<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-13551
------------------------
WESTERN BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3863296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4100 NEWPORT PLACE, SUITE 900,
NEWPORT BEACH, CALIFORNIA 92660
(Address of principal executive offices)
Registrant's telephone number: (949) 863-2444
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 12, 1999: 21,188,954 shares of common stock, no par
value.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
PART I--FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited)................................... 3
Unaudited Condensed Consolidated Balance Sheets................................. 3
Unaudited Condensed Consolidated Statements of Income........................... 4
Unaudited Condensed Consolidated Statements of Cash Flows....................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.................. 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 13
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk....................... 26
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................... 26
ITEM 2. Changes in Securities and Use of Proceeds....................................... 26
ITEM 3. Defaults Upon Senior Securities................................................. 26
ITEM 4. Submission of Matters to a Vote of Security Holders............................. 26
ITEM 5. Other Information............................................................... 26
ITEM 6. Exhibits and Reports on Form 8-K................................................ 27
SIGNATURES................................................................................................ 28
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Assets:
Cash and due from banks.............................................................. $ 129,495 $ 131,787
Federal funds sold................................................................... 173,249 92,752
------------ ------------
Total cash and cash equivalents.................................................... 302,744 224,539
------------ ------------
Securities:
FRB and FHLB stock................................................................. 16,479 9,760
Securities available for sale; amortized cost of $249,394 and $354,208............. 244,431 355,324
------------ ------------
Total securities................................................................. 260,910 365,084
Loans and leases held for investment, net............................................ 1,692,793 1,642,211
Loans held for sale, net............................................................. 73,235 130,255
Premises and equipment............................................................... 32,330 33,536
Other real estate owned.............................................................. 3,677 4,361
Goodwill............................................................................. 140,038 145,514
Other assets......................................................................... 44,166 40,380
------------ ------------
Total assets..................................................................... $ 2,549,893 $2,585,880
------------ ------------
------------ ------------
Liabilities and shareholders' equity:
Liabilities:
Noninterest-bearing deposits......................................................... $ 830,967 $ 868,965
Interest-bearing deposits............................................................ 1,289,815 1,303,304
------------ ------------
Total deposits................................................................... 2,120,782 2,172,269
Borrowings........................................................................... 29,616 23,722
Accrued interest payable and other liabilities....................................... 37,795 37,814
------------ ------------
Total liabilities................................................................ 2,188,193 2,233,805
Shareholders' Equity:
Preferred stock; 5,000,000 shares authorized, and none issued........................ -- --
Common stock; 100,000,000 shares authorized; 21,167,431 and 20,858,512 outstanding at
June 30, 1999 and December 31, 1998, respectively.................................. 327,243 322,566
Retained earnings.................................................................... 37,336 28,856
Accumulated other comprehensive income--unrealized net gain (loss) on securities
available for sale, net of tax..................................................... (2,879) 653
------------ ------------
Total shareholders' equity....................................................... 361,700 352,075
------------ ------------
Total liabilities and shareholders' equity..................................... $ 2,549,893 $2,585,880
------------ ------------
------------ ------------
Number of common shares outstanding.................................................. 21,167.4 20,858.5
Common shareholders' equity per share................................................ $ 17.09 $ 16.88
Tangible common shareholders' equity per share....................................... $ 10.47 $ 9.90
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
3
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 (A) 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans and leases............................... $ 77,448 $ 73,735 $ 39,142 $ 38,610
Interest on investment securities................................... 7,776 9,288 4,127 4,563
Interest on federal funds sold...................................... 3,029 6,184 1,420 3,418
--------- --------- --------- ---------
Total interest income............................................. 88,253 89,207 44,689 46,591
Interest expense:
Interest expense on deposits........................................ 19,800 23,062 9,798 11,857
Interest expense on borrowed funds.................................. 690 991 360 544
--------- --------- --------- ---------
Total interest expense............................................ 20,490 24,053 10,158 12,401
--------- --------- --------- ---------
Net interest income:.................................................. 67,763 65,154 34,531 34,190
Less: provision for loan and lease losses........................... 1,350 650 675 350
--------- --------- --------- ---------
Net interest income after provision for loan and lease losses......... 66,413 64,504 33,856 33,840
Noninterest income:
Service charges and fees on deposit accounts........................ 4,792 4,979 2,347 2,545
Trust fees.......................................................... 2,288 1,615 1,193 978
Escrow fees......................................................... 488 532 273 273
Mortgage related fees and commissions............................... 4,106 3,577 1,875 1,960
Other fees and commissions.......................................... 2,196 1,754 1,133 1,024
Gain on sale of loans............................................... 6,695 7,141 3,162 3,908
Securities gains.................................................... -- 200 -- 76
Other income........................................................ 789 462 490 337
--------- --------- --------- ---------
Total noninterest income.......................................... 21,354 20,260 10,473 11,101
Noninterest expense:
Salaries and benefits............................................... 27,730 27,772 13,478 14,439
Occupancy, furniture and equipment.................................. 6,688 7,528 3,370 3,999
Advertising and business development................................ 920 885 455 456
Other real estate owned............................................. (340) (156) 28 (354)
Professional services............................................... 1,430 2,118 670 835
Telephone, stationery and supplies.................................. 2,663 2,088 1,276 1,045
Goodwill amortization............................................... 5,476 4,798 2,738 2,725
Data processing..................................................... 1,215 1,126 655 568
Customer services cost.............................................. 1,621 1,706 744 989
Litigation settlement costs......................................... 1,850 -- 1,850 --
Merger costs........................................................ -- 79 -- 79
Other............................................................... 3,931 4,865 1,890 2,930
--------- --------- --------- ---------
Total noninterest expense......................................... 53,184 52,809 27,154 27,711
--------- --------- --------- ---------
Income before income taxes.......................................... 34,583 31,955 17,175 17,230
Income taxes........................................................ 16,639 14,900 8,251 8,124
--------- --------- --------- ---------
Net income........................................................ $ 17,944 $ 17,055 $ 8,924 $ 9,106
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding:
Basic............................................................... 20,985.5 19,515.4 21,081.4 20,451.9
Diluted............................................................. 21,268.5 20,165.8 21,321.5 21,127.2
Net income per share:
Basic............................................................... $ 0.86 $ 0.87 $ 0.42 $ 0.45
Diluted............................................................. $ 0.84 $ 0.85 $ 0.42 $ 0.43
Dividends declared.................................................... $ 0.45 $ 0.30 $ 0.225 $ 0.15
</TABLE>
- ------------------------------
a) Santa Monica Bank was acquired on January 27, 1998. Accordingly, Santa
Monica Bank's operating results are included only since February of the 1998
period. Due to the relatively large size of the acquisition of Santa Monica
Bank, any comparison of data for the six month period ended June 30, 1998 to
data for the current period may not be meaningful. See Note 2 and Note 3 of
"Notes to Unaudited Condensed Consolidated Financial Statements."
See "Notes to Unaudited Condensed Consolidated Financial Statements."
