<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 MARCH 31, 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)
<TABLE>
<S> <C>
CALIFORNIA 95-3863296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
4100 NEWPORT PLACE, SUITE 900,
NEWPORT BEACH, CALIFORNIA 92660
(Address of principal executive offices)
Registrant's telephone number: (949) 863-2444
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 10, 1999: 21,108,433 shares of common stock, no par
value.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<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...................................................................... 11
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk....................... 24
PART II-OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................... 25
ITEM 2. Changes in Securities and use of Proceeds....................................... 25
ITEM 3. Defaults Upon Senior Securities................................................. 25
ITEM 4. Submission of Matters to a Vote of Security Holders............................. 25
ITEM 5. Other Information............................................................... 25
ITEM 6. Exhibits and Reports on Form 8-K................................................ 26
SIGNATURES................................................................................................ 27
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 31,
1999 1998
--------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Assets:
Cash and due from banks............................................. $ 109,249 $ 131,787
Federal funds sold.................................................. 108,393 92,752
--------- -----------
Total cash and cash equivalents................................... 217,642 224,539
Securities:
FRB and FHLB stock.................................................. 9,870 9,760
Securities available for sale; amortized cost of $296,900 and
$354,208.......................................................... 295,062 355,324
--------- -----------
Total securities.................................................. 304,932 365,084
Loans and leases held for investment, net........................... 1,652,330 1,642,211
Loans held for sale, net............................................ 99,157 130,255
Premises and equipment.............................................. 32,940 33,536
Other real estate owned............................................. 4,140 4,361
Goodwill............................................................ 142,776 145,514
Other assets........................................................ 42,320 40,380
--------- -----------
Total assets...................................................... $2,496,237 $2,585,880
--------- -----------
--------- -----------
Liabilities and shareholders' equity:
Liabilities:
Noninterest-bearing deposits........................................ $ 804,438 $ 868,965
Interest-bearing deposits........................................... 1,279,509 1,303,304
--------- -----------
Total deposits.................................................... 2,083,947 2,172,269
Borrowings.......................................................... 24,079 23,722
Accrued interest payable and other liabilities...................... 33,221 37,814
--------- -----------
Total liabilities................................................. 2,141,247 2,233,805
Shareholders' equity:
Preferred stock; 5,000,000 shares authorized, and none issued....... -- --
Common stock; 100,000,000 shares authorized; 20,903,784 and
20,858,512 outstanding at March 31, 1999 and December 31, 1998,
respectively...................................................... 322,884 322,566
Retained earnings................................................... 33,172 28,856
Accumulated other comprehensive income--unrealized net gain (loss)
on securities available for sale, net of tax...................... (1,066) 653
--------- -----------
Total shareholders' equity........................................ 354,990 352,075
--------- -----------
Total liabilities and shareholders' equity...................... $2,496,237 $2,585,880
--------- -----------
--------- -----------
Number of common shares outstanding................................. 20,903.8 20,858.5
Common shareholders' equity per share............................... $ 16.98 $ 16.88
Tangible common shareholders' equity per share...................... $ 10.15 $ 9.90
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
3
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Interest income:
Interest and fees on loans and leases........................................... $ 38,306 $ 35,149
Interest on investment securities............................................... 3,649 4,701
Interest on federal funds sold.................................................. 1,609 2,766
--------- ---------
Total interest income......................................................... 43,564 42,616
Interest expense:
Interest expense on deposits.................................................... 10,002 11,205
Interest expense on borrowed funds.............................................. 330 447
--------- ---------
Total interest expense........................................................ 10,332 11,652
--------- ---------
Net interest income:.............................................................. 33,232 30,964
Less: provision for loan and lease losses....................................... 675 300
--------- ---------
Net interest income after provision for loan and lease losses..................... 32,557 30,664
Noninterest income:
Service charges and fees on deposit accounts.................................... 2,445 2,434
Trust fees...................................................................... 1,095 637
Escrow fees..................................................................... 215 259
Mortgage related fees and commissions........................................... 2,231 1,617
Other fees and charges.......................................................... 1,063 730
Gain on sale of loans........................................................... 3,533 3,233
Net securities gains............................................................ -- 124
Other income.................................................................... 299 125
--------- ---------
Total noninterest income...................................................... 10,881 9,159
Noninterest expense:
Salaries and benefits........................................................... 14,252 13,333
Occupancy, furniture and equipment.............................................. 3,318 3,529
Advertising and business development............................................ 465 429
Other real estate owned......................................................... (368) 198
Professional services........................................................... 760 1,283
Telephone, stationery and supplies.............................................. 1,387 1,043
Goodwill amortization........................................................... 2,738 2,073
Data processing................................................................. 560 558
Customer services cost.......................................................... 877 717
Other........................................................................... 2,041 1,935
--------- ---------
Total noninterest expense..................................................... 26,030 25,098
--------- ---------
Income before income taxes...................................................... 17,408 14,725
Income taxes.................................................................... 8,388 6,776
--------- ---------
Net income.................................................................... $ 9,020 $ 7,949
--------- ---------
--------- ---------
Per share information:
Weighted average common shares outstanding:
Basic......................................................................... 20,888.6 18,568.6
Diluted....................................................................... 21,167.6 19,232.6
Net income per share:
Basic......................................................................... $ 0.43 $ 0.43
Diluted....................................................................... $ 0.43 $ 0.41
</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 period ended March 31, 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>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flow from operating activities:
Net income............................................................. $ 9,020 $ 7,949
Adjustments to reconcile net income to net cash provided by operations:
(Gain) on sale of securities available for sale...................... -- (124)
(Gain) on sale of premises and equipment............................. (43) (5)
(Gain) on sale of other real estate owned............................ (390) (77)
Provision for loan and lease losses.................................. 675 300
Goodwill amortization................................................ 2,738 2,073
Depreciation......................................................... 1,361 1,152
(Gain) on sale of loans.............................................. (3,533) (3,233)
Provision for indemnification losses................................. -- (200)
Loans originated for sale............................................ (386,496) (346,517)
Proceeds from sale of loans.......................................... 420,808 349,989
Amortization of (discounts) on investment securities................. (81) (518)
Increase (decrease) in unearned lease income......................... 32 (125)
Net (decrease) in accrued interest payable and other liabilities..... (3,357) (2,135)
