
treatment of the SMB Acquisition, SMB results are not included in the 1997
numbers:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
1998
-------------------------------------- 1997
THE COMPANY ------------
SMB WITHOUT SMB CONSOLIDATED CONSOLIDATED
--------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and benefits...................................... $ 8,700 $ 17,117 $ 25,817 $ 19,172
Occupancy, furniture and equipment......................... 2,959 5,057 8,016 5,756
Advertising and business development....................... 489 180 669 941
Other real estate owned.................................... (143) (49) (192) 335
Professional services...................................... 406 2,296 2,702 2,779
Telephone, stationery and supplies......................... 828 1,409 2,237 2,068
Data processing............................................ 166 1,570 1,736 1,202
Customer services cost..................................... 73 1,175 1,248 867
Other...................................................... 947 3,165 4,112 4,327
--------- ------------- ------------ ------------
Operating non-interest expense............................. 14,425 31,920 46,345 37,447
Goodwill amortization.................................... 5,266 1,904 7,170 1,907
Merger costs............................................. -- -- -- 3,470
--------- ------------- ------------ ------------
Total non-interest expense............................... $ 19,691 $ 33,824 $ 53,515 $ 42,824
--------- ------------- ------------ ------------
--------- ------------- ------------ ------------
</TABLE>
Before giving effect to the SMB Acquisition and excluding goodwill in both
years and merger related expenses in 1997, operating non-interest expense
declined by $2,054,000 and $5,527,000 for the three and nine month periods ended
September 30, 1998 compared to the same periods of 1997, respectively. The
19
<PAGE>
reduction was in almost every category listed above as combined resources of all
banks acquired were applied to achieve increased efficiencies, especially in
salaries, benefits and other operating expenses.
The efficiency ratio (operating expense before goodwill amortization and
merger costs divided by net interest income plus non-interest income) is a
measure of how effective the Company is at using its expense dollars. A lower or
declining ratio indicates improving efficiency. Due to the efficiency
improvements discussed above, the Company's efficiency ratio improved from 58.9%
in the third quarter of 1997 to 49.0% in the third quarter of 1998.
CREDIT QUALITY AND ANALYSIS
The Company defines nonperforming assets to include (i) loans on which it
has ceased to accrue interest ("Nonaccrual Loans") and (ii) foreclosed real
estate owned. "Impaired loans" are commercial, commercial real estate, and
individually significant mortgage and consumer loans for which it is probable
that the Company will not be able to collect all amounts due according to
contractual terms of the loan agreement. The category of "impaired loans" is not
coextensive with the category of "nonaccural loans," although the two categories
overlap. "Nonaccrual loans" include impaired loans and are those on which the
accrual of interest is discontinued when collectibility of principal or interest
is uncertain or payments of principal or interest have become contractually past
due 90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the loan
impaired, if (i) it is probable that the Company will collect all amounts due in
accordance with the contractual terms of the loan or (ii) the loan is not a
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, the impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Planned-workout arrangements are currently in place for substantially all
nonperforming assets, and, unless there are any unexpected changes in the
financial condition of the borrowers, management is not aware of any additional
significant loss potential that has not already been included in the ALLL.
20
<PAGE>
The following table shows the historical trends in nonperforming assets and
comparative key credit statistics at the Company:
CREDIT QUALITY MEASURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT OR
FOR THE
YEAR
AT OR FOR THE QUARTER ENDED ENDED
-------------------------------------------------------- --------
30-SEP 30-JUN 31-MAR 31-DEC 30-SEP 31-DEC
1998 1998 1998 1997 1997 1996
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loans past due 90 days and still
accruing......................... $ 435 $ 2,495 $ -- $ 31 $ 1,267 $ 193
Nonaccrual loans and leases........ 12,320 13,709 11,713(1) 7,488 9,468 16,157
Other real estate owned............ 4,916 4,946 7,508(2) 6,261 8,354 7,082
---------- ---------- ---------- -------- -------- --------
Nonperforming assets............. 17,236 18,655 19,221 13,749 17,822 23,239
Impaired loans gross............... 12,322 16,192 17,579 13,482 14,960 21,034
Allocated reserves................. 875 2,274 679 679 418 2,172
---------- ---------- ---------- -------- -------- --------
Net investment in impaired
loans.......................... 11,447 13,918 16,900 12,803 14,542 18,862
Charge-offs........................ 4,396 727 296 422 1,461 4,675
Recoveries......................... 468 273 580 481 551 1,123
---------- ---------- ---------- -------- -------- --------
Net charge-offs.................. 3,928 454 (284) (59) 910 3,552
Allowance for loan and lease losses
("ALLL")......................... 20,903 24,681 24,985 15,894 15,160 15,757
Loans and leases, net of deferred
fees and costs................... 1,316,670 1,274,611 1,253,887 880,734 874,283 817,358
Average loans and leases for the
quarter, net of deferred fees and
costs............................ 1,289,639 1,265,049 1,128,806 868,466 854,323 601,115
ALLL to loans and leases........... 1.59% 1.94% 1.99% 1.80% 1.73% 1.93%
ALLL to nonaccrual loans and
leases........................... 169.7% 180.0% 213.3% 212.3% 160.1% 97.5%
ALLL to nonperforming assets....... 121.3% 132.3% 130.0% 115.6% 85.1% 67.8%
Nonperforming assets to loans,
leases and OREO.................. 1.30% 1.46% 1.52% 1.55% 2.02% 2.82%
Annualized net charge-offs
(recoveries) to average loans and
leases........................... 1.22% 0.14% (0.10%) (0.03%) 0.43%
Full year net charge-offs to
average loans and leases......... 0.31% 0.59%
</TABLE>
- ------------------------
(1) Includes approximately $2.2 million related to the January 27, 1998 SMB
Acquisition.