4
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
<S> <C> <C>
1999 1998
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash flow from operating activities:
Net income.............................................................................. $ 17,944 $ 17,055
Adjustments to reconcile net income to net cash provided by operations:
Gain on sale of securities............................................................ -- (200)
Gain on sale of premises and equipment................................................ (82) (10)
Gain on sale of other real estate owned............................................... (403) (345)
Provision for loan and lease losses................................................... 1,350 650
Goodwill amortization................................................................. 5,476 4,798
Depreciation.......................................................................... 2,726 2,091
Gain on sale of loans................................................................. (6,695) (7,141)
Provision for indemnification losses.................................................. -- 680
Net increase in loans originated for sale............................................. (738,252) (737,456)
Proceeds from sale of loans........................................................... 801,548 733,458
Amortization of (discounts) premiums on investment securities......................... (454) (893)
Decrease in unearned lease income..................................................... (59) (131)
Net increase (decrease) in accrued interest payable and other liabilities............. 2,529 (1,199)
Net (increase) decrease in other assets............................................... (3,786) 4,953
----------- -----------
Net cash provided by operating activities........................................... 81,842 16,310
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale........................ 26 36,078
Principal payments received on investment securities available for sale............... 281,961 183,066
Principal payments received on investment securities held to maturity................. -- 42,538
Purchase of investment securities available for sale.................................. (176,720) (138,944)
Purchase of investment securities held to maturity.................................... -- (81,288)
Purchase of FHLB or FRB Stock......................................................... (8,105) (1,093)
Sale of FHLB or FRB Stock............................................................. 1,386 --
Proceeds from sale of premises and equipment.......................................... 139 327
Increase in net loans and leases...................................................... (55,240) (19,539)
Recoveries of loans and investment in leases.......................................... 2,546 1,058
Additions to premises and equipment................................................... (1,577) (4,306)
Reductions (increases) to other real estate owned..................................... 2,327 5,586
Changes in assets and liabilities due to the acquisition of Santa Monica Bank:
Increase in investments available for sale.......................................... -- (89,238)
Increase in loans................................................................... -- (387,609)
Increase in other real estate owned................................................. -- (3,318)
Increase in other assets............................................................ -- (4,277)
Increase in premises and equipment.................................................. -- (16,328)
Increase in deposits................................................................ -- 584,095
Increase in borrowed funds.......................................................... -- 1,960
Increase in other liabilities....................................................... -- 5,988
Goodwill............................................................................ -- (119,656)
----------- -----------
Net cash provided by (used in) investing activities................................. 46,743 (4,900)
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash flow from financing activities:
Cash received from exercise of options................................................ 4,678 1,161
Proceeds from issuance of common stock................................................ -- 150,071
Common stock repurchase and retired................................................... -- (11)
Dividends paid........................................................................ (9,465) (4,710)
Net decrease in deposits.............................................................. (51,487) (89,759)
Additional borrowings, net of repayments.............................................. 5,894 11,319
----------- -----------
Net cash provided by financing activities........................................... (50,380) 68,071
Net increase in cash and cash equivalents............................................... 78,205 79,481
Cash and cash equivalents at the beginning of the period................................ 224,539 303,544
----------- -----------
Cash and cash equivalents at the end of the period...................................... $ 302,744 $ 383,025
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Dividends declared in prior period and paid in current period........................... $ -- $ 2,221
Property acquired through foreclosure................................................... $ 1,240 $ 1,319
Loans to facilitate the sale of OREO.................................................... $ -- $ 256
Increase (decrease) in unrealized gain on securities available for sale, net of tax..... $ (3,532) $ 217
Cash paid for interest.................................................................. $ 20,663 $ 23,868
Cash paid for taxes..................................................................... $ 13,510 $ 855
Acquisition of SMB:
Fair value of assets acquired......................................................... $ -- $ 794,782
Common stock issued to shareholder's of SMB........................................... -- (84,669)
Cash paid............................................................................. -- (118,070)
----------- -----------
Liabilities assumed................................................................... $ -- $ 592,043
----------- -----------
----------- -----------
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
6
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1--BASIS OF PRESENTATION
Western Bancorp (the "Company") is the holding company for Southern
California Bank ("SCB"), Santa Monica Bank ("SMB" and, together with SCB, the
"Banks") and Venture Partners, Inc. The unaudited condensed consolidated
financial statements of the Company included herein reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary to present a fair statement of the results for the interim
periods indicated. Certain reclassifications have been made to the unaudited
condensed consolidated financial statements for 1998 to conform to the 1999
presentation. Certain information and note disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission"). The
results of operations for the three and six months ended June 30, 1999 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year.
The preparation of unaudited condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates subject to change include the allowance for loan and lease
losses, the carrying value of other real estate owned, the carrying value of
loans held for sale, the deferred tax asset and the liability for recourse and
representations and warranties related to loans sold.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report filed on Form 10-K for the
year ended December 31, 1998.
NOTE 2--ACQUISITIONS
U.S. BANCORP MERGER
On May 19, 1999 the Company signed a definitive agreement to be acquired by
U.S. Bancorp, subject to customary conditions for similar acquisitions. In the
proposed transaction, each share of the Company's common stock will be exchanged
for 1.2915 shares of U.S. Bancorp common stock. The transaction is expected to
close by October 1999.
SMB ACQUISITION
On January 27, 1998, the Company acquired SMB through the merger of SMB with
and into Western Bank, a banking subsidiary of the Company (the "SMB
Acquisition"). As part of the SMB Acquisition, the name of Western Bank was
changed to "Santa Monica Bank". Upon completion 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") at the election of the holder of such
shares of SMB Common Stock. Of the 7,084,244 shares of SMB Common Stock
outstanding at the time of the SMB Acquisition, approximately 57.2 percent
elected to receive the Cash Consideration, resulting in a payment of
approximately $113,451,000 in the aggregate, and approximately 42.8 percent
elected to receive the Stock Consideration, resulting in the issuance of
approximately 2,653,000 shares of the Company's Common Stock. In order to fund a
part of the Cash Consideration payments, the Company issued an additional
2,327,550 shares of its Common Stock to certain private investors for $28 per
share, or
7
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 2--ACQUISITIONS (CONTINUED)
$65,171,400 in the aggregate. Accordingly, in the aggregate, approximately
4,980,550 shares of the Company's 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 the Company's Common Stock and
cash.
The SMB Acquisition was accounted for using the purchase method of
accounting. Consequently, the results of operations of Santa Monica Bank are
only included in the Company's results since the January 27, 1998 acquisition
date. In conjunction with the SMB Acquisition, the Company and Santa Monica Bank
incurred after-tax merger costs of approximately $8.4 million representing
investment banking fees, filing and professional fees, employee compensation,
and costs of computer conversions and consolidation. See Note 3 of "Notes to
Unaudited Condensed Consolidated Financial Statements."
BKLA ACQUISITION
On October 23, 1998, the Company acquired all of the issued and outstanding
shares of common stock of Bank of Los Angeles, a California state-chartered bank
operating in the western part of Los Angeles County ("BKLA"), through the merger
of BKLA with and into SMB with SMB being the surviving corporation (the "BKLA
Acquisition"). The exchange ratio was 0.4224 shares of Company Common Stock
issued for each share of common stock of BKLA ("BKLA Common Stock"), pursuant to
which approximately 2,214,350 shares of the Company's Common Stock were issued
as consideration to holders of BKLA Common Stock and all of the then issued and
outstanding shares of BKLA Common Stock were cancelled. The BKLA Acquisition was
accounted for using the pooling-of-interests method of accounting.
The financial information as of all dates and for all periods prior to the
BKLA Acquisition 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 Acquisition had been in effect as of all dates and for all
periods presented.
PNB MERGER
On December 30, 1998, PNB Financial Group, Inc. ("PNB"), a bank holding
company, merged with and into the Company (the "PNB Merger") in a transaction
accounted for using the pooling-of-interests method of accounting. In the PNB
Merger, 2,779,733 shares of the Company's Common Stock were issued based on a
1-for-1 exchange ratio, and all of the then outstanding shares of common stock
of PNB ("PNB Common Stock") were cancelled. All options to purchase shares of
PNB Common Stock were converted to options to purchase shares of the Company's
Common Stock. On February 26, 1999, the Company merged Pacific National Bank, a
wholly-owned subsidiary of PNB prior to the PNB Merger ("Pacific"), with and
into SCB (the "Pacific Merger"). In connection with the Pacific Merger, the
Beverly Hills branch of Pacific was sold to SMB and consolidated with an SMB
branch and the Orange and Newport Beach branch offices of Pacific were
consolidated with branches of SCB.
The financial information as of all dates and for all periods prior to the
PNB Merger presented herein has been restated to reflect the combined
consolidated financial condition and results of operations of the Company and
PNB as if the PNB Merger had been in effect as of all dates and for all periods
presented.
8
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 3--UNAUDITED SUMMARY PRO FORMA DATA
The following table shows unaudited summary pro forma income statement
information for the six month period ended June 30, 1998, as if the SMB
Acquisition was consummated at the beginning of the period compared to the
actual results for the same period in 1999. As the SMB Acquisition was
consummated on January 27, 1998, the actual results for the Company for the six
month period ended June 30, 1998, already include the results of SMB for the
months of February through June. January 1998 results for SMB and an additional
month of amortization of purchase accounting entries are included in the pro
forma results for the six months ended June 30, 1998. The pro forma income
statement adjustments included below are based on management's estimates of
costs and the fair value adjustments associated with this transaction. The
unaudited summary pro forma income statement information is not necessarily
indicative of the results that would have occurred had the SMB Acquisition been
consummated on the dates indicated or that may be achieved in the future.
