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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 0-13551
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WESTERN BANCORP
(Exact name of registrant as specified in its charter)
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CALIFORNIA 95-3863296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4100 NEWPORT PLACE, SUITE 900, NEWPORT BEACH 92660
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number: (949) 863-2444
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Securities registered pursuant to Section 12(b) of Exchange Act: None
Securities registered pursuant to Section 12(g) of Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the common stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices on the
Nasdaq National Market on March 1, 1999 of $30.66 was in excess of $481,694,693.
Number of registrant's shares of Common Stock outstanding as of March 1,
1999 was 20,891,784.
Documents incorporated by reference: None
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10-K CROSS-REFERENCE INDEX
This Annual Report on Form 10-K incorporates into a single document the
requirements of the accounting profession and the Securities and Exchange
Commission, including a comprehensive explanation of 1998 results.
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10-K Cross-Reference Index................................................................................. i
Table of Defined Terms..................................................................................... iii
PART I..................................................................................................... 1
ITEM 1. Business......................................................................................... 1
General................................................................................................ 1
Strategic Evolution.................................................................................... 2
Capital Transactions................................................................................... 5
Management Changes..................................................................................... 7
Business of the Company................................................................................ 8
Statistical Disclosure................................................................................. 14
Supervision and Regulation............................................................................. 14
Available Information.................................................................................. 16
ITEM 2. Properties....................................................................................... 17
SCB Properties......................................................................................... 17
SMB Properties......................................................................................... 18
ITEM 3. Legal Proceedings................................................................................ 19
General................................................................................................ 19
PDI Litigation......................................................................................... 19
FIP Litigation......................................................................................... 19
First Pension Litigation............................................................................... 20
Smart Clothes Litigation............................................................................... 21
ITEM 4. Submission of Matter to a Vote of Security Holders............................................... 21
PART II.................................................................................................... 21
ITEM 5. Market for Company Common Stock and Related Security Holder Matters.............................. 21
Marketplace Designation and Sales Price Information.................................................... 21
Dividends.............................................................................................. 22
Recent Sales of Unregistered Securities................................................................ 23
ITEMS 6, 7 and 7A. Selected Financial Data; Management's Discussion and Analysis of Financial Condition
and Results of Operations; and Qualitative and Quantitative Disclosure About Market Risk............... 23
Overview............................................................................................... 23
Selected Financial Data................................................................................ 24
Balance Sheet Analysis................................................................................. 26
Liquidity, Interest Rate Risk and Market Risk.......................................................... 42
Results of Operations.................................................................................. 45
Recent Accounting Pronouncements....................................................................... 53
Year 2000 Readiness Disclosure......................................................................... 53
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ITEM 8. Financial Statements and Supplementary Data...................................................... 56
Contents............................................................................................... 56
Independent Auditors' Reports.......................................................................... 57
Consolidated Balance Sheets............................................................................ 63
Consolidated Statements of Operations.................................................................. 64
Consolidated Statement of Comprehensive Income......................................................... 65
Consolidated Statements of Changes in Shareholders' Equity............................................. 66
Consolidated Statements of Cash Flows.................................................................. 67
Notes to Consolidated Financial Statements............................................................. 69
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 112
PART III................................................................................................... 112
ITEM 10. Directors and Executive Officers of the Company................................................. 112
Directors.............................................................................................. 112
Committees of the Board of Directors................................................................... 114
Compensation Committee Interlocks and Insider Participation............................................ 116
Executive Officers..................................................................................... 117
ITEM 11. Executive Compensation.......................................................................... 119
Executive Compensation................................................................................. 119
Compensation of Directors.............................................................................. 120
Employment Arrangements................................................................................ 121
Executive Severance Plan............................................................................... 122
Performance Graph...................................................................................... 122
Section 16 Reporting................................................................................... 123
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................. 123
ITEM 13. Certain Relationships and Related Transactions.................................................. 126
Banking Transactions................................................................................... 126
Investment Banking Services............................................................................ 126
The 1998 Private Placement............................................................................. 127
ITEM 14. Exhibits and Reports on Form 8-K................................................................ 128
Exhibits............................................................................................... 128
Reports on Form 8-K.................................................................................... 130
Signatures............................................................................................. 131
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ii
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TABLE OF DEFINED TERMS
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1995 Private Placement..................................................................................... 6
1995 Private Placement Shares.............................................................................. 6
1996 Private Placement..................................................................................... 6
1996 Private Placement Investors........................................................................... 6
1996 Private Placement Shares.............................................................................. 6
1998 Private Placement..................................................................................... 6
1998 Private Placement Investors........................................................................... 6
1998 Private Placement Shares.............................................................................. 6
Annual Report.............................................................................................. 2
Bank Defendants............................................................................................ 20
Banks...................................................................................................... 1
BHC Act.................................................................................................... 1
BKLA....................................................................................................... 4
BKLA Acquisition........................................................................................... 4
BKLA Common Stock.......................................................................................... 77
Board...................................................................................................... 1
Cash Consideration......................................................................................... 4
Cash Liquidity............................................................................................. 27
CCB........................................................................................................ 3
CCB Common Stock........................................................................................... 19
CCB Merger................................................................................................. 3
CCB Private Placement...................................................................................... 7
CGCL....................................................................................................... 5
Company.................................................................................................... 1
Company Common Stock....................................................................................... 2
Credit Agreement........................................................................................... 22
Commission................................................................................................. 16
DFI........................................................................................................ 22
Evan's Action.............................................................................................. 20
Exchange Act............................................................................................... 16
FDIC....................................................................................................... 14
FHLB....................................................................................................... 88
FIP........................................................................................................ 19
FRB........................................................................................................ 15
Fund....................................................................................................... 6
Funds...................................................................................................... 126
Initial Shares............................................................................................. 19
Impaired Loans............................................................................................. 36
KSOP....................................................................................................... 96
Monarch.................................................................................................... 1
Mortgage Division.......................................................................................... 9
NBSC....................................................................................................... 3
Note....................................................................................................... 2
NQSO....................................................................................................... 105
OREO....................................................................................................... 40
Pacific.................................................................................................... 1
Pacific Merger............................................................................................. 1
PDI........................................................................................................ 19
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iii
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PDI Litigation............................................................................................. 19
Plan....................................................................................................... 105
PNB........................................................................................................ 5
PNB Common Stock........................................................................................... 5
PNB Merger................................................................................................. 5
PNB Mortgage............................................................................................... 9
Regulation D............................................................................................... 6
Reverse Stock Split........................................................................................ 6
Rights Offering............................................................................................ 7
Rouseau Action............................................................................................. 20
RSA........................................................................................................ 43
RSL........................................................................................................ 43
SAC Reports................................................................................................ 40
SARs....................................................................................................... 120
Salary Continuation Agreement.............................................................................. 121
SCB........................................................................................................ 1
SCB Bank Merger............................................................................................ 24
SCB Merger................................................................................................. 3
Severance Plan............................................................................................. 122
Securities Act............................................................................................. 6
SFAS 123................................................................................................... 74
SFAS 130................................................................................................... 74
SFAS 131................................................................................................... 74
SFAS 132................................................................................................... 75
SFAS 133................................................................................................... 75
SFAS 134................................................................................................... 75
Smart Clothes.............................................................................................. 21
SMB........................................................................................................ 1
SMB Acquisition............................................................................................ 3
SMB Common Stock........................................................................................... 4
Standby Agreements......................................................................................... 6
Stock Based Compensation................................................................................... 121
Stock Consideration........................................................................................ 4
Western Acquisition........................................................................................ 2
WTB........................................................................................................ 21
Year 2000 Plan............................................................................................. 54
Zwick Action............................................................................................... 20
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PART I
ITEM 1. BUSINESS
GENERAL
Western Bancorp, formerly Monarch Bancorp (the "Company"), was organized on
May 20, 1983 as a California corporation for the purpose of becoming a bank
holding company and to acquire all the outstanding capital stock of Monarch Bank
("Monarch"), a California state-chartered bank. The Company commenced operations
on June 18, 1984. The Company is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to
the supervision and regulation of the Board of Governors of the Federal Reserve
System (the "Board").
At December 31, 1998, the Company had three banking subsidiaries, Santa
Monica Bank ("SMB"), Southern California Bank ("SCB") and Pacific National Bank
("Pacific"). On February 26, 1999 the Company merged Pacific with and into SCB
with SCB being the surviving bank (the "Pacific Merger"). Unless indicated
otherwise, references to SCB herein refer to the combined entity, and historical
financial data with respect to SCB have been restated to reflect the financial
data for the combined entity. See "--Strategic Evolution--PNB MERGER." The
Company's principal business is to provide, through its two banking
subsidiaries, financial services throughout Southern California. Each of SCB and
SMB (together, the "Banks") is a California state-chartered bank and
wholly-owned subsidiary of the Company. Unless the context otherwise requires,
references to the Company refer to the Company and the Banks on a consolidated
basis. At December 31, 1998 the Company had total assets of approximately $2.6
billion. At December 31, 1998, SMB had total assets of approximately $1.4
billion and SCB had total assets of approximately $1.2 billion after giving
effect to the Pacific Merger. Currently, the Company's primary market areas are
the western part of Los Angeles County, Orange County and San Diego County,
California. Since January 27, 1998, when the Company acquired Santa Monica Bank
through the merger of Santa Monica Bank with and into Western Bank, with the
name of Western Bank changed to "Santa Monica Bank", the Company has served the
western part of Los Angeles County through SMB. The Company serves Orange County
and parts of southern Los Angeles County and northern San Diego County through
SCB. The Company also provides mortgage banking services through PNB Mortgage, a
division of SCB, and its four full service residential mortgage loan offices
located in Irvine, Santa Ana, San Diego and Dublin, California, and its five
mortgage loan production offices in Honolulu, Hawaii; Bellevue, Washington; and
Phoenix, Tucson and Prescott, Arizona.
The Banks are full-service community banks offering a broad range of banking
products and services, including accepting time and demand deposits, originating
commercial loans, consumer loans, real estate loans and mortgage loans,
providing trust and escrow services, and making other investments. The Banks'
loans are primarily short-term and adjustable rate. At December 31, 1998, the
gross loans of the Banks totaled approximately $1.7 billion of which
approximately 35% consisted of commercial loans, 56% consisted of real estate
loans and 9% consisted of consumer loans. Special services and requests beyond
the lending limits of the Banks can be arranged through correspondent banks. The
Company also offers residential mortgage services through PNB Mortgage, a
division of SCB. During 1998, SCB originated approximately $1.6 billion in
mortgage loans. In addition, SMB maintains a trust department established in
1968 with over $771 million in assets under administration at December 31, 1998.