Net (increase) decrease in other assets.............................. (1,940) 2,808
--------- ---------
Net cash provided by operating activities.......................... 38,794 11,337
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale......... -- 20,999
Principal payments received on investment securities available for
sale................................................................. 163,755 84,865
Principal payments received on investment securities held to
maturity............................................................. -- 12,485
Purchase of investment securities available for sale................... (106,367) (53,995)
Purchase of investment securities held to maturity..................... -- (42,723)
Purchase of FRB or FHLB Stock.......................................... (110) (89)
Proceeds from sale of premises and equipment........................... 78 59
(Increase) decrease in net loans and leases............................ (12,655) 17,219
Recoveries of loans and investment in leases........................... 1,734 709
Additions to premises and equipment.................................... (800) (2,167)
Reductions to other real estate owned.................................. 1,025 2,433
Change 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 investing activities.......................... 46,660 11,412
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flow from financing activities:
Cash received from exercise of options and warrants.................... 317 379
Proceeds from issuance of common stock................................. -- 149,840
Common stock repurchased and retired................................... -- (11)
Dividends paid......................................................... (4,703) (132)
Net decrease in deposits............................................... (88,322) (28,614)
Net additions to borrowings............................................ 357 4,441
--------- ---------
Net cash provided by (used in) financing activities................ (92,351) 125,903
Net increase (decrease) in cash and cash equivalents................... (6,897) 148,652
Cash and cash equivalents at the beginning of the period............... 224,539 301,419
--------- ---------
Cash and cash equivalents at the end of the period..................... $ 217,642 $ 450,071
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Property acquired through foreclosure.................................. $ 414 $ 1,059
Loans to facilitate the sale of OREO................................... -- 256
Increase (decrease) in unrealized gain (loss) on securities available
for sale, net of tax................................................. (1,719) 73
Cash paid for interest................................................. 10,479 11,669
Cash paid for taxes.................................................... $ 1,160 $ 18
Acquisition of SMB:
Fair value of assets acquired.......................................... $ -- $ 794,782
Common stock issued to shareholders 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
MARCH 31, 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 months ended March 31, 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 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
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 the SMB Acquisition becoming effective,
each share of common stock of Santa Monica Bank (the "SMB Common Stock") issued
and outstanding at the time was converted into the right to receive either (i)
$28.00 in cash (the "Cash Consideration") or (ii) 0.875 shares 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 Company Common Stock. In order to fund a part
of the Cash Consideration payments, the Company issued an additional 2,327,550
shares of Company Common Stock to certain private investors for $28 per share,
or $65,171,400 in the aggregate. Accordingly, in the aggregate, approximately
4,980,550 shares of Company Common Stock were issued in connection with the SMB
Acquisition. The total value of the consideration paid in the SMB Acquisition
was approximately $198.4 million in Company Common Stock and cash.
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
7
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
NOTE 2--ACQUISITIONS (CONTINUED)
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 Company 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 Company 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 Company 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 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.
NOTE 3--UNAUDITED SUMMARY PRO FORMA DATA
The following table shows unaudited summary pro forma income statement
information for the three month period ended March 31, 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, results for the Company for the three month
period ended March 31, 1998, already include the results of SMB for the months
of February and March. January results for SMB and an additional month of
amortization of purchase accounting entries are included in the pro forma
results for the three months ended March 31, 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
Company's cost and fair value estimates may differ in the future, based on
additional facts
8
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
NOTE 3--UNAUDITED SUMMARY PRO FORMA DATA (CONTINUED)
and information, such that actual cost could differ and hence are
forward-looking. Readers are cautioned that the type and amount of actual costs
incurred could vary materially from these estimates if future developments
differ from the underlying assumptions used by management in determining the
current estimate of these costs. The unaudited summary pro forma 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
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 31,
1999 1998
------------- -------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Interest income.............................................. $ 43,564 $ 46,547
Interest expense............................................. 10,332 12,848
------------- -------------
Net interest income........................................ 33,232 33,699
Provision for loan and lease losses.......................... 675 380
------------- -------------
Net interest income after provision for loan and lease
losses................................................... 32,557 33,319
Noninterest income........................................... 10,881 9,773
Noninterest expense.......................................... 26,030 28,125
------------- -------------
Income before taxes........................................ 17,408 14,967
Income tax expense........................................... 8,388 7,137
------------- -------------
Net income................................................. $ 9,020 $ 7,830
------------- -------------
------------- -------------
Net income per share:
Basic...................................................... $ 0.43 $ 0.39
Diluted.................................................... $ 0.43 $ 0.37
Weighted average shares outstanding:
Basic...................................................... 20,888.6 20,228.8
Diluted.................................................... 21,167.6 20,892.8
</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)
MARCH 31, 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>
THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net income............................................................... $ 9,020 $ 7,949
Other comprehensive income (loss), net of related income taxes:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period............ (1,719) 167
Less reclassification of realized gains included in income............. -- (93)
--------- ---------
(1,719) 74
--------- ---------
Comprehensive income..................................................... $ 7,301 $ 8,023
--------- ---------
--------- ---------
</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 month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net income............................................................ $ 9,020 $ 7,949
--------- ---------
--------- ---------
Weighted average shares outstanding................................... 20,888.6 18,568.6
--------- ---------
--------- ---------
Basic net income per share............................................ $ 0.43 $ 0.43
--------- ---------
--------- ---------
Weighted average shares outstanding................................... 20,888.6 18,568.6
Effect of dilutive stock options and warrants......................... 279.0 664.0
--------- ---------
Diluted shares outstanding............................................ 21,167.6 19,232.6
--------- ---------
--------- ---------
Diluted net income per share.......................................... $ 0.43 $ 0.41
--------- ---------
--------- ---------
</TABLE>
10
<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 March 31, 1999, and for the three month periods
ended March 31, 1999, and March 31, 1998. This discussion should be read in
conjunction with the unaudited condensed consolidated financial statements and
notes thereto as of March 31, 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 $89.6 million. The major components of this decline in assets are
a decrease of approximately $60.2 million in securities available for sale and a
decrease of approximately $31.1 million in loans held for sale. The reduction in
securities resulted primarily from maturities and principal payments of
approximately $163.8 million offset partially by purchases of approximately
$106.4 million in securities available for sale. The reduction in loans held for
sale occurred primarily as a result of the seasonality of the mortgage business.