UNAUDITED SUMMARY PRO FORMA INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998
-------------- --------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Interest income............................................................... $ 88,253 $ 93,138
Interest expense.............................................................. 20,490 25,249
-------------- --------------
Net interest income....................................................... 67,763 67,889
Provision for loan and lease losses........................................... 1,350 730
-------------- --------------
Net interest income after provision for loan and lease losses............. 66,413 67,159
Noninterest income............................................................ 21,354 20,874
Noninterest expense........................................................... 53,184 55,836
-------------- --------------
Income before taxes....................................................... 34,583 32,197
Income tax expense........................................................ 16,639 15,261
-------------- --------------
Net income................................................................ $ 17,944 $ 16,936
-------------- --------------
-------------- --------------
Net income per share:
Basic..................................................................... $ 0.86 $ 0.83
Diluted................................................................... $ 0.84 $ 0.81
Weighted average shares outstanding:
Basic..................................................................... 20,985.5 20,345.5
Diluted................................................................... 21,268.5 20,995.9
</TABLE>
NOTE 4--STATEMENT OF COMPREHENSIVE INCOME
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
9
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 4--STATEMENT OF COMPREHENSIVE INCOME (CONTINUED)
investments in certain debt and equity securities (i.e., securities available
for sale). The Company's statement of comprehensive income for the periods
presented is as follows:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
--------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income.............................................................. $ 17,944 $ 17,055 $ 8,924 $ 9,106
Other comprehensive income (loss), net of related income taxes:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period......... (3,532) 310 (1,813) 143
Less reclassification of realized gains included in income.......... -- (93) -- --
--------- --------- --------- ---------
(3,532) 217 (1,813) 143
--------- --------- --------- ---------
Comprehensive income.................................................... $ 14,412 $ 17,272 $ 7,111 $ 9,249
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 six month periods ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income.................................................... $ 17,944 $ 17,055 $ 8,924 $ 9,106
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding........................... 20,985.5 19,515.4 21,081.4 20,451.9
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic net income per share.................................... $ 0.86 $ 0.87 $ 0.42 $ 0.45
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding........................... 20,985.5 19,515.4 21,081.4 20,451.9
Effect of dilutive stock options and warrants................. 283.0 650.4 240.1 675.3
---------- ---------- ---------- ----------
Diluted shares outstanding.................................... 21,268.5 20,165.8 21,321.5 21,127.2
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net income per share.................................. $ 0.84 $ 0.85 $ 0.42 $ 0.43
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
10
<PAGE>
NOTE 6--SEGMENT INFORMATION
The Company operates in two business segments: banking and mortgage banking.
These segments are managed separately because they require different resources
and service different markets. The mortgage banking segment was acquired through
the PNB Merger which was consummated on December 30, 1998.
The banking segment provides traditional banking services and products to
banking customers in the markets served by the Banks. These services and
products include deposits, commercial loans, real estate loans, consumer loans,
leases, and trust and escrow services. In addition, the Banks maintain
investment portfolios consisting of different types of debt obligations and
equity securities. The banking segment derives its income primarily from the
interest it earns on loans and investments and fees for services provided. These
revenues are offset by interest expense on deposits and borrowings. In addition,
the banking segment provides for losses on loans and leases. The significant
general and administrative expenses of the banking segment include salaries and
benefits, occupancy, communications, professional services, data processing and
regulatory assessments. Goodwill amortization is allocated to the banking
segment as such expense relates to acquisitions of banking organizations.
The Company provides mortgage banking services through a division of SCB
under the name "PNB Mortgage". The mortgage banking segment originates
residential mortgage loans for sale to third parties on a servicing-released
basis, which are funded by the banking segment, and derives its income from the
gain on sale of loans and processing fees on the related loans. PNB Mortgage
does not retain the servicing on the mortgage loans it sells. The gain on sale
of loans, which is the main source of revenue for the mortgage banking segment,
is offset by general and administrative expenses which include salaries and
benefits, occupancy, insurance and professional services. The mortgage banking
segment provides for losses on sold loans to indemnify investors against losses
stemming from recourse and breaches of representations or warranties through
purchasing insurance and maintaining the indemnification reserve.
Income taxes are allocated to each segment based on their separate income or
loss before income taxes. The Company evaluates segment performance based on the
net income of each segment. The Company does not allocate the interest income
earned on mortgage loans held for sale or the interest expense related to the
cost of funding the mortgage banking segment's originations. There are no other
intersegment sales, revenues or transfers.
The following tables reconcile significant portions, but not all, of the
banking and mortgage banking segments' financial information.
<TABLE>
<CAPTION>
REVENUE (EXPENSE)
EXTERNAL REVENUE (1) FROM OTHER TOTAL
OPERATING UNITS NET INCOME ASSETS
-------------------- -------------------- -------------------- ---------
AT OR FOR THE THREE MONTH PERIOD ENDED JUNE 30,
---------------------------------------------------------------------------
BUSINESS SEGMENT 1999 1998 1999 1998 1999 1998 1999
- --------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Banking...................................... $ 40,067 $ 39,479 $ -- $ -- $ 8,284 $ 8,227 $2,470,350
Mortgage Banking............................. 4,937 5,812 -- -- 640 879 79,543
Eliminations................................. -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Totals....................................... $ 45,004 $ 45,291 $ -- $ -- $ 8,924 $ 9,106 $2,549,893
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
BUSINESS SEGMENT 1998
- --------------------------------------------- ---------
<S> <C>
Banking...................................... $2,459,795
Mortgage Banking............................. 114,130
Eliminations................................. --
---------
Totals....................................... $2,573,925
---------
---------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
REVENUE (EXPENSE)
EXTERNAL REVENUE (1) FROM OTHER TOTAL
OPERATING UNITS NET INCOME ASSETS
-------------------- -------------------- -------------------- ---------
AT OR FOR THE SIX MONTH PERIOD ENDED JUNE 30,
---------------------------------------------------------------------------
BUSINESS SEGMENT 1999 1998 1999 1998 1999 1998 1999
- --------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Banking...................................... $ 78,416 74,900 $ -- $ -- $ 16,460 $ 15,426 $2,470,350
Mortgage Banking............................. 10,701 10,514 -- -- 1,484 1,629 79,543
Eliminations................................. -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Totals....................................... $ 89,117 $ 85,414 $ -- $ -- $ 17,944 $ 17,055 $2,549,893
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
BUSINESS SEGMENT 1998
- --------------------------------------------- ---------
<S> <C>
Banking...................................... $2,459,795
Mortgage Banking............................. 114,130
Eliminations................................. --
---------
Totals....................................... $2,573,925
---------
---------
</TABLE>
- ------------------------------
(1) External revenue represents net interest income and noninterest income;
there is no revenue from foreign sources.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following tables and data set forth certain statistical information
relating to the Company as of June 30, 1999, and for the three and six month
periods ended June 30, 1999, and June 30, 1998. This discussion should be read
in conjunction with the unaudited condensed consolidated financial statements
and notes thereto as of June 30, 1999, included herein, and 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, 1998.
When the Company uses or incorporates by reference in this Quarterly Report
on Form 10-Q (the "Quarterly Report") the words "anticipate," "estimate,"
"expect," "project," "intend," "commit," "believe" and similar expressions, the
Company intends to identify certain forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions, including those
described in this Quarterly Report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected,
projected, intended, committed or believed.