The Company, through the Banks, derives its income primarily from interest
received on real estate loans, commercial loans and consumer loans and, to a
lesser extent, fees from the sale of mortgage loans originated, interest on
investment securities, fees received in connection with loans and other services
offered, including loan servicing and trust, escrow and deposit services. The
Company's major operating expenses are the interest it pays on deposits and on
borrowings and general operating expenses. The Banks rely on a foundation of
locally generated deposits. Management believes it has a relatively low cost of
funds due to a high percentage of low cost and non-interest bearing deposits.
The Company's operations, like those of other financial institutions operating
in California, are significantly influenced by economic
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conditions in California, including the strength of the real estate market, and
the fiscal and regulatory policies of the federal government and of the
regulatory authorities that govern financial institutions. See "--Supervision
and Regulation."
The Company is committed to running the Banks as premier relationship-based,
community banks in Southern California serving the needs of small- to
medium-sized businesses and the owners and employees of those businesses. The
strategy for serving the Company's target markets is the delivery of a finely-
focused set of value-added products and services that satisfy the primary needs
of the Company's customers, emphasizing superior service and relationships
rather than transaction volume.
The Company operates in two business segments: banking and mortgage banking.
These segments are discussed in more detail below under the heading "Business of
the Company" and in Note 21 of Notes to Consolidated Financial Statements
included in "Item 8. Financial Statements and Supplementary Data."
When the Company uses or incorporates by reference in this Annual Report on
Form 10-K (the "Annual Report") the words "anticipate," "estimate," "expect,"
"project," "intend," "commit," "believe" and similar expressions, the Company
intends to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties and assumptions, including those described in this
Annual 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.
STRATEGIC EVOLUTION
MONARCH BANCORP
The Company, originally named Monarch Bancorp, was organized on May 20, 1983
as a California corporation for the purpose of becoming a bank holding company
and to acquire all the outstanding capital stock of Monarch. As of June 30,
1996, prior to the consummation of the Western Acquisition described below, the
Company had total assets of approximately $60 million.
WESTERN ACQUISITION
On September 30, 1996 the Company acquired all of the issued and outstanding
shares of common stock of Western Bank (the "Western Acquisition"), a California
state-chartered bank operating in the western part of Los Angeles County in
California. At that time, Western Bank had five branch offices, including its
head office in Westwood. The Company paid $17.25 per share in cash for each of
the 3,543,156 then outstanding shares of common stock of Western Bank, or
approximately $61.1 million, and an additional $5.5 million representing the
difference between $17.25 and the various exercise prices of the 425,724
outstanding options to purchase shares of common stock of Western Bank. The
aggregate net consideration paid in the Western Acquisition was approximately
$66.6 million. The Western Acquisition was accounted for under the purchase
method of accounting. Consequently, the results of operations contained herein
include Western Bank only from the date of the Western Acquisition.
The Company funded the purchase price in the Western Acquisition with (i)
the issuance of approximately 3,076,045 shares of common stock, no par value, of
the Company ("Company Common Stock") in the 1996 Private Placement described
below under "--Capital Transactions" for approximately $42.2 million, net of
approximately $0.9 million in issuance costs incurred, and (ii) from the
proceeds of a three year loan of $26.5 million (the "Note") from The Northern
Trust Company. A $15.5 million dividend was declared by Western Bank
concurrently with the completion of the Western Acquisition and paid to the
Company, which was used to reduce the outstanding balance on the Note to $11.0
million. The Company paid $1.4 million in investment banking fees and incurred
approximately $700,000 in other acquisition-related costs. These expenses were
capitalized as part of goodwill. Following consummation of the Western
Acquisition, Western Bank was operated as a wholly-owned subsidiary of the
Company,
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servicing targeted customers of the Company in the western part of Los Angeles
County in California with five branch offices including its headquarters in
Westwood, California.
CCB MERGER
On June 3, 1997, the Company Common Stock was designated for quotation on
the Nasdaq National Market-Registered Trademark-. On June 4, 1997, California
Commercial Bankshares, a bank holding company ("CCB"), merged with and into the
Company (the "CCB Merger") in a transaction accounted for using the
pooling-of-interests method of accounting. In the CCB Merger, 3,043,226 shares
of Company Common Stock were issued to holders of common stock of CCB based on a
1-for-1 exchange ratio (after giving effect to the 8.5-to-1.0 Reverse Stock
Split described below under "--Capital Transactions"), and all of the then
outstanding shares of common stock of CCB were canceled. As a part of the CCB
Merger, Monarch was merged with and into National Bank of Southern California, a
wholly-owned subsidiary of CCB prior to the CCB Merger ("NBSC"). Following
consummation of the CCB Merger, NBSC was operated as a wholly-owned subsidiary
of the Company, servicing the Company's targeted customers in Orange County,
California with seven branch offices including its headquarters in Newport
Beach, California.
The financial information as of all dates and for all periods prior to the
CCB Merger that is presented herein has been restated to present the combined
consolidated financial condition and results of operations of the Company and
CCB as if the CCB Merger had been in effect as of all dates and for all periods
presented. Upon consummation of the CCB Merger, the Company charged to expense
after-tax merger costs of approximately $3.0 million, representing investment
banking fees of $1.4 million and other acquisition-related costs including
filing and professional fees, employee compensation, and costs of computer
conversions and consolidation.
SCB MERGER
On October 10, 1997, SC Bancorp, a bank holding company, merged with and
into the Company (the "SCB Merger") in a transaction accounted for using the
pooling-of-interests method of accounting. In the SCB Merger approximately
3,555,500 shares of Company Common Stock (prior to adjustment for fractional
shares) were issued based on a 0.4556-for-1 exchange ratio, and all of the then
issued and outstanding shares of common stock of SC Bancorp were cancelled. On
December 15, 1997, the Company merged NBSC with and into SCB, a wholly-owned
subsidiary of SC Bancorp prior to the SCB Merger. Thereafter, SCB has operated
as a wholly-owned subsidiary of the Company, servicing the Company's targeted
customers in southern Los Angeles County, Orange County and northern San Diego
County, California, with 21 branch offices as of December 31, 1997, including
its head office in Newport Beach, California. During 1998, SCB closed six of its
branches, five as a result of the SCB Merger, leaving 15 branches at December
31, 1998.
The financial information as of all dates and for all periods prior to the
SCB Merger that is presented herein has been restated to present the combined
consolidated financial condition and results of operations of the Company and SC
Bancorp as if the SCB Merger had been in effect as of all dates and for all
periods presented. In conjunction with the SCB Merger, the Company charged to
expense after-tax merger costs of approximately $8.8 million, representing
investment banking fees of $1.8 million and other acquisition-related costs
including filing and professional fees, expenses related to branch closures,
interest rate swap termination fees, employee compensation, and costs of
computer conversions and consolidation. In addition, the Company realized tax
benefits of $1.8 million as a result of SC Bancorp employee and director options
being converted into Company Common Stock.
SMB ACQUISITION
On January 27, 1998, the Company acquired Santa Monica Bank through the
merger of Santa Monica Bank with and into Western Bank with Western Bank being
the surviving corporation (the "SMB Acquisition"). As part of the SMB
Acquisition, the name of Western Bank was changed to "Santa
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Monica Bank." Upon the SMB Acquisition becoming effective, each share of common
stock, $3.00 par value, of Santa Monica Bank (the "SMB Common Stock") issued and
outstanding at the time was converted into the right to receive either (i)
$28.00 in cash (the "Cash Consideration") or (ii) 0.875 shares of Company Common
Stock (the "Stock Consideration"). 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
received the Stock Consideration resulting in the issuance of approximately
2,653,000 shares of Company Common Stock. In order to fund a part of the Cash
Consideration payments, the Company issued an additional 2,327,550 shares of
Company Common Stock in the 1998 Private Placement, described below under
"Capital Transactions", for $65,171,400 in the aggregate. Accordingly, in the
aggregate, approximately 4,980,550 shares of Company Common Stock were issued in
connection with the SMB Acquisition. The total value of the consideration paid
in the SMB Acquisition was approximately $198.4 million in Company Common Stock
and cash. The SMB Acquisition was accounted for using the purchase method of
accounting. Consequently, the results of operations contained herein include
Santa Monica Bank only from the date of the SMB Acquisition. In conjunction with
the SMB Acquisition, the Company and Santa Monica Bank incurred after-tax merger
costs of approximately $8.4 million, representing $2.7 million in investment
banking fees and other acquisition-related costs including filing and
professional fees, employment compensation, and costs of computer conversions
and consolidation. These expenses were capitalized as part of goodwill.
BKLA MERGER
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 in California ("BKLA"),
through the merger of BKLA with and into SMB with SMB being the surviving bank
(the "BKLA Acquisition"). The BKLA Acquisition was accounted for using the
pooling-of-interests method of accounting. As consideration in the BKLA
Acquisition, approximately 2,214,350 shares of Company Common Stock were issued
to holders of common stock of BKLA based on a 0.4224-for-1 exchange ratio, and
all of the then issued and outstanding shares of common stock of BKLA were
cancelled.
The financial information as of all dates and for all periods prior to the
BKLA Acquisition that is 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. In conjunction with the BKLA Acquisition, the
Company charged to expense after-tax merger costs of approximately $8.1 million,
representing investment banking fees of $711,000 and other acquisition-related
costs, including filing and professional fees, expenses related to branch
closures, employee compensation, and costs of computer conversions and
consolidation. In addition, the Company realized tax benefits of $514,000 as a
result of BKLA employee and director options being converted to Company Common
Stock.
In the three years prior to the acquisition of BKLA by the Company, BKLA
completed three purchase transactions resulting in the issuance of shares of
common stock of BKLA. The share counts in the following discussion have been
adjusted for the exchange ratio of 0.4224 used in the BKLA Acquisition.
BKLA entered into an Agreement Respecting Merger and Plan of Reorganization,
dated August 29, 1997, with Culver National Bank, a one branch, nationally
chartered bank with headquarters in Culver City, California. The acquisition was
completed December 31, 1997 and accounted for as a purchase. The results of
operations of Culver National Bank are included in the accompanying statements
of operations since the date of acquisition. BKLA issued 488,010 shares of
common stock in connection with this transaction.
