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UNITED STATES
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
NOVEMBER 12, 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)
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<S> <C>
0-13551 95-3863296
(Commission File Number) (IRS Employer Identification
No.)
</TABLE>
4100 NEWPORT PLACE, SUITE 900
NEWPORT BEACH, CALIFORNIA 92660
(Address of Principal Executive Offices)(Zip Code)
(949) 863-2444
(Registrant's Telephone Number, including Area Code)
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<PAGE>
ITEM 5. OTHER EVENTS.
Western Bancorp (the "Company") serves as the holding company for Southern
California Bank ("SCB") and Santa Monica Bank ("SMB", and together with SCB, the
"Banks") and Venture Partners, Inc. On October 23, 1998, the Company acquired
Bank of Los Angeles ("BKLA") pursuant to an Agreement and Plan of Merger, dated
as of April 16, 1998, and amended and restated as of June 24, 1998 and July 16,
1998 (the "Merger Agreement"), by and among the Company, SMB and BKLA (the "BKLA
Acquisition"). Pursuant to the Merger Agreement, BKLA merged with and into SMB,
with SMB being the surviving corporation. The BKLA Acquisition was accounted for
using the pooling-of-interest method of accounting. On January 27, 1998 the
Company consummated the acquisition of Santa Monica Bank, which was accounted
for using the purchase method of accounting. The Company hereby files Unaudited
Restated 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 1997 and Audited Supplemental Consolidated Financial Statements as
of December 31, 1997 and 1996 and for each of the years ended in the three year
period ended December 31, 1997, reflecting the effect of the BKLA Acquisition.
In addition, Management's Discussion and Analysis of the Restated Financial
Condition and Results of Operations after giving effect to the BKLA Acquisition
as of those dates and for those periods is set forth below.
This Item 5 includes the following:
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PAGE
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A. Unaudited Restated 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
1997........................................................................................ 3
B. Management's Discussion and Analysis of the Restated Financial Condition and Results of
Operations as of September 30, 1998 and for the Three and Nine Month Periods ended September
30, 1998 and 1997........................................................................... 10
C. Management's Discussion and Analysis of the Supplemental Financial Condition and Results of
Operations as of December 31, 1997 and 1996 and for Each of the Years in the Three Year
Period Ended December 31, 1997.............................................................. 24
D. Audited Supplemental Consolidated Financial Statements as of December 31, 1997 and 1996 And
for Each of the Years in the Three Year Period Ended December 31, 1997...................... 52
</TABLE>
2
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A. UNAUDITED RESTATED 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 1997.
UNAUDITED RESTATED 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............................................................. $ 139,365 $ 117,977
Interest bearing deposits in other banks............................................ 770 2,125
Federal funds sold.................................................................. 153,664 168,257
------------- ------------
TOTAL CASH AND CASH EQUIVALENTS................................................. 293,799 288,359
FRB and FHLB stock.................................................................. 8,016 6,411
Securities:
Securities held to maturity (market value of $93,559 and $48,247)................. 93,088 48,138
Securities available for sale (amortized cost of $208,834 and $213,606)........... 209,707 213,398
------------- ------------
TOTAL SECURITIES................................................................ 310,811 267,947
Net loans and leases................................................................ 1,443,569 1,004,654
Property, plant and equipment....................................................... 35,129 16,335
Other real estate owned............................................................. 5,251 7,736
Goodwill............................................................................ 148,307 36,369
Other assets........................................................................ 36,161 34,143
------------- ------------
TOTAL ASSETS.................................................................... $ 2,273,027 $1,655,543
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------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Non-interest bearing deposits....................................................... $ 696,532 $ 542,725
Interest bearing deposits........................................................... 1,200,334 922,080
------------- ------------
TOTAL DEPOSITS.................................................................. 1,896,866 1,464,805
Borrowed funds...................................................................... 32,892 14,600
Accrued interest payable and other liabilities...................................... 14,658 15,429
------------- ------------
TOTAL LIABILITIES............................................................... 1,944,416 1,494,834
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized, none issued............. -- --
Common stock, no par value, 100,000,000 shares authorized, 17,784,616 and 12,655,429
shares issued and outstanding..................................................... 294,575 143,577
Retained earnings................................................................... 33,561 17,274
Accumulated other comprehensive income:
Unrealized net gains (losses) on securities available for sale, net of tax........ 475 (142)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY...................................................... 328,611 160,709
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $ 2,273,027 $1,655,543
------------- ------------
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Number of common shares outstanding................................................. 17,784.6 12,655.4
Common shareholders' equity per share............................................... $ 18.48 $ 12.70
Tangible common shareholders' equity per share...................................... $ 10.14 $ 9.83
</TABLE>
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(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 Restated Condensed Consolidated Financial Statements."
3
<PAGE>
UNAUDITED RESTATED 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................................... $ 98,484 $ 67,716 $ 34,146 $ 24,090
Interest on interest bearing deposits................................... 54 1 16 --
Interest on investment securities....................................... 13,591 14,282 4,554 4,643
Interest on federal funds sold.......................................... 8,771 3,463 2,757 1,320
--------- --------- --------- ---------
TOTAL INTEREST INCOME................................................. 120,900 85,462 41,473 30,053
INTEREST EXPENSE:
Interest expense on deposits............................................ 30,978 23,549 10,498 8,196
Interest expense on borrowed funds...................................... 1,374 1,048 528 325
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE................................................ 32,352 24,597 11,026 8,521
--------- --------- --------- ---------
NET INTEREST INCOME:...................................................... 88,548 60,865 30,447 21,532
Less: provision for loan and lease losses............................... 450 2,535 150 725
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES............. 88,098 58,330 30,297 20,807
NON-INTEREST INCOME:
Service charges and fees on deposit accounts and other fees............. 9,310 6,217 3,251 2,114
Trust fees.............................................................. 2,594 -- 979 --
Escrow fees............................................................. 748 551 217 214
Gain on sale of loans and other assets.................................. -- 78 -- --
Securities gains........................................................ 481 342 277 --
Other income............................................................ 877 1,263 398 466
--------- --------- --------- ---------
TOTAL NON-INTEREST INCOME............................................. 14,010 8,451 5,122 2,794
NON-INTEREST EXPENSE:
Salaries and benefits................................................... 29,917 22,720 9,422 7,736
Occupancy, furniture and equipment...................................... 9,588 7,048 3,080 2,349
Advertising and business development.................................... 798 1,070 134 387
Other real estate owned................................................. (335) 363 (142) 282
Professional services................................................... 3,052 3,101 1,033 1,127
Telephone, stationery and supplies...................................... 2,604 2,326 911 746
Goodwill amortization................................................... 7,520 2,081 2,722 709
Data processing......................................................... 1,736 1,202 610 411
Customer services cost.................................................. 1,248 867 406 308
Merger costs............................................................ 139 3,470 60 --
Other................................................................... 4,985 4,942 2,229 1,246
--------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE............................................ 61,252 49,190 20,465 15,301
--------- --------- --------- ---------
Income before income taxes.............................................. 40,856 17,591 14,954 8,300
Income taxes............................................................ 19,723 8,022 7,365 3,211
--------- --------- --------- ---------
NET INCOME............................................................ $ 21,133 $ 9,569 $ 7,589 $ 5,089
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic................................................................... 17,155.3 11,805.3 17,777.5 11,993.8
Diluted................................................................. 17,594.4 12,294.9 18,201.0 12,536.8
NET INCOME PER SHARE:.
Basic................................................................... $ 1.23 $ 0.81 $ 0.43 $ 0.42
Diluted................................................................. $ 1.20 $ 0.78 $ 0.42 $ 0.41
</TABLE>
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(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 Restated Condensed Consolidated Financial Statements."
4
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UNAUDITED RESTATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
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(IN THOUSANDS)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income................................................................................................ $ 21,133 $ 9,569
Adjustments to reconcile net income to net cash provided by operations:
(Gain) on sale of securities available for sale......................................................... (481) (342)
(Gain) on sale of premises and equipment................................................................ (30) (6)
(Gain) on sale of other real estate owned............................................................... (524) (178)
Provision for loan and lease losses..................................................................... 450 2,535
Goodwill amortization................................................................................... 7,520 2,081
Depreciation............................................................................................ 3,426 2,250
(Gain) on sale of loans................................................................................. -- (78)
Amortization of (discounts) premiums on investment securities........................................... (1,364) 106
Net increase (decrease) in accrued interest payable and other liabilities............................... (5,795) (78)
Net (increase) decrease in other assets................................................................. (2,526) 5,488
---------- ----------
Net cash provided by operating activities............................................................... 21,809 21,347
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities available for sale............................................ 61,012 8,465
Principal payments received on investment securities available for sale................................... 155,429 168,185
Principal payments received on investment securities held to maturity..................................... 70,694 6,405
Purchase of investment securities available for sale...................................................... (121,395) (87,133)
Purchase of investment securities held to maturity........................................................ (115,644) (24,409)
Purchase of FRB or FHLB stock............................................................................. (171) (94)
Proceeds from sale of premises and equipment.............................................................. 229 109
(Increase) decrease in net loans and leases............................................................... (55,800) (67,022)
Proceeds from sale of loans............................................................................... -- 1,299
Recoveries of loans and investment in leases.............................................................. 4,098 1,022
Additions to premises and equipment....................................................................... (6,208) (1,174)
Proceeds from sale of other real estate owned............................................................. 6,096 344
Change in assets and liabilities due to acquisitions:
Increase in investments................................................................................. (89,238) (17,990)
Increase in loans....................................................................................... (387,609) (37,416)
Increase in other real estate owned..................................................................... (3,318) --
Increase in other assets................................................................................ (4,277) 7
Increase in premises and equipment...................................................................... (16,328) --
Increase in deposits.................................................................................... 584,095 61,266
Increase in borrowed funds.............................................................................. 1,960 --
Increase in other liabilities........................................................................... 5,988 99
Goodwill................................................................................................ (119,656) 568
---------- ----------
Net cash provided by investing activities............................................................... (29,159) 12,531
CASH FLOW FROM FINANCING ACTIVITIES:
Cash received from exercise of options.................................................................... 301 499
Proceeds from issuance of common stock.................................................................... 150,707 5,949
Common stock repurchased and retired...................................................................... (11) (515)
Dividends paid............................................................................................ (4,845) (2,680)
Net (decrease) increase in deposits....................................................................... (149,694) 25,784
Additional (repayment of) borrowings...................................................................... 16,332 3,361
---------- ----------
Net cash provided by financing activities................................................................. 12,790 32,398
---------- ----------
Net increase in cash and cash equivalents................................................................. 5,440 66,276
Cash and cash equivalents at the beginning of the period.................................................. 288,359 148,858
---------- ----------
Cash and cash equivalents at the end of the period........................................................ $ 293,799 $ 215,134
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Dividends declared in prior period and paid in current period............................................. $ 2,221 $ --
Property acquired through foreclosure..................................................................... -- 9,479
Loans to facilitate the sale of OREO...................................................................... 256 4,292
Increase (decrease) in unrealized gain on securities available for sale, net of tax....................... 617 876
Cash paid for interest.................................................................................... 27,750 21,781
Cash paid for taxes....................................................................................... 5,507 1,568
ACQUISITIONS:
Fair value of assets acquired............................................................................. $ 794,782 $ 67,291
Common stock issued....................................................................................... (84,900) (5,926)
Cash paid................................................................................................. (117,839) --
---------- ----------
Liabilities assumed....................................................................................... $ 592,043 $ 61,365
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</TABLE>
See "Notes to Unaudited Restated Condensed Consolidated Financial Statements."
5
<PAGE>
NOTES TO UNAUDITED RESTATED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1--BASIS OF PRESENTATION
The Company is the holding company for the Banks. The Unaudited Restated
Condensed Consolidated Financial Statements of the Company and the Banks
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 Restated 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 results of operations for the
three months and nine months ended September 30, 1998 and 1997, are not
necessarily indicative of the results of operations to be expected for the
remainder of the year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the 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.
These Unaudited Restated 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, BKLA's Annual Report filed on Form 10-K for the year
ended December 31, 1997, and the Company's Supplemental Consolidated Financial
Statements as of December 31, 1997, and for each of the years in the three year
period ended December 31, 1997 and the notes thereto filed as part of this
Current Report on Form 8-K.
NOTE 2--COMPLETED ACQUISITIONS
WESTERN BANK ACQUISITION
On September 30, 1996, the Company acquired, for cash, all of the issued and
outstanding shares of Western Bank, a state-chartered bank located in West Los
Angeles, California. Western Bank had five offices, including its head office in
Westwood. In connection with the California acquisition, Western Bank began
operating as a wholly-owned subsidiary of the Company. The acquisition of
Western Bank was accounted for under the purchase method of accounting. As such,
the results of operations for Western Bank were included in the Company's
results of operations beginning October 1, 1996.
CALIFORNIA COMMERCIAL BANKSHARES MERGER
On December 19, 1997, the Company entered into an agreement to merge with
California Commercial Bankshares ("CCB"), a bank holding company operating in
Orange County, California (the "CCB Merger"). The shareholders of the Company
approved the CCB Merger on June 2, 1997, and the transaction closed on June 4,
1997. The Company issued approximately 3,043,200 shares of Company Common Stock
to the holders of Common Stock of CCB based upon an exchange ratio of one (after
the Company completed a reverse stock split of 8.5 to 1 on June 3, 1997). Also
on June 4, 1997, the Company changed its name from "Monarch Bancorp" to "Western
Bancorp", and Monarch Bank, a wholly-owned subsidiary of the Company was merged
with and into National Bank of Southern California ("NBSC"), a
6
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NOTES TO UNAUDITED RESTATED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 2--COMPLETED ACQUISITIONS (CONTINUED)
wholly-owned subsidiary of CCB prior to the CCB Merger. The CCB Merger was
accounted for under the pooling-of-interests method of accounting, and all
financial information presented herein has been restated for this combination.
SC BANCORP ACQUISITION
On April 29, 1997, the Company entered into an agreement to merge with SC
Bancorp, a bank holding company operating in Orange, San Diego and Los Angeles
counties in California (the "SCB Merger"). The shareholders of SC Bancorp and
the Company approved the merger on October 10, 1997, and the SCB Merger was
consummated on that date. The exchange ratio was 0.4556 shares of the Company
Common Stock issued for each share of common stock of SC Bancorp issued and
outstanding immediately prior to consummation of the SCB Merger. Approximately
3,555,500 shares of the Company's Common Stock (before adjustments for
fractional shares) were issued as part of the SCB Merger. The acquisition of SC
Bancorp was accounted for under the pooling-of-interests method of accounting,
and all financial information presented herein has been restated for this
combination. In December 1997, the Company merged NBSC with and into Southern
California Bank, a wholly-owned subsidiary of SC Bancorp prior to the SCB
Merger.
SANTA MONICA BANK ACQUISITION
On January 27, 1998, the Company acquired Santa Monica Bank through the
merger of Santa Monica Bank with and into Western Bank, (the "SMB Acquisition").
As part of the SMB Acquisition, the name of Western Bank was changed to "Santa
Monica Bank." The merged entity is hereinafter referred to as "SMB". Upon
consummation of the SMB Acquisition, each share of common stock, $3.00 par
value, of Santa Monica Bank (the "SMB Common Stock") issued and outstanding at
the time was converted into the right to receive either (i) $28.00 in cash (the
"Cash Consideration") or (ii) 0.875 shares of Common Stock of the Company (the
"Stock Consideration"). Of the 7,084,244 shares of SMB Common Stock outstanding
at the time of the SMB Acquisition, approximately 57.3 percent elected to
receive the Cash Consideration, resulting in a payment of $113,722,700 in the
aggregate, and approximately 42.7 percent received the Stock Consideration
resulting in the issuance of approximately 2,653,000 shares of common stock, no
par value, of the Company. In order to fund a part of the Cash Consideration
payments, the Company issued an additional 2,327,550 shares of Company Common
Stock to certain private investors for $65,171,400 in the aggregate.
Accordingly, in the aggregate, approximately 4,980,550 shares of Company Common
Stock were issued in connection with the SMB Acquisition. The total value of the
consideration paid in the SMB Acquisition was approximately $198.4 million in
Company Common Stock and cash.
BKLA ACQUISITION
On October 23, 1998, the Company completed the BKLA Acquisition in which the
Company issued approximately 2,214,300 shares of Company Common Stock to the
BKLA shareholders, and BKLA merged with and into the SMB. The BKLA Acquisition
has been accounted for as a pooling-of-interests. These Unaudited Restated
Condensed Consolidated Financial Statements, Notes to Unaudited Restated
Condensed Consolidated Financial Statements and Management's Discussion and
Analysis as of September 30, 1998 and for the three months and nine months ended
September 30, 1998 and September 30, 1997 have been restated as if the BKLA
Acquisition had occurred at the beginning of the earliest period
7
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NOTES TO UNAUDITED RESTATED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 2--COMPLETED ACQUISITIONS (CONTINUED)
presented. At the date of the BKLA Acquisition, the Company charged to expense
approximately $7.3 million (after-tax) representing investment banking, filing
and professional fees; compensation; and costs of computer conversion. Such
costs are not included in the accompanying financial statements.
PENDING ACQUISITION
PACIFIC NATIONAL BANK
On October 6, 1998, the Company entered into an Agreement and Plan of Merger
(the "PNB Merger Agreement"), between the Company and PNB Financial Group, Inc.
("PNB"), pursuant to which PNB will merge with and into the Company.
Shareholders of PNB will receive one share of Company Common Stock for each
outstanding share of PNB stock in a tax-free exchange. The acquisition is
expected to qualify for pooling-of-interests accounting and close either late in
the fourth quarter of 1998 or in the first quarter of 1999. Completion of the
transaction is conditioned upon the receipt of shareholder and applicable
regulatory approvals. PNB operates through its subsidiary Pacific National Bank
("Pacific").
NOTE 3--TERMINATED ACQUISITIONS
On July 24, 1998, the Company executed an Agreement and Plan on Merger (the
"Peninsula Merger Agreement") with Portola Merger ("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.
NOTE 4--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
8
<PAGE>
NOTES TO UNAUDITED RESTATED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 4--STATEMENT OF COMPREHENSIVE INCOME (CONTINUED)
(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............................................... $ 21,133 $ 9,569 $ 7,589 $ 5,089
Other comprehensive income (loss), net of related income
taxes:
Unrealized gains (losses) on securities:
Unrealized holding gains arising during the period... 721 877 439 689
Less reclassification of realized gains included in
income............................................. (104) (154) (34) --
--------- --------- --------- ---------
Comprehensive income..................................... $ 21,750 $ 10,292 $ 7,994 $ 5,778
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NOTE 5--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............................................ $ 21,133 $ 9,569 $ 7,589 $ 5,089
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding................... 17,155.3 11,805.3 17,777.5 11,993.8
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic net income per share............................ $ 1.23 $ 0.81 $ 0.43 $ 0.42
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding................... 17,155.3 11,805.3 17,777.5 11,993.8
Effect of dilutive stock options and warrants......... 439.1 489.6 423.5 543.0
--------- --------- --------- ---------
Diluted shares outstanding............................ 17,594.4 12,294.9 18,201.0 12,536.8
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted net income per share.......................... $ 1.20 $ 0.78 $ 0.42 $ 0.41
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
9
<PAGE>
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESTATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AS OF
SEPTEMBER 30, 1998 AND FOR THE THREE AND NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
OVERVIEW
The following tables and data set forth statistical information relating to
the Company and its subsidiaries as of September 30, 1998 and for the three
months and nine months ended September 30, 1998 and September 30, 1997. Such
tables and data reflect the combination of the Company and BKLA, SCB and CCB
which were acquired by the Company on October 23, 1998, October 10, 1997 and
June 4, 1997, respectively, each in a merger accounted for as a
pooling-of-interests. This discussion should be read in conjunction with the
Unaudited Restated Condensed Consolidated Financial Statements as of September
30, 1998 and for the three and nine month periods ended September 30, 1998 and
September 30, 1997 and related notes included elsewhere herein. Santa Monica
Bank was acquired on January 27, 1998 in a transaction accounted for using the
purchase method of accounting. 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. Due to the relatively large size of the of SMB
Acquisition, 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.
FINANCIAL CONDITION
As a result of the SMB Acquisition and the additional equity that was raised
to help fund the transaction, consolidated assets, total deposits and
shareholders' equity increased by approximately $795 million, $584 million and
$150 million, respectively (based on SMB's unaudited balance sheet at January
31, 1998). Due to the use of purchase accounting for the SMB Acquisition,
goodwill accounted for approximately $120 million of the total increase in
assets resulting from this transaction. Due to the issuance of additional
shares, and the improvement in earnings, book value per share increased from
$12.70 at December 31, 1997 to $18.48 at September 30, 1998.
Adjusting for the increases related to the SMB Acquisition, since December
31, 1997 the Company's total assets have declined by approximately $177 million.
The major components of this decline in assets are a decrease in federal funds
sold and cash of approximately $169 million and a decrease of approximately $46
million in total securities offset by an increase in net loans and leases
approximately $51 million. The reduction in securities resulted from sales of
approximately $61 million of securities and maturities and principal payments of
approximately $227 million offset partially by purchases of approximately $237
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 $152
million. Of this decline, approximately $120 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
69.9% as of December 31, 1997 to 77.3% as of September 30, 1998.
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1998 was $7,589,000 or $0.42
per diluted share. This compares with earnings of $5,089,000, or $0.41 per
diluted share, for the quarter ended September 30, 1997. On an operating basis,
before the amortization of goodwill and before after-tax merger costs, net
10
<PAGE>
income for the three month periods would have been $10,346,000 and $5,798,000 in
1998 and 1997, respectively, or $0.57 and $0.46 per diluted share, respectively,
a growth of approximately 24%. The SMB Acquisition was accounted for as a
purchase and, therefore, the earnings of Santa Monica Bank have been included in
operating results since February 1, 1998.
Consolidated net income for the nine months ended September 30, 1998 was
$21,133,000, or $1.20 per diluted share. This compares with earnings of
$9,569,000, or $0.78 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 costs, net income for the nine month periods would have been
$28,734,000 and $14,725,000 in 1998 and 1997, respectively, or $1.63 and $1.20
per diluted share, respectively, a growth of approximately 36%. Operating
results for the 1998 period include those of Santa Monica Bank since February
1998.
During the third quarter, the Western Bancorp Board of Directors 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.
11
<PAGE>
<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).................................... 17,155.3 11,805.3 17,777.5 11,993.8
Diluted shares (weighted average, in
thousands).................................... 17,594.4 12,294.9 18,201.0 12,536.8
Basic income per share.......................... $ 1.23 $ 0.81 $ 0.43 $ 0.42
Diluted income per share........................ $ 1.20 $ 0.78 $ 0.42 $ 0.41
Before merger costs and goodwill amortization:
Basic income per share........................ $ 1.67 $ 1.25 $ 0.58 $ 0.48
Diluted income per share...................... $ 1.63 $ 1.20 $ 0.57 $ 0.46
PROFITABILITY MEASURES:
Return on average assets........................ 1.26% 0.84% 1.30% 1.30%
Return on average equity........................ 9.3% 8.6% 9.2% 13.1%
Before merger costs and goodwill amortization:
Return on average tangible assets............. 1.82% 1.33% 1.90% 1.51%
Return on average equity...................... 12.7% 13.2% 12.5% 14.9%
Efficiency ratio.............................. 52.3% 63.0% 49.7% 60.0%
ADJUSTMENTS TO NET INCOME (IN THOUSANDS):
Net income...................................... $ 21,133 $ 9,569 $ 7,589 $ 5,089
Merger costs.................................... 139 3,470 60 --
Tax benefits.................................. 58 395 25 --
--------- --------- --------- ---------
After tax merger costs.......................... 81 3,075 35 --
Goodwill amortization........................... 7,520 2,081 2,722 709
--------- --------- --------- ---------
ADJUSTED NET INCOME........................... $ 28,734 $ 14,725 $ 10,346 $ 5,798
--------- --------- --------- ---------
--------- --------- --------- ---------
REVENUES (IN THOUSANDS):
Net interest income............................. $ 88,548 $ 60,865 $ 30,447 $ 21,532
Non-interest income............................. 14,010 8,451 5,122 2,794
--------- --------- --------- ---------
REVENUES...................................... $ 102,558 $ 69,316 $ 35,569 $ 24,326
--------- --------- --------- ---------
--------- --------- --------- ---------
ADJUSTMENTS TO EXPENSES (IN THOUSANDS):
Non-interest expense............................ $ 61,252 $ 49,190 $ 20,465 $ 15,301
Merger costs.................................... (139) (3,470) (60) --
Goodwill amortization........................... (7,520) (2,081) (2,722) (709)
--------- --------- --------- ---------
ADJUSTED EXPENSES............................. $ 53,593 $ 43,639 $ 17,683 $ 14,592
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Operating profits for the Company are dependent on loan growth, controlling
costs and continual efforts to prevent any unexpected loan and lease losses that
would require additions to the allowance for loan and lease losses ("ALLL"). The
demand for loans has increased in the Company's primary market areas, and the
Company plans to take advantage of this increased demand, while maintaining its
credit quality standards. The Company's operating return on average tangible
assets improved from 1.51% in the third quarter of 1997 to 1.90% in the third
quarter of 1998. Over the same period, the efficiency ratio declined from 60.0%
to 49.7%. These improvements comes from improving credit quality, a higher net
interest margin and improvements in efficiency.
12
<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
interest-bearing liabilities and yields and rates thereon for the three and nine
months ended September 30, 1998 and September 30, 1997, respectively. Nonaccrual
loans are included in the average 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..................................... $1,376,593 $ 928,932 $1,442,662 $ 964,811
Investments................................. 318,924 326,591 318,791 316,329
Federal funds sold.......................... 213,626 83,766 198,958 93,703
--------- --------- --------- ---------
AVERAGE EARNING ASSETS.................... 1,909,143 1,339,289 1,960,411 1,374,843
--------- --------- --------- ---------
Goodwill.................................... 139,133 33,948 151,149 33,429
Other assets................................ 195,965 142,475 199,787 148,998
--------- --------- --------- ---------
AVERAGE TOTAL ASSETS...................... $2,244,241 $1,515,712 $2,311,347 $1,557,270
--------- --------- --------- ---------
--------- --------- --------- ---------
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest-bearing deposits............... $ 686,157 $ 458,579 $ 717,953 $ 474,750
Interest-bearing deposits................... 1,209,779 877,380 1,221,604 898,514
--------- --------- --------- ---------
AVERAGE DEPOSITS.......................... 1,895,936 1,335,959 1,939,557 1,373,264
Other interest-bearing liabilities.......... 24,746 17,642 27,314 16,994
Other liabilities........................... 20,222 12,959 16,428 12,469
--------- --------- --------- ---------
AVERAGE LIABILITIES....................... 1,940,904 1,366,560 1,983,299 1,402,727
--------- --------- --------- ---------
Shareholders' equity........................ 303,337 149,152 328,048 154,543
--------- --------- --------- ---------
AVERAGE LIABILITIES AND SHAREHOLDERS'
EQUITY.................................. $2,244,241 $1,515,712 $2,311,347 $1,557,270
--------- --------- --------- ---------
--------- --------- --------- ---------
YIELD ANALYSIS
(Dollars in millions)
Average earning assets........................ $ 1,909.1 $ 1,339.3 $ 1,960.4 $ 1,374.8
Yield....................................... 8.47% 8.53% 8.39% 8.67%
Average interest-bearing deposits............. $ 1,209.8 $ 877.4 $ 1,221.6 $ 898.5
Cost........................................ 3.42% 3.59% 3.41% 3.62%
Average deposits.............................. $ 1,895.9 $ 1,336.0 $ 1,939.6 $ 1,373.3
Cost........................................ 2.18% 2.36% 2.15% 2.37%
Average interest-bearing liabilities.......... $ 1,234.5 $ 895.0 $ 1,248.9 $ 915.5
Cost........................................ 3.50% 3.67% 3.50% 3.69%
Interest spread............................... 4.97% 4.86% 4.89% 4.98%
Net interest margin........................... 6.20% 6.08% 6.16% 6.21%
</TABLE>
Interest income for the three and nine month periods ended September 30,
1998 were $41.5 million and $120.9 million, respectively, compared with $30.1
million and $85.5 million for the same periods in 1997, respectively. The
increase in 1998 compared with 1997 was due mostly to the SMB Acquisition which
was consummated on January 27, 1998.
13
<PAGE>
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>
NET INCREASE
CONSOLIDATED IMPACT OF CONSOLIDATED (DECREASE)
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Average earnings assets.................................... $1,960,411 $ 567,759 $1,374,843 $ 17,809
Interest income............................................ 41,473 11,933 30,053 (513)
Yield.................................................... 8.39% 8.34% 8.67%
</TABLE>
The following table shows the average 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 INCREASE
1998 SMB 1998 1997 BEFORE SMB
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Average earnings assets.................................... $1,909,143 $ 567,971 $1,339,289 $ 1,883
Interest income............................................ 120,900 31,814 85,462 3,624
Yield.................................................... 8.47% 8.45% 8.53%
</TABLE>
Without the increase due to the SMB Acquisition, average earning assets
increased by approximately $18 million and $2 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 $0.5 million and increased by approximately $3.6 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 the
decline in yield on average earning assets. The increase in interest income for
the nine month periods ended September 30, 1998 compared to 1997 is a result of
the increase in interest earning assets.