(2) Includes approximately $3.3 million related to the January 27, 1998 SMB
Acquisition.
The Company has established a monitoring system for its loans in order to
identify impaired loans potential problem loans and to permit periodic
evaluation of impairment and the adequacy of the ALLL in a timely manner. The
monitoring system and ALLL methodology have evolved over a period of years and
loan classifications have been incorporated into the determination of the ALLL.
This monitoring system and allowance methodology include a loan-by-loan analysis
for all classified loans as well as loss factors for
21
<PAGE>
the balance of the portfolio that are based on migration analysis relative to
the unclassified portfolio. This analysis includes such factors as historical
loss experience, current portfolio delinquency and trends, and other inherent
risk factors such as economic conditions, risk levels of particular loan
categories, internal loan review and oversight, and concentrations in the
portfolio.
Loans past due 90 days and still accruing represent loans which are past due
90 days or more as to interest or principal, but not included in the nonaccrual
or restructured categories. All loans in this category are well-secured and in
the process of collection or renewal
At September 30, 1998, the Company had approximately $12,322,000 of loans,
which were considered impaired, compared with $16,192,000 at June 30, 1998.
Specific reserves of approximately $875,000 were established for certain
impaired loans in addition to reserves estimated in the quarterly ALLL review.
Of these loans, approximately $12,320,000 are on a nonaccrual status. Nonaccrual
loans decreased by $1,389,000 to $12,320,000 and other real estate owned
decreased by $30,000 during the quarter.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
On a stand-alone basis, the Company's sources of liquidity include dividends
from the Banks and outside borrowings. The amount of dividends that the Banks
can pay to the Company is restricted by regulatory guidelines.
The primary functions of asset/liability management are to ensure adequate
liquidity and maintain an appropriate balance between interest-earning assets
and interest-bearing liabilities at the Banks. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers who may need assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Historically, the overall liquidity of the Banks is based on the core
deposit base of the Banks. The Banks have not relied on large denomination time
deposits.
To meet short-term liquidity needs, the Company has maintained at the Banks
what it believes are adequate balances in federal funds sold, certificates of
deposits with other financial institutions and investment securities having
maturities of five years or less. On a consolidated basis, liquid assets (cash,
federal funds sold and investment securities available for sale) as a percent of
total deposits are 28.1% and 35.7% as of September 30, 1998 and December 31,
1997, respectively.
INCOME TAXES
The Company's normal effective income tax rate is approximately 42.0%,
representing a blend of the statutory Federal income tax rate of 35.0% and the
California income tax rate of 10.84%. The Company's actual effective income tax
rates were 50.0% and 44.0% for the three months ended September 30, 1998 and
1997, respectively, and 49.5% and 51.6% for the nine month periods ending
September 30, 1998 and 1997, respectively. The actual effective tax rates are
higher during the 1998 periods largely as a result of nondeductible goodwill.
The actual effective tax rates are higher during the 1997 periods as a result of
nondeductible goodwill and nondeductible merger costs (nine month period only).