BKLA entered into an Agreement and Plan of Reorganization, dated October 22,
1996, with American West Bank, a two branch state chartered bank with
headquarters in Encino, California. The
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acquisition was completed on March 31, 1997 and accounted for as a purchase. The
results of operations since the date of acquisition are included in the
accompanying statements of operations. BKLA issued 577,629 shares of common
stock in connection with this transaction.
BKLA entered into an Agreement and Plan of Reorganization, dated June 30,
1995 with World Trade Bank, a one branch, nationally chartered bank with
headquarters in Beverly Hills, California. The acquisition was completed
November 15, 1995 and accounted for as a purchase. The results of operations of
World Trade Bank are included in the selected financial data presented herein
since the date of acquisition. BKLA issued 146,288 shares of common stock in
connection with this transaction.
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, a wholly-owned
subsidiary of PNB prior to the PNB Merger, with and into SCB. In connection with
the Pacific Merger, the Beverly Hills branch of Pacific was sold to SMB, and the
Beverly Hills branch of Pacific was consolidated with the Beverly Hills branch
of SMB. Also in connection with the Pacific Merger the Orange and Newport Beach
branches of Pacific were consolidated into branches of SCB.
The financial information as of all dates and for all periods prior to the
PNB Merger that is presented herein has been restated to present 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. In conjunction with the PNB Merger, the Company charged to expense
after-tax-merger costs of approximately $4.6 million, representing investment
banking fees of $753,000 and other acquisition-related costs including filing
and professional fees, expenses related to branch closures, employee
compensation and costs of computer conversions and consolidations.
CAPITAL TRANSACTIONS
DIVIDENDS
THE COMPANY. On August 20, 1997, the Board of Directors of the Company
approved the institution of a quarterly dividend and thereafter declared a cash
dividend of $0.15 per share payable on December 10, 1997 to shareholders of
record on November 10, 1997, $0.15 per share payable on March 27, 1998 to
shareholders of record on February 27, 1998, $0.15 per share payable on June 26,
1998 to shareholders of record on June 5, 1998, $0.15 per share payable on
September 25, 1998 to shareholders of record August 28, 1998, $0.225 per share
payable on December 24, 1998 to shareholders of record December 4, 1998, and
$0.225 per share payable on March 26, 1999 to shareholders of record March 5,
1999. Because the Company must comply with the California General Corporation
Law ("CGCL") and applicable federal and state banking regulations as well as
with contractual limitations imposed by its credit facility when paying
dividends, there can be no assurance that the Company will continue to pay
dividends at this level, if at all. See "--Regulation and Supervision" and Item
5. "Market for Company Common Stock and Related Security Holder
Matters--Dividends."
PNB. PNB issued a 15 percent stock dividend in the first quarter of 1998
which was valued at approximately $7.4 million.
SC BANCORP. Prior to the SCB Merger, SC Bancorp declared three cash
dividends during 1997. On each of January 23, March 27, and July 24, 1997, SC
Bancorp declared a $0.05 per share cash dividend, payable to its shareholders of
record at the close of business on February 6, May 2, and August 4, 1997,
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respectively. The dividends were paid on February 20, May 20, and August 20,
1997, respectively, totaling $374,000, $375,000, and $375,000, respectively.
For additional information regarding dividends, see "Item 5. Market for the
Company's Common Stock and Related Security Holder Matters--Dividends."
REVERSE STOCK SPLIT
On June 3, 1997 and in connection with the CCB Merger, the Company effected
an 8.5-to-1 reverse stock split (the "Reverse Stock Split"). All references to
share counts in this document have been adjusted to give effect to the Reverse
Stock Split.
CAPITAL RAISING TRANSACTIONS
1998 PRIVATE PLACEMENT. To fund a portion of the Cash Consideration paid in
the SMB Acquisition, on January 27, 1998 the Company issued 2,327,550 shares of
Company Common Stock (the "1998 Private Placement Shares") for $28 per share in
a private placement (the "1998 Private Placement") exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act") pursuant to
Regulation D ("Regulation D") under the Securities Act for $65,171,400 in the
aggregate. The 1998 Private Placement Shares were sold to certain "accredited
investors" within the meaning of Rule 501(a) under the Securities Act, some of
whom were officers, directors and/or shareholders of the Company at the time of
the 1998 Private Placement (the "1998 Private Placement Investors"). The 1998
Private Placement was effected pursuant to Standby Stock Purchase Agreements
entered into by and between the Company and the 1998 Private Placement Investors
(the "Standby Agreements"). Pursuant to the Standby Agreements, the Company
filed under the Securities Act a "shelf" registration statement providing for
the registration of the 1998 Private Placement Shares. See "Item 13. Certain
Relationships and Related Transactions--The 1998 Private Placement."
1996 PRIVATE PLACEMENT. As part of the Western Acquisition on September 30,
1996, the Company sold approximately 3,076,045 shares (the "1996 Private
Placement Shares") of Company Common Stock for $14.025 per share in a private
placement (the "1996 Private Placement") for proceeds of approximately $42.2
million net of approximately $0.9 million in issuance costs. The 1996 Private
Placement was exempt from registration under the Securities Act pursuant to
Regulation D. The 1996 Private Placement Shares were sold to certain "accredited
investors" within the meaning of Rule 501(a) under the Securities Act, some of
whom were officers, directors and/or shareholders of the Company at the time of
the 1996 Private Placement (the "1996 Private Placement Investors") and some of
whom were also among the 1998 Private Placement Investors. As part of the cost
of the 1996 Private Placement, the Company issued to parties related to Belle
Plaine Financial, L.L.C., an affiliate of Belle Plaine Partners, Inc., the
exclusive financial advisor to the Company pursuant to an agreement dated May
17, 1997, 92,275 warrants to acquire Company Common Stock at $16.83 per share,
which included 33,557 warrants to Castle Creek Partners Fund-I, L.P. (the
"Fund") and 28,089 warrants to John M. Eggemeyer, a director of the Company and
principal of Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. The
warrants expire on September 30, 2001. Such warrants were issued as payment of a
portion of Belle Plaine Partners, Inc. advisory fees. Mr. Eggemeyer was not a
director of the Company at the time of this transaction.
1995 PRIVATE PLACEMENT. In a private placement which closed in March 1995
(the "1995 Private Placement"), the Company issued approximately 535,000 shares
(the "1995 Private Placement Shares") of Company Common Stock for $11.475 per
share, resulting in net proceeds of approximately $5.7 million. The 1995 Private
Placement was exempt from registration under the Securities Act pursuant to
Regulation D. The 1995 Private Placement Shares were sold to certain "accredited
investors" within the meaning of Rule 501(a) under the Securities Act, including
certain directors and shareholders of the Company.
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CCB PRIVATE PLACEMENT. In November 1995, CCB sold 474,000 shares of its
common stock through a private placement at $6.75 per share (the "CCB Private
Placement") for the purpose of contributing most of the proceeds into NBSC as
additional capital. Of the total proceeds of approximately $3.2 million, CCB
contributed $2.9 million into NBSC's capital in December 1995. The CCB Private
Placement was exempt from registration under the Securities Act pursuant to
Section 4(2) thereunder. The increased capital allowed CCB and NBSC to meet
certain regulatory commitments to increase capital, provide an additional source
of funds that could be used to fund earning assets, and to allow for possible
future growth opportunities.
RIGHTS OFFERING. In September 1995, pursuant to a shareholders' rights and
public offering (the "Rights Offering"), the Company issued approximately
340,000 shares of Company Common Stock for $11.475 per share, resulting in net
proceeds of approximately $3,464,000 in an offering registered under the
Securities Act. In the Rights Offering, the Company offered both to shareholders
of the Company and to the public up to 373,799 shares of Company Common Stock.
Shareholders of the Company were issued rights to subscribe for all or any
portion of four shares of Company Common Stock for each share of Company Common
Stock held. Shares of Company Common Stock for which holders of Company Common
Stock did not subscribe were offered to the public. In connection with the
Rights Offering, Belle Plaine Partners, Inc. and McAllen Capital Partners, of
which John M. Eggemeyer and John W. Rose, were principals, respectively, acted
as financial advisors to the Company. Pursuant to the Rights Offering, the
Company issued to parties related to such financial advisors, including John M.
Eggemeyer and John W. Rose, 48,400 warrants to acquire Company Common Stock at
$13.77 per share as a portion of their advisory fees. The warrants expire on
September 30, 2000. Mr. Eggemeyer was not a director of the Company at the time
of this transaction. Mr. Rose was a director of the Company at the time of the
Rights Offering, but did not stand for re-election at the Company's 1998 annual
meeting of shareholders.
For additional information regarding capital activities, see "Item 6, 7 and
7A. Selected Financial Data; Management's Discussion and Analysis of Financial
Condition and Results of Operations; and Qualitative and Quantitative Disclosure
About Market Risk--Balance Sheet Analysis--CAPITAL ACTIVITIES" and Notes 2 and 9
of Notes to Consolidated Financial Statements contained in "Item 8. Financial
Statements and Supplementary Data."
MANAGEMENT CHANGES
In conjunction with the Western Acquisition in 1996, the Company
restructured its management team. Hugh S. Smith, Jr., former Chairman and Chief
Executive Officer of Western Bank, became Chairman and Chief Executive Officer
of the Company. Matthew P. Wagner, formerly an Executive Vice President of U.S.
Bancorp in Minneapolis, Minnesota, was recruited to become President and Chief
Executive Officer of Western Bank. Mr. Wagner was appointed President of the
Company in February 1997. Arnold C. Hahn, formerly a Senior Vice President of
U.S. Bancorp in Minneapolis, Minnesota, was recruited to become an Executive
Vice President and Chief Financial Officer of the Company.
During 1997, the Company hired additional executives to add to its senior
management team. Suzanne R. Brennan, formerly a Senior Vice President of U.S.
Bancorp, was hired as Executive Vice President of Operations of the Company.
Robert M. Borgman, President of National Business Finance, Inc., a factoring
company purchased by Norwest Corporation, was hired as Executive Vice President
and Chief Credit Officer. Julius G. Christensen, formerly in practice with the
law firm of Sullivan & Cromwell, was hired as Executive Vice President, General
Counsel and Secretary of the Company. As part of the SCB Merger, Mark H.
Stuenkel, President and Chief Executive Officer of NBSC, was appointed President
and Chief Executive Officer of SCB. In December 1997, Mr. Smith stepped down as
Chief Executive Officer and Mr. Wagner was elected by the Board of Directors to
that position. Mr. Smith remains Chairman of the Company.