Since December 31, 1998, the Company's total deposits have declined by
approximately $88.3 million including a decline of approximately $23.8 million
in interest bearing deposits. This decline resulted primarily from the
seasonality of deposits with the first quarter generally being lower than the
end of a year and some deposit run off due to the closure of branches associated
with the PNB Merger and the BKLA Acquisition.
Consolidated net income for the quarter ended March 31, 1999, was $9,020,000
or $0.43 per diluted share. This compares with consolidated net income of
$7,949,000 or $0.41 per diluted share, for the quarter ended March 31, 1998.
Consolidated net income, before goodwill amortization, for the same three month
periods in 1999 and 1998 was $11,758,000 and $10,022,000, respectively, or $0.55
and $0.52 per diluted share, respectively.
During the first 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 March 26, 1999, to shareholders of record on March 5, 1999.
RESULTS OF OPERATIONS
OPERATING INCOME. The Company defines operating income as net income before
goodwill amortization and after-tax merger costs and litigation costs. The
Company's operating return on average tangible assets was 2.01% in the first
quarter of 1999 versus 1.83% in the first quarter of 1998 and 1.88% in the
fourth quarter of 1998. As a result of the integration of BKLA at the end of
last year, the operating efficiency ratio improved from 57.4% in the first
quarter of 1998 to 55.0% in the fourth quarter of 1998 to
11
<PAGE>
52.8% in the first 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>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
PER SHARE INFORMATION:
Number of shares (weighted average, in thousands)................... 20,888.6 18,568.6
Diluted shares (weighted average, in thousands)..................... 21,167.6 19,232.6
Basic income per share.............................................. $ 0.43 $ 0.43
Diluted income per share............................................ $ 0.43 $ 0.41
Before goodwill amortization
Basic income per share............................................ $ 0.56 $ 0.54
Diluted income per share.......................................... $ 0.55 $ 0.52
PROFITABILITY MEASURES:
Return on average assets............................................ 1.46% 1.38%
Return on average equity............................................ 10.2% 11.3%
Before goodwill amortization
Return on average tangible assets................................. 2.01% 1.83%
Return on average equity.......................................... 13.3% 14.2%
Efficiency ratio.................................................. 52.8% 57.4%
ADJUSTMENTS TO NET INCOME (IN THOUSANDS):
Net income.......................................................... $ 9,020 $ 7,949
Goodwill amortization............................................... 2,738 2,073
--------- ---------
Adjusted net income............................................... $ 11,758 $ 10,022
--------- ---------
--------- ---------
REVENUES (IN THOUSANDS):
Net interest income................................................. $ 33,232 $ 30,964
Noninterest income.................................................. 10,881 9,159
--------- ---------
Revenues.......................................................... $ 44,113 $ 40,123
--------- ---------
--------- ---------
ADJUSTMENTS TO EXPENSES (IN THOUSANDS):
Noninterest expense................................................. $ 26,030 $ 25,098
Goodwill amortization............................................... (2,738) (2,073)
--------- ---------
Adjusted expenses................................................. $ 23,292 $ 23,025
--------- ---------
--------- ---------
</TABLE>
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 for 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 one 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 80.7% as of March 31, 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
12
<PAGE>
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 acquisition 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.
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 table reconciles significant portions, but not all, of the
banking and mortgage banking segments' financial information.
<TABLE>
<CAPTION>
REVENUE (EXPENSE)
EXTERNAL FROM OTHER
REVENUE(1) OPERATING UNITS NET INCOME TOTAL ASSETS
-------------------- -------------------- -------------------- --------------------
AT OR FOR THE PERIOD ENDED MARCH 31,
--------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BUSINESS SEGMENT
Banking.................... $ 38,349 $ 35,421 $ -- $ -- $ 8,170 $ 7,205 $2,391,458 $2,517,583
Mortgage Banking........... 5,764 4,702 -- -- 850 744 104,779 103,381
Eliminations............... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Totals..................... $ 44,113 $ 40,123 $ -- $ -- $ 9,020 $ 7,949 $2,496,237 $2,620,964
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Net interest income and noninterest income.