22
<PAGE>
REGULATORY MATTERS
The regulatory capital guidelines as well as the actual regulatory capital
ratios for SCB, SMB and the Company on a consolidated basis, as of September 30,
1998, follow:
<TABLE>
<CAPTION>
REGULATORY REQUIREMENTS
---------------------------- ACTUAL
ADEQUATELY WELL ----------------------------------
CAPITALIZED CAPITALIZED SCB SMB CONSOLIDATED
----------- --------------- --------- --------- ------------
(GREATER THAN OR EQUAL TO
STATED PERCENTAGE)
<S> <C> <C> <C> <C> <C>
Tier 1 leverage capital ratio................... 4.00% 5.00% 8.85% 7.75% 7.98%
Tier 1 risk-based capital ratio................. 4.00% 6.00% 9.86% 10.20% 9.72%
Total risk-based capital........................ 8.00% 10.00% 10.93% 11.46% 10.97%
</TABLE>
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 or
possibly earlier. The Year 2000 issue affects the Company in that the financial
services business is highly dependent on computer applications in a variety of
ways, including the following: (i) the Company relies on computer systems in
almost all aspects of its business, including the processing of deposits, loans
and other services and products offered to customers as well as for certain
environmental issues such as heating, ventilation and air conditioning in the
buildings in which the Company conducts its business, the failure of which in
connection with the Year 2000 could cause systemic disruptions and failures in
the products and services offered by the Company; (ii) other banks, clearing
houses and vendors whose products and services the Company uses 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 Company and the stability of deposits
of the Company might be diminished by significant disruptions of their business
as a result of their own or others' failure to address adequately 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 to address
appropriately 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 of the institution's composite rating.
In order to address the Year 2000 issues facing the Company, the management
of the Company initiated a program to prepare the Company's computer systems and
applications for the Year 2000. As the primary focus of the Year 2000 Plan, the
Company has converted the Banks to target systems identified and believed to be
Year 2000 compliant. The Company has divided its Year 2000 Plan into five
phases, and the Company charts its progress in each of those phases. The
following is the Company's progress in each of the phases as an approximate
percentage of completion of that phase as of September 30, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
PHASE PERCENTAGE OF COMPLETE
- --------------------------------------------------------------------------------- -------------------------
<S> <C>
Awareness........................................................................ 100%
Assessment....................................................................... 100%
Renovation....................................................................... 80%
Validation....................................................................... 10%
Implementation................................................................... 40%
</TABLE>
Pursuant to the Year 2000 Plan, the Company expects to substantially
complete validation of its mission-critical systems and the computer-related
interactive vendor systems by December 31, 1998 and to
23
<PAGE>
complete all validation by June 30, 1999. In addition, the Company expects to
complete all phases of its Year 2000 Plan by June 30, 1999. 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 the Year
2000. Validation and conversion of primary system applications and hardware is
expected to cost approximately $1,100,000, of which approximately $148,000 has
been expensed through September 30, 1998. The remainder will be expensed in the
fourth quarter of 1998 and in fiscal 1999. This cost estimate does not include
costs associated with infrastructure and facilities enhancements required in
connection with operational consolidations due to the Company's prior, current
or future acquisitions. A significant portion of the cost to the Company in
connection with becoming Year 2000 compliant is expected to be derived from 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 validation necessary to ensure
that the Company is adequately prepared for the Year 2000, but the Company is
also communicating with its vendors upon whose services the Company relies to
ensure that such vendors are taking appropriate steps to address their Year 2000
issues. In addition, as part of the credit review process, the Company is
communicating with its 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 is
communicating with its major deposit customers as well in an effort to ensure
deposit stability. The Company is also preparing contingency plans to try to
minimize the harm to the Company in the event that the Company or any or all of
the third parties with which it interacts is unable to attain Year 2000
compliance. The contingency plans being prepared are system and application
specific and are intended to ensure that in the event that one or more of such
systems and/or applications fail by or at the Year 2000, the Company will be
able to engage in its core business functions in spite of such failure.
Although the Company believes that its Year 2000 Plan and other steps being
taken are adequate to ensure that it 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 fully protect the
Company from the risks associated with the Year 2000 problem. 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
the Company's management 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 businesses of the Company, vendors of the
Company or customers of the Company are disrupted as a result of the Year 2000
problem, such disruption could have a material adverse effect on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk sensitive instruments are generally defined as on and off
balance sheet derivatives and other financial instruments. At December 31, 1997
and September 30, 1998, the Company had no material on or off balance sheet
derivatives. The Company's financial instruments include interest sensitive
loans receivable, federal funds sold, FRB and FHLB stock, investment securities,
deposits and borrowings. At December 31, 1997, the Company reported that it had
$1.2 billion in interest sensitive assets and $782 million in interest sensitive
liabilities. At September 30, 1998, the Company's interest sensitive assets,
before the allowance for loan and lease losses, and interest sensitive
liabilities totaled approximately $1.7 billion and $1.1 billion, respectively.
The increases in such assets and liabilities from December 31, 1997 to September
30, 1998 were largely the result of the SMB Acquisition. See "Note 2 of the
Notes to Unaudited Condensed Consolidated Financial Statements."