In December 1998, Michael L. Thompson, formerly Senior Vice President,
Director of Human Resources of Citizens Business Bank, was hired as Senior Vice
President, Director of Human Resources of
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the Company. In February 1999, David I. Rainer, formerly of Pacific Century
Bank, was hired as President and Chief Executive Officer of SMB. For additional
information regarding the Company's executive officers, see "Item 10. Directors
and Executive Officers of the Company-- Executive Officers."
BUSINESS OF THE COMPANY
BANKING BUSINESS
The Company, through the Banks, provides banking, trust, escrow and other
financial services throughout Southern California to small and medium-sized
businesses and the owners and employees of those businesses. The Banks offer a
broad range of banking products and services, including many types of business
and personal savings and checking accounts and other consumer banking services.
The Banks originate several types of loans, including secured and unsecured
commercial and consumer loans, commercial and residential real estate mortgage
loans, and commercial and residential construction loans. The Banks' loans are
primarily short-term and adjustable rate. Special services or requests beyond
the lending limits of the Banks can be arranged through correspondent banks. The
Banks have a network of ATMs and offer access to ATM networks through other
major banks. The Banks issue MasterCard and Visa credit cards through a
correspondent bank and are also merchant depositories for cardholder drafts
under Visa and MasterCard credit cards. The Banks can provide investment and
international banking services through correspondent banks.
The Company, through the Banks, concentrates its lending activities in four
principal areas:
(1) REAL ESTATE LOANS. Real estate loans are comprised of construction
loans, miniperm loans collateralized by first or junior trust deeds on
specific properties and equity lines of credit. The properties
collateralizing real estate loans are principally located in the Company's
primary market areas of Los Angeles, Orange and San Diego counties in
California and the contiguous communities. The construction loans are
comprised of loans on residential and income producing properties that
generally have terms of less than two years and typically bear an interest
rate that floats with the prime rate or other established index. The
miniperm loans finance the purchase and/or ownership of income producing
properties. Miniperm loans are generally made with an amortization schedule
ranging from fifteen to thirty years with a lump sum balloon payment due in
one to ten years. Equity lines of credit are revolving lines of credit
collateralized by junior trust deeds on real properties. They bear a rate of
interest that floats with the prime rate, LIBOR, or other established index
and have maturities of five to fifteen years. The Company also makes a small
number of loans on 1-4 family residential properties and 5 or more unit
residential properties. From time to time, the Company purchases
participation interests in loans made by other institutions. These loans are
subject to the same underwriting criteria and approval process as loans made
directly by the Company. The Banks' real estate portfolio is subject to
certain risks, including (i) a possible downturn in the Southern California
economy such as that which occurred during the early 1990s, (ii) interest
rate increases due to inflation, (iii) reduction in real estate values in
Southern California, and (iv) continued increase in competitive pricing and
loan structure. The Banks strive to reduce the exposure to such risks by (i)
reviewing each loan request and renewal individually, (ii) using a dual
signature approval system, whereby both the marketing and credit
administration departments must approve each request individually, and (iii)
following strict written loan policies, including, among other factors,
minimum collateral requirements and maximum loan-to-value ratio
requirements. Each loan request is reviewed on the basis of the Bank's
ability to recover both principal and interest in view of the inherent
risks.
(2) COMMERCIAL LOANS. Commercial loans are made to finance operations,
to provide working capital or for specific purposes, such as to finance the
purchase of assets, equipment or inventory. Since a borrower's cash flow
from operations is generally the primary source of repayment, the Company's
policies provide specific guidelines regarding required debt coverage and
other important financial ratios. Commercial loans include lines of credit
and commercial term loans. Lines of credit are extended to businesses or
individuals based on the financial strength and integrity of the borrower
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and are generally (with some exceptions) collateralized by short term assets
such as accounts receivable and inventory (monitored by the Company's asset
based lending department), equipment or real estate and generally have a
maturity of one year or less. Such lines of credit bear an interest rate
that floats with the prime rate, LIBOR or other established index.
Commercial term loans are typically made to finance the acquisition of fixed
assets, refinance short term debt originally used to purchase fixed assets
or, in rare cases, to finance the purchase of businesses. Commercial term
loans generally have terms from one to five years. Commercial term loans may
be collateralized by the asset being acquired or other available assets and
bear interest which either floats with the prime rate, LIBOR or other
established index or is fixed for the term of the loan. The Banks' portfolio
of commercial loans is subject to certain risks, including (i) a possible
downturn in the Southern California economy which could potentially be
brought on by large companies or industries leaving the state, (ii) possible
higher interest rates, and (iii) the possible deterioration of companies'
financial capabilities over time. The Banks strive to reduce the exposure to
such risks through (i) a dual signature approval system, whereby both the
marketing and credit administration departments must approve each credit
request individually, and (ii) following strict written loan policies. In
addition, loans based on short term asset values are monitored on a monthly
or quarterly basis. In general, the Banks receive and review financial
statements of borrowing customers on an ongoing basis during the term of the
relationship and respond to any deterioration noted.
(3) RESIDENTIAL MORTGAGE LOANS. Residential mortgage loans originated by
SCB's mortgage division ("PNB Mortgage" or the "Mortgage Division") include
conventional, jumbo, and FHA and VA guaranteed loans. The Mortgage Division
operates both wholesale and retail departments, although the wholesale
division accounts for the majority of the loan volume. The wholesale
business is generated through a professional commissioned sales staff which
services an extensive network of over 1,500 wholesale mortgage loan brokers.
All of the mortgage loans the Mortgage Division originates are sold to
institutional investors. These loans are funded by SCB and generally are
sold within 30 days after funding. The Company does not retain the servicing
on the mortgage loans it sells. Over 95 percent of the mortgage loans
originated by the Mortgage Division are considered by the market to be A
rated loans. The Mortgage Division also originates and sells a small number
of sub-prime A- rated loans. For further information related to the Mortgage
Division, see "--THE MORTGAGE DIVISION" and Note 21 to the Consolidated
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data".
(4) CONSUMER LOANS AND LEASES. Consumer loans include personal loans,
auto loans, boat loans, home improvement loans, equipment loans, revolving
lines of credit and other loans typically made by banks to individual
borrowers. The Company also makes leases on new and used automobiles. These
leases may be closed-end or commercial leases, have terms of one to five
years and bear interest at a fixed rate. The Banks' consumer loan portfolio
is subject to certain risks, including (i) the high amount of credit offered
to consumers in the market, (ii) the possibility of higher interest rates
due to possible inflation, and (iii) the consumer bankruptcy laws which
allow consumers to discharge certain debts. The Banks strive to reduce the
exposure to such risks through (i) the use of standardized credit scoring
techniques which are continually updated in light of any recent trends and
(ii) the direct approval of loans in excess of $100,000 by credit
administration department using a dual signature system of approval and
strict adherence to written credit policies.
As part of its efforts to achieve long-term stable profitability and respond
to a changing economic environment in Southern California, the Company is
investigating all possible options to augment its traditional focus by
broadening its customer services. The Company believes that the strengthened
capital base achieved through its strategic evolution will permit an
acceleration of efforts to achieve growth and greater diversification of both
the Banks' loan portfolios and deposit bases and sources of fee income. Possible
avenues of growth and future diversification include expanded days and hours of
operation and new types of lending, brokerage, annuity and mutual funds
products. In recent years, the Company has expanded and diversified its customer
services through the acquisition of financial institutions. Examples of
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the diversification heretofore achieved through acquisition are the ability to
provide (i) escrow services and international banking services through
departments acquired in the CCB Merger; (ii) asset based lending services and
cash management services through departments acquired in the SCB Merger; (iii)
trust services through departments acquired in the SMB Acquisition, and (iv)
residential mortgage banking products through the Mortgage Division acquired in
the PNB Merger. See "--Strategic Evolution". The Company believes that the range
of services offered positions it to achieve future growth of its core earnings;
however, there can be no assurance that the Company will be able to expand or
diversify its services or market area in the future or that the growth
heretofore achieved will result in stable profitability.
THE MORTGAGE DIVISION
Pacific opened its residential mortgage loan division, which now operates as
PNB Mortgage, a division of SCB, in 1986. PNB Mortgage conducted its residential
mortgage loan activity primarily throughout Southern California and Arizona
during 1998. In early 1999, PNB Mortgage opened mortgage offices in Honolulu,
Hawaii and Bellevue, Washington. PNB Mortgage operates both wholesale and retail
departments. The wholesale department accounts for the majority of the loan
volume. The wholesale business is brought to PNB Mortgage through a professional
commissioned sales staff which services an extensive network of over 1,500
wholesale mortgage loan brokers. PNB Mortgage's retail sales staff generates
mortgage loans through their own efforts in contacting the end consumer. All of
the mortgage loans PNB Mortgage originates are sold to institutional investors.
These loans are funded by SCB and generally delivered to the purchaser within
thirty days after funding. PNB Mortgage sells the loans it originates with the
servicing released, which means that PNB Mortgage sells the servicing related to
the sold loan. As a result, PNB Mortgage does not have a servicing asset and
does not recognize servicing fee income. During 1996, PNB Mortgage expanded its
product line to more aggressively market loans which are not FHA insured or VA
guaranteed. In 1998 approximately 37 percent of the mortgage loans originated
were FHA insured or VA guaranteed loans.
During 1998, PNB Mortgage originated approximately $1.6 billion in mortgage
loans compared to $1.1 billion for 1997. The mortgage loan volume in 1998
consisted of approximately 49 percent and 51 percent of purchase money loans and
loan refinances, respectively, compared to 73 percent and 27 percent,
respectively, in 1997, almost all of which are considered "A" rated loans. The
increase in loan refinancing from 1997 to 1998 is due largely to the low
interest rate environment which existed during 1998, and there can be no
assurance that the low interest rate environment will continue in the future.
Under certain circumstances, PNB Mortgage may become liable for the unpaid
principal and interest if there has been a breach of the representations or
warranties to purchasers and insurers of the mortgage loans. One of the
representations PNB Mortgage makes with respect to the mortgage loans sold is
that the mortgage loan does not contain any fraudulent information. Such fraud
generally relates to false or materially inaccurate information in relation to
the borrower or the underlying collateral which was provided to PNB Mortgage by
the borrower or broker presenting the loan to PNB Mortgage. During the life of
the loan, if the investor finds that there was fraud in the loan package, PNB
Mortgage may be required to either repurchase the loan or indemnify the investor
against any losses incurred from the loan. In addition, some mortgage loans are
sold with a recourse provision that generally provides for the recourse if the
loan becomes delinquent within a range of two to six months after funding,
depending upon the investor. PNB Mortgage may become liable for the unpaid and
uninsured portion of the principal and delinquent interest on mortgage loans
either repurchased or indemnified. After October 1, 1996, the majority of the
mortgage loans were sold to investors who did not have a recourse provision tied
to loan delinquency. This significantly reduced the number of delinquent loans
which PNB Mortgage indemnified during the 1997 and 1998 fiscal year.