Interest expense for the three and nine month periods ended September 30,
1998 were $11.0 million and $32.4 million, respectively, compared with $8.5
million and $24.6 million for the same periods in 1997, respectively. The
increase in 1998 compared to 1997 was due mostly to 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....................... $1,248,918 $ 386,176 $ 915,508 $ (52,766)
Interest income............................................ 11,026 3,202 8,521 (697)
Cost..................................................... 3.50% 3.29% 3.69%
</TABLE>
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 (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....................... $1,234,525 $ 386,067 $ 895,022 $ (46,564)
Interest income............................................ 32,352 8,737 24,597 (982)
Cost..................................................... 3.50% 3.41% 3.67%
</TABLE>
14
<PAGE>
Without the increase due to the SMB Acquisition, average interest-bearing
liabilities declined by approximately $52.8 million and $46.6 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 $0.7 million and $1.0 million for the three and nine months
ending 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 $4,850,000 from $18,713,000 at December 31, 1997 to $23,563,000 at
September 30, 1998 resulting from $450,000 of provision, $4,257,000 of net
charge-offs and $8,657,000 added from the SMB Acquisition. The allowance for
loan and lease losses was 1.61% of loans and leases at September 30, 1998, down
slightly from 1.83% at December 31, 1997. The decrease resulted mainly from the
charge-off of one real estate loan, acquired in the merger with Southern
California Bank, which was subsequently found to have environmental problems
that were not remedied during the quarter. During November 1998, the charged off
note was sold to a private investor, resulting in a recovery of approximately
$1,100,000. Nonperforming assets decreased from 1.89% of total loans, leases and
OREO at December 31, 1997 to 1.42% at September 30, 1998. The Company had net
charge-offs of approximately $4,257,000 or an annualized rate of 0.41% of
average loans and leases for the first nine months of 1998. The allowance for
loan and lease losses to nonperforming assets increased from 96.0% to 113.1%
over the same time period and is believed by management to be adequate based on
the Company's quarterly migration analysis of loan and lease losses, improved
economic conditions and continued adherence to established credit policies.
During the three months ended September 30, 1998, approximately $4,488,000
of loans were charged to the Company's ALLL, and approximately $537,000 of loans
were recovered resulting in net charge-offs for the period of approximately
$3,951,000. For the nine months ended September 30, 1998, approximately
$5,772,000 of loans were charged to the Company's ALLL, and approximately
$1,515,000 of loans were recovered resulting in net charge-offs for the nine
month period of approximately $4,257,000.
Nonperforming assets decreased by approximately $2,426,000 during the
quarter ended September 30, 1998 from approximately $23,262,000 at June 30, 1998
to approximately $20,386,000 at September 30, 1998, due to a decrease of
approximately $1,186,000 in nonaccrual loans and a decrease in OREO of
approximately $1,240,000 during the period. The coverage of ALLL to
nonperforming assets increased from 96.0% at December 31, 1997 to 113.1% 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.
15
<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,
other fees..................................... $ 1,257 $ 1,994 $ 3,251 $ 2,114
Trust fees....................................... 979 -- 979 --
Escrow fees...................................... -- 217 217 214
Securities gains................................. 49 228 277 --
Other income..................................... 28 370 398 466
--------- ------ ----------- -----------
Total non-interest income.................... $ 2,313 $ 2,809 $ 5,122 $ 2,794
--------- ------ ----------- -----------
--------- ------ ----------- -----------
</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,
other fees..................................... $ 2,783 $ 6,527 $ 9,310 $ 6,217
Trust fees....................................... 2,594 -- 2,594 --
Escrow fees...................................... -- 748 748 551
Gain on sale of loans and other assets........... -- -- -- 78
Securities gains................................. 49 432 481 342
Other income..................................... 121 756 877 1,263
--------- ------ ----------- -----------
Total non-interest income.................... $ 5,547 $ 8,463 $ 14,010 $ 8,451
--------- ------ ----------- -----------
--------- ------ ----------- -----------
</TABLE>
Before giving effect to the SMB Acquisition, non-interest income increased
by $15,000 for the three months ended September 30, 1998 compared to the same
period for 1997, due largely to the gain on sale of securities in the amount of
$228,000 offset by modest reductions in service charges and fees and other
income. Non-interest income has increased by approximately $12,000 for the nine
month period ended September 30, 1998 compared to the same period of 1997. This
increase is mostly explained by purchase transactions completed by BKLA in 1997
offset by a reduction in other income. Trust fees are generated from the
approximately $710 million of assets held in trust by SMB as of September 30,
1998.
16
<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, SMB results are not included in the 1997
numbers:
<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 $ 6,550 $ 9,422 $ 7,736
Occupancy, furniture and equipment............... 1,274 1,806 3,080 2,349
Advertising and business development............. 166 (32) 134 387
Other real estate owned.......................... (48) (94) (142) 282
Professional services............................ 166 867 1,033 1,127
Telephone, stationery and supplies............... 277 634 911 746
Data processing.................................. 103 507 610 411
Customer services cost........................... 36 370 406 308
Other............................................ 214 2,015 2,229 1,246
--------- ----------- ----------- -----------
Operating non-interest expense................. 5,060 12,623 17,683 14,592
Goodwill amortization............................ 1,975 747 2,722 709
Merger costs..................................... -- 60 60 --
--------- ----------- ----------- -----------
Total non-interest expense................... $ 7,035 $ 13,430 $ 20,465 $ 15,301
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</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>
THREE 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 $ 21,217 $ 29,917 $ 22,720
Occupancy, furniture and equipment.............. 2,959 6,629 9,588 7,048
Advertising and business development............ 489 309 798 1,070
Other real estate owned......................... (143) (192) (335) 363
Professional services........................... 406 2,646 3,052 3,101
Telephone, stationery and supplies.............. 828 1,776 2,604 2,326
Data processing................................. 166 1,570 1,736 1,202
Customer services cost.......................... 73 1,175 1,248 867
Other........................................... 947 4,038 4,985 4,942
--------- ----------- ----------- -----------
Operating non-interest expense................ 14,425 39,168 53,593 43,639
Goodwill amortization........................... 5,266 2,254 7,520 2,081
Merger costs.................................... -- 139 139 3,470
--------- ----------- ----------- -----------
Total non-interest expense.................. $ 19,691 $ 41,561 $ 61,252 $ 49,190
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
Before giving effect to the SMB Acquisition and excluding goodwill and
merger costs in both years, operating non-interest expense declined by
$1,969,000 and $4,471,000 for the three and nine months
17
<PAGE>
ending September 30, 1998 compared to the same periods of 1997, respectively.
The 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 60.0%
in the third quarter of 1997 to 49.7% 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 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.
18
<PAGE>
The following table shows the historical trends in nonperforming assets and
comparative key credit statistics at the Company:
CREDIT QUALITY MEASURES
<TABLE>
<CAPTION>
AT AND FOR QUARTER ENDED AT OR FOR
---------------------------------------------------------------- YEAR ENDED
30-SEP 30-JUN 31-MAR 31-DEC 30-SEP 30-JUN 31-DEC
1998 1998 1998 1997 1997 1997 1996
--------- --------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans past due 90 days and still
accruing............................ $ 507 $ 2,696 $ 341 $ 203 $ 1,642 $ 815 $ 193
Nonaccrual loans and leases........... 15,585 16,771 15,200(1) 11,753 11,750 16,002 18,951
Other real estate owned............... 5,251 6,491 9,053(2) 7,736 9,494 8,220 7,621
--------- --------- --------- --------- --------- --------- -----------
NONPERFORMING ASSETS................ 20,836 23,262 24,253 19,489 21,244 24,222 26,572
Impaired loans gross.................. 15,839 19,855 21,842 17,972 17,004 19,812 23,828
Allocated reserves.................... 1,467 2,831 1,304 1,368 742 1,923 2,833
--------- --------- --------- --------- --------- --------- -----------
NET INVESTMENT IN IMPAIRED LOANS.... 14,372 17,024 20,538 16,604 16,262 17,889 20,995
Charge-offs........................... 4,488 763 521 520 1,569 2,885 6,304
Recoveries............................ 537 304 674 515 874 468 1,326
--------- --------- --------- --------- --------- --------- -----------
NET CHARGE-OFFS..................... 3,951 459 (153) 5 695 2,417 4,978
Allowance for loan and lease losses
("ALLL")............................ 23,563 27,364 27,673 18,713 17,204 17,174 17,439
Loans and leases, net of deferred fees
and costs........................... 1,467,132 1,428,256 1,400,190 1,023,367 987,053 959,550 889,624
Average loans and leases for the
quarter, net of deferred fees and
costs............................... 1,442,662 1,413,326 1,271,957 981,960 964,811 937,633 601,115
ALLL to loans and leases.............. 1.61% 1.92% 1.98% 1.83% 1.74% 1.79% 1.96%
ALLL to nonaccrual loans and leases... 151.2% 163.2% 182.1% 159.2% 146.4% 107.3% 92.0%
ALLL to nonperforming assets.......... 113.1% 117.6% 114.1% 96.0% 81.0% 70.9% 65.6%
Nonperforming assets to loans, leases
and OREO............................ 1.42% 1.62% 1.72% 1.89% 2.13% 2.50% 2.96%
Annualized net charge-offs
(recoveries) to average loans and
leases.............................. 1.10% 0.13% (0.05%) 0.00% 0.29% 1.03%
Full year net charge-offs to average
loans and leases.................... 0.39% 0.74%
</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.
19
<PAGE>
The Company has established a monitoring system for its loans in order to
identify impaired loans, potential problem loans and to permit periodic
evaluation of impairment and the adequacy of the ALLL in a timely manner. The
monitoring system and ALLL methodology have evolved over a period of years and
loan classifications have been incorporated into the determination of the ALLL.
This monitoring system and allowance methodology include a loan-by-loan analysis
for all classified loans as well as loss factors for the balance of the
portfolio that are based on migration analysis relative to the unclassified
portfolio. This analysis includes such factors as historical loss experience,
current portfolio delinquency and trends, and other inherent risk factors such
as economic conditions, risk levels of particular loan categories, internal loan
review and oversight, and concentrations in the portfolio.
Loans past due 90 days and still accruing represent loans which are past due
90 days or more as to interest or principal, but not included in the nonaccrual
or restructured categories. All loans in this category are well-secured and in
the process of collection or renewal
On September 30, 1998, the Company had approximately $15,839,000 of loans,
which were considered impaired, which decreased from $19,855,000 at June 30,
1998. Of these loans, approximately $15,585,000 are on a nonaccrual status at
September 30, 1998.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
On a stand-alone basis, the Company's sources of liquidity include dividends
from the Banks and outside borrowings. The amount of dividends that the Banks
can pay to the Company is restricted by regulatory guidelines.
The primary functions of asset/liability management are to ensure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities at the Banks. Liquidity management
involves the ability to meet the cash flow requirements of customers who may be
either depositors wanting to withdraw funds or borrowers who may need assurance
that sufficient funds will be available to meet their credit needs. Interest
rate sensitivity management seeks to avoid fluctuating interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Historically, the overall liquidity of the Banks is based on the core
deposit base of the Banks. The Banks have not relied on large denomination time
deposits.
To meet short-term liquidity needs, the Company has maintained at the Banks
what it believes are adequate balances in federal funds sold, certificates of
deposits with other financial institutions and investment securities having
maturities of five years or less. On a consolidated basis, liquid assets (cash,
federal funds sold and investment securities available for sale) as a percent of
total deposits are 26.5% and 34.3% 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 49.3% and 38.7% for the three months ended September 30, 1998 and
1997, respectively, and 48.3% and 45.6% for the nine month periods ending
September 30, 1998 and 1997, respectively. The actual effective tax rates are
higher than the normal effective income tax rate during the 1998 periods largely
as a result of nondeductible goodwill. The actual effective tax rate is higher
for the nine months ended September 30, 1997, as a result of nondeductible
goodwill. The actual effective rate is lower than the normal rate for the three
months ended September 30, 1997, because of BKLA's reduction of its deferred tax
asset valuation reserve.
20
<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>
Detailed computations of
Tier 1 leverage capital ratio........... 4.00% 5.00% 8.85% 8.18% 8.21%
Tier 1 risk-based capital ratio......... 4.00% 6.00% 9.86% 11.20% 10.30%
Total risk-based capital.................. 8.00% 10.00% 10.93% 12.46% 11.55%
</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>
21
<PAGE>
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 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.
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
$1.5 billion in interest sensitive assets and $937 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 $1.9 billion and $1.2 billion, respectively.
The increases in such assets and liabilities from December 31, 1997 to September
30, 1998 was largely the result of the SMB Acquisition. See "Note 2--Completed
Acquisitions of the Notes to Unaudited Condensed Consolidated Financial
Statements."
22
<PAGE>
The yield on interest sensitive assets and the cost of interest sensitive
liabilities for the third quarter of 1998 was 8.47% and 3.42%, respectively,
compared to 8.33% and 3.65%, respectively, at December 31, 1997. The increase in
the yield on interest sensitive assets is primarily a result of the percentage
of average loans to average interest sensitive assets increasing from
approximately 70.2% at December 31, 1997 to 75.9% 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 $1.4 billion and $938 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 $23.8 million at
December 31, 1997 to $25.9 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 $1.9 billion and $1.2 billion, respectively,
at September 30, 1998.
23
<PAGE>
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE SUPPLEMENTAL FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AS OF DECEMBER 31, 1997 AND 1996
AND FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1997
OVERVIEW
On October 23, 1998, the Company consummated the BKLA Acquisition which was
accounted for using the pooling-of-interests method of accounting. On January
27, 1998 the Company consummated the SMB Acquisition which was accounted for
using the purchase method of accounting. Management's Discussion and Analysis of
the Supplemental Financial Condition and Results of Operations after giving
effect to the BKLA Acquisition, as of December 31, 1997 and 1996 and in the
three year period ended December 31, 1997 is set forth below.
STRATEGIC EVOLUTION
The Company, SMB and BKLA entered into an Agreement and Plan of Merger,
dated as of April 16, 1998 and amended and restated as of June 24, 1998 and July
24, 1998, pursuant to which BKLA merged with and into SMB with SMB being the
surviving corporation on October 23, 1998. The exchange ratio was 0.4224 shares
of Company Common Stock issued for each share of BKLA Common Stock, pursuant to
which, approximately 2,214,300 shares of Company Common Stock were issued as
consideration to BKLA shareholders.
On January 27, 1998, the Company acquired Santa Monica Bank through the
merger of Santa Monica with and into Western Bank. As part of the SMB
Acquisition, the name of Western Bank was changed to "Santa Monica Bank." Upon
consummation of the SMB Acquisition, 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 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 Company Common Stock. In order to
fund a part of the Cash Consideration payments, the Company issued an additional
2,327,550 shares of Company Common Stock to certain private investors for
$65,171,400 in the aggregate. Accordingly, in the aggregate, approximately
4,980,550 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. (For further
information on the SMB Acquisition, see Note 20 of Notes to Supplemental
Consolidated Financial Statements included elsewhere herein.)
On October 10, 1997, the Company consummated the merger of SC Bancorp with
and into the Company (the "SCB Merger"). The exchange ratio was 0.4556 shares of
Company Common Stock issued for each share of common stock of SC Bancorp,
pursuant to which, approximately 3,555,500 shares of the Company's Common Stock
(before adjustments for fractional shares) were issued as consideration. (For
further information on the SCB Merger, see Note 2 of Notes to Supplemental
Consolidated Financial Statements included elsewhere herein.)
On June 4, 1997, the Company consummated the merger of California Commercial
Bankshares ("CCB") with and into the Company (the "CCB Merger"), pursuant to
which, 3,043,226 shares of Company Common Stock were issued as consideration. In
addition, on June 3, 1997, in connection with the CCB Merger, the Company
completed an 8.5 to 1 reverse stock split (the "Reverse Stock Split"). (For
further information on the CCB Merger, see Note 2 of Notes to Supplemental
Consolidated Financial Statements included elsewhere herein.) All share amounts
herein have been restated to give effect to the Reverse Stock Split.
24
<PAGE>
On September 30, 1996, the Company acquired all of the issued and
outstanding shares of Western Bank. The Company funded the purchase price with
the issuance of 3,076,045 shares of Company Common Stock in the 1996 Private
Placement from which the Company raised approximately $42.2 million, net of
approximately $0.9 million in issuance costs, and from the proceeds of a three
year loan of $26.5 million from The Northern Trust Company. A $15.5 million
dividend was declared by Western Bank concurrently with the completion of the
Western Acquisition and paid to the Company, which was used to reduce the $26.5
million note to $11 million. (For further information on the Western
Acquisition, see Note 2 of Notes to Supplemental Consolidated Financial
Statements included elsewhere herein.)
BKLA ACQUISITIONS: In the three years prior to the acquisition of BKLA by
the Company, BKLA completed three purchase transactions resulting in the
issuance of shares of common stock of BKLA. The share counts in the following
discussion have been adjusted for the 0.4224 BKLA Conversion Number.
BKLA entered into an Agreement Respecting Merger and Plan of
Reorganization, dated August 29, 1997, with Culver National Bank, a one
branch, nationally chartered bank with headquarters in Culver City,
California. The acquisition was completed December 31, 1997 and accounted
for as a purchase. The results of operations of Culver National Bank are not
included in the accompanying statements. BKLA issued 488,010 shares of
common stock in connection with this transaction.
BKLA entered into an Agreement and Plan of Reorganization, dated October
22, 1996, with American West Bank, a two branch state chartered bank with
headquarters in Encino, California. The acquisition was completed on March
31, 1997 and accounted for as a purchase. The results of operations since
the date of acquisition are included in the accompanying statements of
operations. BKLA issued 577,629 shares of common stock in connection with
this transaction.
BKLA entered into an Agreement and Plan of Reorganization, dated June
30, 1995 with World Trade Bank, a one branch, nationally chartered bank with
headquarters in Beverly Hills, California. The acquisition was completed
November 15, 1995 and accounted for as a purchase. The results of operations
of World Trade Bank are included in the accompanying statements of
operations. BKLA issued 146,288 shares of common stock in connection with
this transaction.
For further information on the BKLA acquisitions, see Note 2 of Notes to
Supplemental Consolidated Financial Statements included elsewhere herein.
SELECTED FINANCIAL DATA
The following tables and data set forth statistical information relating to
the Company and its subsidiaries for each of the years in the five-year period
ended December 31, 1997. Such tables and data reflect the combination of the
Company with each of CCB, SC Bancorp and BKLA on June 4, 1997, October 10, 1997
and October 23, 1998, respectively, each in a merger accounted for as a
pooling-of-interests. The following summary financial data was derived from the
Audited Supplemental Consolidated Financial Statements of the Company, which
reflect the effect of the CCB Merger, the SCB Merger and the BKLA Acquisition.
This data should be read in conjunction with the Audited Supplemental
Consolidated Financial Statements as of December 31, 1997 and 1996 and for each
of the years in the three-year period ended December 31, 1997 and related notes
included elsewhere herein. All share data has been adjusted to reflect the
Reverse Stock Split.
25
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1997 1996(1) 1995 1994 1993
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENT OF OPERATIONS DATA:
Interest income................................................. $ 115,888 $ 84,798 $ 69,448 $ 58,873 $ 64,814
Interest expense................................................ 33,289 25,398 21,656 15,146 20,939
---------- --------- --------- --------- ---------
Net interest income............................................. 82,599 59,400 47,792 43,727 43,875
Provision for loans and lease losses............................ (3,210) (1,768) (8,253) (3,510) (19,872)
Non-interest income (other than gains or losses on securities &
sale of loans and other assets transactions).................. 10,654 9,971 9,179 9,179 10,110
Gain (losses) on securities transactions........................ 342 276 (738) (24) 7,486
Gain on sale of loans and other assets, net..................... 78 665 263 215 --
Other non-interest expense...................................... (71,244) (53,841) (46,418) (44,035) (47,679)
Lower of cost or market adjustment on loans..................... -- -- (756)
Goodwill amortization........................................... (2,784) (1,123) (841) (211) (167)
OREO (expense) income........................................... (271) 66 (3,104) (3,160) (4,894)
---------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES.................................... 16,164 13,646 (2,876) 2,181 (11,141)
Income tax expense (benefit).................................... 9,271 3,656 (1,733) 1,680 (1,979)
---------- --------- --------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle.......................................... 6,893 9,990 (1,143) 501 (9,162)
Cumulative effect of change in accounting principle............. -- -- -- -- (41)
---------- --------- --------- --------- ---------
NET INCOME (LOSS)............................................. $ 6,893 $ 9,990 $ (1,143) $ 501 $ (9,203)
---------- --------- --------- --------- ---------
PER SHARE DATA(2)(3):
Basic net income (loss) per share............................... $ 0.58 $ 1.11 $ (0.17) $ 0.10 $ (2.19)
Diluted net income (loss) per share............................. 0.56 1.07 (0.17) 0.10 (2.19)
Cash dividends declared......................................... 0.30 0.00 0.00 0.00 0.00
Dividend payout ratio........................................... 52% 0% 0% 0% 0%
Book value per share............................................ $ 12.70 $ 12.47 $ 10.90 $ 10.97 $ 13.58
Shares used to compute diluted net income (loss) per share...... 12,315,452 9,294,204 7,134,433 5,256,439 4,199,166
---------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Assets.......................................................... $1,655,543 $1,469,618 $ 996,130 $ 839,701 $ 898,550
Loans and leases net of deferred fees and unearned income(4).... 1,023,367 889,624 609,063 477,355 511,735
Allowance for loan and lease losses............................. 18,713 17,439 15,488 13,748 21,555
Securities...................................................... 267,947 354,944 218,300 250,697 277,299
Goodwill........................................................ 36,369 34,630 5,864 2,464 2,616
Deposits........................................................ 1,464,805 1,292,610 888,907 750,442 823,217
Borrowings...................................................... 14,600 22,132 9,202 16,991 11,995
Shareholders' equity............................................ 160,709 141,679 89,619 66,091 57,074
---------- --------- --------- --------- ---------
ASSET QUALITY:
Nonaccrual loans and leases..................................... 11,753 18,951 18,721 17,652 31,615
OREO............................................................ 7,736 7,621 4,906 9,130 9,715
---------- --------- --------- --------- ---------
Total nonaccrual loans and leases and OREO.................... 19,489 26,572 23,627 26,782 41,330
---------- --------- --------- --------- ---------
PERFORMANCE RATIOS:
Return on average assets........................................ 0.45% 0.89% (0.12%) 0.06% (0.93%)
Return on average shareholders' equity.......................... 4.57% 9.59% (1.49%) 0.72% (14.82%)
Net interest spread............................................. 4.86% 4.72% 4.72% 4.84% 4.20%
Net interest margin............................................. 6.08% 5.96% 5.87% 5.67% 4.92%
Average shareholders' equity to average assets.................. 9.81% 9.30% 8.36% 7.90% 6.28%
ASSET QUALITY RATIOS:
Nonaccrual loans and leases to gross loans and leases........... 1.15% 2.12% 3.06% 3.68% 6.16%
Nonaccrual loans and leases and OREO to total assets............ 1.18% 1.81% 2.37% 3.19% 4.60%
Allowance for loan and lease losses to total loans and leases... 1.82% 1.95% 2.53% 2.87% 4.20%
Allowance for loan and lease losses to nonaccrual loans......... 159.2% 92.0% 82.7% 77.9% 68.2%
Net charge-offs to average loans and leases..................... 0.39% 0.74% 1.57% 2.39% 2.62%
</TABLE>
- ------------------------
(1) Includes the accounts and operating results of Western Bank since the
September 30, 1996 acquisition date.
(2) Excludes stock options as common stock equivalents in 1995 and 1993 as the
effect thereof was anti-dilutive.
(3) The Company adopted SFAS No. 128 on December 31, 1997. Diluted net income
per share for all prior periods has been restated to reflect adoption of
SFAS No. 128. See Note 1 of Notes to Supplemental Consolidated Financial
Statements below.
(4) Includes loans available for sale.
26
<PAGE>
BALANCE SHEET ANALYSIS
OVERVIEW
The Company had total assets of approximately $1.7 billion at December 31,
1997 as compared to total assets of approximately $1.5 billion at December 31,
1996. At January 31, 1998, the Company had total assets of approximately $2.4
billion after giving effect to the SMB Acquisition. Historical amounts have been
restated for the CCB Merger, the SCB Merger and the BKLA Acquisition through the
use of pooling-of-interests accounting. The Company's total deposits increased
from approximately $1.3 billion at December 31, 1996 to approximately $1.5
billion at December 31, 1997 and, after giving effect to the SMB Acquisition, to
approximately $2.0 billion at January 31, 1998. Common shareholders' equity has
increased from approximately $141.7 million at December 31, 1996 to $160.7
million at December 31, 1997 and to $314.6 million at January 31, 1998.
The SMB Acquisition was consummated on January 27, 1998 and was accounted
for using the purchase method of accounting. At December 31, 1997, based on
unaudited data heretofore made available to the Company, SMB had total assets of
$678 million, deposits of $592 million, shareholders' equity of $81 million and
approximately 7.1 million shares of SMB Common Stock outstanding. For the year
ended December 31, 1997, SMB reported net income and net income per share of
approximately $10.9 million and $1.54, respectively.
Following is an analysis of the Company's assets and liabilities as of
December 31, 1997. Because the SMB Acquisition was consummated on January 27,
1998, the following analysis does not include a discussion of SMB unless
otherwise indicated. For a discussion of the Company's assets and liabilities as
of September 30, 1998, see Management's Discussion and Analysis of Restated
Financial Condition and Results of Operators as of September 30, 1998 and for
the Three and Nine Month Periods Ended September 30, 1998 and 1997, included
elsewhere herein.
CASH LIQUIDITY
The Company defines "Cash Liquidity" at the Banks as cash and cash
equivalents and securities available for sale less pledged securities and
reserve requirement divided by total deposits, treasury, tax and loan borrowings
and other borrowings less securities pledged for deposit balances. During 1997,
the Banks consistently maintained cash liquidity of approximately 25 percent or
greater, which was a product of low demand for loans and high underwriting
standards established during the latter part of a major recession. The Banks
were also hesitant to commit liquid funds to mid- to long-term investments
during a period when the yield curve was relatively flat such as existed during
most of 1997, and in anticipation of increased funding needs as the loan
portfolios of the Banks grow.
The primary sources of liquidity of the Company on a stand alone basis (the
"Parent Company") are the receipt of dividends from the Banks, the ability to
raise capital and a revolving line of credit (See "-- BORROWINGS" below). The
availability of dividends from the Banks is limited by various statutes and
regulations of state and federal law. (See Note 9 of Notes to Supplemental
Consolidated Financial Statements included elsewhere herein.) California law
restricts the amount available for cash dividends by state-chartered banks to
the lesser of retained earnings or the bank's net income for its last three
fiscal years (less any distributions to shareholders made during such period).
In the event a bank has no retained earnings or net income for its last three
fiscal years, cash dividends may be paid in an amount not exceeding the net
income for such bank's last preceding fiscal year only after obtaining the prior
approval of the California Department of Financial Institutions. In conjunction
with the SMB Acquisition on January 27, 1998, the Company received approval to
take dividends from SCB and SMB of $9 million and $45 million, respectively.
27
<PAGE>
INVESTMENT PORTFOLIO
Securities available for sale decreased approximately $129.0 million from
$342.4 million at December 31, 1996 to $213.4 million at December 31, 1997. This
decrease is largely attributable to increased loan production and maturities of
securities which were invested in federal funds sold.
The fair value of securities available for sale at the dates indicated are
summarized in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government securities.................... $ 107,536 $ 176,361 $ 57,496
U.S. Agency securities or insured
obligations................................. 53,515 95,395 67,986
Mortgage-backed securities.................... 51,065 58,906 73,428
Other debt securities......................... 1,220 1,860 416
--------- --------- ---------
Total debt securities....................... 213,336 332,522 199,326
Mutual funds.................................. -- 9,078 9,240
Other equity securities....................... 62 783 250
--------- --------- ---------
Total....................................... $ 213,398 $ 342,383 $ 208,816
--------- --------- ---------
--------- --------- ---------
</TABLE>
For acquisitions completed in 1997, in order to to bring all Banks under the
Company's asset/liability management philosophy, the Banks reclassified their
held-to-maturity portfolios to available-for-sale in the fourth quarter of 1997.
At that time, the Banks, excluding BKLA, collectively had approximately $2.9
million in held-to-maturity securities including, municipal, treasury note,
collateralized mortgage obligations ("CMOs") and agency securities. The
held-to-maturity portfolio, reported below, as of December 31, 1997 relates to
BKLA.