NET INTEREST INCOME. Net interest income is the difference between interest
earned on assets and interest paid on liabilities. Net interest margin is net
interest income expressed as a percentage of average interest-earning assets.
The following tables provide information concerning average interest-earning
assets and interest-bearing liabilities and yields and rates thereon for the
three months ended March 31,
13
<PAGE>
1999 and March 31, 1998, respectively. Nonaccrual loans are included in the
average earning assets amounts.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
AVERAGE BALANCE SHEETS
Average assets:
Loans and leases, net of deferred fees and costs.................. $1,673,054 $1,389,332
Mortgage loans held for sale...................................... 104,941 90,295
Investments....................................................... 255,851 331,842
Federal funds sold................................................ 151,755 203,146
--------- ---------
Average earning assets.......................................... 2,185,601 2,014,615
Goodwill.......................................................... 143,976 113,819
Other assets (including the allowance for loan and lease
losses)......................................................... 182,710 211,430
--------- ---------
Average total assets............................................ $2,512,287 $2,339,864
--------- ---------
--------- ---------
Average liabilities and shareholders' equity:
Noninterest bearing deposits...................................... $ 786,041 $ 715,851
Interest bearing deposits......................................... 1,297,477 1,283,105
--------- ---------
Average deposits................................................ 2,083,518 1,998,956
Other interest bearing liabilities................................ 37,395 27,919
Other liabilities................................................. 33,281 27,348
--------- ---------
Average liabilities............................................. 2,154,194 2,054,223
--------- ---------
Shareholders' equity.............................................. 358,093 285,641
Average liabilities and shareholders' equity.................... $2,512,287 $2,339,864
--------- ---------
--------- ---------
YIELD ANALYSIS:
(Dollars in millions)
Average earning assets............................................ $ 2,185.6 $ 2,014.6
Yield........................................................... 8.08% 8.58%
Average interest bearing deposits................................. $ 1,297.5 $ 1,283.1
Cost............................................................ 3.13% 3.54%
Average deposits.................................................. $ 2,083.5 $ 1,999.0
Cost............................................................ 1.95% 2.27%
Average interest bearing liabilities.............................. $ 1,334.9 $ 1,311.0
Cost............................................................ 3.14% 3.60%
Interest spread................................................... 4.94% 4.98%
Net interest margin............................................... 6.17% 6.23%
</TABLE>
Interest income increased by approximately $948,000 from $42.6 million for
the first quarter of 1998 to $43.6 million for the same period of 1999. The
increase was due mostly to an increase of approximately $171.0 million in
average earning assets as a result of the SMB Acquisition which was consummated
on January 27, 1998. This increase was limited by a decline in the Company's
yield on average earning assets from 8.58 percent in the first quarter of 1998
to 8.08 percent in the first quarter of 1999. The Company attributes this
decline primarily to the affect of the overall decline in the market interest
rates experienced at the end of 1998.
Interest expense decreased by approximately $1.3 million from $11.7 million
for the first quarter of 1998 to $10.3 million for the same period of 1999. This
decrease is due primarily to a decline in the cost of average interest bearing
liabilities from 3.60% to 3.14% over the same periods of time as a result of the
14
<PAGE>
above mentioned decline in the general level of interest rates. The decrease in
the Company's interest expenses was partially offset by the impact of the
increase in average interest bearing liabilities of approximately $23.9 million
from the 1998 period compared to the 1999 period due mostly to the SMB
Acquisition.
NONINTEREST INCOME. The following table sets forth the details of
noninterest income for the three months ended March 31, 1999 and March 31, 1998.
As Santa Monica Bank was acquired on January 27, 1998, the results for 1998 only
includes two 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>
THREE THREE THREE
MONTHS MONTHS MONTHS
ENDED SANTA ENDED ENDED
MARCH 31, MONICA MARCH 31, MARCH 31,
1998 BANK 1998 1999
CONSOLIDATED JANUARY PRO FORMA CONSOLIDATED INCREASE
COMPANY 1998 COMPANY COMPANY (DECREASE)
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges and fees on deposits.... $ 2,434 $ 268 $ 2,702 $ 2,445 $ (257)
Trust fees.............................. 637 284 921 1,095 174
Escrow fees............................. 259 -- 259 215 (44)
Mortgage related fees and commissions... 1,617 1,617 2,231 614
Other fees and charges.................. 730 43 773 1,063 290
Gain on sale of loans................... 3,233 -- 3,233 3,533 300
Net securities gains.................... 124 -- 124 -- (124)
Other income............................ 125 19 144 299 155
----------- ----- ----------- ----------- -----------
Total noninterest income.............. $ 9,159 $ 614 $ 9,773 $ 10,881 $ 1,108
----------- ----- ----------- ----------- -----------
----------- ----- ----------- ----------- -----------
</TABLE>
On a pro forma basis with Santa Monica Bank, total noninterest income
increased approximately $1.1 million from $9.8 million to $10.9 million, or 11
percent, from the three months ended March 31, 1998 to the three months ended
March 31, 1999. Of this increase, $914,000 represents an increase 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 growth in the mortgage business and the improved pricing
obtained in the 1999 period. Mortgage originations increased from approximately
$347 million in the first quarter of 1998 to approximately $386 million in the
first quarter of 1999, or 11.2 percent. The decline in service charges and fees
on deposits of approximately $257,000 is mostly a result of the decline in
deposits. The increase in trust fees of approximately $174,000 is a result of
the increase in assets under administration from approximately $748 million at
March 31, 1998 to approximately $784 million at March 31, 1999 and a 10.5
percent increase in assets under management over the same period from
approximately $465 million to approximately $514 million. There were no security
sales during the first quarter of 1999 and the increase in other income consists
of various smaller items.