Since December 31, 1998, the Company's total assets have declined by
approximately $36.0 million. The major components of this decline in assets are
a decrease of approximately $110.9 million in securities available for sale and
a decrease of approximately $57.0 million in loans held for sale. The reduction
in securities resulted primarily from maturities and principal payments of
approximately $282.0 million offset partially by purchases of approximately
$176.7 million in securities available for sale. The reduction in loans held for
sale is due to a decrease in mortgage loan originations at PNB Mortgage, a
division of SCB, resulting from the increase in mortgage rates during the second
quarter of 1999. Since December 31, 1998, total cash and cash equivalents
increased by approximately $78.2 million and net loans and leases held for
investment increased by approximately $50.6 million. The increase in loans is a
result of the overall increase in economic activity in Southern California and
the Company's success in obtaining new business.
Since December 31, 1998, the Company's total deposits have declined by
approximately $51.5 million including a decline of approximately $38.0 million
in noninterest-bearing deposits and a decline in interest-bearing deposits of
approximately $13.5 million. This decline resulted primarily from the
seasonality of deposits with deposits during the first half of the year
generally being lower than the end of a year. Some deposit run-off ocurred due
to the closure of branches associated with the PNB Merger and the BKLA
Acquisition and the Company's decision not to pay higher rates to attract
deposits due to its liquidity position.
Consolidated net income for the quarter ended June 30, 1999 was $8,924,000
or $0.42 per diluted share. This compares with consolidated net income of
$9,106,000 or $0.43 per diluted share, for the quarter ended June 30, 1998.
Consolidated net income, before goodwill amortization and before after-tax
litigation settlement and merger costs, for the same three month periods in 1999
and 1998 was $12,735,000 and $11,910,000, respectively, or $0.60 and $0.56 per
diluted share, respectively.
Consolidated net income for the six months ended June 30, 1999 was
$17,944,000 or $0.84 per diluted share. This compares with consolidated net
income of $17,055,000 or $0.85 per diluted share, for the six months ended June
30, 1998. Consolidated net income, before goodwill amortization and before
after-tax litigation settlement and merger costs, for the same six month periods
in 1999 and 1998 was $24,493,000 and $21,932,000, respectively, or $1.15 and
$1.09 per diluted share, respectively.
During the second quarter of 1999, the Board of Directors of the Company
approved the declaration of a quarterly dividend of $0.225 per common share
which was paid on June 25, 1999, to shareholders of record on June 4, 1999.
13
<PAGE>
RESULTS OF OPERATIONS
OPERATING INCOME. The Company defines operating income as net income before
goodwill amortization and before after-tax merger and litigation settlement
costs. The Company's operating return on average tangible assets was 2.19% in
the second quarter of 1999 versus 1.98% in the second quarter of 1998 and 2.01%
in the first quarter of 1999. As a result of the integration of BKLA at the end
of 1998 and the integration of PNB during the first quarter of 1999, the
operating efficiency ratio (expenses before goodwill amortization and litigation
settlement costs divided by net interest income plus noninterest income)
improved from 55.0% in the second quarter of 1998 to 52.8% in the first quarter
of 1999 to 50.1% in the second quarter of 1999. These improvements are a result
of improved credit quality, a higher net interest margin, acquisition
consolidations and general improvements in efficiency.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE INFORMATION:
Number of shares (weighted average, in thousands)............... 20,985.5 19,515.4 21,081.4 20,451.9
Diluted shares (weighted average, in thousands)................. 21,268.5 20,165.8 21,321.5 21,127.2
Basic income per share.......................................... $ 0.86 $ 0.87 $ 0.42 $ 0.45
Diluted income per share........................................ $ 0.84 $ 0.85 $ 0.42 $ 0.43
BEFORE AFTER-TAX MERGER AND LITIGATION SETTLEMENT COSTS
Basic income per share........................................ $ 0.91 $ 0.88 $ 0.47 $ 0.45
Diluted income per share...................................... $ 0.89 $ 0.85 $ 0.47 $ 0.43
BEFORE AFTER-TAX MERGER AND LITIGATION SETTLEMENT COSTS AND
GOODWILL AMORTIZATION
Basic income per share........................................ $ 1.17 $ 1.12 $ 0.60 $ 0.58
Diluted income per share...................................... $ 1.15 $ 1.09 $ 0.60 $ 0.56
PROFITABILITY MEASURES:
Return on average assets...................................... 1.45% 1.40% 1.45% 1.42%
Return on average equity...................................... 10.0% 10.8% 9.9% 10.4%
BEFORE AFTER-TAX MERGER AND LITIGATION SETTLEMENT COSTS AND
GOODWILL AMORTIZATION
Return on average tangible assets............................. 2.10% 1.91% 2.19% 1.98%
Return on average equity...................................... 13.7% 13.9% 14.1% 13.7%
Efficiency ratio.............................................. 51.5% 56.1% 50.1% 55.0%
ADJUSTMENTS TO NET INCOME (IN THOUSANDS):
Net income...................................................... $ 17,944 $ 17,055 $ 8,924 $ 9,106
Litigation settlement costs..................................... 1,850 -- 1,850 --
Merger costs.................................................... -- 79 -- 79
Tax benefits.................................................... 777 -- 777 --
--------- --------- --------- ---------
After-tax merger costs and litigation settlement costs.......... 1,073 79 1,073 79
--------- --------- --------- ---------
Net income excluding after-tax merger and litigation
settlement costs.......................................... 19,017 17,134 9,997 9,185
Goodwill amortization........................................... 5,476 4,798 2,738 2,725
--------- --------- --------- ---------
OPERATING INCOME.............................................. $ 24,493 $ 21,932 $ 12,735 $ 11,910
--------- --------- --------- ---------
--------- --------- --------- ---------
REVENUES (IN THOUSANDS):
Net interest income............................................. $ 67,763 $ 65,154 $ 34,531 $ 34,190
Noninterest income.............................................. 21,354 20,260 10,473 11,101
--------- --------- --------- ---------
Revenues...................................................... $ 89,117 $ 85,414 $ 45,004 $ 45,291
--------- --------- --------- ---------
--------- --------- --------- ---------
ADJUSTMENTS TO EXPENSES (IN THOUSANDS):
Noninterest expense............................................. $ 53,184 $ 52,809 $ 27,154 $ 27,711
Litigation settlement costs..................................... (1,850) -- (1,850) --
Merger costs.................................................... -- (79) -- (79)
Goodwill amortization........................................... (5,476) (4,798) (2,738) (2,725)
--------- --------- --------- ---------
Operating expenses............................................ $ 45,858 $ 47,932 $ 22,566 $ 24,907
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
14
<PAGE>
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 ") and, to a
lesser extent, gain on sale of loans and the processing fees collected on the
related loans from the Company's mortgage banking segment. The Company believes
that the demand for loans has increased in the Company's primary market areas
due to the growth in the Southern California economy along with the ability of
the Company's customers to participate in that growth. However, the perceived
increase in the demand for loans is tempered by the highly competitive banking
marketplace and the Company's desire to maintain strong credit quality
standards. These factors contributed to the Company's loans and leases held for
investment growth of approximately three percent since December 31, 1998. As a
result of the increase in loans and the decline in deposits, the Company's
loan-to-deposit ratio, excluding loans held for sale, has increased from 76.8%
as of December 31, 1998, to 81.2% as of June 30, 1999.
SEGMENT INFORMATION. The Company operates in two business segments: banking
and mortgage banking. These segments are managed separately because they require
different resources and service different markets. The mortgage banking segment
was acquired through the PNB Merger which was consummated on December 30, 1998.
The banking segment provides traditional banking services and products to
banking customers in the markets served by the Banks. These services and
products include deposits, commercial loans, real estate loans, consumer loans,
leases, and trust and escrow services. In addition, the Banks maintain
investment portfolios consisting of different types of debt obligations and
equity securities. The banking segment derives its income primarily from the
interest it earns on loans and investments and fees for services provided. These
revenues are offset by interest expense on deposits and borrowings. In addition,
the banking segment provides for losses on loans and leases. The significant
general and administrative expenses of the banking segment include salaries and
benefits, occupancy, communications, professional services, data processing and
regulatory assessments. Goodwill amortization is allocated to the banking
segment as such expense relates to acquisitions of banking organizations.