The following table shows the maturities and yields of debt securities
available for sale at December 31, 1997 (Dollars in thousands):
<TABLE>
<CAPTION>
FIVE YEARS
ONE YEAR OR LESS ONE YEAR THRU FIVE YEARS THRU
TOTAL TEN YEARS
---------------------- ------------------------ ------------------------ -----------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
--------- ----- ----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
US Government securities.............. $ 107,536 5.87% $ 62,128 5.90% $ 45,408 5.83% $ --
US Agency or insured Obligations...... 53,515 6.09% 20,457 5.77% 32,448 6.29% --
Mortgage-backed securities............ 51,065 6.39% 13,243 6.50% 17,574 6.39% 10,855
Other debt securities................. 1,220 4.31% -- 365 3.81% 404
--------- ----------- ----------- -----------
Total............................... $ 213,336 6.04% $ 95,828 5.96% $ 95,795 6.08% $ 11,259
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Amortized cost...................... $ 213,544 $ 95,912 $ 95,938 $ 11,355
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
<CAPTION>
OVER 10 YEARS
------------------------
YIELD AMOUNT YIELD
----- ----------- -----
<S> <C> <C> <C>
US Government securities.............. $ --
US Agency or insured Obligations...... 610 6.09%
Mortgage-backed securities............ 6.50% 9,393 6.12%
Other debt securities................. 4.27% 451 4.76%
-----------
Total............................... 6.42% $ 10,454 6.05%
-----------
-----------
Amortized cost...................... $ 10,339
-----------
-----------
</TABLE>
The following table shows the carrying amounts of the securities held to
maturity at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government securities......................... $ 24,966 $ 1,147 $ 485
U.S. Agency securities............................. 17,962 3,989 4,500
Mortgage-backed securities......................... 5,210 1,921 1,676
--------- --------- ---------
$ 48,138 $ 7,057 $ 6,661
--------- --------- ---------
--------- --------- ---------
</TABLE>
28
<PAGE>
The following table shows the maturities and yields of debt securities held
to maturity at December 31, 1997. (Dollars in thousands).
<TABLE>
<CAPTION>
5 YEARS
1 YEAR THRU 5 YEARS THRU 10
TOTAL 1 YEAR OR LESS YEARS
------------------------ ------------------------ ------------------------ -----------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
----------- ----- ----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
US government and US agency
securities.......................... $ 42,928 5.95% $ 26,476 5.85% $ 16,452 6.10% --
Mortgage-backed securities............ 5,210 6.30% -- 5,210 6.30% --
----------- ----------- ----------- -----------
Total............................... $ 48,138 5.98% 26,476 5.85% 21,662 6.15% --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fair value.......................... $ 48,247 $ 26,517 $ 21,770 $ --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
OVER 10 YEARS
------------------------
YIELD AMOUNT YIELD
----- ----------- -----
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY
US government and US agency
securities.......................... --
Mortgage-backed securities............ --
-----------
Total............................... --
-----------
-----------
Fair value.......................... $ --
-----------
-----------
</TABLE>
At December 31, 1997, the Company did not have investments in securities
issued by any one non-federal issuer which exceeded ten percent of shareholders'
equity.
The Banks may hold derivative securities as part of their investment
portfolios. At December 31, 1997, the Bank's held three CMOs with an amortized
cost of approximately $1.0 million approximate their market value. The weighted
average yield of these investments was 7.19 percent and the weighted average
life was 1.88 years as of December 31, 1997. All three CMOs have been tested no
less than annually using the Federal Financial Institutions Examination Council
("FFIEC") "High Risk Security Test" and each of the securities has passed the
annual tests. This stress test is used by bank regulators to assess the relative
risks of investments in CMOs. A security that passes this test is not considered
to be "high-risk;" a security that fails the test may be subject to additional
regulatory scrutiny, and under the most severe case, the bank could be asked to
sell the security.
The Banks do not have securities trading accounts and do not intend to trade
securities. For further information, see Note 4 of Notes to Supplemental
Consolidated Financial Statements below.
LOAN AND LEASE PORTFOLIO
The Company, through the Banks, concentrates its lending activities in three
principal areas.
(1) REAL ESTATE LOANS. Real estate loans are comprised of construction
loans, miniperm loans collateralized by first or junior trust deeds on specific
properties and equity lines of credit. At December 31, 1997 approximately 51.0%
of the Company's loan and lease portfolio was constituted of real estate loans.
The properties collateralizing real estate loans are principally located in the
Company's primary market areas of Los Angeles, Orange and San Diego counties and
the contiguous communities. The construction loans are comprised of loans on
residential and income producing properties, generally have terms of less than
two years and typically bear an interest rate that floats with the prime rate or
other established index. The miniperm loans finance the purchase and/or
ownership of income producing properties. Miniperm loans are generally made with
an amortization schedule ranging from fifteen to thirty years with a lump sum
balloon payment due in one to ten years. Equity lines of credit are revolving
lines of credit collateralized by junior trust deeds on real properties. They
bear a rate of interest that floats with the prime rate, LIBOR, or other
established index and have maturities of five to seven years. The Company also
makes a small number of loans on one to four family residential properties and
five or more unit residential properties. From time to time, the Company
purchases participation interests in loans made by other institutions. These
loans are subject to the same underwriting criteria and approval process as
loans made directly by the Company. The Banks' real estate portfolio is subject
to certain risks the occurrence of which could have a material adverse effect on
the results of operations of the Company, including (i) a possible downturn in
the Southern California economy such as that which occurred during the early
1990's, (ii) interest rate increases due to inflation, (iii) reduction in real
estate values in Southern California, and (iv) continued increase in competitive
pricing and loan structure. The Banks strive to reduce the exposure to such
risks by (i) reviewing each loan request and renewal individually, (ii) using a
29
<PAGE>
dual signature approval system, whereby both the marketing and credit
administration departments must approve each request individually, and (iii)
following strict written loan policies. Each loan request is reviewed on the
basis of the Bank's ability to recover both principal and interest in view of
the inherent risks.
(2) COMMERCIAL LOANS. Commercial loans are made to finance operations, to
provide working capital or for specific purposes, such as to finance the
purchase of assets, equipment or inventory. At December 31, 1997 approximately
40.0% of the Company's loans and lease portfolio was constituted of commercial
loans. Since a borrower's cash flow from operations is generally the primary
source of repayment, the Company's policies provide specific guidelines
regarding required debt coverage and other important financial ratios.
Commercial loans include lines of credit and commercial term loans. Lines of
credit are extended to businesses or individuals based on the financial strength
and integrity of the borrower and are generally (with some exceptions)
collateralized by short term assets such as accounts receivable and inventory
(monitored by the Company's asset based lending department), equipment or real
estate and generally have a maturity of one year or less. Such lines of credit
bear an interest rate that floats with the prime rate, LIBOR, or other
established index. Commercial term loans are typically made to finance the
acquisition of fixed assets, to refinance short term debt originally used to
purchase fixed assets or, in rare cases, to finance the purchase of businesses.
Commercial term loans generally have terms from one to five years. Commercial
term loans may be collateralized by the asset being acquired or other available
assets and bear interest which either floats with the prime rate, LIBOR, or
other established index or is fixed for the term of the loan. The Banks'
portfolio of commercial loans is subject to certain risks the occurrence of
which could have a material adverse effect on the results of operations of the
Company, including (i) a possible downturn in the Southern California economy
which could potentially be brought on by large companies or industries leaving
the state, (ii) possible higher interest rates, and (iii) the possible
deterioration of companies financial capabilities over time. The Banks strive to
reduce the exposure to such risks through (i) a dual signature approval system,
whereby both the marketing and credit administration departments must approve
each credit request individually, and (ii) following strict written loan
policies. In addition, loans based on short term asset values are monitored on a
monthly or quarterly basis. In general, the Banks receive and review financial
statements of borrowing customers on an ongoing basis during the term of the
relationship and react to any deterioration noted.
(3) CONSUMER LOANS AND LEASES. Consumer loans include personal loans, auto
loans, boat loans, home improvement loans, equipment loans, revolving lines of
credit and other loans typically made by banks to individual borrowers. The
Company also makes leases on new and used automobiles. These leases may be
closed-end or commercial leases, have terms of one to five years and bear
interest at a fixed rate. At December 31, 1997, approximately 9.0% of the
Company's loan and lease portfolio was constituted of consumer loans and leases.
The Banks' consumer loan portfolio is subject to certain risks the occurrence of
which could have a material adverse effect on the results of operations of the
Company, including (i) the high amount of credit offered to consumers in the
market, (ii) the possibility of higher interest rates due to possible inflation,
and (iii) the consumer bankruptcy laws which allow consumers to discharge
certain debts. The Banks strive to reduce the exposure to such risks through (i)
the use of standardized credit scoring techniques which are continually updated
in light of any recent trends and (ii) the direct approval of loans in excess of
$100,000 by credit administration department using a dual signature system of
approval and strict adherence to written credit policies.
In addition to the dual signature method of loan approval and strict
adherence to written lending policies, all major loan commitments are reviewed
after approval, on a monthly basis, by an outside, independent loan review team.
30
<PAGE>
The following table sets forth the amount of loans and leases outstanding at
the end of the following periods including loans and leases available for sale,
according to the type of loan. The Company's lending activities are
predominantly in Southern California, and the Company has no foreign loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real Estate Construction................. $ 75,318 $ 64,954 $ 34,254 $ 33,854 $ 45,615
Real Estate Mortgage..................... 449,813 355,034 225,834 193,968 215,458
Commercial............................... 407,282 360,704 268,938 184,223 188,604
Leases................................... 1,934 3,027 3,463 4,159 4,532
Installment and other.................... 91,906 108,779 78,527 62,963 59,406
--------- --------- --------- --------- ---------
Gross loans and leases................. 1,026,253 892,498 611,016 479,167 513,615
--------- --------- --------- --------- ---------
Less:
Unearned lease income.................. (226) (364) (399) (544) (562)
Deferred loan fees..................... (2,660) (2,510) (1,554) (1,268) (1,318)
Allowance for loan & lease losses...... (18,713) (17,439) (15,488) (13,748) (21,555)
--------- --------- --------- --------- ---------
Net loans and leases................... $1,004,654 $ 872,185 $ 593,575 $ 463,607 $ 490,180
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Gross loans increased $133.8 million from $892.5 million at December 31,
1996 to $1.0 billion at December 31, 1997 and the allowance for loan and lease
losses increased $1.3 million from $17.4 million at December 31, 1996 to $18.7
million at December 31, 1997. The increase in net loans and leases during 1997
is attributable primarily to the continued growth of the Southern California
economy and the associated borrowing requirements of the Company's customers to
participate in that growth as well as BKLA's acquisition of Culver National Bank
and American West Bank. The growth in the allowance for loan and lease losses
during 1997 is attributable primarily to the purchase acquisitions completed by
BKLA in 1997.
With certain exceptions, the Banks are permitted under California law to
make loans to a single borrower in aggregate amounts up to 25 percent of the sum
of shareholders' equity (excluding goodwill and the effect of the unrealized
gain or loss on securities available for sale included in shareholders' equity),
allowance for loan and lease losses, capital reserves, if any, and debentures,
if any, for "secured loans" (as defined for regulatory purposes), and up to 15
percent of such sum for the aggregate of "unsecured loans" (as defined for
regulatory purposes). As of December 31, 1997 these consolidated lending limits
for the Banks were approximately $44.9 million for secured loans, and
approximately $26.9 million for unsecured loans. The Company sells
participations in loans between its subsidiaries and to outside parties where
necessary to stay within lending limits or otherwise to limit the Company's
exposure in particular credits. Where deemed appropriate to better utilize
available funds, the Company may purchase participations in loans. At December
31, 1997, there were no loans outstanding to a single borrower which exceed
these limits.
31
<PAGE>
MATURITIES OF LOANS AND LEASES. As is customary in the banking industry,
loans that meet sound underwriting criteria can be renewed by mutual agreement
between the Company and the borrower. Because the Company is unable to estimate
the extent to which its borrowers will renew their loans, the table below is
based on contractual maturities at December 31, 1997:
<TABLE>
<CAPTION>
ONE YEAR
ONE YEAR OR THROUGH 5
LESS YEARS OVER 5 YEARS TOTAL
----------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate Construction.................................... $ 60,110 $ 13,247 $ 1,961 $ 75,318
Real Estate Mortgage........................................ 135,728 175,734 138,351 449,813
Commercial.................................................. 216,424 133,476 57,382 407,282
Installment, leases and other............................... 38,861 35,464 19,515 93,840
----------- ---------- ------------ ------------
Total................................................... $ 451,123 $ 357,921 $ 217,209 $ 1,026,253
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
Loan maturing after one year with:
Fixed interest rates...................................... $ 165,589 $ 123,749
Variable interest rates................................... 192,332 93,460
---------- ------------
Total................................................... $ 357,921 $ 217,209
---------- ------------
---------- ------------
</TABLE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES. The following table
shows the Company's nonaccrual, past due and restructured loans and leases.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases:
Real estate construction........................... $ -- $ 1,031 $ 4,545 $ 7,730 $ 7,706
Real estate mortgage............................... 8,173 13,139 11,666 1,479 12,158
Commercial......................................... 3,263 3,567 2,284 7,991 11,289
Leases............................................. -- -- 27 -- 26
Installment and others............................. 317 1,214 199 452 436
--------- --------- --------- --------- ---------
Total............................................ $ 11,753 $ 18,951 $ 18,721 $ 17,652 $ 31,615
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total nonaccrual loans and leases as a
percentage of gross loans and leases............... 1.15% 2.12% 3.06% 3.68% 6.16%
Allowance for loan and lease losses to
nonaccrual loans and leases........................ 159.2% 92.0% 82.7% 77.9% 68.2%
Loans past due 90 days or more on accrual status:
Real estate mortgage............................... $ -- $ -- $ -- $ 199 $ 124
Commercial......................................... 185 193 -- 1,014 375
Installment and other.............................. 18 -- -- -- 6
--------- --------- --------- --------- ---------
Total............................................ $ 203 $ 193 $ -- $ 1,213 $ 505
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Restructured loans:
On accrual status.................................. $ 3,107 $ 2,111 $ 4,528 $ 3,262 $ --
On nonaccrual status(1)............................ 6,346 5,170 168 8,024 1,399
--------- --------- --------- --------- ---------
Total............................................ $ 9,453 $ 7,281 $ 4,696 $ 11,286 $ 1,399
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Included in nonaccrual loans above.
32
<PAGE>
Nonaccrual loans decreased $7.2 million from $19.0 million at December 31,
1996 to $11.8 million at December 31, 1997. The decrease represents an
improvement of $6.6 million in the Company's nonaccrual loans and leases due to
two real estate loans which were foreclosed upon, converted to OREO and
subsequently sold during 1997. Nonaccrual loans and leases at SCB increased by
approximately $2.1 million during the same period of time due in part to the
addition of a $2.8 million real estate loan, payments on nonaccrual loans by
borrowers, and the transfer of one real estate loan for $867 thousand to OREO.
Total nonaccrual loans and leases as a percentage of gross loans and leases
decreased from 2.12 percent at December 31, 1996 to 1.15 percent at December 31,
1997. Three BKLA loans, totaling $1.6 million have been brought current as of
December 31, 1997 but remain on nonaccrual status.
There are no commitments to lend additional funds to borrowers listed as
nonaccrual or past due 90 days or more.
The Company's policy concerning nonperforming loans is to cease accruing
interest, and to charge off all accrued and unpaid interest on loans which are
past due as to principal and/or interest for at least 90 days, or at such
earlier time as management determines timely collection of the interest to be in
doubt. However, in certain circumstances loans which are past due 90 days or
more may continue accruing interest or interest may not be charged off when the
related loans are well secured or in the process of being collected. When the
Company receives cash on nonaccrual loans or leases, the Company's policy is to
record such receipts first as a reduction to the principal and then as interest
income. A nonperforming loan or lease may be returned to accrual status if the
loan or lease performs for a period of six months.
The Company has not been active in areas that involve hazardous waste. Based
on portfolio reviews by the Company, one loan with a principal balance of $2.8
million has been identified as being impacted by hazardous material. This loan
was charged off during the third quarter of 1998 and in the opinion of
management does not have a material impact on the Company. During November 1998,
the charged off note was sold to a private investor, resulting in a recovery of
approximately $1,100,000.
POTENTIAL PROBLEM LOANS AND IMPAIRED LOANS. "Impaired loans" are
commercial, commercial real estate, and individually significant mortgage and
consumer loans for which it is probable that the Company will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. The category of "impaired loans" is not coextensive with the category
of "nonaccrual loans," although the two categories overlap. "Nonaccrual loans"
include impaired loans and are those on which the accrual of interest is
discontinued when collectibility of principal or interest is uncertain or
payments of principal or interest have become contractually past due 90 days.
The Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired, if (i) it is probable that the Company will collect all amounts due in
accordance with the contractual terms of the loan or (ii) the loan is not a
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
33
<PAGE>
At December 31, 1997 and 1996, impaired loans and leases and the related
specific loan and lease loss allowances were as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------
ALLOWANCE FOR
RECORDED LOAN AND NET
INVESTMENT LEASE LOSSES INVESTMENT
----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances.................................... $ 6,397 $ 1,368 $ 5,029
Without specific allowances................................. 11,575 -- 11,575
----------- ------ -----------
Total impaired loans and leases........................... $ 17,972 $ 1,368 $ 16,604
----------- ------ -----------
----------- ------ -----------
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
ALLOWANCE FOR
RECORDED LOAN AND NET
INVESTMENT LEASE LOSSES INVESTMENT
----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances.................................... $ 12,682 $ 2,833 $ 9,849
Without specific allowances................................. 11,146 -- 11,146
----------- ------ -----------
Total impaired loans and leases........................... $ 23,828 $ 2,833 $ 20,995
----------- ------ -----------
----------- ------ -----------
</TABLE>
Except as reflected above, management is not aware of any borrowers who are
experiencing severe financial difficulties, or who, in the normal course of
business, represent any identified loss potential. The Company monitors all
loans and completes a monthly internal watch list report, which is inclusive of
both loans past due and borrowers that have been identified for closer
monitoring.
LOAN CONCENTRATIONS. The Company's lending activities are predominantly in
Southern California. Other than this geographical concentration, the Company
considers the loan portfolios to be diverse, and there are no specific
concentrations to any one borrower or group of borrowers that are engaged in
similar activities which would cause them to be similarly impacted by economic
or other considerations. However, at December 31, 1997, approximately 51 percent
of the Company's loan and lease portfolio consisted of loans secured by various
types of real estate. The ability and willingness of the borrowers of the Banks
to repay such loans and the value of the collateral that secures such loans
depends on the economic conditions present in the various markets in which the
Banks have loans or hold properties. These conditions include general economic
conditions, the availability of loans, changes in governmental rules or policies
and acts of nature. Declines in real estate values in Southern California, or a
worsening of economic conditions in the Company's principal market areas, could
result in an increase in charge-offs and an increase in nonperforming assets and
require the Company to materially increase its provision for loan and lease
losses, and could have a material adverse effect on the Company.
34
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The following table summarizes loan balances, loans charged off, the
provision for loan and lease losses charged to expense, the allowance, and loan
recoveries.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of the year........... $ 17,439 $ 15,488 $ 13,748 $ 21,555 $ 16,476
Loans and leases charged off:
Real Estate Mortgage......................... 2,195 2,083 5,367 5,575 5,698
Real Estate Construction..................... -- 1,017 739 4,076 1,394
Commercial................................... 3,092 2,614 2,885 3,855 8,866
Leases....................................... -- 27 11 48 120
Installment and other........................ 587 563 982 640 1,215
--------- --------- --------- --------- ---------
Total loans and leases charged off......... 5,874 6,304 9,984 14,194 17,293
--------- --------- --------- --------- ---------
Recoveries on loans and leases charged off:
Real Estate Mortgage......................... 196 138 569 551 257
Real Estate Construction..................... 41 9 103 354 2
Commercial................................... 1,630 1,046 772 1,774 1,887
Leases....................................... -- -- 34 52 12
Installment and other........................ 189 133 244 146 342
--------- --------- --------- --------- ---------
Total recoveries on loans and leases
charged off.............................. 2,056 1,326 1,722 2,877 2,500
--------- --------- --------- --------- ---------
Net loans and leases charged off........... 3,818 4,978 8,262 11,317 14,793
--------- --------- --------- --------- ---------
Provision for loan and lease losses............ 3,210 1,768 8,253 3,510 19,872
Addition to allowance due to:
Acquisitions................................. 1,882 5,041 1,132 -- --
Loan portfolio purchases..................... -- 120 617 -- --
--------- --------- --------- --------- ---------
Balance at the end of the year................. $ 18,713 $ 17,439 $ 15,488 $ 13,748 $ 21,555
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loans:
Average loans and leases outstanding during
year....................................... $ 969,899 $ 670,161 $ 527,546 $ 474,368 $ 565,481
Gross loans and leases at end of year........ 1,026,253 892,498 611,016 479,167 513,615
Ratios:
Net loans and leases charged off to average
Loans and leases........................... 0.39% 0.74% 1.57% 2.39% 2.62%
Allowance as a percentage of end of year
loans
and leases................................. 1.82% 1.95% 2.53% 2.87% 4.20%
</TABLE>
The allowance for loan and lease losses increased from $17.4 million at
December 31, 1996 to $18.7 million at December 31, 1997. Net loans and leases
charged off decreased $1.2 million from $5.0 million at December 31, 1996 to
$3.8 million at December 31, 1997, and the provision charged to operating
expense increased $1.4 million from $1.8 million at December 31, 1996 to $3.2
million at December 31, 1997, respectively.
The Company's local markets were severely affected by the recession in 1993
through 1995, and in several instances borrowers who had never reported
financial difficulties as well as borrowers whose loans were past due declared
bankruptcy. During 1996 the economy started a slow recovery which was evidenced
by the decrease in net charge-offs for 1996 and 1997.
35
<PAGE>
The allowance for loan and lease losses as a percentage of end of year loans
and leases has declined from 4.20 percent at December 31, 1993 to 1.82 percent
at December 31, 1997 along with a decline in the percentage of net loans and
leases charged off to average loans and leases from 2.62 percent at December 31,
1993 to 0.39 percent at December 31, 1997. While the allowance as a percentage
of end of year loans and leases has declined from 1.95 percent to 1.82 percent
from December 31, 1996 to 1997, respectively, the allowance for loan and lease
losses as a percentage of nonaccrual loans has increased from 92 percent to 159
percent from December 31, 1996 to December 31, 1997, respectively.
The following table reflects management's allocation of the allowance for
loan and lease losses by loan category and the ratio of loans and leases in each
category to total loans and leases at December 31 for each of the last five
years:
<TABLE>
<CAPTION>
ALLOWANCE AS OF DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real Estate Construction....................... $ 891 $ 726 $ 864 $ 2,576 $ 3,297
Real Estate Mortgage........................... 4,730 6,891 4,439 3,978 5,193
Commercial..................................... 6,580 4,118 4,246 3,192 5,311
Leases......................................... 47 47 47 88 85
Installment and other.......................... 1,243 1,109 1,243 978 714
Not allocated.................................. 5,222 4,548 4,649 2,936 6,955
--------- --------- --------- --------- ---------
Total........................................ $ 18,713 $ 17,439 $ 15,488 $ 13,748 $ 21,555
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
LOANS AND LEASES AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real Estate Construction................. $ 75,318 $ 64,954 $ 34,254 $ 33,854 $ 45,615
Real Estate Mortgage..................... 449,813 355,034 225,834 193,968 215,458
Commercial............................... 407,282 360,704 268,938 184,223 188,604
Leases................................... 1,934 3,027 3,463 4,159 4,532
Installment and other.................... 91,906 108,779 78,527 62,963 59,406
--------- --------- --------- --------- ---------
Total.................................. $1,026,253 $ 892,498 $ 611,016 $ 479,167 $ 513,615
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF LOANS AND LEASES
TO TOTAL LOANS AND LEASES AT DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Real Estate Construction.................................. 7% 7% 6% 7% 9%
Real Estate Mortgage...................................... 44% 40% 37% 41% 42%
Commercial................................................ 40% 40% 43% 38% 36%
Leases.................................................... 0% 0% 1% 1% 1%
Installment and other..................................... 9% 13% 13% 13% 12%
--- --- --- --- ---
Total................................................... 100% 100% 100% 100% 100%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
The allowance for loan and lease losses allocated to the loan and lease
categories shown above is based on previous loan and lease loss experience, the
level of nonaccrual loans, management's review of classified loans, evaluation
of the current loan portfolio, and anticipated economic conditions. While the
allowance for loan and lease losses is allocated to specific loans and to
portfolio segments, the allowance is general in nature and is available for the
portfolio in its entirety.
36
<PAGE>
At December 31, 1997, the Company had identified impaired loans with a
recorded investment of approximately $18.0 million. An allowance of $1.4
million, representing the difference between the value of collateral supporting
these loans and their outstanding balance, is included in the allowance for loan
and lease losses. For further information on loans and leases, see Note 5 of
Notes to Supplemental Consolidated Financial Statements included elsewhere
herein.
The Company has an established monitoring system for its loans and leases in
order to identify impaired loans and potential problem loans and to permit
periodic evaluation of impairment and the adequacy of allowance for loan and
lease losses in a timely manner. All problem loans and leases are monitored on a
monthly basis making appropriate adjustments to grade classifications where
necessary. This monitoring system and allowance methodology includes a
loan-by-loan and lease-by-lease analysis for all classified loans and leases as
well as loss factors for the balance of the portfolio that are based on
migration analysis relative to both the classified and the unclassified portion
of the portfolio. This analysis includes such factors as historical loss
experience, current portfolio delinquencies, and risk levels of classified loans
and leases and particular loan and lease pool categories.
The Company is required under applicable law and regulations to review its
assets on a regular basis and to classify them as "pass," "special mention,"
"substandard," "doubtful," or "loss." An asset which possesses no apparent
weakness or deficiency is designated "pass." An asset which possesses weaknesses
or deficiencies deserving close attention is designated as "special mention." An
asset, or a portion thereof, is generally classified as "substandard" if it
possesses a well-defined weakness which could jeopardize the timely liquidation
of the asset or realization of the collateral at the asset's book value.
Substandard assets are characterized by the possibility that the institution
will sustain some loss if the deficiencies are not corrected. An asset, or
portion thereof, is classified as "doubtful" if a probable loss of principal
and/or interest exists but the amount of the loss, if any, is subject to the
outcome of future events, which are undeterminable at the time of
classification. If an asset, or portion thereof, is classified as "loss," the
Company charges off such amount.
On a quarterly basis, senior management and the board of directors of the
Company review the adequacy of the allowance for loan and lease losses. Special
Asset Credit Reports ("SAC Reports") are prepared and reviewed by senior
management for each loan and lease on the Company's classified asset listing.
SAC Reports include all pertinent details about the loan or lease, a write-up of
the current status, steps being taken to correct any problems, a detailed
workout plan and recommendations as to a classification of the loans and leases
as "pass," "special mention," "substandard," "doubtful," or "loss." Loans and
leases classified as "loss" are immediately charged against the allowance for
loan and lease losses.
Based on the foregoing discussion and all of the factors analyzed by
management in determining the adequacy of the allowance for loan and lease
losses, management believes that the allowance is adequate at December 31, 1997.
Management utilizes its best judgement in providing for possible loan and lease
losses and establishing the allowance for loan and lease losses. However, the
allowance is an estimate which is inherently uncertain and depends on the
outcome of future events. Although the Company believes that its allowance for
loan and lease losses is adequate, there can be no assurance that the allowance
will be adequate to cover future loan and lease losses.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of real estate acquired
through foreclosure or through the receipt of a deed in lieu of foreclosure.
These assets are recorded at the lower of the carrying value of the loan or the
fair value less selling costs of the related real estate. The excess carrying
value, if any, over the fair market value of the asset received is charged to
the allowance for loan and lease losses at the time of acquisition. Any
subsequent decline in the fair market value of the OREO is recognized as a
37
<PAGE>
charge to operations and a corresponding decrease to the OREO asset. Gains from
sales and operating expenses associated with OREO assets are included in
operations when realized.
The following table summarizes the Company's net OREO portfolio:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Other Real Estate Owned............. $ 7,736 $ 7,621 $ 4,906 $ 9,130 $ 9,715
Percent of Total Assets............. 0.47% 0.52% 0.49% 1.09% 1.08%
</TABLE>
DEPOSITS
In 1995, the Banks along with banks in Southern California generally,
progressively increased deposit rates which had been held low in 1994 due to the
lack of competition for deposits at a time when banks were still operating with
low or lower than normal loan demand. Starting in mid-1995 and continuing into
1997, the Banks along with banks in Southern California, have generally become
much more aggressive in pricing time deposits, but have yet to make a
significant increase in the rate paid on interest-bearing transactional
accounts.
The Company provides a range of deposit types to meet the needs of the local
communities. Time deposits, which are normally sensitive to competitive rate
changes, are generally used to expand or contract the overall liability position
needed to meet the various management ratios established for liquidity, capital,
loans to deposits, and other funding measurements. As a policy, the Company does
not accept or solicit brokered deposits.
The following table shows the average amount of interest-bearing and
non-interest-bearing deposits and rates as of December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 AVERAGE 1996 AVERAGE 1995 AVERAGE
-------------------- -------------------- --------------------
BALANCE RATE BALANCE RATE BALANCE RATE
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing deposits.............. $ 468,108 0.00% $ 335,291 0.00% $ 264,618 0.00%
Interest-bearing demand deposits........... 455,889 2.73 209,831 2.77 130,437 1.92
Savings deposits........................... 127,579 3.11 187,492 2.65 190,803 2.60
Time deposits.............................. 303,544 5.12 257,430 5.22 235,193 5.63
--------- --------- ---------
Total(1)................................. $1,355,120 2.36% $ 990,044 2.44% $ 821,051 2.52%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Includes non-interest-bearing deposits for both amounts and rates. Rates
represent weighted averages.