PNB Mortgage attempts to mitigate these risks by using Certified Direct
Endorsement Underwriters, thereby assuring itself of having qualified personnel
with the necessary underwriting skills. PNB Mortgage also performs pre-funding
audits of randomly and specifically selected loans by PNB Mortgage's quality
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control department. The quality control department also performs post funding
audits of randomly and specifically selected loans to ensure that its credit
quality standards are being met. In addition, many of the loans originated by
PNB Mortgage have FHA insurance or VA guarantees which reduce the potential
losses, if any, and some non-government loans also are required to have mortgage
insurance. If PNB Mortgage incurs a loss, PNB Mortgage generally has recourse
and attempts to recover the loss from the broker who provided the loan to PNB
Mortgage; however, in many cases, the only course of action open to PNB Mortgage
may be to stop conducting any further business with that particular broker.
Finally, PNB Mortgage attempts to mitigate the risk caused by breach of
representations and warranties by borrowers through representation and warranty
insurance. Such insurance is expected to respond in the event of a breach of a
representation or warranty for conventional, jumbo and sub-prime loans funded
after November 30, 1998, subject to a $5,000 deductible per occurrence.
Management is continually assessing the risks associated with both
representations and warranties and the recourse provisions in mortgage loans
sold and has established an accrued liability for the estimated future losses.
Management believes that this risk has been adequately provided for in the
Company's consolidated financial statements. Management uses its best judgment
in establishing this estimated liability; however, this liability is an estimate
which is inherently uncertain and depends on the outcome of future events.
Although the Company believes that this estimated liability is adequate, there
can be no assurance that the estimated liability will be adequate to cover
future losses. See "Item 6, 7 and 7A-- Selected Financial Data; Management
Discussion and Analysis of Financial Conditions and Results of Operations; and
Qualitative and Quantitative Disclosure About Market Risk--Balance Sheet
Analysis-- MORTGAGE LOANS HELD FOR SALE" and "Item 8--Financial Statements and
Supplementary Data--Notes to Consolidated Financial Statements--Note 21 Segment
Data".
PNB Mortgage is also subject to risks associated with servicing premiums and
loan discounts earned in connection with the sale of mortgage loans. If a
mortgage loan is paid off within one to 90 days after the investor's purchase of
the loan, depending on the investor, PNB Mortgage must refund the loan premium.
PNB Mortgage attempts to mitigate this risk of refinancing by establishing
underwriting policies designed to discourage loans from being refinanced
frequently. In addition, PNB Mortgage tracks loans which are refinanced and will
discontinue a broker relationship if it appears that a broker is churning loans.
A portion of mortage loans held for sale are not funded until PNB Mortgage
obtains a purchase commitment from a third party. The risk specifically
associated with this portion of mortgage loans held for sale is that PNB
Mortgage will fail to deliver the loans to the purchaser by the commitment date.
PNB Mortgage attempts to mitigate this risk through its policies and procedures
that are designed to ensure that all mortgage loans held for sale are shipped to
the purchaser within the required time frames.
Interest rate exposure is created by both the portion of mortgage loans held
for sale that is not allocated to an existing purchase commitment and unfunded
loans with locked interest rates. PNB Mortgage monitors this exposure daily and
limits the potential exposure by the purchase of mandatory forward commitments
to sell whole loans. Management estimates the amount of unfunded rate-locked
loans that will actually fund and purchases mandatory forward commitments based
upon this estimate and based upon the general interest rate environment.
Management does not speculate on interest rate movement and uses mandatory
forward commitments purely as a hedge against interest rate swings which could
affect the value of its unfunded pipeline of rate-locked loans and unallocated
loans held for sale. The estimates which management uses can differ from actual
loan fundings and, therefore, interest rate risk does exist. PNB Mortgage
attempts to mitigate this risk by employing experienced personnel who follow
conservative secondary marketing policies, in the opinion of management. PNB
Mortgage also attempts to reduce interest rate exposure by limiting customer
rate commitments to varying periods of less than sixty days. For additional
discussion of the mortgage business, see "Item 6, 7 and 7A. Selected Financial
Data; Management's Discussion and Analysis of Financial Condition and Results of
Operation; Qualitative and Quantitative Disclosure about Market Risk--Balance
Sheet Analysis--MORTGAGE LOAN HELD FOR SALE" and "Item 8-Financial Statements
and Supplementary Data--Notes to Consolidated Financial Statements-- Note 21
Segment Data".
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MARKET AREA
SMB's primary market area is the western part of Los Angeles County in
California. As of March 15, 1999 SMB had 16 branch offices, including branch
offices in Santa Monica, Westwood, Malibu, Pacific Palisades, Marina Del Rey,
Beverly Hills, Century City, West Hollywood, Glendale, Culver City and Encino.
These communities are generally affluent with a strong base of small to
medium-sized businesses, including businesses that provide services to the
entertainment industry. SMB's market area offers opportunities in new
construction lending, retail banking and commercial banking for small
businesses, professionals and some light industry.
SCB's primary market area includes southern Los Angeles County, Orange
County and northern San Diego County in California. As of March 15, 1999 SCB had
six branch offices in southern Los Angeles County, eight branch offices
throughout Orange County and one branch in northern San Diego County. In
addition the Mortgage Division has residential mortgage loan division offices in
Irvine, Santa Ana, San Diego and Dublin in California; Phoenix, Tucson and
Prescott in Arizona; Bellevue, Washington; and Honolulu, Hawaii. There is no one
dominant business segment in SCB's primary market area. SCB's market area offers
opportunities in retail banking and commercial banking for small- to
medium-sized businesses, professionals and some light industry.
BUSINESS CONCENTRATIONS
No individual or single group of related accounts is considered material in
relation to the Company's assets or the Banks' assets or deposits, or in
relation to the overall business of the Banks or the Company. However,
approximately 56 percent of the Company's loan portfolio held for investment at
December 31, 1998 consisted of real estate-related loans, including construction
loans, miniperm loans, real estate mortgage loans and commercial loans secured
by real estate. See "Items 6, 7, and 7A. Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and Results of Operations; and
Qualitative and Quantitative Disclosure about Market Risk--Balance Sheet
Analysis--LOAN AND LEASE PORTFOLIO". Moreover, the business activities of the
Company currently are focused in Southern California, with the majority of its
business concentrated in Los Angeles and Orange Counties in California.
Consequently, the results of operations and financial condition of the Company
are dependent upon the general trends in the Southern California economies and,
in particular, the residential and commercial real estate markets. In addition,
the concentration of the Company's operations in Southern California exposes it
to greater risk than other banking companies with a wider geographic base in the
event of catastrophes, such as earthquakes, fires and floods in this region.
COMPETITION
The banking business in California generally, and in the Banks' primary
service areas specifically, is highly competitive with respect to both loans and
deposits as well as other banking and mortgage banking services, and is
dominated by a relatively small number of major banks with many offices and
operations over a wide geographic area. Among the advantages such major banks
have over the Banks are their ability to finance and engage in wide-ranging
advertising campaigns and to allocate their investment assets to regions of
higher yield and demand. Such banks offer certain services which are not offered
directly by the Banks (but which usually can be offered indirectly by the Banks
through correspondent institutions). In addition, by virtue of their greater
total capitalization, such banks have substantially higher lending limits than
the Banks. (Legal lending limits to an individual customer are based upon a
percentage of a bank's total capital accounts.) Other entities, both
governmental and in private industry, seeking to raise capital through the
issuance and sale of debt or equity securities also provide competition for the
Banks in the acquisition of deposits. Banks also compete with money market funds
and other money market instruments which are not subject to interest rate
ceilings. In recent years, increased competition has also developed from
specialized finance and non-finance companies that offer wholesale finance,
credit card, and other consumer finance services, including on-line banking
services and personal finance software.
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Competition for deposit and loan products remains strong, from both banking and
non-banking firms, and affects the rates of those products as well as the terms
on which they are offered to customers.
Technological innovation continues to contribute to greater competition in
domestic and international financial services markets. Technological innovation
has, for example, made it possible for non-depository institutions to offer
customers automated transfer payment services that previously have been
traditional banking products. In addition, customers now expect a choice of
several delivery systems and channels, including telephone, mail, home computer,
ATMs, self-service branches, and in-store branches.
Mergers between financial institutions have placed additional pressure on
banks within the industry to streamline their operations, reduce expenses, and
increase revenues to remain competitive. In addition, competition has
intensified due to federal and state interstate banking laws, which permit
banking organizations to expand geographically with fewer restrictions than in
the past. Such laws allow banks to merge with other banks across state lines,
thereby enabling banks to establish or expand banking operations in the
Company's most significant markets. The competitive environment also is
significantly impacted by federal and state legislation which may make it easier
for non-bank financial institutions to compete with the Company.
Economic factors, along with legislative and technological changes, will
have an ongoing impact on the competitive environment within the financial
services industry. As an active participant in financial markets, the Company
strives to anticipate and adapt to these changing competitive conditions, but
there can be no assurance as to their impact on the Company's future business or
results of operations or as to the Company's continued ability to anticipate and
adapt to such changing conditions. In order to compete with other competitors in
their primary service areas, the Banks attempt to use to the fullest extent
possible the flexibility which the Banks' independent status permits, including
an emphasis on specialized services, local promotional activity, and personal
contacts by their respective officers, directors and employees with their
customers. In particular, each of the Banks strive to offer highly personalized
banking services. In addition, the Company intends to continue diversifying its
services and banking products and to leverage, through cross-marketing services
and banking products provided by one of the Banks, but not the other, into new
markets serviced by the other Bank. The Company believes that through the cross-
marketing of products into new markets, the Banks can distinguish themselves
from other community banks with which the Banks compete based on the range of
services provided and banking products offered. However, there can be no
assurance the Company will be able to diversify its services and/or banking
product or successfully compete with its competitors in its primary service
area.