15
<PAGE>
NONINTEREST EXPENSE. The following table sets forth the details of
noninterest expense for the three months ended March 31, 1999 and March 31,
1998. As Santa Monica Bank was acquired on January 27, 1998, the results for
1998 only includes two 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>
THREE THREE THREE
MONTHS MONTHS MONTHS
ENDED SANTA ENDED ENDED
MARCH 31, MONICA MARCH 31, MARCH 31,
1998 BANK 1998 1999
CONSOLIDATED JANUARY PRO FORMA CONSOLIDATED INCREASE
COMPANY 1998 COMPANY COMPANY (DECREASE)
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and benefits................... $ 13,333 $ 1,112 $ 14,445 $ 14,252 $ (193)
Occupancy, furniture and equipment...... 3,529 370 3,899 3,318 (581)
Advertising and business development.... 429 58 487 465 (22)
Other real estate owned................. 198 9 207 (368) (575)
Professional services................... 1,283 73 1,356 760 (596)
Telephone, stationery and supplies...... 1,043 55 1,098 1,387 289
Data processing......................... 558 17 575 560 (15)
Customer services cost.................. 717 8 725 877 152
Other................................... 1,935 231 2,166 2,041 (125)
----------- ----------- ----------- ----------- -----------
Total operating noninterest expense... 23,025 1,933 24,958 23,292 (1,666)
Goodwill amortization................. 2,073 665 2,738 2,738 --
Merger related costs.................. -- 429 429 -- (429)
----------- ----------- ----------- ----------- -----------
Total noninterest expense............. $ 25,098 $ 3,027 $ 28,125 $ 26,030 $ (2,095)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
On a pro forma basis with Santa Monica Bank total operating noninterest
expense decreased approximately $1.7 million from $25.0 million to $23.3
million, or 6.7%, from the three months ended March 31, 1998 to the three months
ended March 31, 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 fully integrated. The decrease in other real estate
owned is due mainly to the Company recognizing a gain of approximately $350,000
on the sale of one other real estate owned asset in the first quarter of 1999
which is recorded as a reduction of noninterest expense.
The efficiency ratio (operating expense before goodwill amortization and
merger 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 57.4%
in the first quarter of 1998 to 52.8% in the first quarter 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 48.2% and 46.0% for the three months ended March
31, 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
16
<PAGE>
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 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.
Planned-workout arrangements are currently in place for 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").
17
<PAGE>
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
------------------------------------------------------------------------
31-MAR 31-DEC 30-SEP 30-JUN 31-MAR 31-DEC
1999 1998 1998 1998 1998 1997
---------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loans past due 90 days or more and
still accruing..................... $ 250 $ 1,007 $ 937 $ 3,389 $ 1,285 $ 363
Nonaccrual loans and leases.......... 15,474 14,929 16,099 17,332 15,441(a) 12,990
Other real estate owned.............. 4,140 4,361 6,010 7,584 10,525(b) 8,212
---------- ----------- ---------- ---------- ---------- -----------
Nonperforming assets............... 19,614 19,290 22,109 24,916 25,966 21,202
Impaired loans gross................. 25,236 23,874 16,353 20,416 22,083 20,347
Allocated reserves................... 3,883 3,254 1,515 2,886 1,363 1,418
---------- ----------- ---------- ---------- ---------- -----------
Net investment in impaired loans... 21,353 20,620 14,838 17,530 20,720 18,929
Charge-offs.......................... 693 1,243 4,488 827 653 1,641
Recoveries........................... 1,734 2,062 580 350 709 684
---------- ----------- ---------- ---------- ---------- -----------
Net charge-offs (recoveries)....... (1,041) (819) 3,908 477 (56) 957
Allowance for loan and lease
losses............................. 28,459 26,743 25,624 29,157 29,284 20,271
Loans and leases, net of deferred
fees and costs (c)................. 1,680,789 1,668,954 1,604,474 1,554,796 1,520,065 1,141,192
Average loans and leases for the
quarter, net of deferred fees and
costs.............................. 1,673,054 1,609,542 1,571,254 1,536,087 1,389,332 1,097,521
ALLL to loans and leases............. 1.69% 1.60% 1.60% 1.88% 1.93% 1.78%
ALLL to nonaccrual loans and
leases............................. 183.9% 179.1% 159.2% 168.2% 189.7% 156.1%
ALLL to nonperforming assets......... 145.1% 138.6% 115.9% 117.0% 112.8% 95.6%
Nonperforming assets to loans, leases
and OREO........................... 1.16% 1.15% 1.37% 1.59% 1.70% 1.84%
Annualized net charge-offs
(recoveries) to average loans and
leases............................. (0.25%) (0.20%) 0.99% 0.12% (0.02%) 0.35%
Full year net charge-offs to average
loans and leases................... 0.23% 0.46%
Average loans and leases for the
year, net of deferred fees and
costs.............................. $ 1,527,243 $ 1,051,588
</TABLE>
- --------------------------
(a) Includes approximately $2.2 million related to the January 27, 1998 SMB
Acquisition.
(b) Includes approximately $3.3 million related to the January 27, 1998 SMB
Acquisition.