The following table shows the contractual maturity schedule of time
certificates of deposit of $100,000 or more as of December 31, 1997 (dollars in
thousands).
<TABLE>
<S> <C>
3 months or less.................................................. $ 107,997
Over 3 months through 6 months.................................... 30,964
Over 6 months through 12 months................................... 19,088
Over 1 year....................................................... 10,683
---------
Total........................................................... $ 168,732
---------
---------
</TABLE>
38
<PAGE>
Deposits increased approximately $172 million, or 13.3 percent, from $1.29
billion at December 31, 1996 to $1.46 billion at December 31, 1997. This growth
was attributable primarily to the acquisitions of Culver National Bank and
American West Bank which added $112 million in deposits at their respective
acquisition dates as well as the increase in economic activity in Los Angeles,
Orange and San Diego counties. The increase in average deposits from 1995 to
1996 was due mainly to the acquisition of Western Bank in the fourth quarter of
1996. The increase in average deposits from 1996 to 1997 is due to both the
increased economic activity discussed above as well as Western Bank's deposits
included in the average balance for the entire year and American West Bank
deposits included for 9 months.
BORROWINGS
On September 30, 1996, the Company borrowed $26.5 million from The Northern
Trust Company under a three year revolving credit agreement. Concurrent with the
acquisition of Western, the Company reduced the loan by $15.5 million as a
result of a dividend in the same amount from Western Bank and retained a credit
line of $11.0 million. In 1997 the credit line was increased to $13.0 million.
The balance at December 31, 1997 and 1996 was $7.1 million and $11.0 million,
respectively, and the interest rate was 7.02 percent and 6.75 percent,
respectively. The highest amount outstanding during 1997 and 1996 was $12.2
million and $26.5 million, respectively; the average balance outstanding during
1997 and 1996 was $9.6 million and $2.75 million, respectively; and the average
rate paid in 1997 and 1996 was 7.07 percent and 6.95 percent, respectively.
On January 26, 1998, the Company executed a third amendment to the revolving
credit agreement that, among other things, increased the line of credit from
$13.0 million to $17.5 million and adjusted certain of the financial covenants
in the revolving credit agreement to reflect the Company's larger size. The
revolving loan agreement expires on September 25, 1999.
CCB entered into a note with a shareholder in March 1996 bearing an interest
rate of 3 percent over the prime rate with interest only payable monthly for the
first year; thereafter, quarterly principal payments of $125,000 plus interest
were payable monthly. The note would have matured on April 1, 1999. On March 17,
1997, the Company paid $2.0 million on this note and paid the remaining
principal balance of $350,000 on April 1, 1997.
For further information, see Note 8 of the Notes to the Supplemental
Consolidated Financial Statements included elsewhere herein.
LIQUIDITY, INTEREST RATE RISK AND MARKET RISK
Major sources of liquidity for the Banks include deposits, maturities and
sales of securities, and loan repayments. Deposits are a volatile source of
funds because of changing conditions in the interest rate markets and
competition. The ability to sell securities without significant loss is subject
to changing market conditions. Loan repayments are dependent on the financial
wherewithal of the Company's borrowers.
The Parent Company's sources of liquidity include dividends from the Banks,
its ability to raise capital and outside borrowings. The amount of dividends
that the Banks can pay to the Company is restricted by regulatory guidelines and
covenants in the Parent Company's debt instruments.
Management believes that current levels and sources of liquidity are
sufficient to meet the Parent Company's and the Banks' commitments. Management
utilizes its best judgement in determining levels and sources of liquidity.
However, liquidity requirements of the Parent Company are inherently uncertain
and depend on the outcome of future events. Consequently, there can be no
assurance that the current levels and sources of liquidity will be sufficient to
meet the Parent Company's and the Banks' requirements. For further information
on commitments, see Notes 11 and 14 of Notes to Supplemental Consolidated
Financial Statements included elsewhere herein.
39
<PAGE>
In a rising interest rate environment, when rate sensitive assets ("RSA")
exceed rate sensitive liabilities ("RSL"), assets reprice to higher interest
rates faster than liabilities reprice, resulting in a net interest margin that
tends to rise. When RSL exceed RSA, net interest margin will tend to fall in the
same interest rate environment. The opposite effect on the net interest margin
occurs in a decreasing interest rate environment. As a rule, the Company works
to keep the cumulative difference between RSA and RSL as low as possible over a
one year cycle. The following table for the Company breaks down RSA and RSL at
December 31, 1997 based on the earliest possible repricing dates for variable
rate instruments, or for fixed rate assets and liabilities, on scheduled
maturities. In the past few years, various models and rate sensitive studies
have focused on the interest rate risk characteristics of interest-bearing
transactional accounts. Based on historical reviews and documentation, it
appears that these accounts do not have the same degree of short-term interest
rate sensitivity associated with loans that are tied to any immediate change in
prime rate or to short-term investments such as Federal funds sold. The
following table makes certain assumptions as to the interest rate sensitivity of
savings accounts that have limited rate fluctuation during the past three years,
as to money market accounts which are based on a tiered rate structure depending
on the account deposit level, and as to NOW accounts that have had very little
price fluctuation in the past three years:
<TABLE>
<CAPTION>
90 DAYS OR
LESS 90-365 DAYS 1-5 YEARS 5+ YEARS TOTAL
----------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal funds sold........................ $ 168,257 $ -- $ -- $ -- $ 168,257
Securities................................ 53,399 103,004 94,980 10,153 261,536
FRB and FHLB stocks....................... -- -- -- 6,411 6,411
Loans and leases (gross).................. 666,585 83,055 193,634 82,979 1,026,253
----------- ----------- --------- --------- ---------
Total RSA............................... 888,241 186,059 288,614 99,543 1,462,457
Savings................................... -- -- 149,724 37,431 187,155
Interest bearing demand deposits.......... -- 141,359 141,360 -- 282,719
NOW accounts.............................. -- -- 103,839 25,960 129,799
Time certificate of deposit of $100,000 or
more.................................... 107,997 50,052 10,432 251 168,732
Time certificate of deposit less than
$100,000................................ 75,536 64,919 13,150 70 153,675
Borrowings................................ 12,751 -- -- 1,849 14,600
----------- ----------- --------- --------- ---------
Total RSL............................... 196,284 256,330 418,505 65,561 936,680
----------- ----------- --------- --------- ---------
Net RSA-RSL........................... $ 691,957 $ (70,271) $(129,891) $ 33,982 $ 525,777
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Cumulative RSA-RSL........................ $ 691,957 $ 621,686 $ 491,795 $ 525,777
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Cumulative as a percentage of total
assets.................................. 41.80% 37.55% 29.71% 31.76%
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1997. Market risk sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments. For discussion of the fair value of financial
instruments as of December 31, 1997, see Note 15 of the Notes to Supplemental
Consolidated Financial Statements included elsewhere herein.
40
<PAGE>
EXPECTED MATURITY DATA AT DECEMBER 31, 1997(1)
<TABLE>
<CAPTION>
EXPECTED MATURITY DATA AT DECEMBER 31, 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ESTIMATED
TOTAL FAIR
1998 1999 2000 2001 2002 THEREAFTER BALANCE VALUE
--------- --------- --------- --------- --------- ----------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Loans Receivable............ $ 491,769 $ 186,322 $ 99,484 $ 78,212 $ 51,384 $ 119,072 $1,026,253 $1,002,243
Average interest rate..... 9.16% 9.31% 9.39% 9.26% 9.09% 9.06% 9.38%
Federal Funds Sold.......... 168,257 -- -- -- -- -- 168,257 168,257
Average interest rate..... 1.03% -- -- -- -- -- 5.87%
FRB and FHLB Stock.......... -- -- -- -- -- 6,411 6,411 6,411
Average interest rate..... -- -- -- -- -- 0.01 6.26%
Investment Securities....... 132,285 78,836 26,487 16,046 1,108 6,920 261,682 261,583
Average interest rate..... 5.69% 5.91% 6.21% 6.14% 6.88% 6.23% 5.87%
--------- --------- --------- --------- --------- ----------- --------- ---------
Total interest-sensitive
assets.................... $ 792,311 $ 265,168 $ 125,971 $ 94,258 $ 52,492 $ 132,403 $1,462,603 $1,438,494
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
INTEREST-SENSITIVE
LIABILITIES:
Deposits:
NOW....................... $ -- $ 38,941 38,939 $ 12,980 $ 12,980 $ 25,959 $ 129,799 $ 129,799
Average interest rate... -- 1.43% 1.43% 1.43% 1.43% 1.43% 1.43%
Savings................... -- 56,146 56,146 18,715 18,717 37,431 187,155 187,155
Average interest rate... -- 3.19% 3.19% 3.19% 3.19% 3.19% 2.78%
Money-market.............. 141,359 70,680 70,680 -- -- -- 282,719 282,719
Average interest rate... 3.13% 3.13% 3.13% -- -- -- 3.13%
Certificates.............. 298,504 17,601 4,443 702 723 434 322,407 323,668
Average interest rate... 5.15% 5.36% 5.90% 5.18% 5.52% 5.78% 5.17%
Borrowings:
Other..................... 5,671 7,080 -- -- -- 1,849 14,600 14,600
Average interest rate... 5.30% 7.02% -- -- -- 14.00% 7.24%
--------- --------- --------- --------- --------- ----------- --------- ---------
Total interest-sensitive
liabilities............... $ 445,534 $ 190,448 $ 170,208 $ 32,397 $ 32,420 $ 65,673 $ 936,680 $ 937,941
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
</TABLE>
- ------------------------
(1) The Company used certain assumptions to estimate fair values and expected
maturities. For loans, expected maturities are contractual maturities
adjusted for estimated prepayments of principal based on market indicators.
Investment securities, except for mortgage backed securities, are at quoted
market rates and stated maturities. Expected maturities of mortgage backed
securities are based upon cashflow projections for principal prepayments.
For loan fair value computations, the Company used a discounted cashflow
model with discount rates based upon prevailing market rates for similar
types of loans, incorporating adjustments for credit risk. For deposit
liabilities, fair values were calculated using discounted cashflow models
based on market interest rates for different product types and maturity
dates for which the deposits are held.
RESULTS OF OPERATIONS
Banking is a business that depends largely on rate differentials. In
general, the difference between the interest rate paid by the Banks on their
deposits and their other borrowings and the interest rate received by the Banks
on loans extended to their customers and securities held in the Banks'
portfolios comprise the major portion of the Banks' earnings. These rates are
highly sensitive to many factors that are beyond the control of the Banks.
Accordingly, the earnings and growth of the Banks are subject to, among others,
the influence of local, domestic and foreign economic conditions, including
recession, unemployment and inflation.
NET INCOME
Consolidated net income for the year ended December 31, 1997 was $6.9
million or $0.56 per diluted share. This compares with consolidated net income
of $10.0 million or $1.07 per diluted share, for the year ended December 31,
1996 and a net loss for the year ended December 31, 1995 of $1.1 million or
$0.17 net loss per diluted share. The decline in earnings from 1996 to 1997 is
primarily the result of the costs incurred in connection with the CCB Merger and
the SCB Merger. The net loss for the year ended December 31, 1995 was due
primarily to the credit problems associated with the downturn in the California
economy. As the table below indicates, the provision for loan and lease losses,
the lower of cost
41
<PAGE>
or market adjustment on loans and OREO expense was substantially higher in 1995
than the subsequent years:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Provision for loan and lease losses................. $ 3,210 $ 1,768 $ 8,253
Lower of cost or market adjustment on loans......... -- -- $ 756
OREO expense (income)............................... $ 271 $ (66) $ 3,104
</TABLE>
Credit quality at the Company has improved substantially since December 31,
1995 due largely to an improved economy in Southern California and management's
focus on credit quality.
Due to the acquisition activity of the Company during 1997, there was a
significant amount of merger costs which are one-time in nature and are not part
of ongoing operating results. (See Note 2 of Notes to Supplemental Consolidated
Financial Statements included elsewhere herein). In addition, since the Western
Acquisition was consummated using the purchase method of accounting, expenses
include goodwill amortization which is also a non-operating expense. As the
following table indicates, on an operating basis, the financial results of the
Company have improved significantly for the year ended December 31, 1997 over
the year ended December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
INCOME:
Net income.............................................. $ 6,893 $ 9,990
ADJUSTMENTS TO NET INCOME TO DERIVE OPERATING INCOME:
Merger costs.......................................... 14,201 --
Merger costs tax benefit.............................. (2,382) --
--------- ---------
After tax merger costs................................ 11,819 --
Goodwill amortization................................. 2,784 1,123
Gain on sale of loans, net of tax..................... (46) (389)
--------- ---------
OPERATING INCOME.................................... $ 21,450 $ 10,724
--------- ---------
--------- ---------
PER SHARE INFORMATION:
Number of shares (weighted average)..................... 11,887 9,023
Diluted shares.......................................... 12,316 9,294
Basic net income per share.............................. $ 0.58 $ 1.11
Diluted net income per share............................ $ 0.56 $ 1.07
OPERATING PER SHARE EARNINGS:
Basic net income per share............................ $ 1.80 $ 1.19
Diluted net income per share.......................... $ 1.74 $ 1.15
PROFITABILITY MEASURES:
Return on average assets................................ 0.45% 0.89%
Return on average equity................................ 4.57% 9.59%
OPERATING PROFITABILITY MEASURES:
Return on average tangible assets..................... 1.43% 0.96%
Return on tangible equity............................. 14.22% 10.29%
Efficiency ratio...................................... 61.2% 77.2%
</TABLE>
42
<PAGE>
The improvement in operating earnings is a result of the Company's focus on
making its operations more efficient and leveraging management and back room
operations. As the consolidation of operations of the entities acquired in 1997,
the SMB Acquisition and the BKLA Acquisition are completed in 1998, it is
expected that the operating results will continue to improve. However, there can
be no assurance that the Company will be able to successfully consolidate the
operations of the entities acquired or that any reductions in operating costs
will result therefrom. In addition, the Company continues to pursue acquisition
opportunities and, if successful, will continue to have merger costs which will
affect reported net income.
NET INTEREST INCOME
The Company's consolidated earnings depend primarily upon the difference
between the income the Banks receive from their loan portfolios and investment
securities, and their cost of funds, including principally interest paid on
savings and time deposits. Interest rates charged on the Banks' loans are
influenced principally by the demand for such loans, the supply of money for
lending purposes, and competitive factors. These factors are, in turn, affected
by general economic conditions and other factors beyond the Banks' control, such
as federal economic and tax policies, the general supply of money in the
economy, governmental budgetary actions, and the actions of the Federal Reserve
Board.
The following table provides information on net interest income for the past
three fiscal years, setting forth average balances of interest-earning assets
and interest-bearing liabilities, the income earned and expense recorded thereon
and the resulting average yield-cost ratios:
43
<PAGE>
INTEREST RATES AND INTEREST RATE DIFFERENTIAL
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- ----------------------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INCOME/ YIELD/ BALANCE INCOME/ YIELD/ BALANCE INCOME/
(1) EXPENSE COST (1) EXPENSE COST (1) EXPENSE
--------- --------- ----------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits with
banks........................ $ 14 $ 1 7.14% $ 250 $ 15 6.00% $ 1,046 $ 45
Securities held to maturity.... 29,452 1,788 6.07% 8,011 516 6.44% 67,503 3,991
Securities available for
sale......................... 286,656 16,657 5.81% 248,553 14,354 5.78% 162,896 8,310
Federal funds sold............. 100,352 5,574 5.55% 71,004 3,837 5.40% 56,882 3,280
Loans and leases (net)(2)...... 941,274 91,868 9.76% 668,113 66,076 9.89% 525,841 53,822
--------- --------- --------- ----------- --------- -----------
Interest-earning assets...... 1,357,748 $ 115,888 8.54% 995,931 $ 84,798 8.51% 814,168 $ 69,448
--------- ----------- -----------
NON-INTEREST-EARNING ASSETS:
Cash and due from banks........ 105,527 75,860 62,020
Premises and equipment net..... 16,974 14,727 14,787
Other real estate owned........ 9,118 6,109 10,202
Goodwill....................... 33,596 9,140 220
Other assets................... 14,919 18,992 14,238
--------- --------- ---------
Total assets................. $1,537,882 $1,120,759 $ 915,635
--------- --------- ---------
--------- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits..................... $ 455,889 $ 12,442 2.73% $ 209,831 $ 5,813 2.77% $ 130,437 $ 2,506
Savings deposits............... 127,579 3,964 3.11% 187,492 4,971 2.65% 190,803 4,955
Time deposits.................. 303,544 15,543 5.12% 257,430 13,428 5.22% 235,193 13,248
Federal funds purchased........ 2,964 168 5.67% 463 26 5.62% 1,099 69
Notes payable.................. 11,793 986 8.36% 7,046 726 10.30% 4,316 527
Other borrowings............... 3,836 186 4.85% 8,145 434 5.33% 6,281 351
--------- --------- --------- ----------- --------- -----------
Interest-bearing liabilities... 905,605 $ 33,289 3.68% 670,407 $ 25,398 3.79% 568,129 $ 21,656
--------- ----------- -----------
NON-INTEREST-BEARING LIABILITIES
AND EQUITY:
Non-interest bearing demand
deposits..................... $ 468,108 $ 335,291 $ 264,618
Non-interest-bearing
liabilities.................. 13,328 10,838 6,310
Shareholders' equity........... 150,841 104,223 76,578
Total liabilities & Shareholders'
equity......................... $1,537,882 $1,120,759 $ 915,635
--------- --------- ---------
--------- --------- ---------
Net interest income.............. $ 82,599 $ 59,400 $ 47,792
--------- ----------- -----------
--------- ----------- -----------
Net interest margin on interest-
earning assets(3).............. 6.08% 5.96%
--- -----
--- -----
Net interest spread.............. 4.86% 4.72%
--- -----
--- -----
<CAPTION>
AVERAGE
YIELD/
COST
-----------
<S> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits with
banks........................ 4.30%
Securities held to maturity.... 5.91%
Securities available for
sale......................... 5.10%
Federal funds sold............. 5.77%
Loans and leases (net)(2)...... 10.24%
Interest-earning assets...... 8.53%
NON-INTEREST-EARNING ASSETS:
Cash and due from banks........
Premises and equipment net.....
Other real estate owned........
Goodwill.......................
Other assets...................
Total assets.................
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits..................... 1.92%
Savings deposits............... 2.60%
Time deposits.................. 5.63%
Federal funds purchased........ 6.28%
Notes payable.................. 12.21%
Other borrowings............... 5.59%
Interest-bearing liabilities... 3.81%
NON-INTEREST-BEARING LIABILITIES
AND EQUITY:
Non-interest bearing demand
deposits.....................
Non-interest-bearing
liabilities..................
Shareholders' equity...........
Total liabilities & Shareholders'
equity.........................
Net interest income..............
Net interest margin on interest-
earning assets(3).............. 5.87%
-----
-----
Net interest spread.............. 4.72%
-----
-----
</TABLE>
- ------------------------
(1) Average balances are primarily computed on daily balances during the period.
When such balances are not available, averages are computed on a monthly
basis. Average balances include the effect of discounts and premiums on
loans, investment securities, deposits and borrowings acquired in
acquisitions, as well as deferred loan fees.
(2) Nonaccrual loans are included in the average balances for the periods;
however, interest on such loans has been excluded in computing the average
yields for the periods.
(3) The net interest margin on interest-earning assets for a period is net
interest income divided by average interest-earning assets.
The following table sets forth changes in interest income and interest
expense, and the amount of change attributable to variances in volume, rates and
the combination of volume and rates. The Company has no tax-exempt assets.
44
<PAGE>
INTEREST RATES AND INTEREST RATE DIFFERENTIALS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
1997 COMPARED TO 1996 1996 COMPARED TO 1995
---------------------------------------------- ---------------------------------
CHANGE DUE TO CHANGE DUE TO
---------------------------------------------- ---------------------------------
TOTAL TOTAL
INCREASE/ VOLUME AND INCREASE/
(DECREASE) VOLUME RATE RATE (DECREASE) VOLUME RATE
----------- --------- --------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans........... $ 25,792 $ 27,015 $ (868) $ (355) $ 12,254 $ 14,562 $ (1,817)
Interest-bearing deposits with
banks.............................. (14) (14) 3 (3) (30) (34) 18
Securities held to maturity.......... 1,272 1,381 (30) (79) (3,475) (3,517) 357
Securities available for sale........ 2,303 2,200 89 14 6,044 4,370 1,097
Federal funds sold................... 1,737 1,586 107 44 557 814 (206)
----------- --------- --------- ----- ----------- --------- ---------
Total interest income.............. 31,090 32,168 (699) (379) 15,350 16,195 (551)
----------- --------- --------- ----- ----------- --------- ---------
INTEREST EXPENSE:
Interest-bearing demand deposits..... 6,629 6,817 (86) (102) 3,307 1,525 1,108
Saving deposits...................... (1,007) (1,588) 855 (274) 16 (86) 104
Time deposits........................ 2,115 2,405 (246) (44) 180 1,253 (980)
Federal funds purchased.............. 142 140 0 2 (43) (40) (7)
Notes payable........................ 260 489 (137) (92) 199 333 (82)
Other borrowings..................... (248) (230) (39) 21 83 104 (16)
----------- --------- --------- ----- ----------- --------- ---------
Total interest expense............. 7,891 8,033 347 (489) 3,742 3,089 127
----------- --------- --------- ----- ----------- --------- ---------
Net interest income.................... $ 23,199 $ 24,135 (1,046) 110 11,608 13,106 (678)
----------- --------- --------- ----- ----------- --------- ---------
----------- --------- --------- ----- ----------- --------- ---------
<CAPTION>
VOLUME AND
RATE
-----------
<S> <C>
INTEREST INCOME:
Interest and fees on loans........... $ (491)
Interest-bearing deposits with
banks.............................. (14)
Securities held to maturity.......... (315)
Securities available for sale........ 577
Federal funds sold................... (51)
-----
Total interest income.............. (294)
-----
INTEREST EXPENSE:
Interest-bearing demand deposits..... 674
Saving deposits...................... (2)
Time deposits........................ (93)
Federal funds purchased.............. 4
Notes payable........................ (52)
Other borrowings..................... (5)
-----
Total interest expense............. 526
-----
Net interest income.................... (820)
-----
-----
</TABLE>
INTEREST INCOME
Interest income increased by $31.1 million for the year ended December 31,
1997 compared to 1996 and $15.4 million for the year ended December 31, 1996
compared to 1995. The increase for 1997 compared to 1996 is due largely to the
increase in average earning assets resulting from the Western Acquisition.
Average earning assets for Western Bank are included in the 1996 average totals
for only three months. Interest income also improved as a result of a
significant decline in nonperforming assets from $26.6 million at December 31,
1996 to $19.5 million at December 31, 1997. The increase in interest income from
the year ended December 31, 1995 to the year ended December 31, 1996 is also a
result of the increase in average earning assets as a result of the Western
Acquisition. Due to the use of purchase accounting for the Western Acquisition,
Western Bank's average balances are not included with the Company until October
1, 1996.
INTEREST EXPENSE
Interest expense increased by $7.9 million for the year ended December 31,
1997 compared with the year ended December 31, 1996 and increased by $3.7
million for the year ended December 31, 1996 compared to the year ended December
31, 1995. The increase in interest expense in both 1997 and 1996 compared to the
respective prior years is due mostly to the increase in average interest-bearing
deposits as a result of the acquisition of Western Bank and the acquisition of
American West Bank by BKLA. Due to the use of purchase accounting for these
acquisitions, Western Bank's average balances for Western Bank and American West
Bank are not included with the Company until October 1, 1996 and April 1, 1997,
respectively.
45
<PAGE>
NON-INTEREST INCOME
The following table sets forth the details of non-interest income for the
years ended December 31, 1997 and December 31, 1996. Western Bank was acquired
on October 1, 1996. Therefore, 1996 only includes three months of non-interest
income from Western Bank, while 1997 includes a full year of non-interest income
for Western. The amount for the Parent Company and SCB includes the same
entities for both years.
<TABLE>
<CAPTION>
1997 1996 INCREASE
------------------------------------- ------------------------------------- (DECREASE)
PARENT PARENT BEFORE
WESTERN COMPANY WESTERN COMPANY WESTERN
CONSOLIDATED BANK AND SCB CONSOLIDATED BANK AND SCB BANK
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges, commissions and
fees........................... $ 7,979 $ 665 $ 7,314 $ 7,670 $ 315 $ 7,355 $ (41)
Escrow fees...................... 827 827 781 -- 781 46
Other income..................... 1,848 386 1,462 1,520 23 1,497 (35)
----------- ----------- ----------- ----------- ----- ----------- -----
Operating non-interest
income....................... 10,654 1,051 9,603 9,971 338 9,633 (30)
Gain on sale of loans............ 78 -- 78 665 -- 665 (587)
Gain on sale of securities
available for sale............. 342 107 235 276 267 9 226
----------- ----------- ----------- ----------- ----- ----------- -----
Total non-interest income...... $ 11,074 $ 1,158 $ 9,916 $ 10,912 $ 605 $ 10,307 $ (391)
----------- ----------- ----------- ----------- ----- ----------- -----
----------- ----------- ----------- ----------- ----- ----------- -----
</TABLE>
Annualized 1996 operating non-interest income for Western Bank would be
approximately $1.4 million, as compared with approximately $1.1 million in 1997.
This reduction at Western Bank is due primarily to more customers paying service
charges on deposit accounts in 1996 and Western Bank no longer servicing a
portfolio of loans in 1997.
Without Western Bank, operating non-interest income declined approximately
$30 thousand from $9.63 million to $9.60 million. This decrease can be
attributed to rental income and income related to other real estate owned of
approximately $387 thousand in 1996 which did not reoccur in 1997 offset by an
increase in fees and charges on demand deposit accounts from the addition of two
branches and their associated deposits from the acquisition of America West Bank
by BKLA on April 1, 1997.
46
<PAGE>
The following table shows the details of non-interest income for the years
ended December 31, 1996 and December 31, 1995. Western Bank was acquired on
October 1, 1996. Therefore, 1996 includes three months of non-interest income
from Western Bank, while 1995 does not include any non-interest income for
Western Bank. The amount for the Parent Company and SCB includes the same
entities for both years.
<TABLE>
<CAPTION>
1996
-------------------------------------- INCREASE
PARENT 1995 (DECREASE)
WESTERN COMPANY ------------- BEFORE
CONSOLIDATED BANK AND SCB CONSOLIDATED WESTERN BANK
------------ ----------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges, commissions and fees............ $ 7,670 $ 315 $ 7,355 $ 7,000 $ 355
Escrow fees...................................... 781 -- 781 308 473
Other income..................................... 1,520 23 1,497 1,871 (374)
------------ ----- ----------- ------ ------
Operating non-interest income.................... 9,971 338 9,633 9,179 454
Gain on sale of loans............................ 665 -- 665 99 566
Gain (loss) on sale of securities available for
sale........................................... 276 267 9 (574) 583
------------ ----- ----------- ------ ------
Total non-interest income........................ $ 10,912 $ 605 $ 10,307 $ 8,704 $ 1,603
------------ ----- ----------- ------ ------
------------ ----- ----------- ------ ------
</TABLE>
Without Western Bank operating non-interest income increased by
approximately $454 thousand. Escrow fees increased by $473 thousand as the
Company emphasized this business. In 1995, other income included a legal
settlement of approximately $252 thousand which did not reoccur in 1996. The
remainder of the $339 thousand reduction in other income is a result of several
smaller amounts.
NON-INTEREST EXPENSE
The following table shows the details of non-interest expense for the years
ended December 31, 1997 and December 31, 1996. The Western Acquisition was
consummated on September 30, 1996. Therefore, 1996 only includes three months of
non-interest expense for Western Bank, while 1997 includes a full year
47
<PAGE>
of non-interest expense for Western Bank. The amount for the Parent Company and
SCB includes the same entities for both years.