The yield on interest sensitive assets and the cost of interest sensitive
liabilities for the third quarter of 1998 was 8.44% and 3.43%, respectively,
compared to 8.27% and 3.65%, respectively, at December 31, 1997. The increase in
the yield on interest sensitive assets is primarily a result of the percentage
of average
24
<PAGE>
loans to average interest sensitive assets increasing from approximately 72% at
December 31, 1997 to 79% for the quarter ended September 30, 1998. The decrease
in the cost of interest sensitive liabilities is primarily a result of the
reduction in the rates paid on higher cost deposits over the same period.
The Company's interest sensitive assets and interest sensitive liabilities
were reported to have estimated fair values of $1.2 billion and $783 million,
respectively, at December 31, 1997. The interest sensitive assets and interest
sensitive liabilities acquired in the SMB Acquisition were recorded at their
estimated fair values on the January 27, 1998 acquisition date. Management has
estimated that the market discount on interest sensitive assets (which reflects
the allowance for loan and lease losses) versus book value (before the allowance
for loan and lease losses) has increased from approximately $20 million at
December 31, 1997 to $23 million at September 30, 1998, while the discount on
interest sensitive liabilities has remained at approximately $1 million over the
same period. As a result, the estimated fair values of interest sensitive assets
and liabilities was approximately $1.7 billion and $1.1 billion, respectively at
September 30, 1998.
25
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of October 6, 1998, between Western Bancorp and PNB
Financial Group, Inc.(Exhibit 2.1 to Western Bancorp's Current Report on Form 8-K dated
October 21, 1998 incorporated herein by reference)
3.1 Restated Articles of Incorporation of Western Bancorp (Exhibit 3.6 of Registration Statement
No. 333-26915 incorporated herein by reference)
3.3 Restated Bylaws of Western Bancorp approved on October 10, 1997 (Exhibit 3.2 of Registration
Statement No. 333-35271 incorporated herein by reference)
4.1 Form of certificate representing shares of common stock of Western Bancorp (Exhibit 3.1 to
Western Bancorp's Current Report on Form 8-K dated June 18, 1997 incorporated herein by
reference)
10.1 Third Amendment to Revolving Credit Agreement, First Amendment to Pledge Agreement and Waiver,
dated January 26, 1997. (Exhibit 10.2 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by reference)
10.2 Amended and Restated 1993 Stock Option Plan (Exhibit 10.1 of the Company's Proxy Materials for
the 1998 Annual Meeting of Shareholders filed on Schedule 14A and incorporated herein by
reference)
10.3 Western Bancorp Executive Severance Policy. (Exhibit 10.8 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference)
11.1 Computation of Per Share Earnings (See Note 6 of Notes to Unaudited Condensed Consolidated
Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q)
27.1 Financial Data Schedule
</TABLE>
26
<PAGE>
REPORTS ON FORM 8-K
On August 6, 1998, the Company filed a Current Report on Form 8-K
announcing, under Item 5, the signing of a definitive agreement to acquire
Peninsula Bank of San Diego and second quarter financial results.
On August 7, 1998, the Company filed a Current Report on Form 8-K which
included, under Item 5, certain documents and reports filed by BKLA pursuant to
the Securities Exchange Act of 1934, as amended.
On September 11, 1998, the Company filed a Current Report on Form 8-K
announcing, under Item 5, the declaration of a cash dividend.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
WESTERN BANCORP
Date: November 12, 1998 /s/ ARNOLD C. HAHN
-----------------------------------------
Arnold C. Hahn,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: November 12, 1998 /s/ JULIUS G. CHRISTENSEN
-----------------------------------------
Julius G. Christensen,
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
</TABLE>
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 120,125
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 135,364
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 209,646
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,316,670
<ALLOWANCE> 20,903
<TOTAL-ASSETS> 1,978,312
<DEPOSITS> 1,856,169
<SHORT-TERM> 12,447
<LIABILITIES-OTHER> 13,878
<LONG-TERM> 1,948
0
0
<COMMON> 293,397
<OTHER-SE> 475
<TOTAL-LIABILITIES-AND-EQUITY> 1,978,312
<INTEREST-LOAN> 87,028
<INTEREST-INVEST> 10,164
<INTEREST-OTHER> 7,790
<INTEREST-TOTAL> 104,982
<INTEREST-DEPOSIT> 26,853
<INTEREST-EXPENSE> 27,636
<INTEREST-INCOME-NET> 77,346
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 432
<EXPENSE-OTHER> 53,515
<INCOME-PRETAX> 35,895
<INCOME-PRE-EXTRAORDINARY> 18,132
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,132
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 6.24
<LOANS-NON> 12,320
<LOANS-PAST> 435
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 12,322
<ALLOWANCE-OPEN> 15,894
<CHARGE-OFFS> 5,419
<RECOVERIES> 1,321
<ALLOWANCE-CLOSE> 20,903
<ALLOWANCE-DOMESTIC> 20,903
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