(c) 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 March 31, 1999, the Company had approximately $25,236,000 of loans, which
were considered impaired, including $15,474,000 of loans on nonaccrual status,
compared to $23,874,000 of impaired loans
18
<PAGE>
at December 31, 1998. The ALLL at March 31, 1999, includes specific reserves of
approximately $3,883,000 established for certain impaired loans. Nonperforming
assets increased approximately $324,000 from $19,290,000 at December 31, 1998,
to $19,614,000 at March 31, 1999. This increase is a result of nonaccrual loans
and leases increasing $545,000 to $15,474,000 and other real estate owned
decreasing $212,000 to $4,141,000 at March 31, 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 allowance for loan and lease losses to loans and leases
was 1.69% at March 31, 1999, an increase from 1.60% at the end of 1998.
Nonperforming assets remained essentially steady from the end of 1998 at
$19,290,000 or 1.15% of total loans, leases and OREO versus $19,614,000 at March
31, 1999 or 1.16% of total loans, leases and OREO. The Company had net
recoveries during the first quarter of 1999 of $1,041,000 representing an
annualized net recovery rate of 0.25% of average loans. With the provision for
loan and lease losses of $675,000 for the first quarter of 1999 and net
recoveries, the allowance for loan and lease losses increased $1,716,000 from
$26,743,000 at December 31, 1998 to $28,459,000 at March 31, 1999. The allowance
as a percentage of nonperforming assets increased to 145.1% at March 31, 1999
from 138.6% at December 31, 1998. Management believes that the allowance for
loan and lease losses of $28,459,000 at March 31, 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 March 31, 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% 9.52% 8.31% 9.04%
Tier 1 risk-based capital ratio............. 4.00% 6.00% 11.26% 9.91% 10.69%
Total risk-based capital...................... 8.00% 10.00% 12.51% 11.16% 11.94%
</TABLE>
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.
19
<PAGE>
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 investment securities available for sale) as a percent of
total deposits were 24.6% and 26.7% as of March 31, 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 March 31, 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 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 March 31, 1999, the Company's
interest sensitive assets and interest sensitive liabilities totaled
approximately $2.3 billion and $1.3 billion, respectively.
The yield on interest sensitive assets and the cost of interest sensitive
liabilities for the first quarter of 1999 was 8.08% 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 81.4% for the quarter ended March
31, 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 value of the interest sensitive assets and liabilities and
their estimated fair values.
20
<PAGE>
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 the Company's progress in each of the phases as an approximate
percentage of completion of that phase as of May 3, 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% 99%
Validation............................................. 87% 62%
Implementation......................................... 79% 79%
</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 and expects to substantially complete all validation by June 30,
1999. In addition, the Company expects to substantially complete each phase of
its Year 2000 Plan for its mission critical systems by June 30, 1999. The
Company expects to incur internal staff costs as well as consulting and other
expenses related to infrastructure and facilities enhancements necessary to
prepare for the Year 2000. Validation and conversion of primary system
applications and hardware is expected to cost approximately $1.1 million, of
which approximately $357,000 has been spent through May 3, 1999. The estimated
balance is expected to be spent during the remainder of fiscal 1999. This cost
estimate does not include costs associated with infrastructure and facilities
enhancements required in connection with operational consolidations due to the
Company's prior, current or future acquisitions. A significant portion of the
cost to the Company in connection with becoming Year 2000 ready is expected to
be derived from the redeployment of existing technology and operations resources
rather than incremental costs to the Company.
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.
21
<PAGE>
QUARTERLY UNAUDITED CONDENSED STATEMENTS OF INCOME AND OTHER FINANCIAL
INFORMATION
The following tables present quarterly financial statement information for
the 1998 fiscal year restated for the PNB Merger and the BKLA Acquisition, each
of which was accounted for under the pooling-of-interests method of accounting.
<TABLE>
<CAPTION>
Q4 98 Q3 98 Q2 98 Q1 98
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases............... $ 38,637 $ 39,111 $ 38,610 $ 35,125
Interest on interest bearing deposits............... 38 16 14 24
Interest on investment securities................... 4,621 4,701 4,549 4,701
Interest on federal funds sold...................... 2,418 2,879 3,418 2,766
--------- --------- --------- ---------
Total interest income............................. 45,714 46,707 46,591 42,616
INTEREST EXPENSE:
Interest expense on deposits........................ 11,388 11,769 11,857 11,205
Interest expense on borrowed funds.................. 669 641 544 447
--------- --------- --------- ---------
Total interest expense............................ 12,057 12,410 12,401 11,652
--------- --------- --------- ---------
NET INTEREST INCOME:.................................. 33,657 34,297 34,190 30,964
Less: provision for loan and lease losses........... 300 375 350 300
--------- --------- --------- ---------
Net interest income after provision for loan and lease
losses.............................................. 33,357 33,922 33,840 30,664
NONINTEREST INCOME:
Service charges and fees on deposit accounts........ 2,508 2,324 2,545 2,434
Trust fees.......................................... 900 979 978 637
Escrow fees......................................... 223 217 273 259
Mortgage related fees and commissions............... 2,133 1,833 1,960 1,617
Other fees and charges.............................. 1,137 1,337 1,024 730
Gain on sale of loans............................... 4,411 4,390 3,908 3,233
Net securities gains................................ 1,073 277 76 124
Other income........................................ 629 225 337 125
--------- --------- --------- ---------
Total noninterest income.......................... 13,014 11,582 11,101 9,159