<TABLE>
<CAPTION>
1997 1996
------------------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PARENT PARENT INCREASE
COMPANY COMPANY (DECREASE)
WESTERN & SCB WESTERN & SCB BEFORE
CONSOLIDATED BANK & BKLA CONSOLIDATED BANK & BKLA WESTERN
------------ --------- ----------- ------------ ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits................... $ 29,825 $ 5,520 $ 24,305 $ 26,424 $ 2,025 $ 24,399 $ (94)
Occupancy............................... 9,621 1,254 8,367 8,955 373 8,582 (215)
Advertising and business development.... 1,380 228 1,152 1,479 27 1,452 (300)
Other real estate owned................. 271 (24) 295 (66) (158) 92 203
Insurance............................... 851 154 697 606 41 565 132
Legal expense........................... 2,524 227 2,297 3,539 48 3,491 (1,194)
Other professional services............. 1,564 215 1,349 2,987 253 2,734 (1,385)
Telephone, stationery and supplies...... 3,082 392 2,690 2,547 143 2,404 286
Data processing......................... 1,667 667 1,000 1,064 186 878 122
Customer services costs................. 1,263 651 612 510 210 300 312
Loan related expenses................... 668 149 519 629 12 617 (98)
Regulatory assessments.................. 544 82 462 1,025 39 986 (524)
Other................................... 4,054 903 3,151 4,076 109 3,967 (816)
------------ --------- ----------- ------------ ----------- ----------- -----------
Operating non-interest expense.......... 57,314 10,418 46,896 53,775 3,308 50,467 (3,571)
Goodwill amortization................... 2,784 1,997 787 1,123 499 624 163
Merger related costs.................... 14,201 -- 14,201 -- -- -- 14,201
------------ --------- ----------- ------------ ----------- ----------- -----------
Non-interest expense.................... $ 74,299 $ 12,415 $ 61,884 $ 54,898 $ 3,807 $ 51,091 $ 10,793
------------ --------- ----------- ------------ ----------- ----------- -----------
------------ --------- ----------- ------------ ----------- ----------- -----------
</TABLE>
Annualized 1996 operating non-interest expense for Western Bank would be
approximately $13.2 million, as compared with approximately $10.4 million in
1997. This reduction at Western Bank is due mostly to the implementation of
various efficiency efforts at Western Bank.
Without Western Bank, operating non-interest expense declined approximately
$3.6 million from $50.5 million to $46.9 million. Expenses declined in many
categories as management of the Company focused on more efficient operations and
cost reductions from the acquisitions completed in 1997.
The following table shows the details of non-interest expense for the years
ended December 31, 1996 and December 31, 1995. The Western Acquisition was
consummated on September 30, 1996. Therefore, 1996 includes three months of
non-interest expense for Western Bank, while 1995 does not include any
48
<PAGE>
non-interest income for Western Bank. The amount for the Parent Company and SCB
includes the same entities for both years.
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
PARENT INCREASE
COMPANY (DECREASE)
WESTERN & SCB BEFORE WESTERN
CONSOLIDATED BANK & BKLA CONSOLIDATED BANK
------------ ----------- ----------- ------------ --------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and benefits........................... $ 26,424 $ 2,025 $ 24,399 $ 22,373 $ 2,026
Occupancy....................................... 8,955 373 8,582 8,819 (237)
Advertising and business development............ 1,479 27 1,452 1,327 125
Other real estate owned......................... (66) (158) 92 3,104 (3,012)
Insurance....................................... 606 41 565 790 (225)
Legal expense................................... 3,539 48 3,491 2,444 1,047
Other professional services..................... 2,987 253 2,734 1,279 1,455
Telephone, stationery and supplies.............. 2,547 143 2,404 2,591 (187)
Data processing................................. 1,064 186 878 822 56
Customer services costs......................... 510 210 300 184 116
Loan related expenses........................... 629 12 617 658 (41)
Regulatory assessments.......................... 1,025 39 986 1,658 (672)
Other........................................... 4,076 109 3,967 3,473 494
------------ ----------- ----------- ------------ -------
Operating non-interest expense.................. 53,775 3,308 50,467 49,522 945
Goodwill amortization........................... 1,123 499 624 841 (217)
Lower at cost or market adjustment on loans
available for sale............................ -- -- -- 756 (756)
------------ ----------- ----------- ------------ -------
Non-interest expense........................ $ 54,898 $ 3,807 $ 51,091 $ 51,119 $ (28)
------------ ----------- ----------- ------------ -------
------------ ----------- ----------- ------------ -------
</TABLE>
Operating non-interest expense without Western Bank increased by
approximately $945 thousand in 1996 versus 1995. Other real estate expense
declined by approximately $3.0 million, as certain credit problems that occurred
in 1995 did not recur in 1996. Legal expenses in 1996 include approximately $950
thousand to provide for potential losses related to on-going litigation matters.
Salary and benefits increased by approximately $2.0 million in 1996 over 1995
mostly due increased activity in the escrow division, the business development
group and opening of two new branches in Fountain Valley and Laguna Beach.
As a result of the CCB Merger and the SCB Merger, the Company incurred
certain merger related costs in 1997. These costs are described below:
<TABLE>
<CAPTION>
CCB SCB PAID IN ACCRUED AT
MERGER MERGER TOTAL 1997 DECEMBER 31, 1997
--------- --------- --------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Investment banking fees.......................... $ 1,400 $ 3,520 $ 4,920 $ (4,920) $ --
Other professional services...................... 697 1,960 2,657 (2,483) 174
Compensation related expense..................... 1,055 2,769 3,824 (2,303) 1,521
Conversion costs................................. 252 753 1,005 (225) 780
Branch closure expense........................... -- 790 790 -- 790
Termination of interest rate swap................ -- 446 446 (446) --
Other............................................ -- 559 559 (359) 200
--------- --------- --------- ----------- ------
Total merger related costs................... $ 3,404 $ 10,797 $ 14,201 $ (10,736) $ 3,465
--------- --------- --------- ----------- ------
--------- --------- --------- ----------- ------
</TABLE>
49
<PAGE>
The merger related costs for the SMB Acquisition and the BKLA Merger were
incurred in fiscal 1998.
INCOME TAXES
The Company's effective income tax (tax benefit) rates were 57.4 percent,
26.8 percent, and (60.3) percent for the years ending December 31, 1997, 1996
and 1995, respectively. The difference from the expected rate of 35 percent in
1997 is largely the result of non-deductible merger costs. The difference from
the expected rate of 35 percent in 1996 relates to state income taxes and the
non-deductibility of goodwill for tax purposes, offset by a reduction in the
deferred tax valuation allowance. The difference from the expected rate of 34
percent in 1995 results from state income taxes and the reduction in the
deferred tax asset valuation allowance. At December 31, 1997, the Company had a
net deferred tax asset of approximately $10.3 million. Management has determined
that realization of the deferred tax asset is more likely than not based on
current and expected taxable income. For further information on income taxes,
see Note 10 of Notes to Supplemental Consolidated Financial Statements, included
elsewhere herein.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Notes to the Supplemental Consolidated Financial
Statements, included elsewhere herein, for information on current accounting
pronouncements and their impact on the Company's consolidated financial
statements.
YEAR 2000 RISKS AND PREPAREDNESS
Many existing computer programs use only two digits to identify a year in a
data field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000 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 of the Company 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
adequately to address the Year 2000 issue prior to the Year 2000; and (iv)
federal banking agencies have issued interagency guidance on the business-wide
risk posed to financial institutions by the Year 2000 problem pursuant to which
the federal banking agencies may take supervisory action against financial
institutions that fail appropriately to address Year 2000 issues prior to the
Year 2000, including formal and informal enforcement actions, the denial of
applications to the federal banking agencies, civil money penalties, and a
reduction in the management component rating or the institution's composite
rating.
In order to address the Year 2000 issues facing the Company, management of
the Company initiated a program to prepare the Company's computer systems and
applications for the Year 2000 (the "Year 2000 Plan"). The primary focus of the
Year 2000 Plan is to convert the Parent Company and each of the Banks to the
target systems identified and believed to be Year 2000 compliant. The Company
expects to incur internal staff costs as well as consulting and other expenses
related to infrastructure and facilities enhancements necessary to prepare for
the Year 2000. Validation and conversion of primary system applications and
hardware is expected to cost approximately $1,100,000, to be expended during
fiscal years 1998 and 1999. This cost estimate does not include costs associated
with infrastructure and facilities enhancements required in connection with
operational consolidations due to the CCB Merger, the SCB
50
<PAGE>
Merger, the SMB Acquisition and the BKLA Acquisition. A significant portion of
the cost to the Company in connection with becoming Year 2000 compliant is
expected to be the redeployment of existing technology and operations resources
rather than incremental costs to the Company.
As a part of the Year 2000 Plan, the Company is not only undertaking the
infrastructure and facilities enhancement and testing necessary to ensure that
the Company is adequately prepared for the Year 2000, but also the Company is
communicating with its vendors upon whose services the 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 their major borrowers in an effort to ensure that such
borrowers have taken appropriate steps to address their Year 2000 issues and
will not be materially affected by any Year 2000 problems. The Company is
communicating with its major deposit customers as well in an effort to ensure
deposit stability. The Company also is preparing contingency plans to protect
the Company in the event that the Company is unable to attain Year 2000
compliance in certain applications according to the Year 2000 Plan. 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. Pursuant to the Year 2000
Plan, the Company expects to complete substantially validation of its own
systems and the computer-related interactive vendor systems by December 31, 1998
and to complete all phases of its Year 2000 Plan by June 30, 1999.
Although the Company believes that its Year 2000 Plan and other steps being
taken are adequate to ensure that the Company will not be materially affected by
the Year 2000 problem, there can be no assurance that the Year 2000 Plan and the
Company's other Year 2000 remedial and contingency plans will protect fully the
Company from the risks associated with the Year 2000. The analysis of, and
preparation for, the Year 2000 and related problems necessarily rely on a
variety of assumptions about future events, and there can be no assurance that
management of the Company has accurately predicted such future events or that
the remedial and contingency plans of the Company will adequately address such
future events. In the event that the business of any of the Company, vendors of
the Company or customers of the Company is disrupted as a result of the Year
2000 problem, such disruption could have a material adverse effect on the
Company.
51
<PAGE>
D. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997
AND 1996 AND FOR EACH OF THE YEARS IN THE
THREE YEAR PERIOD ENDED DECEMBER 31, 1997
CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Reports.......................................................... 53
Supplemental Consolidated Balance Sheets............................................... 59
Supplemental Consolidated Statements of Operations..................................... 60
Supplemental Consolidated Statements of Changes in Shareholders' Equity................ 61
Supplemental Consolidated Statements of Cash Flows..................................... 62
Notes to Supplemental Consolidated Financial Statements................................ 64
</TABLE>
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Western Bancorp:
We have audited the accompanying supplemental consolidated balance sheets of
Western Bancorp and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related supplemental consolidated statements of operations,
changes in shareholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We did not audit the 1996 consolidated financial statements of California
Commercial Bankshares, acquired by the Company on June 4, 1997 in a
pooling-of-interests, which statements reflect total assets constituting 23.9%
and net interest income and net income constituting 33.6% and 38.0%,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for California Commercial
Bankshares, is based solely on the report of the other auditors.
We did not audit the 1996 consolidated financial statements of SC Bancorp,
acquired by the Company on October 10, 1997 in a pooling-of-interests, which
statements reflect total assets constituting 32.4% and net interest income and
net income constituting 39.4% and 44.6%, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for SC Bancorp, is based solely on the report of the other
auditors.
We did not audit either the 1996 or 1997 financial statements of Bank of Los
Angeles, acquired by the Company on October 23, 1998 in a pooling of interests,
which financial statements reflect total assets constituting 8.9% and net
interest income and net income constituting 12.6% and 10.0%, respectively, of
the related 1996 consolidated totals, and total assets constituting 16.4% and
net interest income and net income constituting 13.2% and 54.1%, respectively,
of the related 1997 consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Bank of Los Angeles, is based solely on the
report of the other auditors.
The Western Bancorp consolidated statements of operations, changes in
shareholders' equity and cash flows for the year ended December 31, 1995, prior
to their restatement for the 1997 and 1998 pooling-of-interests transactions
described in Notes 1 and 2 of the Notes to the supplemental consolidated
financial statements, were audited by other auditors whose report dated February
29, 1996, expressed an unqualified opinion on those statements. The separate
consolidated financial statements of California Commercial Bankshares also
included in the 1995 supplemental consolidated financial statements were audited
by other auditors whose report dated January 24, 1997, and March 17, 1997, as to
Notes 7 and 13, expressed an unqualified opinion on those statements. The
separate consolidated financial statements of SC Bancorp also included in the
1995 supplemental consolidated financial statements were audited by other
auditors whose report dated January 24, 1997, expressed an unqualified opinion
on those statements. The separate financial statements of Bank of Los Angeles
also included in the 1995 supplemental consolidated financial statements were
audited by other auditors whose report dated January 23, 1998, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
53
<PAGE>
The supplemental consolidated financial statements give retroactive effect
to the acquisition of Bank of Los Angeles on October 23, 1998, which has been
accounted for as a pooling-of-interests as described in Notes 1 and 2 of the
notes to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. The supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of Western Bancorp after financial statements covering the date of
consummation of the business combination with Bank of Los Angeles are issued.
In our opinion, based on our audits and the reports of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Western Bancorp and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
We also audited the combination of the accompanying supplemental
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year ended December 31, 1995, after restatement for the 1997 and
1998 pooling-of-interests transactions; in our opinion, such consolidated
financial statements have been properly combined on the basis described in Notes
1 and 2 of the Notes to the accompanying supplemental consolidated financial
statements.
KPMG PEAT MARWICK LLP
Los Angeles, California
October 23, 1998
54
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
SC Bancorp:
We have audited the consolidated balance sheet of SC Bancorp and its
subsidiary as of December 31, 1996, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1996 (such consolidated financial
statements are not included separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of SC Bancorp and its subsidiary
at December 31, 1996, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 24, 1997
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and shareholders of
California Commercial Bankshares:
We have audited the consolidated balance sheet of California Commercial
Bankshares and subsidiaries (the "Company") as of December 31, 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1996
(such consolidated financial statements are not included separately herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of California Commercial
Bankshares and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 24, 1997
(March 17, 1997 as to Notes 7 and 13)
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
Monarch Bancorp
We have audited the consolidated statements of operations, changes in
shareholders' equity, and cash flows of Monarch Bancorp and Subsidiaries for the
year ended December 31, 1995. These financial statements, which are not
presented separately herein, are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Monarch
Bancorp and Subsidiaries for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
DAYTON & ASSOCIATES
February 29, 1996
Laguna Hills, California
57
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Bank of Los Angeles
West Hollywood, California
We have audited the accompanying balance sheets of Bank of Los Angeles as of
December 31, 1997 and 1996, and the related statements of operations, changes in
shareholders' equity and statement of cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the final statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bank of Los Angeles as of
December 31, 1997 and 1996, and the results of its operations, changes in its
shareholders' equity and its statements of cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP
Rancho Cucamonga, California
January 23, 1998
58
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 3).................................................... $ 120,102 $ 104,341
Federal funds sold.................................................................. 168,257 44,517
------------- ------------
Total cash and cash equivalents................................................. 288,359 148,858
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost...................... 6,411 5,504
Securities held to maturity (fair value of $48,247 and $7,032) (Note 4)............. 48,138 7,057
Securities available for sale (amortized cost of $213,606 and $344,113) (Note 4).... 213,398 342,383
------------- ------------
Total securities................................................................ 267,947 354,944
Loans and leases held for investment, net (Notes 5, 8 and 12)....................... 1,004,295 870,951
Loans and leases available for sale, net............................................ 359 1,234
Premises and equipment (Note 6)..................................................... 16,335 17,753
Other real estate owned............................................................. 7,736 7,621
Deferred tax asset, net (Note 10)................................................... 9,662 8,735
Taxes receivable (Note 10).......................................................... 3,496 3,769
Goodwill (Note 2)................................................................... 36,369 34,630
Accrued interest receivable......................................................... 9,760 10,318
Other assets........................................................................ 11,225 10,805
------------- ------------
Total assets.................................................................... $ 1,655,543 $1,469,618
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 7)
Noninterest bearing............................................................... $ 542,725 $ 462,982
Interest-bearing demand........................................................... 412,518 394,963
Savings........................................................................... 187,155 142,197
Time certificates of deposit of $100,000 or more.................................. 168,732 148,668
Time certificates of deposit less than $100,000................................... 153,675 143,800
------------- ------------
Total deposits.................................................................. 1,464,805 1,292,610
Borrowings (Note 8)................................................................. 14,600 22,132
Accrued interest payable............................................................ 2,725 2,324
Other liabilities................................................................... 12,704 10,873
------------- ------------
Total liabilities............................................................... 1,494,834 1,327,939
Commitments and contingencies (Notes 11 and 14)..................................... -- --
Shareholders' equity: (Notes 8, 9, 13, 16, 18 and 20)
Preferred stock no par value, 5 million shares authorized, none issued............ -- --
Common stock, no par value, 100,000,000 shares authorized 12,655,429 and
11,365,877 issued and outstanding in 1997 and 1996.............................. 143,577 127,437
Retained earnings................................................................. 17,274 15,324
Unrealized loss on investment securities available for sale, net of taxes......... (142) (1,082)
------------- ------------
Total shareholders' equity...................................................... 160,709 141,679
------------- ------------
Total liabilities and shareholders' equity...................................... $ 1,655,543 $1,469,618
------------- ------------
------------- ------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
59
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- --------- ---------
Interest income:
Interest and fees on loans.................................................... $ 91,868 $ 66,076 $ 53,822
Interest on interest bearing deposits in other banks.......................... 1 15 45
Interest on investment securities............................................. 18,445 14,870 12,301
Interest on federal funds sold................................................ 5,574 3,837 3,280
---------- --------- ---------
Total interest income....................................................... 115,888 84,798 69,448
---------- --------- ---------
Interest expense:
Deposits...................................................................... 31,949 24,212 20,709
Notes payable................................................................. 986 726 527
Other interest-bearing liabilities............................................ 354 460 420
---------- --------- ---------
Total interest expense...................................................... 33,289 25,398 21,656
---------- --------- ---------
Net interest income............................................................. 82,599 59,400 47,792
Provision for loan and lease losses (Note 5).................................... 3,210 1,768 8,253
---------- --------- ---------
Net interest income after provision for loan and lease losses................... 79,389 57,632 39,539
---------- --------- ---------
Non-interest income:
Service charges, commissions and fees......................................... 8,806 8,451 7,308
Gain (loss) on sale of securities available for sale (Note 4)................. 342 276 (738)
Gain on sale of loans......................................................... 78 665 263
Other......................................................................... 1,848 1,520 1,871
---------- --------- ---------
Total non-interest income................................................... 11,074 10,912 8,704
---------- --------- ---------
Non-interest expense:
Salaries and benefits......................................................... 29,825 26,424 22,373
Occupancy..................................................................... 9,621 8,955 8,819
Advertising and business development.......................................... 1,380 1,479 1,327
Other real estate owned....................................................... 271 (66) 3,104
Professional services......................................................... 4,088 6,526 3,723
Telephone, stationery and supplies............................................ 3,082 2,547 2,591
Lower of cost or market adjustment on loans available for sale................ -- -- 756
Goodwill amortization (Note 2)................................................ 2,784 1,123 841
Data processing for company................................................... 1,667 1,064 822
Customer services cost........................................................ 1,263 510 184
Regulatory assessments........................................................ 544 1,025 1,658
Merger related costs (Note 2)................................................. 14,201 -- --
Other......................................................................... 5,573 5,311 4,921
---------- --------- ---------
Total non-interest expense.................................................. 74,299 54,898 51,119
---------- --------- ---------
Income (loss) before income taxes............................................... 16,164 13,646 (2,876)
Income taxes (benefit) (Note 10)................................................ 9,271 3,656 (1,733)
---------- --------- ---------
Net income (loss)........................................................... $ 6,893 $ 9,990 $ (1,143)
---------- --------- ---------
---------- --------- ---------
Per share information (Notes 1 and 21):
Weighted-average number of common shares outstanding.......................... 11,887 9,023 6,917
Basic net income (loss) per share............................................. $ 0.58 $ 1.11 $ (0.17)
Diluted common shares outstanding............................................. 12,316 9,294 7,134
Diluted net income (loss) per share........................................... $ 0.56 $ 1.07 $ (0.17)
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
60
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
SECURITIES DEFERRED
COMMON STOCK RETAINED AVAILABLE CHARGE
-------------------- EARNINGS FOR RELATED TO TOTAL
SHARES AMOUNT (DEFICIT) SALE, NET KSOP EQUITY
--------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 as Previously
Reported................................. 93 $ 7,368 $ (6,137) $ (356) $ (173) $ 702
Adjustment for the CCB
pooling-of-interests..................... 2,423 11,257 9,789 (1,318) -- 19,728
Adjustment for the SCB
pooling-of-interests..................... 3,403 37,643 7,731 (3,530) -- 41,844
Adjustment for the BKLA
pooling-of-interests..................... 106 11,078 (6,788) (473) -- 3,817
--------- --------- --------- ----------- ----- ---------
Balance at December 31, 1994, as
restated................................. 6,025 67,346 4,595 (5,677) (173) 66,091
Repayment on KSOP debt................... -- -- -- -- 41 41
Unrealized appreciation on investment.... -- -- -- -- -- --
securities available for sale, net..... -- -- -- 5,278 -- 5,278
Stock options exercised (Note 18)........ 26 31 -- -- -- 31
Tax benefits of stock options exercised
(Note 18).............................. -- 78 -- -- -- 78
Issuance of common stock (Note 9)........ 2,170 19,243 -- -- -- 19,243
Reclassification......................... -- (1,882) 1,882 -- -- --
Net loss................................. -- -- (1,143) -- -- (1,143)
--------- --------- --------- ----------- ----- ---------
Balance at December 31, 1995............... 8,221 84,816 5,334 (399) (132) 89,619
Repayment of KSOP debt................... -- -- -- -- 132 132
Unrealized depreciation on investment.... -- -- -- -- -- --
securities available for sale, net..... -- -- -- (683) -- (683)
Stock options exercised (Note 18)........ 69 361 -- -- -- 361
Tax benefits of stock options exercised
(Note 18).............................. -- 51 -- -- -- 51
Issuance of common stock (Note 9)........ 3,076 42,213 -- -- -- 42,213
Repurchase of shares..................... -- (4) -- -- -- (4)
Net income............................... -- -- 9,990 -- -- 9,990
--------- --------- --------- ----------- ----- ---------
Balance at December 31, 1996............... 11,366 127,437 15,324 (1,082) -- 141,679
Unrealized appreciation on investment
securities available for sale, net..... -- -- -- 940 -- 940
Stock options exercised (Note 18)........ 71 527 -- -- -- 527
Warrants exercised (Note 18)............. 43 315 -- -- -- 315
Shares issued for SCB Options related to
the SCB merger......................... 138 -- -- -- -- --
Tax benefits of stock options exercised
(Note 18).............................. -- 1,755 -- -- -- 1,755
Shares issued in mergers................. 1,065 14,392 -- -- -- 14,392
Repurchase of shares..................... (28) (849) -- -- -- (849)
Net income............................... -- -- 6,893 -- -- 6,893
Dividends declared at $0.30 per share.... -- -- (4,943) -- -- (4,943)
--------- --------- --------- ----------- ----- ---------
Balance at December 31, 1997............... 12,655 $ 143,577 $ 17,274 $ (142) $ -- $ 160,709
--------- --------- --------- ----------- ----- ---------
--------- --------- --------- ----------- ----- ---------
</TABLE>
See accompanying Notes Supplemental to Consolidated Financial Statements.
61
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Cash flow from operating activities:
Net income (loss)............................................................... $ 6,893 $ 9,990 $ (1,143)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Provision for loan and lease losses............................................. 3,210 1,768 8,253
Provision for losses on other real estate owned................................. 129 767 335
Depreciation and amortization................................................... 2,923 2,607 3,295
Amortization of discounts and premiums on investment securities, net............ 134 906 3,004
Goodwill amortization........................................................... 2,784 1,123 841
Loans originated for sale....................................................... -- -- (9,620)
Lower of cost of market adjustment on loans available for sale.................. -- -- 756
Proceeds from sale of loans originated for sale................................. 875 3,466 --
(Gain) loss on sale of other real estate owned.................................. (551) (1,260) 1,545
Gain on sale of loans originated for sale....................................... -- (665) (263)
(Gain) loss on sale of securities available for sale............................ (342) (276) 738
Net increase in other liabilities............................................... 11 764 465
Net decrease (increase) in other assets......................................... 4312 1,006 (3,076)
--------- --------- ---------
Net cash provided by operating activities..................................... 20,378 20,196 5,130
--------- --------- ---------
Cash flows from investing activities:
Net decrease in interest-bearing deposits at other banks.......................... 2,125 198 1,184
Securities held to maturity:
Proceeds from maturities of mortgage backed securities........................ 3,838 -- 6,481
Proceeds from maturities of other securities.................................. 4,127 5,267 9,443
Purchases of other securities................................................. (30,598) (4,880) (5,704)
Securities available for sale: -- --
Proceeds from maturities of mortgage backed securities........................ 11,846 17,144 1,553
Purchases of mortgage backed securities....................................... -- -- (1,390)
Proceeds from maturities of other securities.................................. 202,588 84,825 31,006
Proceeds from sales of other securities....................................... 8,546 34,165 54,371
Purchases of other securities................................................. (87,604) (137,029) (42,153)
Purchases of FRB and FHLB stocks.................................................. (106) (2,468) (2,823)
Net increase in loans and leases.................................................. (88,311) (90,489) (118,811)
Recoveries of loans and investment in leases...................................... 2,056 1,326 1,722
Additions to other real estate owned.............................................. (86) (263) --
Proceeds from sales of other real estate owned.................................... 11,274 8,524 11,989
Additions to premises and equipment, net of proceeds from sales................... (1,422) (1,459) (2,547)
Increase in assets and liabilities due to acquisitions:
Securities available for sale................................................... (5,845) (134,394) (15,725)
Securities held to maturity..................................................... (17,990) (988) --
Loans and leases................................................................ (62,952) (198,418) (20,690)
Other assets.................................................................... (3,684) (15,392) (427)
Premises and equipment.......................................................... (296) (5,099) (514)
Deposits........................................................................ 112,491 353,111 40,275
Other liabilities............................................................... 322 3,932 827
Goodwill........................................................................ (4,315) (29,841) (1,801)
--------- --------- ---------
Net cash provided by (used in) investing activities........................... 56,004 (112,228) (53,734)
--------- --------- ---------
</TABLE>
62
<PAGE>
WESTERN BANCORP
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flow from financing activities:
Net increase in deposits........................................................ 57,233 50,592 98,127
Increase (decrease) in borrowings............................................... (7,532) 12,908 (7,369)
Purchase of treasury shares..................................................... (849) (4) --
Dividends paid.................................................................. (2,722) -- --
Proceeds from issuance of common stock and exercise of options and warrants, net
of issuance costs............................................................. 16,989 42,625 19,352
--------- --------- ---------
Net cash provided by financing activities..................................... 63,119 106,121 110,110
Net increase in cash and cash equivalents......................................... 139,501 14,089 61,506
Cash and cash equivalents at the beginning of the year............................ 148,858 134,769 73,263
--------- --------- ---------
Cash and cash equivalents at the end of the year.................................. $ 288,359 $ 148,858 $ 134,769
--------- --------- ---------
Supplemental disclosure of cash flow information:
Property acquired through foreclosure........................................... $ 10,933 $ 4,758 $ 9,635
Loans to facilitate the sale of other real estate owned......................... $ 6,422 $ 2,936 $ 3,386
Transfer of securities held-to-maturity to available-for-sale................... $ 2,933 $ -- $ 61,876
Tax benefits for exercise of non-qualified stock options........................ $ 1,755 $ 51 $ 78
Cash paid for:
Interest...................................................................... $ 33,088 $ 25,442 $ 21,052
Taxes......................................................................... $ 5,597 $ 4,789 $ 1,492
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
63
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
WESTERN BANCORP--ACQUISITIONS
Western Bank was acquired by Western Bancorp (the "Company") on September
30, 1996 (the "Western Acquisition") and was accounted for as a purchase.
Accordingly, results of operations presented herein include Western Bank only
from the date of acquisition. On June 4, 1997, California Commercial Bankshares
("CCB") merged with and into the Company (the "CCB Merger"), and in connection
therewith, National Bank of Southern California ("NBSC"), a wholly-owned
subsidiary of CCB prior to the CCB Merger, merged with Monarch Bank, a
wholly-owned subsidiary of the Company prior to such merger ("Monarch"). On
October 10, 1997, SC Bancorp merged (the "SCB Merger") with and into the
Company. Southern California Bank ("SCB") was a wholly-owned subsidiary of SC
Bancorp prior to the SCB Merger. On October 23, 1998 the Company acquired Bank
of Los Angeles ("BKLA") through the merger of BKLA with and into Santa Monica
Bank, a wholly-owned subsidiary of the Company (the "BKLA Acquisition"). The
BKLA Acquisition, the SCB Merger and the CCB Merger were each accounted for by
the pooling-of-interests method of accounting, and accordingly, the financial
information for all periods presented herein has been restated to present the
combined consolidated financial condition and results of operations of the
Company, CCB, SC Bancorp and BKLA as if the CCB Merger, the SCB Merger and the
BKLA Acquisition had each been in effect for all periods presented. On December
15, 1997, NBSC merged into SCB, leaving the Company with two banking
subsidiaries as of December 31, 1997: Western Bank and SCB. Further details
pertaining to the CCB Merger, the SCB Merger and the BKLA Merger are presented
in Note 2 of Notes to Supplemental Consolidated Financial Statements.
BASIS OF PRESENTATION
The accounting and reporting policies of the Company and its wholly-owned
subsidiaries, SCB and Western Bank (together, the "Banks"), Venture Partners,
Inc. and M. B. Mortgage Company, Inc. (inactive) are in accordance with
generally accepted accounting principles and conform to general practices within
the banking industry. All significant inter-company balances and transactions
have been eliminated.
On June 3, 1997, the Company completed an 8.5-to-1 reverse stock split (the
"Reverse Stock Split"). All share amounts herein have been restated to give
effect to the Reverse Stock Split.