The Company provides mortgage banking services through a division of SCB
under the name "PNB Mortgage". The mortgage banking segment originates
residential mortgage loans for sale to third parties on a servicing-released
basis, which are funded by the banking segment, and derives its income from the
gain on sale of loans and processing fees on the related loans. PNB Mortgage
does not retain the servicing on the mortgage loans it sells. The gain on sale
of loans, which is the main source of revenue for the mortgage banking segment,
is offset by general and administrative expenses which include salaries and
benefits, occupancy, insurance and professional services. The mortgage banking
segment provides for losses on sold loans to indemnify investors against losses
stemming from recourse and breaches of representations or warranties through
purchasing insurance and maintaining an indemnification reserve.
Income taxes are allocated to each segment based on their separate income or
loss before income taxes. The Company evaluates segment performance based on the
net income of each segment. The Company does not allocate the interest income
earned on mortgage loans held for sale or the interest expense related to the
cost of funding the mortgage banking segment's originations. There are no other
intersegment sales, revenues or transfers.
15
<PAGE>
The following tables reconcile significant portions, but not all, of the
banking and mortgage banking segments' financial information.
<TABLE>
<CAPTION>
REVENUE (EXPENSE)
EXTERNAL REVENUE (1) FROM OTHER
OPERATING UNITS NET INCOME TOTAL ASSETS
-------------------- -------------------- -------------------- --------------------------
AT OR FOR THE THREE MONTH PERIOD ENDED JUNE 30,
--------------------------------------------------------------------------------------------
BUSINESS SEGMENT 1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------- --------- --------- --------- --------- --------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Banking........................... $ 40,067 $ 39,479 $ -- $ -- $ 8,284 $ 8,227 $ 2,470,350 $ 2,459,795
Mortgage Banking.................. 4,937 5,812 -- -- 640 879 79,543 114,130
Eliminations...................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ------------ ------------
Totals............................ $ 45,004 $ 45,291 $ -- $ -- $ 8,924 $ 9,106 $ 2,549,893 $ 2,573,925
--------- --------- --------- --------- --------- --------- ------------ ------------
--------- --------- --------- --------- --------- --------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
REVENUE (EXPENSE)
EXTERNAL REVENUE (1) FROM OTHER
OPERATING UNITS NET INCOME TOTAL ASSETS
-------------------- -------------------- -------------------- --------------------------
AT OR FOR THE SIX MONTH PERIOD ENDED JUNE 30,
--------------------------------------------------------------------------------------------
BUSINESS SEGMENT 1999 1998 1999 1998 1999 1998 1999 1998
- ------------------------------- --------- --------- --------- --------- --------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Banking........................ $ 78,416 74,900 $ -- $ -- $ 16,460 $ 15,426 $ 2,470,350 $ 2,459,795
Mortgage Banking............... 10,701 10,514 -- -- 1,484 1,629 79,543 114,130
Eliminations................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ------------ ------------
Totals......................... $ 89,117 $ 85,414 $ -- $ -- $ 17,944 $ 17,055 $ 2,549,893 $ 2,573,925
--------- --------- --------- --------- --------- --------- ------------ ------------
--------- --------- --------- --------- --------- --------- ------------ ------------
</TABLE>
- ------------------------
(1) External revenue represents net interest income and noninterest income;
there is no revenue from foreign sources.
16
<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,
respectively, for the three and six months ended June 30, 1999 and June 30,
1998. Nonaccrual loans are included in the average earning assets amounts.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------------ ------------ ------------ ------------
(IN THOUSANDS)
AVERAGE BALANCE SHEETS
Average Assets:
Loans and leases, net of deferred fees and costs......... $ 1,679,177 $ 1,463,115 $ 1,685,233 $ 1,536,087
Mortgage loans held for sale............................. 98,017 90,167 91,169 90,041
Investments.............................................. 275,771 326,426 283,348 321,070
Federal funds sold....................................... 126,896 227,547 114,434 251,681
------------ ------------ ------------ ------------
Average Earning Assets................................. 2,179,861 2,107,255 2,174,184 2,198,879
Goodwill................................................. 142,594 133,025 141,227 152,020
Other assets............................................. 169,827 213,439 157,086 215,426
------------ ------------ ------------ ------------
Average Total Assets................................... $ 2,492,282 $ 2,453,719 $ 2,472,497 $ 2,566,325
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Average Liabilities and Shareholders' Equity:
Noninterest-bearing deposits............................. $ 788,303 $ 753,653 $ 790,540 $ 791,040
Interest-bearing deposits................................ 1,288,409 1,328,286 1,279,441 1,372,970
------------ ------------ ------------ ------------
Average Deposits....................................... 2,076,712 2,081,939 2,069,981 2,164,010
Other interest-bearing liabilities....................... 21,848 28,807 18,596 29,685
Other liabilities........................................ 32,996 25,079 20,590 22,837
------------ ------------ ------------ ------------
Average Liabilities.................................... 2,131,556 2,135,825 2,109,167 2,216,532
------------ ------------ ------------ ------------
Shareholders' equity..................................... 360,726 317,894 363,330 349,793
------------ ------------ ------------ ------------
Average Liabilities and Shareholders' Equity........... $ 2,492,282 $ 2,453,719 $ 2,472,497 $ 2,566,325
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
YIELD ANALYSIS:
(Dollars in millions)
Average earning assets................................... $ 2,179.9 $ 2,107.3 $ 2,174.2 $ 2,198.9
Yield.................................................. 8.16% 8.54% 8.24% 8.50%
Average interest-bearing deposits........................ $ 1,288.4 $ 1,328.3 $ 1,279.4 $ 1,373.0
Cost................................................... 3.10% 3.50% 3.07% 3.46%
Average deposits......................................... $ 2,076.7 $ 2,081.9 $ 2,070.0 $ 2,164.0
Cost................................................... 1.92% 2.23% 1.90% 2.20%
Average interest-bearing liabilities..................... $ 1,310.3 $ 1,357.1 $ 1,298.0 $ 1,402.7
Cost................................................... 3.15% 3.57% 3.14% 3.55%
Interest spread.......................................... 5.01% 4.97% 5.10% 4.95%
Net interest margin...................................... 6.27% 6.24% 6.37% 6.24%
</TABLE>
Interest income decreased by approximately $954,000 from $89.2 million for
the first six months of 1998 to $88.3 million for the same period of 1999. The
decrease was due to a decline in the yield on interest-earning assets from 8.54%
to 8.16% due to the lower interest rate environment in the 1999 period versus
the 1998 period. Average earnings assets increased over the same period by
approximately $72.6 million mostly as a result of the SMB Acquisition
consummated on January 27, 1998.
17
<PAGE>
Interest income decreased by approximately $1.9 million from $46.6 million
for the second quarter of 1998 to $44.7 million for the same period of 1999. The
decrease was due to a small decline of approximately $24.7 million in average
earning assets and a decline in the yield on earning assets from 8.50% to 8.24%
due to the lower interest rate environment in the 1999 period versus the 1998
period.
Interest expense decreased by approximately $3.6 million from $24.1 million
for the first six months of 1998 to $20.5 million for the same period of 1999.
This decrease is due primarily to a decline in the cost of average
interest-bearing liabilities from 3.57% to 3.15% over the same periods of time
as a result of the above-mentioned decline in the general level of interest
rates. The decrease in the Company's interest expense was also impacted by the
decrease in average interest-bearing liabilities of approximately $46.8 million
from the 1998 period compared to the 1999 period.
Interest expense decreased by approximately $2.2 million from $12.4 million
for the second quarter of 1998 to $10.2 million for the same period of 1999.
This decrease is due primarily to a decline in the cost of average
interest-bearing liabilities from 3.55% to 3.14% over the same periods of time
as a result of the above mentioned decline in the general level of interest
rates. The decrease in the Company's interest expense was also impacted by the
decrease in average interest-bearing liabilities of approximately $104.7 million
from the 1998 period compared to the 1999 period.