NONINTEREST EXPENSE:
Salaries and benefits............................... 14,169 13,267 14,439 13,333
Occupancy, furniture and equipment.................. 3,702 3,654 3,999 3,529
Advertising and business development................ 562 262 456 429
Other real estate owned............................. 99 (35) (354) 198
Professional services............................... 978 814 835 1,283
Telephone, stationery and supplies.................. 1,121 1,125 1,045 1,043
Goodwill amortization............................... 2,732 2,722 2,725 2,073
Data processing..................................... 779 610 568 558
Customer services cost.............................. 922 826 989 717
Legal settlement costs.............................. 4,100 -- -- --
Merger costs........................................ 17,799 60 79 --
Other............................................... 3,318 3,755 2,930 1,935
--------- --------- --------- ---------
Total noninterest expense......................... 50,281 27,060 27,711 25,098
--------- --------- --------- ---------
Income (loss) before income taxes................... (3,910) 18,444 17,230 14,725
Income taxes........................................ 2,603 8,830 8,124 6,776
--------- --------- --------- ---------
Net income (loss)................................... $ (6,513) $ 9,614 $ 9,106 $ 7,949
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Q4 98 Q3 98 Q2 98 Q1 98
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding:
Basic............................................. 20,741.3 20,548.3 20,451.9 18,568.6
Diluted........................................... 21,065.4 21,110.5 21,127.2 19,232.6
Net income (loss) per share:
Basic............................................. $ (0.31) $ 0.47 $ 0.45 $ 0.43
Diluted........................................... $ (0.31) $ 0.46 $ 0.43 $ 0.41
ADJUSTMENTS TO NET INCOME (IN THOUSANDS):
Net income (loss)................................... $ (6,513) $ 9,614 $ 9,106 $ 7,949
Litigation settlement costs......................... 4,100 -- -- --
Merger costs........................................ 17,799 60 79 --
Tax benefits...................................... 6,571 -- -- --
--------- --------- --------- ---------
After tax merger costs and litigation settlement
costs............................................. 15,328 60 79 --
Goodwill amortization............................... 2,732 2,722 2,725 2,073
--------- --------- --------- ---------
Adjusted net income............................... $ 11,547 $ 12,396 $ 11,910 $ 10,022
--------- --------- --------- ---------
--------- --------- --------- ---------
PER SHARE INFORMATION:
Number of shares (weighted average, in thousands)... 20,741.3 20,548.3 20,451.9 18,568.6
Diluted shares (weighted average, in thousands)..... 21,065.4 21,110.5 21,127.2 19,232.6
Basic income (loss) per share....................... $ (0.31) $ 0.47 $ 0.45 $ 0.43
Diluted income (loss) per share..................... $ (0.31) $ 0.46 $ 0.43 $ 0.41
Before merger costs and litigation settlement costs
Basic income per share............................ $ 0.42 $ 0.47 $ 0.45 $ 0.43
Diluted income per share.......................... $ 0.42 $ 0.46 $ 0.43 $ 0.41
Before merger costs, litigation settlement costs and
goodwill amortization
Basic income per share............................ $ 0.56 $ 0.60 $ 0.58 $ 0.54
Diluted income per share.......................... $ 0.55 $ 0.59 $ 0.56 $ 0.52
PROFITABILITY MEASURES:
Return on average assets............................ (1.00%) 1.49% 1.42% 1.38%
Return on average equity............................ (7.1%) 10.6% 10.4% 11.3%
Before merger costs and goodwill amortization
Return on average tangible assets................. 1.88% 2.04% 1.98% 1.83%
Return on average equity.......................... 12.6% 13.7% 13.7% 14.2%
Efficiency ratio.................................. 55.0% 52.9% 55.0% 57.4%
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Q4 98 Q3 98 Q2 98 Q1 98
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVERAGE ASSETS
Loans and leases, net of deferred fees and
costs..................................... $1,609,542 $1,571,254 $1,536,087 $1,389,332
Mortgage loans held for sale................ 105,157 91,669 90,041 90,295
Investments................................. 315,611 327,351 321,070 331,842
Federal funds sold.......................... 205,087 207,812 251,681 203,146
--------- --------- --------- ---------
Average earning assets.................... 2,235,397 2,198,086 2,198,879 2,014,615
Goodwill.................................... 146,159 151,149 152,020 113,819
Other assets................................ 200,510 216,014 215,426 211,430
--------- --------- --------- ---------
Average total assets...................... $2,582,066 $2,565,249 $2,566,325 $2,339,864
--------- --------- --------- ---------
--------- --------- --------- ---------
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits................ $ 815,430 $ 803,968 $ 791,040 $ 715,851
Interest-bearing deposits................... 1,348,583 1,345,981 1,372,970 1,283,105
--------- --------- --------- ---------
Average deposits.......................... 2,164,013 2,149,949 2,164,010 1,998,956
Other interest-bearing liabilities.......... 44,177 34,742 29,685 27,919
Other liabilities........................... 10,553 21,469 22,837 27,348
--------- --------- --------- ---------
Average liabilities....................... 2,218,743 2,206,160 2,216,532 2,054,223
--------- --------- --------- ---------
Shareholders' equity........................ 363,323 359,089 349,793 285,641
--------- --------- --------- ---------
Average liabilities and shareholders'
equity.................................. $2,582,066 $2,565,249 $2,566,325 $2,339,864
--------- --------- --------- ---------
--------- --------- --------- ---------
YIELD ANALYSIS
(Dollars in millions)
Average earning assets........................ $ 2,235.4 $ 2,198.1 $ 2,198.9 $ 2,014.6
Yield....................................... 8.11% 8.43% 8.50% 8.58%
Average interest-bearing deposits............. $ 1,348.6 $ 1,346.0 $ 1,373.0 $ 1,283.1
Cost........................................ 3.35% 3.47% 3.46% 3.54%
Average deposits.............................. $ 2,164.0 $ 2,149.9 $ 2,164.0 $ 1,999.0
Cost........................................ 2.09% 2.17% 2.20% 2.27%
Average interest-bearing liabilities.......... $ 1,392.8 $ 1,380.7 $ 1,402.7 $ 1,311.0
Cost........................................ 3.43% 3.57% 3.55% 3.60%
Interest spread............................... 4.68% 4.86% 4.95% 4.98%
Net interest margin........................... 5.97% 6.19% 6.24% 6.23%
</TABLE>
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.