The Mortgage Division's competition includes large national mortgage
companies which have many offices in the Mortgage Division's primary market
area, along with local non-bank mortgage companies. These large national
mortgage companies also operate wholesale and retail departments along with a
correspondent department. PNB Mortgage competes with these companies on both a
retail and wholesale basis and also sells its loans to the corrrespondent
departments of these companies. The loans which are sold to these companies are
subject to their underwriting guidelines and pricing which may be different than
the underwriting guidelines and pricing applicable to their own retail and
wholesale departments. The large national mortgage companies typically sell
their mortgage loans directly to investment firms and retain the loan servicing.
This, together with their large volume, gives them a competitive advantage over
PNB Mortgage. Management believes that the service PNB Mortgage provides, along
with PNB Mortgage's local presence in the marketplace, gives PNB Mortgage an
advantage over the large national mortgage companies. In addition, PNB Mortgage
is able to fund loans the same day that the signed loan documents are received,
whereas most non-bank mortgage companies must use an outside warehousing line
which can slow down the funding process.
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EMPLOYEES
As of March 1, 1999, SCB had 602 full time equivalent employees, including
192 in PNB Mortgage, SMB had 349 full time equivalent employees and Western
Bancorp had 13 full time equivalent employees in addition to those employed by
the Banks.
STATISTICAL DISCLOSURE
Statistical information relating to the Company and its subsidiaries is
presented within "Item 6, 7 & 7A. Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and Results of Operations; and
Qualitative and Quantitative Disclosure About Market Risk" and should be read in
conjunction with the Consolidated Financial Statements contained in "Item 8.
Financial Statements and Supplementary Data."
SUPERVISION AND REGULATION
GENERAL
The banking and financial services businesses in which the Company engages
are highly regulated. Such regulation is intended, among other things, to
protect depositors covered by the Federal Deposit Insurance Corporation ("FDIC")
and the banking system as a whole. The commercial banking business is also
influenced by the monetary and fiscal policies of the federal government and the
policies of regulatory agencies, particularly the Board. The Board implements
national monetary policies (with objectives such as curbing inflation and
combating recession) by its open-market operations in United States Government
securities, by adjusting the required level of reserves for financial
intermediaries subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on deposits.
Indirectly such actions may also impact the ability of non-bank financial
institutions to compete with the Banks. See "--Competition." The nature and
impact of any future changes in monetary policies cannot be predicted.
The laws, regulations, and policies affecting financial services businesses
are continuously under review by Congress and state legislatures, and federal
and state regulatory agencies. From time to time, legislation is enacted which
has the effect of increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance between banks and
other financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial intermediaries are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
Changes in the laws, regulations or policies that impact the Company cannot
necessarily be predicted, but they may have a material effect on the business
and earnings of the Company.
BANK HOLDING COMPANY REGULATION
The Company, as a bank holding company, is subject to regulation under the
BHC Act, and is registered with and subject to the supervision and examination
of the Board. Pursuant to the BHC Act, the Company is required to obtain the
prior approval of the Board before it may acquire all or substantially all of
the assets of any bank, or ownership or control of voting shares of any bank if,
after giving effect to such acquisition, the Company would own or control,
directly or indirectly, more than 5 percent of such bank.
Under the BHC Act, the Company may not engage in any business other than
managing or controlling banks or furnishing services to its subsidiaries that
the Board deems to be so closely related to banking as "to be a proper incident
thereto." The Company is also prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5 percent of the
voting shares of any company unless the company is engaged in banking activities
or the Board determines that the activity is so closely related
14
<PAGE>
to banking to be a proper incident to banking. The Board's approval must be
obtained before the shares of any such company can be acquired and, in certain
cases, before any approved company can open new offices.
The BHC Act and regulations of the Board also impose certain constraints on
the redemption or purchase by a bank holding company of its own shares of stock.
The Company's earnings and activities are affected by legislation, by
actions of its regulations, and by local legislative and administrative bodies
and decisions of courts in the jurisdictions in which the Company and the Banks
conduct business. For example, these include limitations on the ability of the
Banks to pay dividends to the Company and the abilty of the Company to pay
dividends to the shareholders of the Company. It is the policy of the Board that
bank holding companies should pay cash dividends on common stock only out of
income available over the past year and only if prospective earnings retention
is consistent with the organization's expected future needs and financial
condition. The policy provides that bank holding companies should not maintain a
level of cash dividends that undermines the bank holding company's ability to
serve as a source of strength to its banking subsidiaries. Various federal and
state statutory provisions limit the amount of dividends that subsidiary banks
and savings asociations can pay to their holding companies without regulatory
approval. In addition to these explicit limitations, the federal regulatory
agencies are authorized to prohibit a banking subsidiary or bank holding company
from engaging in an unsafe or unsound banking practice. Depending upon the
circumstances, the agencies could take the position that paying a dividend would
constitute an unsafe or unsound banking practice.
In addition, banking subsidiaries of bank holding companies are subject to
certain restrictions imposed by federal law in dealings with their holding
companies and other affiliates. Subject to certain exceptions set forth in the
Federal Reserve Act, a bank can make a loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, accept securities of an affiliate as collateral security for a loan
or extension of credit to any person or company, issue a guarantee, or accept
letters of credit on behalf of an affiliate only if the aggregate amount of the
above transactions of such subsidiary does not exceed 10 percent of such
subsidiary's capital stock and surplus on a per affiliate basis or 20 percent of
such subsidiary's capital stock and surplus on an aggregate affiliate basis.
Such transactions must be on terms and conditions that are consistent with safe
and sound banking practices. A bank and its subsidiaries generally may not
purchase a "low-quality asset," as that term is defined in the Federal Reserve
Act, from an affiliate. Such restrictions also prevent a holding company and its
other affiliates from borrowing from a banking subsidiary of the holding company
unless the loans are secured by collateral.
The Board has cease and desist powers to cover parent bank holding companies
and non-banking subsidiaries where action of a parent bank holding company or
its non-financial institutions represent an unsafe or unsound practice or
violation of law. The Board has the authority to regulate debt obligations
(other than commercial paper) issued by bank holding companies by imposing
interest ceilings and reserve requirements on such debt obligations.
REGULATION OF THE BANKS
Banks are extensively regulated under both federal and state law. The Banks,
as California state-chartered banks, are subject to primary supervision,
periodic examination and regulation by the Federal Reserve Bank of San Francisco
("FRB") and the FDIC.
The Banks are insured by the FDIC, which currently insures deposits of each
member bank to a maximum of $100,000 per depositor. For this protection, the
Banks, as is the case with all insured banks, pay a semi-annual statutory
assessment and are subject to the rules and regulations of the FDIC. SCB is a
member of the Federal Reserve System and is subject to certain regulations of
the Board. SMB is not a member of the Federal Reserve System, but is
nevertheless subject to certain regulations of the Board.
15
<PAGE>
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Banks. State and
federal statutes and regulations relate to many aspects of the Banks'
operations, including standards for safety and soundness, reserves against
deposits, interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, fair lending
requirements, Community Reinvestment Act activities, and loans to affiliates.
Further, the Banks are required to maintain certain levels of capital. The
regulatory capital guidelines as well as the actual capitalization for SCB, SMB,
Pacific and the Company on a consolidated basis as of December 31, 1998 follow:
<TABLE>
<CAPTION>
REQUIREMENT ACTUAL
---------------------------- ------------------------------------------------
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED SMB SCB PACIFIC CONSOLIDATED
------------- ------------- --------- --------- ----------- -------------
(GREATER THAN OR EQUAL TO)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based capital ratio................. 4.00% 6.00% 10.15% 9.35% 13.91% 10.20%
Total risk-based capital........................ 8.00% 10.00% 11.40% 10.49% 15.04% 11.45%
Tier 1 leverage capital ratio................... 4.00% 5.00% 8.45% 8.76% 10.49% 8.83%
</TABLE>
HAZARDOUS WASTE CLEAN-UP COSTS
The Company is aware of legislation and cases relating to hazardous waste
clean-up costs and potential liability. Since the Company is not involved in any
business that manufactures, uses or transports chemicals, waste, pollutants or
toxins that might have a material adverse effect on the environment, its primary
exposure to environmental laws is through its lending activities. Based on a
general survey of the loan portfolios of the Banks, conversations with local
appraisers, and the type of lending currently and historically done by the
Banks, the Company does not believe that it is exposed to any material loss or
liability related to such environmental laws as of the date hereof. The Banks
have generally not made the types of loans typically associated with hazardous
waste contamination problems, and the Company is not aware of any potential
liability for hazardous waste contamination that might have a material adverse
effect on the Company as of the date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Therefore the Company
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). These reports, proxy statements and
other information may be inspected and copied at the public reference facilities
of the Commission located at 450 Fifth Street, N. W., Washington, D. C. 20549,
at the Commission's regional offices at 7 World Trade Center, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661, at
prescribed rates. Information regarding the Commission can be obtained by
calling 1-800-SEC-0330. Such reports, proxy statements and other information may
also be accessed electronically at the Commission's home page on the Internet at
http://www.sec.gov. Shares of Company Common Stock are designated for quotation
on the Nasdaq National Market-Registered Trademark-. Material filed by the
Company can be inspected at the offices of the National Association of
Securities Dealers, Inc., Reports Section, 1735 K Street, N. W., Washington, D.
C. 20006.
16
<PAGE>
ITEM 2. PROPERTIES
SCB PROPERTIES
SCB's principal office is located at 4100 Newport Place, Suite 900, Newport
Beach, California. In total, as of March 1, 1999, SCB had 31 properties
consisting of 15 branch offices, nine mortgage offices, one operations center
and six discontinued locations. Of the 31 locations, seven are owned and 24 are
leased.
OWNED PROPERTIES
17046 Bellflower Boulevard
Bellflower, California
12802 East Hadley Street
Whittier, California
13525 West Whittier Boulevard
Whittier, California
275 West Central Avenue
Brea, California
10990 Downey Avenue
Downey, California
303 West Katella Avenue
Orange, California
13372 East Telegraph Road
Santa Fe Springs, California
LEASED PROPERTIES
3800-4 (and a portion of 3808) East La Palma Avenue
Anaheim, California
303 Crescent Avenue
Avalon, California
22831 Lake Forest Drive
Lake Forest, California
9042 Garfield Avenue
Huntington Beach, California
4180 La Jolla Village Drive,
Suites 125 & 430
La Jolla, California
LEASED PROPERTIES
16420 Valley View Avenue
La Mirada, California*
1190 Silvergate Dr. Ste. 102
Dublin, California*+
1645 S. King St.
Honolulu, Hawaii*+
41 Corporate Park (Suites 230, 290, 300)
Irvine, California+
4041 North Central Ave. Ste. 860
Prescott, Arizona*+
915 E. Gurley St.
Phoenix, Arizona*+
One Governor Park, 6390 Greenwich Dr.