NONINTEREST INCOME. The following table sets forth the details of
noninterest income for the three months ended June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
<S> <C> <C> <C>
INCREASE
1998 1999 (DECREASE)
--------- --------- -----------
Service charges and fees on deposits............................................ $ 2,545 $ 2,347 $ (198)
Trust fees...................................................................... 978 1,193 215
Escrow fees..................................................................... 273 273 --
Mortgage related fees and commissions........................................... 1,960 1,875 (85)
Other fees and charges.......................................................... 1,024 1,133 109
Gain on sale of loans........................................................... 3,908 3,162 (746)
Net securities gains............................................................ 76 -- (76)
Other income.................................................................... 337 490 153
--------- --------- -----------
Total noninterest income...................................................... $ 11,101 $ 10,473 $ (628)
--------- --------- -----------
--------- --------- -----------
</TABLE>
Total noninterest income declined approximately $628,000 from $11.1 million
to $10.5 million, or approximately 5.7 percent, from the three months ended June
30, 1998 to the three months ended June 30, 1999. This decline is primarily the
result of an approximate $831,000 decrease in mortgage related fees and
commissions and gain on sale of loans achieved through the Company's mortgage
banking business conducted by PNB Mortgage, a division of SCB. This reflects the
decline in the mortgage business as mortgage rates increased in the 1999 period
and the tightening of pricing in the mortgage market. Mortgage originations
declined from approximately $391 million in the second quarter of 1998 to
approximately $345 million in the second quarter of 1999, or 11.7 percent. The
decline in service charges and fees on deposits of approximately $198,000 is
mostly a result of the decline in deposits. Trust fees increased by
approximately $215,000. Assets under administration increased from approximately
$755 million at June 30, 1998 to approximately $789 million at June 30, 1999.
Over the same time period assets under management increased from approximately
$465 million to $527 million, a growth of approximately 13 percent. The
percentage of assets under management to assets under administration increased
from approximately 61.6% at June 30, 1998 to 66.8% at June 30, 1999. There were
no security sales during the second quarter of 1999 and the increase in other
income consists of various smaller items.
18
<PAGE>
The following table sets forth the details of noninterest income for the six
months ended June 30, 1999 and June 30, 1998. As Santa Monica Bank was acquired
on January 27, 1998, the results for 1998 only include five months of
noninterest income from Santa Monica Bank. For purposes of this analysis, the
"Pro Forma Company" column for 1998 combines the historical results for the
Company for the 1998 period with Santa Monica Bank's results for January 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------
<S> <C> <C> <C> <C> <C>
SANTA SIX MONTHS
MONICA ENDED
BANK JUNE 30,1999
CONSOLIDATED JANUARY PRO FORMA CONSOLIDATED INCREASE
COMPANY 1998 COMPANY COMPANY (DECREASE)
------------ ----------- ----------- ------------ -----------
Service charges and fees on deposits............... $ 4,979 $ 268 $ 5,247 $ 4,792 $ (455)
Trust fees......................................... 1,615 284 1,899 2,288 389
Escrow fees........................................ 532 -- 532 488 (44)
Mortgage related fees and commissions.............. 3,577 3,577 4,106 529
Other fees and charges............................. 1,754 43 1,797 2,196 399
Gain on sale of loans.............................. 7,141 -- 7,141 6,695 (446)
Net securities gains............................... 200 -- 200 -- (200)
Other income....................................... 462 19 481 789 308
------------ ----------- ----------- ------------ -----
Total noninterest income....................... $ 20,260 $ 614 $ 20,874 $ 21,354 $ 480
------------ ----------- ----------- ------------ -----
------------ ----------- ----------- ------------ -----
</TABLE>
On a pro forma basis with Santa Monica Bank, total noninterest income
increased approximately $480,000 from $20.9 million to $21.4 million, or 2.3
percent, from the six months ended June 30, 1998 to the six months ended June
30, 1999. Of this increase, approximately $83,000 represents an increase in
mortgage related fees and commissions and gain on sale of loans achieved through
the Company's mortgage banking business. Mortgage originations were relatively
flat in the two six month periods; mortgage originations were approximately $738
million in the first six months of 1998 and approximately $735 million in the
first six months of 1999. The decline in service charges and fees on deposits of
approximately $455,000 is mostly a result of the decline in deposits. There was
a substantial increase in trust fees of approximately $389,000. Assets under
administration increased from approximately $755 million at June 30, 1998 to
approximately $789 million at June 30, 1999. The percentage of assets under
management to assets under administration increased from approximately 61.6% at
June 30, 1998 to 66.8% at June 30, 1999. Over the same time period assets under
management increased from approximately $465 million to $527 million, a growth
of approximately 13 percent. There were no security sales during the first
quarter of 1999 and the increase in other income consists of various smaller
items.
19
<PAGE>
NONINTEREST EXPENSE. The following table sets forth the details of
noninterest expense for the three months ended June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
<S> <C> <C> <C>
INCREASE
1998 1999 (DECREASE)
--------- --------- -----------
Salaries and benefits........................................................... $ 14,439 $ 13,478 $ (961)
Occupancy, furniture and equipment.............................................. 3,999 3,370 (629)
Advertising and business development............................................ 456 455 (1)
Other real estate owned......................................................... (354) 28 382
Professional services........................................................... 835 670 (165)
Telephone, stationery and supplies.............................................. 1,045 1,276 231
Data processing for the Company................................................. 568 655 87
Customer services cost.......................................................... 989 744 (245)
Other........................................................................... 2,930 1,890 (1,040)
--------- --------- -----------
Total operating noninterest expense............................................. 24,907 22,566 (2,341)
Goodwill amortization........................................................... 2,725 2,738 13
Litigation settlement costs..................................................... -- 1,850 1,850
Merger related costs............................................................ 79 -- (79)
--------- --------- -----------
Total noninterest expense....................................................... $ 27,711 $ 27,154 $ (557)
--------- --------- -----------
--------- --------- -----------
</TABLE>
Total operating noninterest expense decreased approximately $2.3 million
from $24.9 million to $22.6 million, or 9.4%, from the three months ended June
30, 1998 to the three months ended June 30, 1999. The decrease in operating
expenses in almost all categories is primarily a result of the integration of
the banks acquired by the Company in 1998. As of the end of February 1999, the
operations of the Company and the Banks have been integrated on to a single
operational platform.
The litigation settlement costs in the second quarter of 1999 relate mainly
to the settlement with Financial Institution Partners, L.P. and Hovde Capital,
Inc. on mutually acceptable terms as of June 30, 1999, and the dismissal of the
lawsuit captioned FINANCIAL INSTITUTION PARTNERS, L.P. AND HOVDE CAPITAL, INC.
V. CALIFORNIA COMMERCIAL BANKSHARES, ET AL.
The efficiency ratio (operating expense before goodwill amortization, merger
and litigation settlement costs divided by net interest income plus noninterest
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 55.0% in the second quarter of 1998 to 50.1% in the second quarter of 1999.
20
<PAGE>
The following table sets forth the details of noninterest expense for the
six months ended June 30, 1999 and June 30, 1998. As Santa Monica Bank was
acquired on January 27, 1998, the results for 1998 only include five months of
noninterest expense from Santa Monica Bank. For purposes of this analysis, the
"Pro Forma Company" column for 1998 combines the historical results for the
Company for the 1998 period with Santa Monica Bank's results for January 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS
---------------------------------------- ENDED JUNE
SANTA MONICA 30, 1999
CONSOLIDATED BANK JANUARY PRO FORMA CONSOLIDATED INCREASE
COMPANY 1998 COMPANY COMPANY (DECREASE)
------------ ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Salaries and benefits........................ $ 27,772 $ 1,112 $ 28,884 $ 27,730 $ (1,154)
Occupancy, furniture and equipment........... 7,528 370 7,898 6,688 (1,210)
Advertising and business development......... 885 58 943 920 (23)
Other real estate owned...................... (156) 9 (147) (340) (193)
Professional services........................ 2,118 73 2,191 1,430 (761)
Telephone, stationery and supplies........... 2,088 55 2,143 2,663 520
Data processing for the Company.............. 1,126 17 1,143 1,215 72
Customer services cost....................... 1,706 8 1,714 1,621 (93)
Other........................................ 4,865 231 5,096 3,931 (1,165)
------------ ------ ----------- ------------- -----------
Total operating noninterest expense........ 47,932 1,933 49,865 45,858 (4,007)
Goodwill amortization........................ 4,798 665 5,463 5,476 13
Litigation settlement costs.................. -- -- -- 1,850 1,850
Merger related costs......................... 79 429 508 -- (508)
------------ ------ ----------- ------------- -----------
Total noninterest expense.................. $ 52,809 $ 3,027 $ 55,836 $ 53,184 $ (2,652)
------------ ------ ----------- ------------- -----------
------------ ------ ----------- ------------- -----------
</TABLE>
On a pro forma basis with Santa Monica Bank total operating noninterest
expense decreased approximately $4.0 million from $49.9 million to $45.9
million, or 8.0%, from the six months ended June 30, 1998, to the six months
ended June 30, 1999. The decrease in operating expenses in almost all categories
is primarily a result of the integration of the banks acquired by the Company in
1998. As of the end of February 1999, the operations of the Company and the
Banks have been integrated on to a single operational platform. Due to the
efficiency improvements discussed above, the Company's efficiency ratio improved
from 56.1% in the first six months of 1998 to 51.5% in the first six months of
1999.