24
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ROBERT D. SHLENS, AN INDIVIDUAL VS. SMB, CITY NATIONAL BANK AND ROES 1-50,
INCLUSIVE, Los Angeles Superior Court Case No. BC 113532. In September of 1994,
RTC Mortgage Trust 1994-52 ("RTC") filed an action against Dr. Robert D. Shlens
("Shlens") for, among other things, judicial foreclosure on a deed of trust
arising from Shlens' default on an underlying loan in the amount of
approximately $3,500,000 originally made by SMB (the "Loan"). RTC successfully
moved for summary adjudication on the judicial foreclosure claim, which was
recently affirmed on appeal. When a deficiency hearing was held in the matter by
the trial court, on April 18, 1997, a deficiency judgment in the amount of
$485,905 was entered against Dr. Shlens. However, that judgment was recently
reversed by the court of appeal and remanded for a new hearing to determine the
fair value of the underlying property and a new deficiency judgment. As of this
date, the Company is unaware that any such new hearing has occurred. On or about
April 12, 1995, Shlens filed a cross-complaint against, among others, SMB
alleging causes of action for negligence, fraud, breach of fiduciary duty,
negligent misrepresentation and breach of contract in connection with the Loan.
A first amended cross-complaint, alleging similar purported claims, was filed by
Shlens on or about August 15, 1995.
The Loan was entered into between Shlens and SMB on January 22, 1988 and was
secured by a deed of trust on certain real property. The Loan and deed of trust
were subsequently assigned by SMB to Western Federal Savings & Loan Association.
Western Federal Savings & Loan Association subsequently became insolvent and was
taken into receivership by the federal government. Plaintiff RTC thereafter
acquired various outstanding receivables, including the Loan. Executed
contemporaneously with and made part of the deed of trust, was an exculpatory
language provision signed by Shlens, the terms of which purportedly shielded
Shlens from any personal liability in connection with the loan. Shlens contends
that if he is responsible to pay any deficiency to the RTC, liability for this
event should be borne by either SMB or the other cross-defendant, the escrow
agent in connection with the Loan.
On January 4, 1996, the Court sustained SMB's demurrer to Shlen's complaint
without leave to amend with respect to the fraud and breach of fiduciary duty
allegations. As to the negligence claims, the Court sustained the demurrer with
leave to amend. However, the Court, on its own motion, determined that the
cross-complaint was premature, and accordingly, stayed the entire action
(including Shlens' ability to amend the cross-complaint) pending the outcome of
Shlens' appeal. Now that the appeal has been resolved, it is expected that the
trial court will schedule a status conference for this matter. The Company
vigorously denies the allegations made in the cross-complaint.
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
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<S> <C>
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 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
of 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)
11.0 Computation of Earnings Per Common Share and Common Share Equivalent. (See Note 3 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 January 14, 1999, the Company filed a Current Report on Form 8-K
disclosing, under Items 5 and 7, the consummation of the merger of PNB Financial
Group with and into the Company.
On March 11, 1999 the Company filed a Current Report on Form 8-K announcing,
under Item 5, the announcement of fourth quarter 1998 and full year 1998
financial results, the declaration of a cash dividend, and the hiring of David
I. Rainer as President and Chief Executive Officer of Santa Monica Bank.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN BANCORP
Date: May 13, 1999 /s/ ARNOLD C. HAHN
-----------------------------------------
Arnold C. Hahn,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: May 13, 1999 /s/ JULIUS G. CHRISTENSEN
-----------------------------------------
Julius G. Christensen,
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 109,249
<INT-BEARING-DEPOSITS> 851
<FED-FUNDS-SOLD> 108,393
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 295,062
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,779,946
<ALLOWANCE> 28,459
<TOTAL-ASSETS> 2,496,237
<DEPOSITS> 2,083,947
<SHORT-TERM> 24,079
<LIABILITIES-OTHER> 33,221
<LONG-TERM> 0
0
0
<COMMON> 354,990
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 2,496,237
<INTEREST-LOAN> 38,306
<INTEREST-INVEST> 3,649
<INTEREST-OTHER> 1,609
<INTEREST-TOTAL> 43,564
<INTEREST-DEPOSIT> 10,002
<INTEREST-EXPENSE> 10,332
<INTEREST-INCOME-NET> 33,232
<LOAN-LOSSES> 675
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 26,030
<INCOME-PRETAX> 17,408
<INCOME-PRE-EXTRAORDINARY> 9,020
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,020
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<YIELD-ACTUAL> 6.17
<LOANS-NON> 15,474
<LOANS-PAST> 250
<LOANS-TROUBLED> 3,772
<LOANS-PROBLEM> 25,236
<ALLOWANCE-OPEN> 26,743
<CHARGE-OFFS> 693
<RECOVERIES> 1,734
<ALLOWANCE-CLOSE> 28,459
<ALLOWANCE-DOMESTIC> 28,459
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,426
</TABLE>