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the 1997 presentation.
NATURE OF OPERATION
The Company conducts business through the Banks. SCB is a full service bank
with twenty-one banking offices, and Western is a full service bank with five
banking offices, in each case, as of December 31, 1997. With the merger of BKLA
with and into SMB, three of BKLA's six branches will be merged into SMB branches
resulting in sixteen SMB branches. The Banks are subject to the laws of the
State of California and federal regulations governing the financial services
industry. The Company is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended, and is subject to regulation and
supervision by the Federal Reserve Board. The areas served by the Banks are San
Diego, Orange and Los Angeles counties in California.
64
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates subject to change include the allowance for loan and lease losses, the
carrying value of other real estate owned, and the carrying value of the
deferred tax asset.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include the
balance sheet captions "Cash and due from banks" and "Federal funds sold."
SECURITIES
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and carried at amortized cost.
Securities that are purchased and held principally for the purpose of selling
them in the near term are classified as "trading" and carried at fair value,
with unrealized gains and losses included in earnings. Securities not classified
as either "held to maturity" or "trading" are classified as "available for sale"
and carried at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity. When a
debt security is transferred into the "held to maturity" category from the
"available for sale" category, the unrealized gain or loss at the transfer date
continues to be reported as a separate component of shareholders' equity and is
amortized over the remaining life of the related security as a yield adjustment.
If a decline in the fair market value of a security below the amortized cost
basis is judged by management to be other than temporary, the cost basis of the
security is written down to fair value and the amount of the writedown is
included in earnings. The Company's investments in Federal Reserve Bank and
Federal Home Loan Bank Stock are carried at cost as these equity securities are
not readily marketable.
Premiums and discounts on securities are recognized in the statements of
income using a method that approximates the level-yield method over the lives of
the securities. Gains and losses on securities are recognized when realized with
the cost basis of securities sold determined on a specific identification basis.
INTEREST ON LOANS
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest income is ordinarily discontinued
when a loan becomes 90 days past due as to principal or interest; however,
management may elect to continue the accrual when the estimated net realizable
value of collateral is sufficient to cover the principal balance and the accrued
interest. When the loan is determined to be uncollectible, the unpaid principal
is charged to the allowance for loan losses.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are
capitalized at origination and the net amount deferred is taken into interest
income over the contractual lives of the loans using the interest method.
65
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained at a level believed by
management to be adequate to meet reasonably foreseeable loan and lease losses
on the basis of many factors including the risk characteristics of the
portfolio, underlying collateral, current and anticipated economic conditions
that may affect the borrower's ability to pay, specific problem loans and trends
in loan delinquencies and charge-offs. Losses on loans and leases are provided
for under the allowance method of accounting. The allowance is increased by
provisions charged to income and reduced by loan and lease charge-offs, net of
recoveries. Loans and leases, including impaired loans, are charged off in whole
or in part when, in management's opinion, collectibility is not probable.
While management uses available information to establish the allowance for
loan and lease losses, future additions to the allowance may be necessary if
economic developments differ substantially from the assumptions used in making
the evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowances for loan
and lease losses. Such agencies may require the Banks to recognize additions to
the allowance based on judgments different from those of management.
The Company's policy concerning nonperforming loans is to cease accruing
interest, and to charge off all accrued and unpaid interest on loans which are
past due as to principal and/or interest for at least 90 days, or at such
earlier time as management determines timely collection of the interest to be in
doubt. However, in certain circumstances loans which are past due 90 days or
more may continue accruing interest or interest may not be charged off when the
related loans are well secured or in the process of being collected. When the
Company receives cash on nonaccrual loans or leases, the Company's policy is to
record such receipts first as a reduction to the principal and then as interest
income. A nonperforming loan or lease may be returned to accrual status if the
loan or lease performs for a period of at least six months.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to contractual
terms of the loan agreement. The category of "impaired loans" is not coextensive
with the category of "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and are those on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or payments of principal or interest have become contractually past
due 90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility while not classifying the loan
as impaired if (i) it is probable that the Company will collect all amounts due
in accordance with the contractual terms of the loan or (ii) the loan is not a
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loan. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis,
66
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
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.
LOANS HELD FOR SALE
Loans held for sale are recorded at the lower of cost or estimated fair
market value, determined on an aggregate basis, and include loan origination
costs and related fees. Any transfers of loans held for sale to the investment
portfolio are recorded at the lower of cost or estimated fair market value on
the transfer date. Gains or losses resulting from sales of loans are recorded at
the time of sale and are determined by the difference between the net sales
proceeds and the carrying value of the loans sold.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of real estate acquired
through foreclosure. These assets are recorded initially at the lower of the
carrying value of the receivable or the fair value less selling costs of the
related real estate. The excess carrying value, if any, over the fair market
value of the asset received is charged to the allowance for loan losses at the
time of acquisition. Any subsequent decline in the fair market value of the OREO
is recognized as a charge to operations and a corresponding decrease in the OREO
asset. Gains from sales and operating expenses associated with OREO assets are
included in operations when realized.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at
cost, less accumulated depreciation and amortization which are charged to
expense on a straight-line basis over the estimated useful lives of the assets
or the terms of the leases if shorter. Capitalized leases are amortized over the
term of the lease on the straight-line method.
GOODWILL
Goodwill is amortized to expense using the straight-line method over its
estimated useful life, not to exceed fifteen years. On an ongoing basis,
management reviews the valuation and amortization of goodwill. During this
review, management estimates the value of the Company's goodwill, taking into
consideration any events and circumstances that might have diminished its value.
INTEREST RATE SWAP AGREEMENTS
SCB entered into two interest rate swap agreements in the management of its
interest rate exposure with notional principal amounts of $50 million and $25
million, respectively. Revenue or expense associated with these agreements,
which were intended to modify the interest-rate characteristics of
interest-bearing assets, were accounted for on a settlement accounting basis and
recognized as an adjustment to interest income, based on the interest rates then
currently in effect for such contracts. SCB used hedge accounting treatment
which requires identification of the asset or liability to be hedged and linking
the swap to the specified asset or liability. The notional amount of interest
rate swaps are not reflected in the Supplemental Consolidated Financial
Statements, but are disclosed in Note 14 of the Notes to Supplemental
Consolidated Financial Statements. In January 1997, the swap with the notional
67
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
principal amount of $25 million matured, and as part of the SCB Merger, and to
be consistent with the asset/liability management philosophy of the Company, the
remaining swap was terminated in the fourth quarter of 1997.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
NET INCOME (LOSS) PER SHARE
Basic net income per share of common stock is based on the weighted-average
number of common shares outstanding during the year. Diluted net income per
share is based on the weighted-average number of common shares outstanding
during the year plus common stock equivalents (stock options and warrants) using
the treasury stock method.
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Such statement requires disclosure of
basic and diluted earnings per share rather than primary net income per share
and fully diluted income per share. All periods presented have been restated to
reflect the new disclosure standard.
EFFECT OF NEW ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which
establishes financial accounting and reporting standards for stock-based
employee compensation plans. This statement encourages all entities to adopt a
new method of accounting to measure compensation cost of all employee stock
compensation plans based on the estimated fair value of the award at the date it
is granted. Companies are, however, allowed to continue to measure compensation
cost for those plans using the intrinsic value-based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net income and
earnings per share as if this statement had been adopted. The Company elected to
continue accounting for stock options under the intrinsic value method and has
provided the pro forma disclosure.
The Company adopted Statement of Financial Accounting Standards No. 125
("SFAS 125"), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," on January 1, 1997. This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers
68
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
that are secured borrowings. Adoption did not have a material impact on the
Company's financial condition and results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Financial
Information About Capital Structure" ("SFAS 129"). SFAS 129 supersedes capital
structure disclosure requirements found in previous accounting pronouncements
and consolidates them into one statement for ease of retrieval and greater
visibility for non-public entities. These disclosures are required for financial
statements for periods ending after December 15, 1997. As SFAS 129 makes no
changes to previous accounting pronouncements as those pronouncements applied to
the Company, adoption of SFAS 129 had no impact on the Company's results of
operations and financial condition.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
inclusion of comprehensive income, either in a separate statement for
comprehensive income, or as part of a combined statement of income and
comprehensive income in a full-set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances,
excluding those resulting from investments by and distributions to owners. SFAS
130 requires that comprehensive income is to be presented beginning with net
income, adding the elements of comprehensive income not included in the
determination of net income, to arrive at comprehensive income. SFAS 130 also
requires that an enterprise display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
SFAS 130 is effective for the Company on January 1, 1998. SFAS 130 requires
the presentation of information already contained in the Company's financial
statements and therefore is not expected to have an impact on the Company's
financial position or results of operation.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the reporting of information
about operating segments by public business enterprises in their annual and
interim financial reports issued to shareholders.
SFAS 131 requires that a public business enterprise report financial and
descriptive information, including profit or loss, certain specific revenue and
expense items, and segment assets, about its reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 is effective for the Company's financial statements beginning
January 1, 1998. Management has concluded that the Company operates in one
segment banking. Accordingly, adoption is not expected to have an effect on the
Company's financial position, results of operations, or existing disclosures.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and other
Post-retirement Benefits" ("SFAS 132"). SFAS 132 standardizes disclosure
requirements for pensions and other post-retirement benefits and requires
additional disclosure on changes in benefit obligations and fair values of plan
assets in order to facilitate financial analysis. SFAS 132 is effective for
fiscal years beginning after December 15, 1997 with earlier application
encouraged. The
69
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
adoption of SFAS 132 will have no impact on the Company's results of operations
and financial condition as this statement relates to disclosure requirements.
The Company adopted SFAS 132 on January 1, 1998.
NOTE 2--ACQUISITIONS
WESTERN BANK
On September 30, 1996, the Company completed the acquisition of Western Bank
in which Western Bank became a wholly-owned subsidiary of the Company. The
Company paid $17.25 per share, or approximately $61.1 million, for the 3,543,156
outstanding shares of common stock of Western Bank and an additional $5.5
million related to the outstanding stock options of Western Bank. The net
consideration for the acquisition of Western Bank was thus approximately $66.6
million. The acquisition was accounted for under the purchase method of
accounting which resulted in approximately $30 million of goodwill being
recorded.
The Company funded the purchase price with the issuance of 3,076,045 shares
of common stock, no par value, of the Company ("Company Common Stock") in a
private placement pursuant to which the Company raised approximately $42.2
million, net of approximately $1 million in issuance costs, and from the
proceeds of a three year loan of $26.5 million from The Northern Trust Company.
A $15.5 million dividend was declared by Western Bank concurrently with the
completion of the acquisition and paid to the Company; the proceeds of such
dividend were used to reduce the $26.5 million note to $11 million.
The following table presents unaudited pro forma results of operations of
the Company for the years ended December 31, 1996 and 1995 as if the acquisition
of Western Bank had been effective at the beginning of each year presented. The
unaudited pro forma combined summary of operations is intended for informational
purposes only and is not necessarily indicative of the future operating results
of the Company or of the operating results of the Company that would have
occurred had the Western Bank acquisition been in effect for the years
presented.
70
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
UNAUDITED PRO FORMA
COMBINED SUMMARY OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Interest income....................................................... $ 106,148 $ 96,306
Interest expense...................................................... 32,664 29,589
---------- ---------
Net interest income................................................. 73,484 66,717
Provision for loan and lease losses................................... 2,571 8,963
---------- ---------
Net interest income after provision for loan and lease losses....... 70,913 57,754
Non-interest income................................................... 12,036 12,209
Non-interest expense.................................................. 67,336 67,846
---------- ---------
Income before taxes................................................. 15,613 2,117
Income tax expense.................................................... 5,095 1,209
---------- ---------
Net income.......................................................... $ 10,518 $ 908
---------- ---------
---------- ---------
Net income per share:
Basic............................................................... $ 0.93 $ 0.09
Diluted............................................................. $ 0.91 $ 0.09
Weighted average shares outstanding:
Basic............................................................... 11,325.5 9,993.0
Diluted............................................................. 11,597.2 10,210.5
</TABLE>
WESTERN BANCORP--CCB MERGER
On June 4, 1997, CCB merged with and into the Company in a transaction
accounted for using the pooling-of-interests method of accounting. In the CCB
Merger, 3,043,226 shares of Company Common Stock were issued to holders of
common stock of CCB based on a 1-for-1 exchange ratio (after the Reverse Stock
Split) and all of the outstanding shares of common stock of CCB were canceled.
The financial information for all periods presented herein has been restated to
present the combined consolidated financial condition and results of operations
of the Company and CCB as if the CCB Merger had been in effect for all periods
presented. At the date of the CCB Merger, the Company charged to expense merger
costs of $3.0 million (after tax), representing investment banking, filing and
professional fees; employee compensation and severance; and costs of computer
conversions.
Separately reported net interest income for CCB and the Company for the
quarter ended March 31, 1997, was $5,089,000 and $939,000, respectively, and
separately reported net income for CCB and the Company was $5,871,000 and
$893,000, respectively. On a combined basis, giving effect to the CCB Merger as
a pooling-of-interests, the Company's restated net interest income and net
income were $10,960,000 and $1,832,000, respectively, for the quarter ended
March 31, 1997. These amounts are unaudited.
71
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
WESTERN BANCORP--SCB MERGER
SC Bancorp merged with and into the Company in a transaction accounted for
using the pooling-of-interests method of accounting on October 10, 1997. In the
SCB Merger approximately 3,555,500 shares of Company Common Stock (prior to
adjustment for fractional shares) were issued based on a 0.4556-for-1 exchange
ratio and all of the outstanding shares of common stock of SC Bancorp were
cancelled. The financial information for all periods presented herein has been
restated to present the combined consolidated financial condition and results of
operations of the Company and SC Bancorp as if the SCB Merger had been in effect
for all periods presented. Management charged to expense merger costs of $8.8
million (after tax), representing investment banking, filing and professional
fees; compensation and severance costs; termination of an interest rate swap;
branch closure expense; and costs of computer conversions.
Separately reported net interest income for SC Bancorp and the Company for
the nine months ended September 30, 1997, was $18,842,000 and $4,014,000,
respectively, and separately reported net income for SC Bancorp and the Company
was $34,066,000 and $3,514,000, respectively. On a combined basis, giving effect
to both the CCB Merger and the SCB Merger as pooling-of-interests, the Company's
restated net interest income and net income were $52,908,000 and $7,528,000,
respectively, for the nine months ended September 30, 1997. These amounts are
unaudited.
WESTERN BANCORP--BKLA MERGER
BKLA merged with and into SMB in a transaction accounted for using the
pooling-of-interests method of accounting on October 23, 1998. The Company
issued approximately 2,214,300 shares of Company Common Stock to the BKLA
shareholders (prior to the adjustment for fractional shares) based on a
0.4224-for-1 exchange ratio. The financial information for all periods presented
herein has been restated to present the combined consolidated financial
condition and results of operations of the Company and BKLA as if the BKLA
Merger had been in effect for all periods presented. At the date of the BKLA
Acquisition, the Company charged to expense approximately $7.3 million
(after-tax) representing investment banking, filing and professional fees;
compensation; and costs of computer conversion. Such costs are not included in
the accompanying financial statements.
MERGER RELATED COSTS
As a result of the CCB Merger and the SCB Merger, the Company incurred
certain merger related costs. These costs are described below:
<TABLE>
<CAPTION>
PAID IN ACCRUED AT
CCB MERGER SCB MERGER TOTAL 1997 DECEMBER 31, 1997
------------- ----------- --------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Investment banking fees..................... $ 1,400 $ 3,520 $ 4,920 $ (4,920) $ --
Other professional services................. 697 1,960 2,657 (2,483) 174
Compensation related expense................ 1,055 2,769 3,824 (2,303) 1,521
Conversion costs............................ 252 753 1,005 (225) 780
Branch closure expense...................... -- 790 790 -- 790
Termination of interest rate swap........... -- 446 446 (446) --
Other....................................... -- 559 559 (359) 200
------ ----------- --------- ---------- ------
Total merger related costs................ $ 3,404 $ 10,797 $ 14,201 $ (10,736) $ 3,465
------ ----------- --------- ---------- ------
------ ----------- --------- ---------- ------
</TABLE>
72
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
SEPARATE COMPANY AND COMBINED FINANCIAL DATA
The following table presents certain financial data reported separately by
each company and on a combined basis for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net interest income:
The Company...................................... $ 71,676 $ 8,545 $ 3,343
CCB.............................................. -- 19,964 17,453
SC Bancorp....................................... -- 23,417 22,029
BKLA............................................. 10,923 7,474 4,967
Combined......................................... 82,599 59,400 47,792
Net income (loss):
The Company...................................... $ 3,162 $ 738 $ 683
CCB.............................................. -- 3,796 (3,341)
SC Bancorp....................................... -- 4,455 869
BKLA............................................. 3,731 1,001 646
Combined......................................... 6,893 9,990 (1,143)
Issuance of common stock:
The Company...................................... $ 715 $ 42,213 $ 9,132
CCB.............................................. -- 281 3,212
SC Bancorp....................................... -- 80 15
BKLA............................................. 14,519 -- 6,915
Combined......................................... $ 15,234 $ 42,574 $ 19,274
</TABLE>
ACQUISITIONS BY BKLA
BKLA acquired American West Bank on March 31, 1997, Culver National Bank on
December 31, 1997, and World Trade Bank on November 15, 1995. Each acquisition
was accounted for by the purchase method of accounting. The significant
components of the 1997 and 1995 acquisitions are as follows:
<TABLE>
<CAPTION>
1997
ACQUISITIONS 1995 ACQUISITION
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Cash and equivalents...................................... $ 32,278 $ 2,849
Other assets.............................................. 90,265 37,837
Goodwill and other intangibles............................ 5,025 1,801
Liabilities............................................... 113,176 41,102
Value of BKLA stock issued................................ $ 14,392 $ 1,385
</TABLE>
73
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
Unaudited pro forma earnings data assuming the 1997 acquisitions were
completed on January 1, 1996 and the 1995 acquisition was completed on January
1, 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net interest income after provision for loan and lease
losses..................................................... $ 81,715 $ 63,714 $ 44,744
Net income (loss)............................................ 7,265 13,362 (2,014)
Earnings (loss) pre share
Basic...................................................... 0.61 1.32 (0.29)
Diluted.................................................... 0.59 1.29 (0.29)
</TABLE>
NOTE 3--RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain average reserve balances with the
Federal Reserve Bank based on a percentage of deposits. The total average amount
of those reserve balances for the year ended December 31, 1997 was approximately
$34 million.
74
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES
Investment securities at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Securities held to maturity:
US government securities.......................... $ 24,966 $ 48 $ -- $ 25,014
US agency securities.............................. 17,962 67 18,029
Mortgaged-backed securities....................... 5,210 -- (6) 5,204
--------- ----- ----------- ---------
Total debt securities........................... $ 48,138 $ 115 $ (6) $ 48,247
--------- ----- ----------- ---------
--------- ----- ----------- ---------
SECURITIES AVAILABLE FOR SALE:
US government securities.......................... $ 107,248 $ 288 $ -- $ 107,536
US agency securities or insured obligations....... 53,599 61 (145) 53,515
Mortgage-backed securities........................ 51,528 97 (560) 51,065
State and political subdivisions.................. 1,169 51 -- 1,220
--------- ----- ----------- ---------
Total debt securities........................... 213,544 497 (705) 213,336
Other equity securities........................... 62 -- -- 62
--------- ----- ----------- ---------
Total........................................... $ 213,606 $ 497 $ (705) $ 213,398
--------- ----- ----------- ---------
--------- ----- ----------- ---------
1996
Securities held to maturity:
US government securities.......................... $ 1,147 $ 13 $ -- $ 1,160
US agency securities.............................. 3,989 2 (1) 3,990
Mortgaged-backed securities....................... 1,921 -- (39) 1,882
--------- ----- ----------- ---------
Total debt securities........................... $ 7,057 $ 15 $ (40) $ 7,032
--------- ----- ----------- ---------
--------- ----- ----------- ---------
SECURITIES AVAILABLE FOR SALE:
US government securities.......................... $ 176,402 $ 70 $ (111) $ 176,361
US agency securities or insured obligations....... 95,917 17 (539) 95,395
Mortgaged-backed securities....................... 60,326 34 (1,454) 58,906
State and political subdivisions.................. 413 -- (2) 411
Other debt securities............................. 1,390 68 (9) 1,449
--------- ----- ----------- ---------
Total debt securities........................... 334,448 189 (2,115) 332,522
Mutual funds...................................... 9,042 36 -- 9,078
Other equity securities........................... 623 160 -- 783
--------- ----- ----------- ---------
Total........................................... $ 344,113 $ 385 $ (2,115) $ 342,383
--------- ----- ----------- ---------
--------- ----- ----------- ---------
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Mortgage-backed securities
that are not due at a single maturity date are allocated over several maturity
groupings based on anticipated maturities of the underlying assets.
75
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES (CONTINUED)
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
AVAILABLE FOR SALE:
Due in one year or less............................................. $ 95,912 $ 95,828
Due after one year through five years............................... 95,938 95,795
Due after five years through ten years.............................. 11,355 11,259
Due after ten years................................................. 10,339 10,454
---------- ----------
$ 213,544 $ 213,336
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
SECURITIES HELD TO MATURITY:
Due in one year or less............................................. $ 26,476 $ 26,517
Due after one year through five years............................... 21,662 21,770
---------- ----------
Total............................................................. $ 48,138 $ 48,287
---------- ----------
---------- ----------
</TABLE>
Gross gains and losses on sale of available for sale securities were
$342,000 and $0, respectively, for 1997, and $293,000 and $17,000, respectively,
for 1996. Gross gains and losses on sale of available for sale securities were
$0 and $738,000, respectively, for 1995.
Investment securities available for sale with a carrying amount of
approximately $21.2 million and $53.5 million were pledged as collateral to
secure public deposits at December 31, 1997 and 1996, respectively.
In December 1997, in conjunction with the merger of NBSC with and into SCB,
each of SCB and Western Bank reclassified their entire held-to-maturity
investment portfolio to the available-for-sale category. The held-to-maturity
investment securities were transferred to available for sale at their fair
market values. The amortized cost of the securities transferred was $2.9 million
and the related unrealized net gain recorded was $35,000. The held-to-maturity
portfolio as of December 31, 1997 and 1996 relates to the BKLA Acquisition.
The Banks may hold derivative securities as part of their investment
portfolios. At December 31, 1997, the Bank's held three collateralized mortgage
obligations ("CMOs") with an amortized cost of approximately $1.042 million and
a current market value of approximately $1.052 million. The weighted average
yield of these investments was 7.19 percent and the weighted average life was
1.88 years as of December 31, 1997. All three CMOs have been tested no less than
annually using the Federal Financial Institutions Examination Council ("FFIEC")
"High Risk Security Test" and each of the securities has passed the annual
tests. This stress test is used by bank regulators to assess the relative risks
of investments in CMOs. A security that passes this test is not considered to be
"high-risk;" a security that fails the test may be subject to additional
regulatory scrutiny, and under the most severe case, the bank could be asked to
sell the security.
76
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES
LOANS AND LEASES
Most of the loans and leases made by the Company are to customers located in
San Diego, Orange and Los Angeles counties of California. Mortgage and
construction loans are collateralized by real estate trust deeds. The Company
generally requires security in the form of assets, including real estate, for
commercial and installment loans. The ability of the Company's customers to
honor their loan agreements is dependent upon the general economy of the
Company's market areas and the financial strength of the customer. The
distribution of the Company's loan and lease portfolio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
------------ ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Real estate construction............................................ $ 75,318 $ 64,954
Real estate mortgage................................................ 449,454 353,800
Commercial.......................................................... 407,282 360,704
Leases.............................................................. 1,934 3,027
Installment and other............................................... 91,906 108,779
------------ ----------
Gross loans and leases.......................................... 1,025,894 891,264
Less:
Unearned lease income............................................. (226) (364)
Deferred loan fees, net........................................... (2,660) (2,510)
Allowance for loan and lease losses............................... (18,713) (17,439)
------------ ----------
Net loans and leases held for investment........................ 1,004,295 870,951
Real estate mortgage loans available for sale..................... 359 1,234
------------ ----------
Net loans and leases............................................ $ 1,004,654 $ 872,185
------------ ----------
------------ ----------
</TABLE>
77
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses for the three years ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan and lease losses:
Balance at the beginning of the period..................... $ 17,439 $ 15,488 $ 13,748
Loans and leases charged off:
Real estate mortgage and construction...................... 2,195 3,100 6,106
Commercial................................................. 3,092 2,614 2,885
Installment and other...................................... 587 563 982
Leases..................................................... -- 27 11
--------- --------- ---------
Total loans and leases charged off....................... 5,874 6,304 9,984
Recoveries on loans and leases charged off:
Real estate mortgage and construction...................... 237 147 672
Commercial................................................. 1,630 1,046 772
Installment and other...................................... 189 133 244
Leases..................................................... -- -- 34
--------- --------- ---------
Total recoveries on loans and leases charged off......... 2,056 1,326 1,722
--------- --------- ---------
Net loans and leases charged off......................... 3,818 4,978 8,262
Provision charged to operating expense....................... 3,210 1,768 8,253
Other additions due to:
Acquisitions............................................... 1,882 5,041 1,132
Loan portfolio purchases................................... -- 120 617
--------- --------- ---------
Balance at the end of the period............................. $ 18,713 $ 17,439 $ 15,488
--------- --------- ---------
--------- --------- ---------
</TABLE>
CREDIT QUALITY
A summary of loans on which the accrual of interest has been discontinued as
of the dates indicated follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans and leases:
Real estate construction................................... $ -- $ 1,031 $ 4,545
Real estate mortgage....................................... 8,173 13,139 11,666
Commercial................................................. 3,263 3,567 2,284
Leases..................................................... -- -- 27
Installment and others..................................... 317 1,214 199
--------- --------- ---------
Total.................................................... $ 11,753 $ 18,951 $ 18,721
--------- --------- ---------
--------- --------- ---------
</TABLE>
78
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
If interest on nonaccrual loans and leases had been recognized at the
original interest rates, interest income would have increased approximately
$820,000, $1,166,000 and $873,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
The Company has no commitments to lend additional funds to borrowers whose
loans were classified as nonaccrual.
At December 31, 1997 and 1996, impaired loans and the related specific loan
loss allowances were as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------
<S> <C> <C> <C>
ALLOWANCE FOR
RECORDED LOAN AND NET
INVESTMENT LEASE LOSSES INVESTMENT
----------- ------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances............................... $ 6,397 $ 1,368 $ 5,029
Without specific allowances............................ 11,575 -- 11,575
----------- ------ -----------
Total impaired loans and leases........................ $ 17,972 $ 1,368 $ 16,604
----------- ------ -----------
----------- ------ -----------
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
<S> <C> <C> <C>
ALLOWANCE FOR
RECORDED LOAN AND NET
INVESTMENT LEASE LOSSES INVESTMENT
----------- ------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances............................... $ 12,682 $ 2,833 $ 9,849
Without specific allowances............................ 11,146 -- 11,146
----------- ------ -----------
Total impaired loans and leases........................ $ 23,828 $ 2,833 $ 20,995
----------- ------ -----------
----------- ------ -----------
</TABLE>
The average recorded investment in impaired loans and leases for the years
ended December 31, 1997, 1996 and 1995 was approximately $19,675,000,
$16,024,000 and $17,783,000, respectively. Interest income on impaired loans and
leases of approximately $870,000, $617,000 and $593,000 was recognized for cash
payments in 1997, 1996 and 1995, respectively.
79
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--PROPERTY AND EQUIPMENT
The components of premises and equipment at December 31, 1997 and 1996 were
as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Land and building....................................................... $ 12,944 $ 12,855
Furniture, fixtures and equipment....................................... 15,139 14,254
Leasehold improvements.................................................. 7,666 7,372
--------- ---------
Total property and equipment........................................ 35,749 34,481
Less accumulated depreciation and amortization.......................... (19,414) (16,728)
--------- ---------
Total property and equipment, net................................... $ 16,335 $ 17,753
--------- ---------
--------- ---------
</TABLE>
NOTE 7--DEPOSITS
At December 31, 1997, the scheduled contractual maturities of certificates
of deposit are as follows (In thousands):
<TABLE>
<S> <C>
1998.............................................................. $ 298,503
1999.............................................................. 17,259
2000.............................................................. 4,443
2001.............................................................. 1,044
2002 and thereafter............................................... 1,158
---------
$ 322,407
---------
---------
</TABLE>
NOTE 8--BORROWINGS
At December 31, 1997 and 1996, borrowings were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes payable........................................................... $ 7,080 $ 13,350
Federal funds purchased................................................. -- 1,852
Treasury, tax and loan note............................................. 5,671 5,088
Capital lease obligations (Note 11)..................................... 1,849 1,842
--------- ---------
Total Borrowings........................................................ $ 14,600 $ 22,132
--------- ---------
--------- ---------
</TABLE>
On September 30, 1996, the Company borrowed $26.5 million from The Northern
Trust Company under a three year revolving credit agreement. Concurrently with
the Western Acquisition, the Company reduced the loan by $15.5 million as a
result of a dividend in the same amount from Western Bank and retained a credit
line of $11 million. In 1997 the credit line was increased to $13 million. The
balance at December 31, 1997 and 1996 was $7.1 million and $11.0 million,
respectively, and the interest rate was 7.02% and 6.75%, respectively. The
highest amount outstanding during 1997 and 1996 was $12.2 million and $26.5
million, respectively; the average balance outstanding during 1997 and 1996 was
$9.6 million and $2.75 million, respectively; and the average rate paid in 1997
and 1996 was 7.07% and 6.95%, respectively.