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 48.0% and 47.2% for the three months ended June
30, 1999 and 1998, respectively. The Company's actual effective income tax rates
were 48.1% and 46.6% for the six months ended June 30, 1999 and 1998,
respectively. The actual effective tax rates are higher than the normal
effective tax rate largely as a result of nondeductible goodwill.
BALANCE SHEET ANALYSIS
CREDIT QUALITY. The Company defines nonperforming assets to include (i)
loans on which it has ceased to accrue interest ("Nonaccrual Loans") and (ii)
assets acquired through foreclosure including other 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 "non accrual 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
21
<PAGE>
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.
Management of the Banks is endeavoring to resolve all nonperforming assets.
Management is not aware of any additional significant loss potential that has
not already been included in the estimation of the allowance for loan and lease
losses ("ALLL").
The following table shows the historical trends in nonperforming assets and
key credit quality statistics for the Company:
CREDIT QUALITY MEASURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
30-JUN 31-MAR 31-DEC 30-SEP 30-JUN 31-DEC
1999 1999 1998 1998 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
Loans past due 90 days or more and still
accruing................................... $ -- $ 250 $ 1,007 $ 937 $ 3,389 $ 363
Nonaccrual loans and leases.................. 19,846 15,474 14,929 16,099 17,332 12,990
Other real estate owned...................... 3,677 4,140 4,361 6,010 7,584 8,212
----------- ----------- ----------- ----------- ----------- -----------
Nonperforming assets....................... 23,523 19,614 19,290 22,109 24,916 21,202
Impaired loans gross......................... 30,542 25,236 23,874 16,353 20,416 20,347
Allocated reserves........................... 2,701 3,883 3,254 1,515 2,886 1,418
----------- ----------- ----------- ----------- ----------- -----------
Net investment in impaired loans........... 27,841 21,353 20,620 14,838 17,530 18,929
Charge-offs.................................. 1,610 693 1,243 4,488 827 1,641
Recoveries................................... 812 1,734 2,062 580 350 684
----------- ----------- ----------- ----------- ----------- -----------
Net charge-offs (recoveries)............... 798 (1,041) (819) 3,908 477 957
ALLL......................................... 28,336 28,459 26,743 25,624 29,157 20,271
Loans and leases, net of deferred fees and
costs (a).................................. 1,721,129 1,680,789 1,668,954 1,604,474 1,554,796 1,141,192
Average loans and leases for the quarter, net
of deferred fees and costs................. 1,685,233 1,673,054 1,609,542 1,571,254 1,536,087 1,097,521
ALLL to loans and leases..................... 1.65% 1.69% 1.60% 1.60% 1.88% 1.78%
ALLL to nonaccrual loans and leases.......... 142.8% 183.9% 179.1% 159.2% 168.2% 156.1%
ALLL to nonperforming assets................. 120.5% 145.1% 138.6% 115.9% 117.0% 95.6%
Nonperforming assets to loans, leases and
OREO....................................... 1.36% 1.16% 1.15% 1.37% 1.59% 1.84%
Annualized net charge-offs (recoveries) to
average loans and leases................... 0.19% (0.25%) (0.20%) 0.99% 0.12% 0.35%
Full year net charge-offs to average loans
and leases................................. 0.23% 0.46%
</TABLE>
- ------------------------
(a) Does not include loans held for sale.
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 June 30, 1999, the Company had approximately $30,542,000 of loans that
were considered impaired, including $19,846,000 of loans on nonaccrual status,
compared to $23,874,000 of impaired loans at December 31, 1998. Impaired and
nonaccrual loans increased $5,306,000 and $4,372,000, respectively, from March
31, 1999 to June 30, 1999, due mainly to one loan. The ALLL at June 30, 1999
includes
22
<PAGE>
specific reserves of approximately $2,701,000 established for certain impaired
loans. Nonperforming assets increased approximately $4,233,000 from $19,290,000
at December 31, 1998, to $23,523,000 at June 30, 1999. This increase is a result
of nonaccrual loans and leases increasing $4,917,000 to $19,846,000 and other
real estate owned decreasing $684,000 to $3,677,000 at June 30, 1999.
ALLOWANCE FOR LOAN AND LEASE LOSSES. The Company has established a
monitoring system for its loans in order to identify impaired loans and
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 Company's 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, concentrations in the portfolio risk levels of particular loan
categories, internal loan review and management oversight.
The percentage of the ALLL to total loans and leases was 1.65% at June 30,
1999, an increase from 1.60% at December 31, 1998. Nonaccrual loans increased by
$4,372,000 during the quarter, from .92% to 1.15% of total loans and leases, due
mainly to one loan. Net OREO decreased by $463,000 during the quarter. Total
nonperforming assets increased by $3,909,000 during the quarter, increasing from
1.16% to 1.36% of total loans, leases and OREO at June 30, 1999. The Company had
net recoveries of $243,000 in the six months ended June 30, 1999 represented by
net recoveries during the first quarter of $1,041,000 and net charge-offs of
$798,000 during the second quarter of 1999. With the provision for loan and
lease losses of $1,350,000 and net recoveries of $243,000, the ALLL increased
$1,593,000 from $26,743,000 at December 31, 1998 to $28,336,000 at June 30,
1999. The allowance as a percentage of nonperforming assets decreased from
138.6% at December 31, 1998 to 120.5% at June 30, 1999 due to the increase in
nonperforming assets. Management believes that the ALLL at June 30, 1999 is
adequate based on the Company's quarterly migration analysis of loan and lease
losses, improved economic conditions and continued adherence to established
credit policies.
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 June 30, 1999, are as follows:
<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% 10.25% 8.84% 9.39%
Tier 1 risk-based capital ratio............. 4.00% 6.00% 11.43% 10.13% 10.68%
Total risk-based capital...................... 8.00% 10.00% 12.63% 11.38% 11.93%
</TABLE>
23
<PAGE>
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK. 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 function of asset/liability management is 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 deposit 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 securities available for sale) as a percent of total
deposits were 25.8% and 26.7% as of June 30, 1999 and December 31, 1998,
respectively.
Market risk sensitive instruments are generally defined as on and off
balance sheet derivatives and other financial instruments. At December 31, 1998
and June 30, 1999, the Company had no material on or off balance sheet
derivatives. However, the Company is party to an interest rate swap with a
notional amount of $20 million intended to reduce the impact of decreasing
interest rates on the balance sheet and maintains forward sale contracts through
the normal course of the mortgage banking business to mitigate the exposure to
fluctuating interest rates in the origination and selling of mortgage loans. The
Company's financial instruments include interest sensitive loans receivable,
federal funds sold, FRB and FHLB stock, investment securities, deposits and
borrowings in addition to the swap and forward contracts. At December 31, 1998,
the Company reported that it had $2.4 billion in interest sensitive assets and
$1.3 billion in interest sensitive liabilities. At June 30, 1999, the Company's
interest sensitive assets and interest sensitive liabilities totaled
approximately $2.2 billion and $1.3 billion, respectively.
The yield on interest sensitive assets and the cost of interest sensitive
liabilities for the second quarter of 1999 was 8.24% and 3.14%, respectively,
compared to 7.90% and 2.83%, respectively, at December 31, 1998. 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 76.7% at December 31, 1998 to 81.7% for the quarter ended June 30,
1999. The increase in the cost of interest sensitive liabilities is primarily a
result of the increase in higher cost accounts as a percentage of interest
bearing liabilities over the same period.