San Diego, California*+
5546 E. 4th St. Ste. 106, 111
Tucson, Arizona*+
400 N. Tustin Ave. Ste 275
Santa Ana, California*+
30000 Town Center Drive
Laguna Niguel, California
4100 Newport Place
Newport Beach, California
3951 South Plaza Drive
Santa Ana, California Branch
170 120th Ave., N.E.
Bellevue, Washington*+
DISCONTINUED PROPERTIES
17330 Brookhurst Street
Fountain Valley, California*
23521 Paseo de Valencia
Laguna Hills, California*
4665 MacArthur Court
Newport Beach, California*
1045 W. Katella Ave.
Orange, California*
401 Glenneyre Street
Laguna Beach, California*
8501 Wilshire Blvd*
Los Angeles, California
* Non-branch property.
+ Mortgage location.
17
<PAGE>
SMB PROPERTIES
SMB's principal office is located at 1251 Fourth Street, Santa Monica,
California. In total, as of March 1, 1999 SMB had 26 properties consisting of 16
branch offices and ten other properties. Of the 26 properties, eight were owned
and 18 were leased.
OWNED PROPERTIES
1231 4th Street
Santa Monica, California
1235 4th Street*
Santa Monica, California
1251 4th Street*
Santa Monica, California
1324 5th Street*
Santa Monica, California
1326-30 5th Street*
Santa Monica, California
1327 5th Street*
Santa Monica, California
1401 Wilshire Boulevard
Santa Monica, California
4700 Lincoln Boulevard
Marina del Rey, California
LEASED PROPERTIES
15910 Ventura Boulevard
Encino, California
1888 Century Park, East
(Suites 110 and 915)
Century City, California
`1251 Westwood Boulevard (land lease only)*
Westwood, California
LEASED PROPERTIES
1237 4th Street*
Santa Monica, California
3302 Pico Boulevard
Santa Monica, California
2221 Santa Monica Boulevard
Santa Monica, California
152 Santa Monica Place
Santa Monica, California
9595 Wilshire Boulevard
Beverly Hills, California
5399 Sepulveda Boulevard
Culver City, California
701 N. Brand Boulevard
Glendale, California
10866 Wilshire Boulevard
Los Angeles, California
8901 Santa Monica Boulevard
West Hollywood, California
12100 Wilshire Boulevard
Los Angeles, California
23705 West Malibu Road
Malibu, California
15245 Sunset Boulevard
Pacific Palisades, California
4700 Lincoln Boulevard (ATM and Drive Up only)*
Marina del Rey, California
DISCONTINUED PROPERTIES
9601 Wilshire Boulevard*
Beverly Hills, California
16861 Ventura Boulevard*
Encino, California
* Non-branch property.
For additional information regarding properties of the Company and of the
Banks, see "Item 8. Financial Statements and Supplementary Data."
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
GENERAL
From time to time, the Company and the Banks are party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's and/or the Banks' exposure to the cases
individually and in the aggregate and provides for potential losses on such
litigation if the amount of the loss is determinable and if the occurrence of
the loss is probable.
Set forth below is a brief summary of the status of certain pending legal
proceedings to which the Company and/or the Banks are subject. Management
believes that the liability which it has established for these matters is
adequate as of the date hereof. However, litigation is inherently uncertain and
no assurance can be given that this or any other litigation will not result in
any loss which might be material to the Company and/or the Banks.
PDI LITIGATION
NBSC v. Vincent E. Galewick, Performance Development, Inc. et al. (the "PDI
Litigation"), was an interpleader action filed by NBSC on August 22, 1995 in the
Orange County Superior Court. The dispute arose from a demand by the California
Department of Corporations under California Government Code Section 7480 on
August 17, 1995 for the identification of account names and account numbers
associated with Vincent Galewick and Performance Development, Inc. (collectively
"PDI"). As a result of receipt of a declaration by the California Department of
Corporations under California Financial Code Section 952, NBSC froze $12,301,113
in PDI's accounts. On August 21, 1995, a temporary restraining order was issued
restraining PDI and others from transferring funds. NBSC was thereafter
threatened by various parties with lawsuits for refusal to release the funds,
and an attack was made on the applicability of the temporary restraining order
to the funds. NBSC deposited the funds with the Orange County Superior Court and
filed the interpleader action to allow the court to determine the disposition of
the funds. In response, the defendants filed a cross complaint against NBSC
alleging damages due to lost opportunities, breach of contract, loss of goodwill
and damage to their reputation due to the inability to use the $12,301,113.
Additional claims for an unspecified amount of punitive damages, consequential
damages and incidental damages were asserted. On November 9, 1998, the Company
entered into a Settlement Agreement and Mutual Release with the various
plaintiffs in the PDI litigation, the terms of which are confidential pursuant
to the agreement. The financial impact of this settlement has been included in
the accompanying Consolidated Financial Statements. See "Item 8. Financial
Statements and Supplementary Data".
FIP LITIGATION
Financial Institution Partners, L. P. v. California Commercial Bankshares et
al., is an action filed by Financial Institution Partners, L. P. (collectively
with its purported assignee, Hovde Capital, Inc., "FIP") on December 19, 1996 in
the United States District Court for the Central District of California. The
dispute arose from the purchase by FIP in December 1995 of 288,888 shares of
common stock of CCB (the "Initial Shares") in a private placement at $6.75 per
share ($1,949,994 in the aggregate), and FIP's agreement to purchase an
additional 266,659 shares of common stock of CCB ("CCB Common Stock") on or
prior to May 5, 1996, subject to satisfaction of certain closing conditions,
including the receipt of required regulatory approval, if any.
FIP informed CCB on April 30, 1996 that it had been informed that no
regulatory approval was required for the purchase of additional shares of CCB
Common Stock. Nevertheless, FIP did not purchase any additional shares of CCB
Common Stock pursuant to the agreement and has alleged, among other things, that
CCB failed to cooperate fully in the due diligence review of CCB that FIP
alleges was a condition precedent to its purchase of those additional shares. On
June 11, 1996, FIP requested that CCB either (a) amend the agreement to allow
FIP until December 31, 1996 to purchase additional shares of CCB Common Stock at
an increased purchase price based upon the earnings of CCB from June 1, 1996
19
<PAGE>
through November 30, 1996, or (b) repurchase the Initial Shares for an amount
equal to the purchase price, plus $6.00 per share, plus 9 percent interest, plus
FIP's legal, accounting and due diligence expenses. On June 28, 1996, CCB
informed FIP that its rights to purchase additional shares had expired under the
terms of the parties' agreement and declined either to amend the agreement or
repurchase the Initial Shares.
On December 19, 1996, FIP filed a complaint in the United States District
Court for the Central District of California against CCB, NBSC and certain of
their respective officers and directors alleging claims for breach of contract
(declaratory relief and specific performance), violation of the Exchange Act and
Rule 10b-5 thereunder, intentional misrepresentation, negligent
misrepresentation, suppression of fact and breach of contract (rescission,
restitution and damages). On August 20, 1997, FIP filed a Third Amended
Complaint adding the Company as a defendant and alleging additional claims for
breach of contact (right of first refusal) and civil violation of California
Penal Code Section 496. The complaint seeks rescission of FIP's purchase of the
Initial Shares, consequential damages in excess of $1,650,000 and punitive
damages. In the alternative, FIP seeks a declaratory judgment requiring CCB to
sell an additional 266,659 shares to FIP at $6.75 per share if FIP determines it
wishes to purchase such shares and requiring CCB and the Company to comply with
the terms of the agreement, which FIP contends provides it with a right of first
refusal as to any offers by defendants of shares of CCB Common Stock in an
amount necessary to maintain FIP's agreed beneficial ownership interest in CCB.
FIP's complaint does not specify which company's stock it believes it currently
has a right of refusal to purchase, or whether the number of shares it believes
it has a right, or right of first refusal, to purchase is subject to adjustment
as a result of the CCB Merger.
In an order dated June 30, 1998, the court dismissed FIP's claim to an
ongoing right of first refusal in CCB Common Stock and/or the Company Common
Stock. The Company's management considers FIP's remaining claims to be without
merit. The action is scheduled for trial in the third quarter of 1999.
FIRST PENSION LITIGATION
ROUSEAU ACTION. Rousseau et al. v. Rancho Vista National Bank et al., is an
action brought in the San Diego Superior Court on October 23, 1995 by a class of
investors who invested pension funds with First Pension, a pension plan
administrator, alleging claims against various banks who dealt with First
Pension (the "Rouseau Action"). The plaintiffs have stated claims for fraud and
deceit, aiding and abetting fraud and deceit, breach of fiduciary duty,
constructive fraud and aiding and abetting constructive fraud against a number
of financial institutions (the "Bank Defendants"), including SCB as successor to
Monarch and NBSC. NBSC and certain of its officers were named as defendants,
based on the fact that First Pension deposited investor pension funds into an
account at NBSC of which NBSC agreed to be custodian. The plaintiffs allege
losses of over $130 million due to the combined alleged wrongdoing of the Bank
Defendants. No specific damage claim was alleged against NBSC.
EVANS ACTION. Evans v. Home Bank et al., is a suit brought by the receiver for
First Pension and related entities in the Central District of California based
on the same allegations as in the Rousseau Action (the "Evans Action"). The
receiver alleges that NBSC and Monarch improperly delegated their respective
fiduciary duties as a custodian of pension funds to First Pension and failed to
ensure that all pension assets were transferred to the successor custodian.
Plaintiffs did not allege a specific damage claim against NBSC or Monarch.
ZWICK ACTION. Beverly Zwick v. Monarch Bank et al., is a class action brought
in the San Diego Superior Court (the "Zwick Action"). The plaintiffs are a class
of investors whose funds were deposited by First Pension in custodial accounts
held at Monarch. The plaintiffs stated claims for negligence, fraud and aiding
and abetting constructive fraud against Monarch and the Company. Plaintiffs
claim that Monarch knew or should have known that principals of First Pension
were periodically stealing funds from the custodial
20
<PAGE>
accounts through transferring authorized withdrawals to bogus accounts from
which the funds were eventually stolen. The damages alleged by the plaintiffs
exceed $2,000,000.