80
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--BORROWINGS (CONTINUED)
In January 1998, the Company executed a third amendment to the revolving
credit agreement increasing the credit line to $17.5 million and modifying
certain covenants to reflect the Company's larger size. The loan agreement
contains covenants which impose certain restrictions on activities of the
Company and its financial condition. Such covenants include minimum net worth
ratios, maximum debt ratios, a minimum return on average assets, a dividend
limitation and minimum and maximum credit quality ratios. The revolving credit
agreement expires on September 25, 1999. As of December 31, 1997 and 1996, the
Company, and where applicable, its subsidiaries, were in compliance with each of
such covenants or the Company has obtained the appropriate waivers from The
Northern Trust Company. Shares of common stock of Western Bank with a carrying
value of approximately $58 million have been pledged as collateral against the
note payable to The Northern Trust Company.
In December 1988 CCB obtained a $3 million term loan from another financial
institution for the purpose of providing additional capital to NBSC. The credit
agreement for this loan was amended pursuant to a Second Amendment to the Credit
Agreement, dated August 25, 1994 (the "Second Amendment"). Interest was payable
monthly on the unpaid principal balance of the loan and required prepayment of
40% of the proceeds of any stock offering or placement of debt or equity. The
Second Amendment was supported by a Support Agreement (the "Support Agreement")
between a shareholder and director of CCB (the "Shareholder") and CCB whereby
the Shareholder guaranteed the payment of the loan.
To compensate the Shareholder for signing the Support Agreement and
subsequently paying off the lending institution, CCB signed a Holding Company
Support Agreement (the "Holding Company Support Agreement") whereby CCB agreed
to: (1) pay to the Shareholder a fee equal to 1% of the unpaid principal amount
of the note on each anniversary date and (2) issue to the Shareholder on or
prior to March 31, 1997, and thereafter on each anniversary date, warrants to
purchase 25,000 shares of Company Common Stock at an exercise price per share
equal to 80% of the book value per share of the Company on December 31, 1996 and
subsequent year end periods. The Shareholder paid off the outstanding balance of
$2,350,000 to the lending institution in March of 1996, and CCB entered into a
new note with the shareholder (the "New Note"). The New Note bore an interest
rate of 3% over the prime rate with interest only payable monthly for the first
year; and thereafter, quarterly principal payable of $125,000 plus interest
payable monthly. Any remaining principal and interest would have been due on
April 1, 1999. On March 17, 1997, CCB paid down $2,000,000 on this note, and
based on the $350,000 remaining balance of the note, CCB issued to the
Shareholder pursuant to the Holding Company Support Agreement, a number of
warrants to purchase 3,723 shares of the CCB's common stock at an exercise price
of $6.60 per share, which number of warrants was proportional to the outstanding
balance on the New Note at that time. CCB also paid the Shareholder a fee equal
to 1% of the unpaid principal balance on March 17, 1997. The remaining unpaid
principal balance of $350,000 was subject to the original terms of the note and
was paid on April 1, 1997.
Under an agreement with the Federal Home Loan Bank of San Francisco, SCB may
obtain an extension of credit of up to 55% of total assets collateralized by
real estate loans. At December 31, 1997, SCB had pledged loans amounting to
$11,150,000 and had available credit of $6,629,000. No amounts were outstanding
on this line of credit at December 31, 1997 and 1996.
Under separate agreements with three commercial banks, SCB may borrow an
aggregate of up to $48 million through federal funds lines of credit. Western
Bank may borrow an aggregate of up to $22.0 million through federal funds lines
of credit. Federal funds arrangements are subject to the terms of
81
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--BORROWINGS (CONTINUED)
the individual arrangements and may be terminated at the discretion of the
correspondent bank. $0 and $1,852,000 were outstanding on these lines of credit
at December 31, 1997 and 1996, respectively.
SCB participates in the Treasury, Tax and Loan Note program. SCB has a limit
of $6.0 million at the Federal Reserve Bank. Treasury, Tax and Loan balances
fluctuate based on the amounts deposited by customers and the amounts called for
payment by the Federal Reserve Bank. At December 31, 1997 the interest rate on
the Treasury, Tax and Loan Note was 5.28 percent.
NOTE 9--SHAREHOLDERS' EQUITY
EQUITY TRANSACTIONS
The Company declared a cash dividend of $0.15 per share payable on December
10, 1997 to shareholders of record on November 10, 1997 and $0.15 per share
payable on March 27, 1998 to shareholders of record on February 27, 1998.
As part of the Western Acquisition the Company sold approximately 3,076,000
shares of Company Common Stock in a private placement for net proceeds of
approximately $42,213,000. Pursuant to this equity transaction, the Company
issued to parties related to Belle Plaine Financial, L.L.C., 92,275 warrants to
acquire Company Common Stock at $16.83 per share. The warrants expire on
September 30, 2006.
During 1995, the Company completed two capital raising transactions. Under a
private placement which closed in March 1995, the Company issued approximately
535,000 shares of Company Common Stock for net proceeds of approximately
$5,669,000. In September 1995, pursuant to a shareholders' rights and public
offering, the Company issued approximately 340,000 shares of Company Common
Stock for net proceeds of approximately $3,464,000. Pursuant to the September
1995 equity transaction, the Company issued to parties related to Belle Plaine
Financial, L.L.C., 48,400 warrants to acquire Company Common Stock at $13.77 per
share. The warrants expire on September 30, 2005.
In November 1995, CCB sold 474,000 shares of its common stock through
private placement at $6.75 per share for the purpose of contributing most of the
proceeds into NBSC as additional capital. Of the total proceeds of $3,200,000,
CCB contributed $2,900,000 into NBSC's capital in December 1995.
SCB declared three cash dividends during 1997. On each of January 23, March
27, and July 24, 1997, SCB declared a $0.05 per share cash dividend, payable to
its shareholders of record at the close of business on February 6, May 2, and
August 4, 1997, respectively. The dividends were paid on February 20, May 20,
and August 20, 1997, respectively, totaling $374,000, $375,000, and $375,000,
respectively.
On March 31, 1995, BKLA completed the issuance of 2,365,880 units of
securities ("BKLA Units") to Investors Banking Corporation ("IBC"), a bank
holding company located in Salem, Oregon, and received proceeds of approximately
$3,440,000, net of costs of approximately $110,000. Each BKLA Unit was comprised
of two shares of common stock, no par value, of BKLA ("BKLA Common Stock") and
one BKLA Warrant, exercisable for three years after issuance, to purchase BKLA
Common Stock at $0.75 per share. As a result of this transaction, IBC purchased
4,731,760 shares of BKLA Common Stock, representing 79% of total shares issued
and outstanding as of March 31, 1995, and indirectly acquired 79% of the issued
and outstanding shares of BKLA Common Stock. Adjusted for the five-for-one
reverse stock split of BKLA Common Stock and the conversion of .4224 shares of
Company Common Stock for each share of BKLA Common Stock, total shares purchased
by IBC were 399,739 shares of Company Common Stock and 199,870 warrants with an
exercise price of $8.88 per share expiring December 1, 1998.
82
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SHAREHOLDERS' EQUITY (CONTINUED)
On November 15, 1995, BKLA completed the acquisition of World Trade Bank and
issued 146,288 shares valued at $1,385,000. These shares represented 16% of the
issued and outstanding shares of BKLA Common Stock at December 31, 1995.
The share counts in the following discussion have been adjusted for the
0.4224 BKLA exchange ratio. On November 30, 1995, a Rights Offering to all BKLA
shareholders of record at October 24, 1995 was concluded. Each shareholder of
2.5 shares of BKLA Common Stock received one right to acquire 6.3 shares of BKLA
Common Stock and 2.1 three year BKLA Warrants. IBC shareholders were standby
purchasers of up to 14,657 BKLA Units (219,859 shares of BKLA Common Stock and
73,285 BKLA Warrants) not purchased by either BKLA shareholders or BKLA
employees. As a result, 275,120 shares of BKLA Common Stock and 91,728
three-year BKLA Warrants, expiring December 1, 1998 were issued. BKLA received
proceeds of $2,086,000, net of costs of approximately $357,000. IBC shareholders
were issued 197,410 shares of BKLA Common Stock and as a group owned 64% of the
BKLA Common Stock issued and outstanding. On December 29, 1995, IBC converted
its shares of BKLA Common Stock into the names of its shareholders so that IBC
shareholders became direct owners of BKLA Common Stock.
BKLA made the following acquisitions by issuing the indicated number of
common shares:
<TABLE>
<CAPTION>
NUMBER OF SHARES
ACQUIRED ENTITY ACQUISITION DATE ISSUED
- ------------------------ ---------------------- ----------------------
<S> <C> <C>
World Trade Bank November 15, 1995 146,288
American West Bank March 31, 1997 577,629
Culver National Bank December 31, 1997 488,010
</TABLE>
RESTRICTIONS ON PAYMENTS OF DIVIDENDS
Holders of Company Common Stock are entitled to receive dividends declared
by the Board of Directors out of funds legally available therefor under the laws
of the State of California and certain federal laws and regulations governing
the banking and financial services business. The Company's ability to pay
dividends is also limited by the Third Amendment to Revolving Credit Agreement,
dated as of January 26, 1998, between the Company and The Northern Trust
Company, which provides that the Company may not declare or pay any dividend
other than dividends payable in Company Common Stock or in the ordinary course
of business not to exceed 50 percent of net income per fiscal quarter before
goodwill amortization and any restructuring charges incurred in connection with
any merger, consolidation or other restructuring contemplated by the Agreement
and Plan of Merger, dated as of July 30, 1997 and restated as of November 20,
1997, by and among the Company, Western and Santa Monica Bank or similar
transactions. In addition, the Banks are subject to certain restrictions under
the laws of the State of California and certain federal laws and regulations
governing banks which limit their ability to transfer funds to the Company
through inter-company loans, advances, or cash dividends.
83
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current expense:
Federal....................................................... $ 6,296 $ 2,002 $ 704
State......................................................... 3,134 489 229
--------- --------- ---------
Total....................................................... 9,430 2,491 933
--------- --------- ---------
Deferred expense (benefit):
Federal....................................................... 8 725 (1,461)
State......................................................... (167) 440 (1,205)
--------- --------- ---------
Total....................................................... (159) 1,165 (2,666)
--------- --------- ---------
Total income taxes........................................ $ 9,271 $ 3,656 $ (1,733)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Tax benefits associated with the exercise of nonqualified stock options of
$1,755,000, $51,000 and $78,000 for 1997, 1996 and 1995, respectively, are
reflected in the Supplemental Consolidated Statements of Changes in
Shareholders' Equity.
The provision for income taxes differs from that which would result from
applying the U.S. statutory rate of 35% in 1997 and 1996 and 34% in 1995 as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Federal income tax expense (benefit) at statutory rate.......... $ 5,657 $ 4,776 $ (978)
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefits................... 1,929 613 (219)
Amortization of goodwill...................................... 739 210 196
Non-deductible merger expenses................................ 2,750 -- --
Change in valuation allowance................................. (1,757) (1,991) (681)
Other, net.................................................... (47) 48 (51)
--------- --------- ---------
Total income tax expense (benefit).............................. $ 9,271 $ 3,656 $ (1,733)
--------- --------- ---------
--------- --------- ---------
</TABLE>
84
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1997 and 1996
are presented below.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Unrealized loss on investment securities................................. $ 66 $ 648
Unrealized loss on loans................................................. -- 265
Loans, principally due to allowance for losses........................... 2,355 2,428
Other real estate owned.................................................. 226 788
Interest on nonaccrual loans............................................. 354 239
Net operating loss carryovers............................................ 2,888 2,821
Purchase accounting adjustments.......................................... 1,109 1,022
Deferred compensation.................................................... 1,267 1,190
Depreciation............................................................. 228 622
Contingencies............................................................ 895 382
Other.................................................................... 1,017 1,169
--------- ---------
Total deferred tax assets.................................................. 10,405 11,574
Valuation allowance...................................................... (146) (1,903)
--------- ---------
Net deferred tax assets.................................................... 10,259 9,671
--------- ---------
Deferred tax liabilities:
FHLB stock dividends..................................................... (289) (215)
Leases................................................................... (179) (183)
Other.................................................................... (129) (538)
--------- ---------
Total deferred tax liabilities........................................... (597) (936)
--------- ---------
Net deferred tax asset................................................. $ 9,662 $ 8,735
--------- ---------
--------- ---------
</TABLE>
Realization of the net deferred tax assets may be based on utilization or
carrybacks to prior taxable periods, anticipation of future taxable income and
the utilization of tax planning strategies.
At December 31, 1997, the Company had approximately $25.7 million and $11.5
million of Federal and California net operating loss carryovers, respectively,
and approximately $563,000 in tax credit carryforwards. Internal Revenue Code
Section 382 imposes an annual limitation on the Company's use of such carryovers
as a result of various ownership changes with respect to the Company, BKLA, and
the banking organizations acquired by BKLA. As a result of various annual
limitations, management believes that approximately $20.0 million and $7.2
million of Federal and California net operating loss carryovers, respectively,
and approximately $333,000 of tax credit carryforwards are no longer available.
Accordingly, management believes the remaining net operating loss carryovers of
approximately $5.7 million and $4.3 million for Federal and California,
respectively, and the remaining tax credit of approximately $230,000 will be
realized. The net operating loss carryovers expire at various dates through the
year 2011.
85
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company and the Banks conduct operations from leased facilities under
operating and capital leases which expire on various dates and which contain
certain renewal options.
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Year ended December 31:
1998........................................................................ $ 3,400
1999........................................................................ 3,031
2000........................................................................ 2,881
2001........................................................................ 2,721
2002........................................................................ 1,762
Thereafter.................................................................. 5,699
-------
Total..................................................................... $ 19,494
-------
-------
</TABLE>
Rental expense was $3.9 million in 1997, $3.1 million in 1996 and $2.9
million in 1995. Rental expense for 1996 includes that for Western since the
date of its acquisition.
Sublease rental income for the years ended December 31, 1997, 1996 and 1995
totaled approximately $194,000, $155,000 and $187,000, respectively.
BKLA's Beverly Hills office is under a capital lease. The term of the lease
is to June 30, 2007 with two ten year options. A portion of the space is
subleased through January 31, 2003. Future minimum rental commitments under this
lease are:
<TABLE>
<CAPTION>
TOTAL
AMOUNT SUBLEASE
--------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Year ended December 31:
1998.............................................................. $ 253 $ 305
1999.............................................................. 253 310
2000.............................................................. 253 310
2001.............................................................. 253 310
2002.............................................................. 253 310
Thereafter........................................................ 7,351 26
------ -----------
Total........................................................... $ 8,616 $ 1,571
-----------
-----------
Less amounts representing interest imputed at 14%................... $ 6,767
------
$ 1,849
------
------
</TABLE>
LITIGATION
GENERAL. From time to time, the Company and the Banks are party to claims
and legal proceedings arising in the ordinary course of business. Management of
the Company evaluates the Company's and/or
86
<PAGE>
WESTERN BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
the Banks' exposure to the cases individually and in the aggregate and provides
for potential losses on such litigation if the amount of the loss is
determinable and if the incurrence of the loss is probable.
Set forth below is a brief summary of the status of certain pending legal
proceedings to which the Company and/or the Banks are subject. Management
believes that the reserves which it has established for these matters are
adequate at this time. However, litigation is inherently uncertain and no
assurance can be given that this or any other litigation will not result in any
loss which might be material to the Company and/or the Banks.
PDI LITIGATION. NBSC v. Vincent E. Galewick, Performance Development, Inc.
et al. (the "PDI Litigation"), is an interpleader action filed by NBSC on August
22, 1995 in the Orange County Superior Court. The dispute arose from a demand by
the California Department of Corporations under California Government Code
Section 7480 on August 17, 1995 for the identification of account names and
account numbers associated with Vincent Galewick and Performance Development,
Inc. (collectively "PDI"). Pursuant to a declaration by the California
Department of Corporations under California Financial Code Section 952, NBSC did
not release approximately $12.3 million in PDI's accounts. On August 21, 1995, a
temporary restraining order was issued restraining PDI and others from
transferring funds. NBSC was thereafter threatened by various parties with
lawsuits for not releasing the funds, and an attack was made on the
applicability of the temporary restraining order to the funds. NBSC deposited
the funds with the Orange County Superior Court and filed the interpleader
action to allow the court to determine the disposition of the funds. In
response, the defendants filed a cross complaint against NBSC alleging $25
million (the original claim alleged $45 million and was reduced during
discovery) in damages due to lost opportunities, breach of contract, loss of
goodwill and damage to their reputation due to the inability to use the
approximately $12.3 million. Additional claims for an unspecified amount of
punitive damages, consequential damages and incidental damages have been
alleged.
FIP LITIGATION. Financial Institution Partners, L.P. v. California
Commercial Bankshares et al., is an action filed by Financial Institution
Partners, L.P. (collectively with its purported assignee, Hovde Capital, Inc.,
"FIP") on December 19, 1996 in the United States District Court for the Central
District of California. The dispute arose from the purchase by FIP in December
1995 of 288,888 shares of common stock of CCB (the "Initial Shares") in a
private placement at $6.75 per share ($1,949,994 in the aggregate), and FIP's
agreement to purchase an additional 266,659 shares of common stock of CCB on or
prior to May 5, 1996, subject to satisfaction of certain closing conditions,
including the receipt of required regulatory approval, if any.
On December 19, 1996, FIP filed a complaint in the United States District
Court for the Central District of California against CCB, NBSC and certain of
their respective officers and directors alleging claims for breach of contract
(declaratory relief and specific performance), violation of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, intentional misrepresentation,
negligent misrepresentation, suppression of fact and breach of contract
(rescission, restitution and damages). On August 20, 1997, FIP filed a Third
Amended Complaint adding the Company as a defendant and alleging additional
claims for breach of contact (right of first refusal) and civil violation of
Penal Code Section 496. The complaint
87
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
sought rescission of FIP's purchase of the Initial Shares, consequential damages
in excess of $1,650,000 and punitive damages. In the alternative, FIP seeks a
declaratory judgment requiring CCB to sell an additional 266,659 shares to FIP
at $6.75 per share if FIP determines it wishes to purchase such shares and
requiring CCB and the Company to comply with the terms of the agreement, which
FIP contends provides it with a right of first refusal as to any offers by
defendants of shares of common stock of CCB in an amount necessary to maintain
FIP's agreed beneficial ownership interest in CCB. In an order dated June 30,
1998, the Court dismissed FIP's claims to an ongoing right of first refusal in
CCB and/or Western stock. Western Management considers FIP's remaining claims
for damages based upon the 266,659 additional shares of CCB common stock that
FIP did not purchase to be without merit.
SMART CLOTHES LITIGATION. Smart Clothes, Inc. v. World Trade Bank, et al,
is an action arising from a lending relationship which originated between World
Trade Bank ("WTB") and Smart Clothes, Inc. ("Smart"). BKLA acquired the
relationship as a result of its acquisition of WTB on November 15, 1995. The
Complaint asserted seven causes of action including (1) breach of loan
agreement; (2) promissory estopel; (3) intentional misrepresentation and
concealment; (4) negligent misrepresentation and concealment; (5) recission of
guarantee; (6) reformation; and (7) interference with contractual relations. The
Complain sought damages of at least $30,000,000, based upon claims of lost
profits.
On October 23, 1998, BKLA entered into a settlement agreement and mutual
release with plaintiffs, the terms of which are confidential pursuant to the
agreement.
FIRST PENSION LITIGATION.
ROUSSEAU ACTION. Rousseau et al. v. Rancho Vista National Bank et al., is
an action brought in the San Diego Superior Court on October 23, 1995 by a class
of investors who invested pension funds with First Pension, a pension plan
administrator, alleging claims against various banks who dealt with First
Pension (the "Rousseau Action"). The plaintiffs stated claims for fraud and
deceit, aiding and abetting fraud and deceit, breach of fiduciary duty,
constructive fraud and aiding and abetting constructive fraud against a number
of financial institutions (the "Bank Defendants"), including SCB as successor to
Monarch and NBSC. NBSC and certain of its officers were named as defendants,
based on the fact that First Pension deposited investor pension funds into an
account at NBSC of which NBSC agreed to be custodian. The plaintiffs alleged
losses of over $130 million due to the combined alleged wrongdoing of the Bank
Defendants. No specific damage claim was alleged against NBSC.
EVANS ACTION. Evans v. Home Bank et al., is a suit brought by the receiver
for First Pension and related entities in the Central District of California
based on the same allegations as in the Rousseau Action (the "Evans Action").
The receiver alleged that NBSC and Monarch improperly delegated their respective
fiduciary duties as a custodian of pension funds to First Pension and failed to
ensure that all pension assets were transferred to the successor custodian.
Plaintiffs did not allege a specific damage claim against NBSC or Monarch.
ZWICK ACTION. Beverly Zwick v. Monarch Bank et al., is a class action
brought in the San Diego Superior Court (the "Zwick Action"). The plaintiffs are
a class of investors whose funds were deposited by First Pension in custodial
accounts held at Monarch. The plaintiffs stated claims for negligence, fraud and
aiding and abetting constructive fraud against Monarch and the Company.
Plaintiffs claim that Monarch knew or should have known that the now
incarcerated principals of First Pension were periodically stealing
88
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
funds from the custodial accounts through transferring authorized withdrawals to
bogus accounts from which the funds were eventually stolen. The damages alleged
by the plaintiffs exceed $2,000,000.
SETTLEMENT. On February 13, 1998, the Company entered into a Settlement
Agreement and Mutual Release, pursuant to which the Company and SCB, as
successors to Monarch and NBSC, were released from all claims raised in the
Rousseau Action, the Evans Action and the Zwick Action and the Company will pay
$1.1 million to be allocated among the various plaintiffs. The settlement
agreement has been approved by the courts in the various actions. The impact of
the settlement has been included in the 1997 consolidated financial statements.
NOTE 12--RELATED PARTY TRANSACTIONS
The Company had loans outstanding to principal officers and directors and
their affiliated companies which were made substantially on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other borrowers and do not involve more than the
normal risks of collectibility. An analysis of the activity with respect to such
loans to related parties is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Balance, January 1....................................................... $ 5,136 $ 6,133
Additions due to acquisitions............................................ -- 184
New loans................................................................ 2,416 2,509
Repayments............................................................... (4,822) (3,690)
--------- ---------
Balance, December 31................................................... $ 2,730 $ 5,136
--------- ---------
--------- ---------
</TABLE>
In addition to the $2.7 million of related party loans outstanding at
December 31, 1997, there were $382,000 in undisbursed commitments. Included in
the repayments of $4.8 million during 1997 is a decrease of $3.4 million due to
a reduction in the number of related parties due to the CCB Merger and the SCB
Merger. In addition, principal officers and directors in the aggregate had $3.1
million in deposits with the Banks at December 31, 1997.
Certain of the Company's life insurance policies have been contracted based
on competitive bids through Rice Brown Financial. The principal of Rice Brown
Financial is a director of the Company.
On January 1, 1996, the Company engaged one of its directors as a financial
advisor. The engagement agreement provides for a monthly fee of $3,000 plus
expenses beginning January 1, 1996. The agreement may be terminated by either
the Company or the director upon 30 days written notice.
Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. are entities
related to a director of the Company. Belle Plaine Partners, Inc. serves as
financial advisor to the Company under an engagement letter dated May 17, 1995.
The agreement may be terminated by either party upon 30 days written notice. In
that capacity, Belle Plaine Partners, Inc. was paid fees of approximately $1.4
million for evaluating and identifying potential acquisitions including the
acquisition of Western Bank which closed September 30, 1996. The Company also
paid Belle Plaine Partners, Inc. fees of approximately $1.35 million and $1.8
89
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--RELATED PARTY TRANSACTIONS (CONTINUED)
million in connection with the CCB Merger and SCB Merger, respectively, and paid
approximately $2.7 million in connection with the SMB acquisition. Belle Plaine
Financial, L.L.C. was engaged by the Company to raise capital to consummate the
acquisition of Western Bank. Belle Plaine Financial, L.L.C. was paid $863,000
for its services and was reimbursed for expenses incurred in the course of that
engagement. In addition Belle Plaine Financial, L.L.C. assisted in the raising
of capital for the Company in connection with the SMB acquisition for which it
did not receive a fee.
As part of the cost of raising equity in September of 1995, 48,400 warrants
were issued to parties related to Belle Plaine Partners, Inc., including 40,425
to directors of the Company. The exercise price of $13.77 was 20% higher than
the price at which the equity was raised. As part of the cost of the equity
raised in 1996 for the Western Acquisition, 92,275 warrants were issued to
parties related to Belle Plaine Partners, Inc., including 33,557 to the
Company's largest shareholder and 28,089 to a director of the Company. The
exercise price of $16.83 was 20% higher than the price at which the equity was
raised.
The lease for one of BKLA's branches is with American West Associates, a
general partnership consisting of, among others, BKLA directors Mr. Shaw and Mr.
Sterman and former director Mr. Rubinstein. The terms of this lease are no less
favorable to BKLA than a similar lease with a third party.
Scott Burford, the president of Burford Capital and son of the late Maurice
J. Burford (former Chairman of BKLA), provided consulting services to BKLA
through GBS Financial in connection with the acquisition of BKLA. GBS Financial
entered into an agreement with BKLA pursuant to which GBS Financial received a
fee of $700,000 for its services in connection with the acquisition of BKLA,
which was paid to GBS Financial upon consummation of the acquisition.
NOTE 13--BENEFITS PLANS
On May 16, 1995, the Board of Directors of the Company approved the 1995
Directors Deferred Compensation Plan which was approved by shareholders on July
17, 1995. The plan is effective for fees earned on and after July 1, 1995. No
compensation has been awarded under the plan.
During 1992 the Company adopted an employee stock ownership and salary
deferral plan ("KSOP"). The Company's contributions to the KSOP totaled
approximately $20,000 in 1995. No contributions were made in 1997 and 1996. In
September of 1996 the Company froze the KSOP plan and recorded a related expense
of approximately $189,000 for repayment of a loan and other expenses. The loan
was classified in other liabilities as of December 31, 1996 and was paid off in
January of 1997.
The Banks have 401(k) plans covering substantially all employees. Amounts
contributed by the Banks and charged to expense were approximately $321,000,
$288,000, and $261,000 in 1997, 1996 and 1995, respectively.
In 1987, CCB purchased cost recovery life insurance with aggregate death
benefits in the amount of $2,473,000 on the lives of the senior management
participants. The Company, as successor to CCB is the sole owner and beneficiary
of such policies, which were purchased to fund CCB's obligation under separate
deferred compensation arrangements. The cash surrender values and obligation
under deferred compensation agreements at December 31, 1997 and 1996 of
$1,415,000 and $1,296,000, respectively, and $568,000 and $529,000,
respectively, have been included in other assets and in other liabilities,
respectively, in the accompanying consolidated balance sheets.
90
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--BENEFITS PLANS (CONTINUED)
The Company, as successor to SC Bancorp, has established deferred
compensation plans which permit certain directors and management employees to
defer portions of their compensation and earn interest at a predetermined amount
above a specified interest rate index on the deferred amounts. Expense incurred
on deferred balances was approximately $220,000, $177,000 and $648,000 in 1997,
1996 and 1995, respectively. The deferred compensation liability at December 31,
1997 and 1996 was approximately $1.9 million and $2.1 million, respectively, of
which $938,000 and $1.2 million, respectively, represented principal, and was
classified with other liabilities in the accompanying consolidated balance
sheets. Approximately $932,000 and $948,000 represented accrued interest payable
at December 31, 1997 and 1996, respectively, and was also classified as other
liabilities in the accompanying consolidated balance sheets. In conjunction with
the plans, the Company purchased life insurance policies on the participants
with the Company as beneficiary. The cash surrender values of the life insurance
policies were included in other assets in the accompanying consolidated balance
sheets and totaled approximately $3.9 million and $3.5 million at December 31,
1997 and 1996, respectively.
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
LENDING COMMITMENTS
The Banks are parties to financial instruments with off-balance sheet risk
in the normal course of business in meeting the financial needs of their
customers. These financial instruments consist primarily of commitments to
extend credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Banks have in particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The same
credit policies are used in making commitments and conditional obligations as
those used for on-balance sheet instruments.
The Company had the following commitments to extend credit:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Loan commitments...................................................... $ 336,283 $ 252,511
Standby letters of credit............................................. 15,124 13,419
---------- ----------
$ 351,407 $ 265,930
---------- ----------
---------- ----------
</TABLE>
In addition to the amounts above, approximately $7,450,000 and $5,089,000 in
consumer credit card and overdraft commitments were outstanding as of December
31, 1997 and 1996. Loan commitment arrangements represent commercial lines of
credit with variable interest rates determined at the time funds are drawn by
adding an interest spread to an agreed upon index. Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any
condition established in the contract; such commitments generally have fixed
expiration dates or other termination clauses and may require a fee. The total
commitment amount generally represents future cash requirements. However,
91
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
many commitments expire without being used. Standby letters of credit are
conditional commitments issued by the Company to guarantee performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers.