The Company's interest sensitive assets and interest sensitive liabilities
were reported to have estimated fair values of $2.3 billion and $1.3 billion,
respectively, at December 31, 1998. Because of the slight change in market
interest rates since December 31, 1998 and consistent contractual maturities,
management believes that there has been no material change in the difference
between the book values of the interest sensitive assets and liabilities and
their estimated fair values.
YEAR 2000 READINESS DISCLOSURE
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 (the "Year 2000 Plan"). The Company has divided
its Year 2000 Plan into five phases, and the Company charts it progress in each
of those phases for mission critical and other systems and applications. The
following is
24
<PAGE>
the Company's estimate of its progress in each of the phases as an approximate
percentage of completion of that phase as of June 30, 1999.
<TABLE>
<CAPTION>
APPROXIMATE
PERCENTAGE OF COMPLETION
------------------------------------
ALL SYSTEMS
MISSION CRITICAL INCLUDING MISSION
PHASE SYSTEMS CRITICAL SYSTEMS
- ------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Awareness.............................................. 100% 100%
Assessment............................................. 100% 100%
Renovation............................................. 100% 100%
Validation............................................. 99% 85%
Implementation......................................... 88% 89%
</TABLE>
Pursuant to the Year 2000 Plan, the Company has substantially completed
validation of its mission-critical systems and the computer-related interactive
vendor systems as of June 30, 1999. In addition, the Company substantially
completed all phases of its Year 2000 Plan for its mission critical systems as
of 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
$1.1 million, of which approximately $430,000 has been spent through June 30,
1999. The estimated balance is expected to be spent during the remainder of
fiscal 1999. A significant portion of the cost to the Company in connection with
becoming Year 2000 ready is expected to be derived from the redeployment of
existing technology and operations resources rather than incremental costs to
the Company.
The Company has updated its business resumption plans based on a review of
the most reasonably likely Year 2000 failure scenarios, even though management
believes any occurrence of these failures is unlikely. This process was
completed as of June 30, 1999. A business resumption plan is intended to provide
alternative potential means for the Bank to continue to conduct its core
business in the event of unexpected Year 2000 related failures of systems or
services. Tests of the business resumption plans have been successfully
conducted to validate the plan's effectiveness. Training has been conducted with
all Bank branch and department managers. Additionally, supplemental training is
planned for all staff during the fourth quarter of 1999. The business resumption
plan will be updated and retested throughout the remainder of the year in the
event that an essential change must be introduced.
Except as set forth herein, there has been no material change in the Year
2000 disclosure provided in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 concerning the Company's Year 2000 risks and
preparedness.
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, suppliers 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.
The foregoing discussion is a Year 2000 disclosure, subject to the
provisions of the Year 2000 Information and Readiness Disclosure Act.
25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See the section titled "Liquidity, Interest Rate Sensitivity and Market
Risk" in the Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ROBERT D. SHLENS, AN INDIVIDUAL V. SMB, CITY NATIONAL BANK AND ROES 1-50,
INCLUSIVE, Los Angeles Superior Court Case No. BC 113532. See discussion of this
litigation set forth in the Company's Quarterly Report on Form 10-Q for the
first quarter of 1999.
FINANCIAL INSTITUTION PARTNERS, L.P. AND HOVDE CAPITAL, INC. V. CALIFORNIA
COMMERCIAL BANKSHARES, ET AL. The dispute between Financial Institution
Partners, Hovde Capital and the Company was resolved on mutually acceptable
terms as of June 30, 1999, and the lawsuit captioned FINANCIAL INSTITUTION
PARTNERS, L.P. AND HOVDE CAPITAL, INC. V. CALIFORNIA COMMERCIAL BANKSHARES, ET
AL. filed in the United States District Court for the Central District of
California was dismissed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of May 19, 1999, by and between Western Bancorp and
U.S. Bancorp (Exhibit 99.1 of the Company's Current Report on Form 8-K filed on May 28, 1999
and incorporated herein by this reference)
3.1 Restated Articles of Incorporation of Western Bancorp. (Exhibit 3.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by
this reference)
3.2 Restated Bylaws of Western Bancorp. (Exhibit 3.2 of Registration Statement No. 333-35271 filed
on September 10, 1997 on Form S-4/A and incorporated herein by this reference)
10.1 Monarch Bancorp 1983 Stock Option Plan; Form Incentive Stock Option Agreement and Form
Nonstatutory Stock Option Agreement. (Exhibit 10.2 of Registration Statement No. 2-85442
filed on July 27, 1983 on Form S-1 and incorporated herein by this reference)
10.2 Third Amendment to Revolving Credit Agreement, First Amendment to Pledge Agreement and Waiver,
dated January 26, 1997. (Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by this reference)
10.3 1993 Stock Option Plan as Amended May 15, 1996. (Exhibit 10.9 of the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996 and incorporated herein by this
reference)
10.4 1993 Stock Option Plan as Amended on March 19, 1998 (Exhibit 10.1 of the Company's Proxy
Materials for the 1998 Annual Meeting of Shareholders filed on Schedule 14-A and
incorporated herein by this reference)
10.5 Executive Salary Continuation Agreement, dated as of January 1, 1988, between National Bank of
Southern California and Mark H. Stuenkel. (Exhibit 10.6 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by this
reference)
10.6 Western Bancorp Executive Severance Policy. (Exhibit 10.8 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by this
reference)
10.7 Stock Option Agreement, dated as of May 19, 1999, by and between Western Bancorp and U.S.
Bancorp (Exhibit 99.2 of the Current Report on Form 8-K filed on May 28, 1999 and
incorporated herein by this reference)
11.0 Computation of Earnings Per Common Share (See Note 5 of the Notes to Unaudited Consolidated
Financial Statements contained in "Item 1. Consolidated Financial Statements (unaudited)" of
this Quarterly Report on Form 10-Q.)
27.1 Financial Data Schedule
</TABLE>
REPORTS ON FORM 8-K
On April 29, 1999, the Company filed a Current Report on Form 8-K
announcing, under Item 5, financial results of the Company for the first quarter
of 1999.
On May 28, 1999 the Company filed a Current Report on Form 8-K announcing,
under Item 5, the execution of an Agreement and Plan of Merger pursuant to which
the Company will merge with and into
27
<PAGE>
U.S. Bancorp, and the declaration of a cash dividend, and discussing the timing
of the Company's Annual Meeting.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN BANCORP
Date: August 13, 1999 /s/ ARNOLD C. HAHN
-----------------------------------------
Arnold C. Hahn,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: August 13, 1999 /s/ JULIUS G. CHRISTENSEN
-----------------------------------------
Julius G. Christensen,
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 129,495
<INT-BEARING-DEPOSITS> 667
<FED-FUNDS-SOLD> 173,249
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 244,431
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,794,364
<ALLOWANCE> 28,336
<TOTAL-ASSETS> 2,549,893
<DEPOSITS> 2,120,782
<SHORT-TERM> 29,616
<LIABILITIES-OTHER> 37,795
<LONG-TERM> 0
0
0
<COMMON> 361,700
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 2,549,893
<INTEREST-LOAN> 77,448
<INTEREST-INVEST> 7,776
<INTEREST-OTHER> 3,029
<INTEREST-TOTAL> 88,253
<INTEREST-DEPOSIT> 19,800
<INTEREST-EXPENSE> 20,490
<INTEREST-INCOME-NET> 67,763
<LOAN-LOSSES> 1,350
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 53,184
<INCOME-PRETAX> 34,583
<INCOME-PRE-EXTRAORDINARY> 17,944
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,944
<EPS-BASIC> .86
<EPS-DILUTED> .84
<YIELD-ACTUAL> 6.27
<LOANS-NON> 19,846
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,137
<LOANS-PROBLEM> 30,542
<ALLOWANCE-OPEN> 26,743
<CHARGE-OFFS> 2,303
<RECOVERIES> 2,546
<ALLOWANCE-CLOSE> 28,336
<ALLOWANCE-DOMESTIC> 28,336
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,018
</TABLE>