INTEREST RATE SWAPS
SCB entered into two interest rate swap agreements with notional principal
amounts of $50 million and $25 million. These agreements were intended to
mitigate interest rate fluctuations on SCB's floating rate loan portfolio. In
January 1997 the swap with the notional principal amount of $25 million matured.
Due to the merger of SCB with the Company in the fourth quarter of 1997 and to
apply the Company's asset liability management philosophy, the Company
terminated the $50 million swap. For the years ended December 31, 1997, 1996,
and 1995, net interest expense of $410,000, $563,000, and $929,000 from the swap
agreements is included in interest income on loans in the consolidated
statements of operations. The costs associated with the termination of the $50
million notional principal swap is $446,000 and is included in other merger
costs for the year ended December 31, 1997.
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no readily discernible
market value exists for a large portion of the financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature,
involve uncertainties and matters of judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in the estimates.
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash and due from banks, and federal funds sold, are
considered to approximate fair value. The fair value of investment securities is
generally based on quoted market prices. The fair value of loans is estimated
using a combination of techniques, including discounting estimated
92
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
future cash flows and quoted market prices of similar instruments, where
available, taking into consideration the varying degrees of credit risk. The
carrying amounts of accrued interest receivable are considered to approximate
fair value.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand is considered
to approximate fair value. For fixed maturity deposits, fair value is estimated
by discounting estimated future cash flows using currently offered rates for
deposits of similar remaining maturities. The fair value of notes payable is
based on rates currently available to the Company for debt with similar terms
and remaining maturities. As notes payable reprice daily, the carrying value
approximates fair value. The carrying amounts of other short-term borrowings and
accrued interest payable are considered to approximate fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of credit
is estimated using the fees currently charged to enter into similar agreements.
The fair value of these financial instruments is not material.
93
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of financial instruments at December 31, 1997 and
1996 is summarized as follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ------------
<S> <C> <C>
(IN THOUSANDS)
DECEMBER 31, 1997
Financial Assets:
Cash and due from banks....................................... $ 120,102 $ 120,102
Federal funds sold............................................ 168,257 168,257
Securities.................................................... 267,947 268,056
Loans and leases, net......................................... 1,004,654 1,002,243
Accrued interest receivable................................... 9,760 9,760
Financial Liabilities:
Deposits...................................................... $ 1,464,805 $ 1,466,066
Notes payable................................................. 14,600 14,600
Accrued interest payable...................................... 2,725 2,725
DECEMBER 31, 1996
Financial Assets:
Cash and due from banks....................................... $ 104,341 $ 104,341
Federal funds sold............................................ 44,517 44,517
Securities.................................................... 354,944 354,919
Loans and leases, net......................................... 872,185 873,412
Accrued interest receivable................................... 10,318 10,318
Financial Liabilities:
Deposits...................................................... $ 1,292,610 $ 1,292,941
Notes payable................................................. 22,132 22,132
Accrued interest payable...................................... 2,324 2,324
Off Balance Sheet Financial Instrument:
Interest rate swap agreements in a net payable
position.................................................... $ -- $ (900)
</TABLE>
94
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by Federal and State of California banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items, as
calculated under regulatory accounting practices, must be met. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. The Company and
the Banks are considered well-capitalized at December 31, 1997.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum ratios based on average
and risk weighted assets as set forth below. Actual capital ratios for the
Company and the Banks as of December 31, 1997 are also shown in the table:
<TABLE>
<CAPTION>
REQUIREMENT ACTUAL
---------------------------- -------------------------------------
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED WESTERN SCB CONSOLIDATED
------------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
(GREATER THAN OR EQUAL TO
STATED PERCENTAGE)
Tier 1 risk-based capital ratio......................... 4.00% 6.00% 11.80% 10.41% 10.94%
Total risk-based capital................................ 8.00% 10.00% 13.06% 11.66% 12.19%
Tier 1 leverage capital ratio........................... 4.00% 5.00% 8.03% 8.22% 8.14%
</TABLE>
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash and due from banks............................................. $ 458 $ 7,401
Other real estate owned............................................. 83 83
Investments in subsidiaries (Note 8)................................ 169,669 147,021
Securities available for sale....................................... -- 262
Other assets........................................................ 1,954 1,253
---------- ----------
Total assets...................................................... $ 172,164 $ 156,020
---------- ----------
Liabilities:
Notes payable....................................................... $ 7,080 $ 13,350
Other liabilities................................................... 4,375 991
---------- ----------
Total liabilities................................................. 11,455 14,341
Shareholders' equity.................................................. 160,709 141,679
---------- ----------
Total liabilities and shareholders' equity........................ $ 172,164 $ 156,020
---------- ----------
---------- ----------
</TABLE>
95
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Interest income.................................................................... $ 79 $ 301 $ 236
Management fees.................................................................... 291 58 --
Gain on sale of securities available for sale...................................... 229 -- --
Dividend income from subsidiaries.................................................. 10,500 -- --
--------- --------- ---------
Total income..................................................................... 11,099 359 236
--------- --------- ---------
Interest expense................................................................... 730 465 260
Merger costs....................................................................... 9,537 -- --
Other expense...................................................................... 2,624 1,757 461
--------- --------- ---------
Total expense.................................................................... 12,891 2,222 721
--------- --------- ---------
Loss before taxes and equity in undistributed subsidiary earnings................ (1,792) (1,863) (485)
Income tax benefit................................................................. (1,857) (846) (47)
Income (loss) before equity in undistributed earnings of subsidiaries.............. 65 (1,017) (438)
Equity in undistributed income (loss) of subsidiaries.............................. 6,828 11,007 (705)
--------- --------- ---------
Net income (loss).................................................................. $ 6,893 $ 9,990 $ (1,143)
--------- --------- ---------
--------- --------- ---------
CONDENSED STATEMENTS OF CASH FLOWS
Net income (loss).................................................................. $ 6,893 $ 9,990 $ (1,143)
Gain on sale of investments........................................................ (229) -- --
Change in other assets............................................................. (701) (1,034) 78
Change in other liabilities........................................................ 1,163 982 (91)
Equity in undistributed subsidiary (earnings) losses............................... (6,828) (11,007) 705
--------- --------- ---------
Cash flows provided (used) by operating activities............................... 298 (1,069) (451)
--------- --------- ---------
Acquisition of Western, including acquisition costs................................ -- (53,154) --
Proceeds from sale of securities available for sale................................ 332 4,924 --
Increase in investment in subsidiaries............................................. -- -- (7,900)
Other investing activities......................................................... (202) 126 (8,939)
--------- --------- ---------
Cash flows provided (used) by investing activities............................... 130 (48,104) (16,839)
--------- --------- ---------
Net proceeds from issuance of common stock, net of issuance costs, and from
exercise of common stock options and warrants.................................... 2,470 42,625 12,973
Repurchases of common stock........................................................ (849) -- --
Dividends paid..................................................................... (2,722) -- --
Issuance (repayments) of debt...................................................... (6,270) 11,000 --
Other financing activities......................................................... -- (137) (589)
--------- --------- ---------
Cash flows provided (used) by financing activities............................... (7,371) 53,488 12,384
--------- --------- ---------
Net increase (decrease) in cash.................................................... (6,943) 4,315 (4,906)
Cash beginning of year............................................................. 7,401 3,086 7,992
--------- --------- ---------
Cash end of year................................................................... $ 458 $ 7,401 $ 3,086
--------- --------- ---------
--------- --------- ---------
Cash paid for interest............................................................. $ 730 $ 465 $ 260
Cash paid for income taxes......................................................... $ 2,750 $ -- $ --
</TABLE>
96
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS
At the time of the CCB Merger, all outstanding stock options of CCB were
converted into stock options of the Company at an exchange rate of one-to-one.
At the time of the SCB Merger, all outstanding stock options of SC Bancorp were
converted into shares of Company Common Stock based upon the difference between
$14.25 and the exercise price of each SC Bancorp option divided by $31.28.
246,401 options were converted into shares as a result of the SCB Merger. The
following disclosures reflect the combination of the Company, CCB, SC Bancorp
and BKLA stock option data.
The Company has a stock option plan (the "Plan") pursuant to which the
Company's Board of Directors may grant stock options to officers, directors and
key employees. The Plan authorizes grants of options to purchase shares of
authorized but unissued Company Common Stock. Stock options are granted with an
exercise price greater than or equal to the stock's fair market value at the
date of grant. Qualified stock options have 5-year terms and vesting schedules
as determined by the Company's Board of Director's. The Company's non-qualified
stock options ("NQSO") have 5-year and 10-year terms and vest pursuant to
vesting schedules established by the Company in Committee or the Board of
Directors of the Company. As of December 31, 1997, of the 404,410 options then
authorized for grant, there were 76,201 options available for grant under the
Plan. SC Bancorp NQSO had 10-year terms and vested over a five year period from
the date of grant. All of SC Bancorp's NQSO vested at the SCB Merger and were
converted into shares of Company Common Stock. In addition, during 1997 the
Company issued 19,803 options outside of the Plan to certain officers and
directors of the Company at an exercise price less than the Company Common
Stock's fair market value at the date of grant resulting in compensation expense
of $254,000 included in merger costs. The following table summarizes the
activity relating to the Company's stock options for the years indicated.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG.
NO. OF EXERCISE NO. OF EXERCISE NO. OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ------------- ------------ ------------- ------------ -------------
Options outstanding, January
1............................. 639,163 $ 11.52 494,987 $ 10.10 424,134 $ 10.84
Options granted................. 257,534 26.94 270,147 13.36 221,616 7.42
Options exercised............... (75,041) 8.26 (80,042) 5.74 (45,937) 5.68
Options forfeited............... (12,304) 12.29 (4,281) 13.77 (4,622) 32.81
Options converted to shares
related to the SCB Merger..... (246,401) 13.70 -- -- -- --
Options expired................. (117) 13.77 (16,648) 13.50 (36,129) 14.18
Options cancelled............... -- -- (25,000) 5.83 (64,075) 11.12
------------ ------------- ------------ ------ ------------ ------
Options outstanding, December
31.......................... 562,835 $ 17.70 639,163 $ 11.52 494,987 $ 10.10
------------ ------------- ------------ ------ ------------ ------
Options exercisable, December
31.......................... 136,953 247,041 236,458
------------ ------------ ------------
Weighted-average grant date fair
value of options granted
during the year............... $ 9.33 $ 8.39 $ 5.94
------------- ------ ------
------------- ------ ------
</TABLE>
97
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
The fair market value of options granted during 1997, 1996 and 1995 was
estimated using the Black-Scholes option-pricing model. The following
assumptions were incorporated into the valuation calculation: (i) an option
contract life of 2 1/2 to 10 years, (ii) a stock price volatility of 40% based
on daily market prices for the preceding five year period, (iii) dividends of
$0.60 per share per annum, and (iv) a risk-free interest rate of 5.2% to 7.9%.
The table below provides the range of exercise prices, weighted-average
exercise prices and weighted-average remaining contractual lives for options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES WEIGHTED-AVG.
- ------------------------------------- NUMBER REMAINING WEIGHTED-AVG. WEIGHTED-AVG.
OUTSTANDING AT CONTRACTUAL EXERCISE NUMBER EXERCISABLE EXERCISE
(IN THOUSANDS EXCEPT PER SHARE DATA) 12/31/97 LIFE PRICE AT 12/31/97 PRICE
-------------- --------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
$5.25 to $6.50....................... 128,584 6.5 $ 5.62 83,916 $ 5.66
$8.88 to $9.47....................... 53,890 8.1 9.47 13,593 9.46
$13.77 to $14.02..................... 121,619 7.9 14.01 33,777 13.99
$14.80 to $16.34..................... 71,250 9.3 16.33 161 42.14
$19.64 to $25.50..................... 19,803 8.9 19.77 2,156 20.86
$29.88 to $33.00..................... 166,641 5.0 32.32 2,303 32.60
$42.14 to $104.88.................... 1,048 1.3 78.08 1,048 78.08
-------------- --------
562,835 6.9 $ 17.70 136,953 $ 9.38
-------------- --------
-------------- --------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its Plan. Accordingly, no compensation cost
has been recognized for its stock option plans in the consolidated financial
statements. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method of SFAS No. 123, the Company's net income (loss) and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Net income:
As reported......................................... $ 6,893 $ 9,990 $ (1,143)
Pro forma........................................... 6,015 9,664 (1,342)
Basic net income per share
As reported......................................... 0.58 1.11 (0.17)
Pro forma........................................... 0.51 1.07 (0.19)
Diluted net income per share
As reported......................................... 0.56 1.07 (0.17)
Pro forma........................................... 0.49 1.04 (0.19)
</TABLE>
The pro forma amounts shown above may not be representative of the effects
on reported net income for future periods.
At December 31, 1997, 1996 and 1995, there were also exercisable warrants
outstanding of 418,549, 432,273 and 339,998, respectively, and the weighted
average exercise price of those warrants exercisable was $11.21, $11.14 and
$9.58, respectively. Of the warrants outstanding on December 31, 1997, 277,874
98
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
expire on December 1, 1998, 48,400 expire on September 30, 2000 and 92,275
expire on September 30, 2001.
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31,
1997 1997 1997 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income....................................... $ 26,500 $ 28,909 $ 30,053 $ 30,426
Interest expense...................................... 7,756 8,320 8,521 8,692
--------- --------- --------- ---------
Net interest income................................... 18,744 20,589 21,532 21,734
Provision for loan and lease losses................... 810 1,000 725 675
--------- --------- --------- ---------
Net interest income after provision for loan and lease
losses.............................................. 17,934 19,589 20,807 21,059
Other income.......................................... 2,861 2,982 2,794 2,434
Merger costs.......................................... (66) (3,404) -- (10,731)
Goodwill amortization................................. (666) (706) (709) (703)
Other expenses........................................ (14,263) (14,970) (14,592) (13,489)
--------- --------- --------- ---------
Income (loss) before income taxes..................... 5,800 3,491 8,300 (1,430)
Income taxes.......................................... 2,431 2,380 3,211 1,249
--------- --------- --------- ---------
Net income (loss)..................................... $ 3,369 $ 1,111 $ 5,089 $ (2,676)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares outstanding:
Basic............................................... 11,414.2 11,997.0 11,993.8 12,134.3
Diluted............................................. 11,845.6 12,468.4 12,536.8 12,606.6
Net income (loss) per share:
Basic............................................... $ 0.30 $ 0.09 $ 0.42 $ (0.22)
Diluted............................................. $ 0.28 $ 0.09 $ 0.41 $ (0.22)
Dividends per common share declared and paid.......... $ -- $ -- $ -- $ 0.15
Common stock price range:
High................................................ $ 34.00 $ 37.19 $ 33.25 $ 33.88
Low................................................. $ 19.13 $ 28.63 $ 28.63 $ 29.88
</TABLE>
99
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31,
1996 1996 1996 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income......................................... $ 18,789 $ 19,573 $ 19,725 $ 26,711
Interest expense........................................ 5,736 5,660 5,890 8,112
--------- --------- --------- ---------
Net interest income..................................... 13,053 13,913 13,835 18,599
Provision for loan and lease losses..................... 660 (205) 580 733
--------- --------- --------- ---------
Net interest income after provision for loan and Lease
losses................................................ 12,393 14,118 13,255 17,866
Other income............................................ 2,423 3,457 1,894 3,138
Merger costs............................................ 0 0 0 0
Goodwill amortization................................... (143) (151) (165) (664)
Other expenses.......................................... (12,108) (13,094) (11,806) (16,767)
--------- --------- --------- ---------
Income before income taxes.............................. 2,565 4,330 3,178 3,573
Income taxes............................................ 926 1,639 1,319 (228)
--------- --------- --------- ---------
Net income.............................................. $ 1,639 $ 2,691 $ 1,859 $ 3,801
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares outstanding:
Basic................................................. 8,237.1 8,244.6 8,249.9 11,342.8
Diluted............................................... 8,434.7 8,477.3 8,483.6 11,709.3
Net income per share:
Basic................................................. $ 0.20 $ 0.33 $ 0.23 $ 0.34
Diluted............................................... $ 0.19 $ 0.32 $ 0.22 $ 0.32
Dividends per common share declared and paid............ $ -- $ -- $ -- $ --
Common stock price range:
High.................................................. $ 11.05 $ 17.00 $ 14.88 $ 29.75
Low................................................... $ 8.93 $ 8.50 $ 8.50 $ 13.86
</TABLE>
NOTE 20--SUBSEQUENT ACQUISITION ACTIVITY
ACQUISITION OF SANTA MONICA BANK
On July 30, 1997, the Company and Santa Monica Bank entered into a
definitive agreement pursuant to which Santa Monica Bank would merge with and
into a subsidiary of the Company, subject to approval by the banking regulators
and shareholders of both companies.
On January 27, 1998, the Company consummated the SMB Acquisition through the
merger of Santa Monica Bank with and into Western Bank. The name of Western Bank
was changed to "Santa Monica Bank." As a result of the SMB Acquisition,
approximately 4,980,550 shares of Company Common Stock were issued to certain
holders of common stock of Santa Monica Bank and to certain private investors.
Upon the SMB Acquisition becoming effective, each share of SMB Common Stock
issued and outstanding at the time was converted into the right to receive
either (i) $28.00 in cash or (ii) 0.875 shares of Company Common Stock. Of the
7,084,244 shares of SMB Common Stock outstanding at the time of the SMB
Acquisition, approximately 57.3% elected to receive cash and approximately 42.7%
elected to receive Company Common Stock.
100
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--SUBSEQUENT ACQUISITION ACTIVITY (CONTINUED)
The SMB Acquisition was accounted for using the purchase method of
accounting. At December 31, 1997, Santa Monica Bank had total assets, deposits,
shareholders' equity and number of shares of SMB Common Stock outstanding of
$678 million, $593 million, $81 million and 7.1 million, respectively. These
amounts were not audited in connection with the preparation of these financial
statements. For the year ended December 31, 1997, Santa Monica Bank reported net
income and net income per share of approximately $10.9 million and $1.54,
respectively; these amounts were not audited in connection with the preparation
of these financial statements.
ACQUISITION OF PNB FINANCIAL GROUP
On October 6, 1998, the Company entered into an Agreement and Plan of Merger
(the "PNB Merger Agreement"), between the Company and PNB Financial Group, Inc.
("PNB"), pursuant to which PNB will merge with and into the Company.
Shareholders of PNB will receive one share of Company Common Stock for each
outstanding share of PNB stock in a tax-free exchange. The acquisition is
expected to qualify for pooling-of-interests accounting. At December 31, 1997,
PNB had total assets, deposits, shareholders' equity and number of PNB Common
Shares outstanding of $242.9 million, $211.1 million, $24.0 million, and 2.6
million, respectively; these amounts were not audited in connection with the
preparation of these financial statements.
NOTE 21--NET INCOME PER SHARE
The following is a summary of the calculation of basic and diluted net
income per share for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net income (loss)................................................. $ 6,893 $ 9,990 $ (1,143)
--------- --------- ---------
Weighted average shares outstanding............................... 11,887 9,023 6,917
Basic net income (loss) per share................................. $ 0.58 $ 1.11 $ (0.17)
Weighted average shares outstanding............................... 11,887 9,023 6,917
Effect of dilutive stock options and warrants..................... 429 271 -- (1)
--------- --------- ---------
Diluted shares outstanding........................................ 12,316 9,294 6,917
--------- --------- ---------
--------- --------- ---------
Diluted net income (loss) per share............................... $ 0.56 $ 1.07 $ (0.17)
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Stock options and warrants would be anti-dilutive in 1995 and therefore are
not used for diluted net income per share. Diluted shares outstanding would
have been 7,134.
101
<PAGE>
WESTERN BANCORP
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS.
(a) Exhibits.
The following exhibits are filed with this Current Report on Form 8-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of October 6, 1998, between Western Bancorp and PNB Financial
Group, Inc. (Exhibit 2.2 to Western Bancorp's Current Report on Form 8-K dated October 21, 1998
incorporated herein by reference)
23.1 Consent of KPMG Peat Marwick LLP (Western Bancorp)
23.2 Consent of Dayton & Associates (Monarch Bancorp)
23.3 Consent of Deloitte & Touche LLP (California Commercial Bankshares)
23.4 Consent of Deloitte & Touche LLP (SC Bancorp)
23.5 Consent of Vavrinek, Trine, Day & Co LLP (Bank of Los Angeles)
27.1 Restated Financial Data Schedule;
</TABLE>
102
<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 hereunder duly authorized.
Dated: November 12, 1998
<TABLE>
<S> <C> <C>
WESTERN BANCORP
By: /s/ ARNOLD C. HAHN
-----------------------------------------
Name: Arnold C. Hahn
Title: EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
103
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of October 6, 1998 between Western Bancorp and PNB Financial
Group, Inc. (Exhibit 2.2 to Western Bancorp's Current Report on Form 8-K dated October 21, 1998
incorporated herein by reference.
23.1 Consent of KPMG Peat Marwick LLP (Western Bancorp)
23.2 Consent of Dayton & Associates (Monarch Bancorp)
23.3 Consent of Deloitte & Touche LLP (California Commercial Bankshares)
23.4 Consent of Deloitte & Touche LLP (SC Bancorp)
23.5 Consent of Vavrinek, Trine, Day & Co LLP (Bank of Los Angeles)
27.1 Restated Financial Data Schedule;
</TABLE>
104
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Western Bancorp:
We consent to the use of our report dated October 23, 1998, incorporated by
reference herein, with respect to the supplemental consolidated financial
statements of Western Bancorp as of December 31, 1997 and 1996, and the related
supplemental consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the years in the two year period ended
December 31, 1997, which report appears in the current report on Form 8-K of
Western Bancorp dated November 12, 1998. Our report, dated October 23, 1998,
contains explanatory paragraphs indicating that: (i) We did not audit the 1996
consolidated financial statements of California Commercial Bankshares. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for California
Commercial Bankshares in the 1996 supplemental consolidated financial statements
of Western Bancorp, is based on the report of the other auditors; (ii) We did
not audit the 1996 consolidated financial statements of SC Bancorp. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for SC Bancorp in
the 1996 supplemental consolidated financial statements of Western Bancorp, is
based on the report of the other auditors; (iii) We did not audit either the
1996 or 1997 financial statements of Bank of Los Angeles. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Bank of Los Angeles
in the 1996 and 1997 supplemental consolidated financial statements of Western
Bancorp, is based on the report of the other auditors; (iv) The consolidated
statements of operations, changes in shareholders' equity and cash flows of
Western Bancorp (formerly Monarch Bancorp) for the year ended December 31, 1995
were audited by other auditors; (v) Separate consolidated financial statements
of California Commercial Bankshares also included in the 1995 supplemental
consolidated financial statements were audited by other auditors; (vi) Separate
consolidated financial statements of SC Bancorp also included in the 1995
supplemental consolidated financial statements were audited by other auditors;
(vii) Separate consolidated financial statements of Bank of Los Angeles also
included in the 1995 supplemental consolidated financial statements were audited
by other auditors; and (viii) We also audited the combination of the
supplemental consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended December 31, 1995, after restatement
for the 1997 and 1998 poolings-of-interests.
KPMG Peat Marwick LLP
Los Angeles, California
November 12, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent, as successor accountants of Dayton & Associates (said firm
being merged with and into Vavrinek, Trine, Day & Co., LLP on September 1, 1996)
to the incorporation by reference of their Independent Auditor's Report dated
February 29, 1996 regarding the consolidated balance sheets of Monarch Bancorp
and Subsidiaries as of December 31, 1995 and December 31, 1994, and the related
statements of operations, changes in capital, and cash flows for each of the two
years in the period ended December 31, 1995, in the Form 8-K filed by Western
Bancorp with the Securities and Exchange Commission and Form S-8 dated June 6,
1997, Form S-8 dated January 21, 1998 and Form S-3 dated May 27, 1998.
VAVRINEK, TRINE, DAY & CO., LLP
Laguna Hills, CA
November 13, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-44609 and No. 333-28633 on Form S-8, and No. 333-53635 on Form S-3 of
Western Bancorp of our report, dated January 24, 1997 (March 17, 1997 as to
Notes 7 & 13), on the consolidated balance sheet of California Commercial
Bancshares and subsidiaries as of December 31, 1996 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1996, appearing in this
Current Report on Form 8-K of Western Bancorp.
DELOITTE & TOUCHE LLP
November 12, 1998
Los Angeles, California
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-44609 and No. 333-28633 on Form S-8, and No. 333-53635 on Form S-3 of
Western Bancorp of our report, dated January 24, 1997, on the consolidated
balance sheet of SC Bancorp and subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1996,
appearing in this Current Report on Form 8-K of Western Bancorp.
DELOITTE & TOUCHE LLP
November 12, 1998
Los Angeles, California
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our Independent Auditor's Report dated
January 23, 1998 regarding the balance sheets of Bank of Los Angeles as of
December 31, 1997 and 1996 and the related statements of operations, changes in
shareholder's equity and cash flows for each of the three years in the period
ending December 31, 1997, in the Form 8-K filed by Western Bancorp with the
Securities and Exchange Commission and Form S-8 dated June 6, 1997, Form S-8
dated January 21, 1998 and Form S-3 dated May 27, 1998.
/s/ VAVRINEK, TRINE, DAY & CO., LLP
- ---------------------------------------------
VAVRINEK, TRINE, DAY & CO., LLP
Rancho Cucamonga, CA
November 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 9-MOS 9-MOS YEAR YEAR
YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1997 DEC-31-1996
DEC-31-1995
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1997 JAN-01-1996
JAN-01-1995
<PERIOD-END> SEP-30-1998 SEP-30-1997 DEC-31-1997 DEC-31-1996
DEC-31-1995
<CASH> 139,365 0 117,977 104,341
0
<INT-BEARING-DEPOSITS> 770 0 2,125 0
0
<FED-FUNDS-SOLD> 153,664 0 168,257 44,517
0
<TRADING-ASSETS> 0 0 0 0
0
<INVESTMENTS-HELD-FOR-SALE> 209,707 0 213,398 342,383
0
<INVESTMENTS-CARRYING> 93,088 0 48,138 7,057
0
<INVESTMENTS-MARKET> 93,559 0 48,247 7,032
0
<LOANS> 1,467,132 0 1,023,367 889,624
0
<ALLOWANCE> 23,563 0 18,713 17,439
0
<TOTAL-ASSETS> 2,273,027 0 1,655,543 1,469,618
0
<DEPOSITS> 1,896,866 0 1,464,805 1,292,610
0
<SHORT-TERM> 12,447 0 12,751 20,290
0
<LIABILITIES-OTHER> 14,658 0 15,429 13,197
0
<LONG-TERM> 20,445 0 1,849 1,842
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 328,136 0 160,851 142,761
0
<OTHER-SE> 475 0 (142) (1,082)
0
<TOTAL-LIABILITIES-AND-EQUITY> 2,273,027 0 1,655,543 1,469,618
0
<INTEREST-LOAN> 98,484 67,716 91,868 66,076
53,822
<INTEREST-INVEST> 13,591 14,282 18,445 14,870
12,301
<INTEREST-OTHER> 8,825 3,464 5,575 3,852
3,325
<INTEREST-TOTAL> 120,900 85,462 115,888 84,798
69,448
<INTEREST-DEPOSIT> 30,978 23,549 31,949 24,212
20,709
<INTEREST-EXPENSE> 32,352 24,597 33,289 25,398
21,656
<INTEREST-INCOME-NET> 88,548 60,865 82,599 59,400
47,792
<LOAN-LOSSES> 450 2,535 3,210 1,768
8,253
<SECURITIES-GAINS> 481 342 342 276
(738)
<EXPENSE-OTHER> 61,252 49,190 74,299 54,898
51,119
<INCOME-PRETAX> 40,856 17,591 16,164 13,646
(2,876)
<INCOME-PRE-EXTRAORDINARY> 21,133 9,569 6,893 9,990
(1,143)
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 21,133 9,569 6,893 9,990
(1,143)
<EPS-PRIMARY> 1.23 0.81 0.58 1.11
(0.17)
<EPS-DILUTED> 1.20 0.78 0.56 1.07
(0.17)
<YIELD-ACTUAL> 6.20 6.08 6.08 5.96
5.87
<LOANS-NON> 15,585 11,753 18,951 18,721
0
<LOANS-PAST> 507 1,642 203 193
0
<LOANS-TROUBLED> 0 0 9,453 7,281
0
<LOANS-PROBLEM> 15,839 17,004 17,972 23,828
0
<ALLOWANCE-OPEN> 18,713 17,439 17,439 15,488
13,748
<CHARGE-OFFS> 5,772 5,354 5,874 6,304
9,984
<RECOVERIES> 1,515 1,541 2,056 1,326
1,722
<ALLOWANCE-CLOSE> 23,563 17,204 18,713 17,439
15,488
<ALLOWANCE-DOMESTIC> 23,563 17,204 18,713 17,439
15,488
<ALLOWANCE-FOREIGN> 0 0 0 0
0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
0
</TABLE>