SETTLEMENT. On February 13, 1998, the Company entered into a Settlement
Agreement and Mutual Release, pursuant to which the Company and SCB, as
successors to Monarch and NBSC, were released from all claims raised in the
Rousseau Action, the Evans Action and the Zwick Action, and the Company paid
$1.1 million to be allocated among the various plaintiffs. The financial impact
of this settlement has been included in the accompanying Consolidated Financial
Statements. See "Item 8. Financial Statements and Supplementary Data".
SMART CLOTHES LITIGATION
Smart Clothes, Inc. et. al, v. World Trade Bank, et al, is an action brought
in the Superior Court of California, County of Los Angeles arising from a
lending relationship which originated between World Trade Bank ("WTB") and Smart
Clothes, Inc. ("Smart Clothes"). SMB is the successor to WTB by merger.
Plaintiffs asserted seven causes of action including (1) breach of loan
agreement; (2) promissory estoppel; (3) intentional misrepresentation and
concealment; (4) negligent misrepresentation and concealment; (5) rescission of
guarantee; (6) reformation; and (7) interference with contractual relations.
Plaintiffs sought damages of at least $30,000,000, based upon claims of lost
profits.
On October 23, 1998, BKLA entered into a Settlement Agreement and Mutual
Release with the various plaintiffs, the terms of which are confidential
pursuant to the agreement. The impact of this settlement has been included in
the accompanying Consolidated Financial Statements. See "Item 8. Financial
Statements and Supplementary Data".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to the shareholders of the Company, through
the solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMPANY COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKETPLACE DESIGNATION AND SALES PRICE INFORMATION
The Company Common Stock trades on the Nasdaq National
Market-Registered Trademark- under the symbol "WEBC." Prior to June 3, 1997,
trading in the Company's Common Stock occurred solely "over the counter," and
was not extensive. Consequently, the prices listed before that date represent
quotations by dealers making a market in Company Common Stock and reflect
inter-dealer prices, without adjustments for mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions. Prior to June 3, 1997,
trading in Company Common Stock was limited in volume and may not be a reliable
indicator of its market value. On June 3, 1997, Company Common Stock was
designated for quotation on the Nasdaq National Market-Registered Trademark- and
on that date the Company effected the 8.5-to-1.0 Reverse Stock Split. The prices
of Company Common Stock prior to June 3, 1997 in the following table have been
adjusted for the Reverse Stock Split. The prices listed below for periods
subsequent to June 3, 1997 are as reported by the Nasdaq National
Market-Registered Trademark-.
The number of record holders of Company Common Stock as of March 15, 1999
was approximately 2,900.
21
<PAGE>
The following table summarizes those trades of Company Common Stock of which
management is aware, setting forth the approximate high and low trade prices for
each quarterly period ended since January 1, 1997:
<TABLE>
<CAPTION>
APPROXIMATE SALES
PRICES
QUARTER ENDED --------------------
(LAST TRADING DAY) HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31, 1997............................................................. 34.00 19.13
June 30, 1997.............................................................. 37.19 28.63
September 30, 1997......................................................... 33.25 28.63
December 31, 1997.......................................................... 33.88 29.88
March 31, 1998............................................................. 43.50 30.75
June 30, 1998.............................................................. 47.88 39.50
September 30, 1998......................................................... 43.13 28.88
December 31, 1998.......................................................... 33.56 25.50
</TABLE>
On March 15, 1999, the approximate high and low trade price for Company
Common Stock was $31.94 and $31.50, respectively.
DIVIDENDS
The ability of the Company to pay dividends to its shareholders is subject
to the restrictions set forth in the CGCL. The CGCL provides that a corporation
may make a distribution to its shareholders if the corporation's retained
earnings equal at least the amount of the proposed distribution. The CGCL
further provides that, in the event that sufficient retained earnings are not
available for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets two conditions, which generally are
as follows: (i) the corporation's assets equal at least 1 1/4 times its
liabilities; and (ii) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's interest expense for such fiscal
years, then the corporation's current assets equal at least 1 1/4 times its
current liabilities. The Company's ability to pay dividends is also subject to
certain other limitations. See "Item 1. Business--Supervision and Regulation".
The primary source of income of Western Bancorp, on a stand alone basis, is
the receipt of dividends from the Banks. The availability of dividends from the
Banks is limited by various statutes and regulations. California law restricts
the amount available for cash dividends by state-chartered banks to the lesser
of retained earnings or the bank's net income for its last three fiscal years
(less any distributions to shareholders made during such period). In the event a
bank is unable to pay cash dividends due to insufficient retained earnings or
net income for its last three fiscal years, cash dividends may be paid under
certain circumstances with the prior approval of the California Department of
Financial Institutions (the "DFI"). Based on the retained earnings and net
income and distributions made to shareholders for the three fiscal years ending
December 31, 1998, the Banks must obtain prior approval from the DFI in order to
pay dividends to the Company. In addition, the FDIC in the case of SMB, and the
Board and the FDIC in the case of SCB, also have authority to prohibit SMB or
SCB, as appropriate, from engaging in what, in the opinion of the Board or FDIC,
might constitute an unsafe or unsound practice in conducting its business. It is
possible, depending upon the financial condition of the Bank in question and
other factors, that the Board and/or the FDIC could assert that payment of
dividends or other payments might, under some circumstances, be considered an
unsafe or unsound practice. In addition, the Company's ability to pay dividends
is limited by a Third Amendment to Revolving Credit Agreement, dated as of
January 26, 1998 (the "Credit Agreement"), between the Company and the Northern
Trust Company which provides that the Company may not declare or pay any
dividend other than dividends payable in the Company's Common Stock or in the
ordinary course of business not to exceed 50 percent of net income per fiscal
quarter of the Company before goodwill amortization and any restructuring
charges incurred in connection with any merger, consolidation or other
restructuring contemplated by transactions similar to a merger.
22
<PAGE>
See "Items 6, 7, 7A, Selected Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of Operations; and Qualitative and
Quantitative Disclosure about Market Risk-- Cash Liquidity and Note 9 of Notes
to Consolidated Financial Statements contained in "Item 8. Financial Statements
and Supplementary Data".
Holders of the Company Common Stock are entitled to receive dividends
declared by the Company's Board of Directors out of funds legally available
therefor under the laws of the State of California, subject to the rights of
holders of any preferred stock of the Company that may be issued after the date
hereof. On August 20, 1997, the Company's Board of Directors approved the
institution of a quarterly dividend and thereafter declared the following
dividends through the date hereof.
<TABLE>
<CAPTION>
RECORD DATE PAY DATE AMOUNT PER SHARE
- ---------------------- ---------------------- -----------------
<S> <C> <C>
November 10, 1997 December 10, 1997 $ 0.15
February 27, 1998 March 27, 1998 $ 0.15
June 5, 1998 June 26, 1998 $ 0.15
August 28, 1998 September 25, 1998 $ 0.15
December 4, 1998 December 24, 1998 $ 0.225
March 5, 1999 March 26, 1999 $ 0.225
</TABLE>
The cash dividend paid by the Company in March 1999 was approximately 41% of
the Company's diluted earnings per share of $0.55 before goodwill amortization
and restructuring charges incurred for the quarter ended December 31, 1998. The
Company's management believes that it will be able to continue paying quarterly
dividends. However, because the Company must comply with the CGCL and banking
regulations when paying dividends, there can be no assurance that the Company
will continue to pay dividends. See "Item 1. Business--Capital
Transactions--DIVIDENDS".
Prior to the SCB Merger, SC Bancorp declared three cash dividends during
1997. On each of January 23, March 27, and July 24, 1997, SC Bancorp declared a
$0.05 per share cash dividend, payable to its shareholders of record at the
close of business on February 6, May 2, and August 4, 1997, respectively. The
dividends were paid on February 20, May 20, and August 20, 1997, respectively,
totaling $374,000, $375,000, and $375,000, respectively.
PNB issued a 15 percent stock dividend in the first quarter of 1998 which
was valued at approximately $7.4 million.
RECENT SALES OF UNREGISTERED SECURITIES
For a discussion of recent sales of unregistered Company Common Stock, see
"Item 1. Business-- Capital Transactions--CAPITAL RAISING TRANSACTIONS".
ITEMS 6, 7 AND 7A. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS;
AND QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET
RISK
OVERVIEW
The Company serves as the holding company for SCB and SMB. SCB was acquired
by the Company in 1997 and is the resulting entity in mergers with Monarch, NBSC
and Pacific, each of which was accounted for as a pooling-of-interests.
On June 4, 1997 the Company consummated the CCB Merger, which resulted in
the merger of Monarch, a then wholly-owned subsidiary of the Company, with and
into NBSC with NBSC being the surviving association as a wholly-owned subsidiary
of the Company. References to NBSC refer to the merged entity except where
indicated. In connection with the CCB Merger, the Company effected the Reverse
Stock Split. Accordingly, all accompanying financial data has been restated to
give effect to the Reverse Stock Split.
23
<PAGE>
On October 10, 1997, the Company consummated the SCB Merger, as a result of
which SCB became a wholly-owned subsidiary of the Company. NBSC and SCB executed
an Agreement and Plan of Merger, dated as of October 10, 1997, pursuant to which
NBSC merged with and into SCB with SCB being the surviving corporation (the "SCB
Bank Merger"). The SCB Bank Merger was consummated on December 15, 1997.
On December 30, 1998, the Company consummated the PNB Merger, as a result of
which Pacific became a wholly-owned subsidiary of the Company. Pacific and SCB
executed an Agreement and Plan of Merger, dated as of December 31, 1998,
pursuant to which Pacific merged with and into SCB with SCB being the surviving
corporation on February 26, 1999. Also, on February 26, 1999, the Beverly Hills
branch of Pacific was sold to SMB. References to SCB refer to the entity
resulting from the SCB Bank Merger and the PNB Merger, except where indicated.
SMB is an entity resulting from mergers by Western Bank with Santa Monica
Bank and BKLA. The Company acquired Western Bank on September 30, 1996 in a
transaction that was accounted for using the purchase method of accounting.
Consequently, the results of operations contained herein include Western Bank
only from the date of the Western Acquisition. The Company acquired Santa Monica
Bank in January 1998 through the merger of Santa Monica Bank with and into
Western Bank, with Western Bank being the surviving corporation. In connection
with the SMB Acquisition, Western Bank changed its name to "Santa Monica Bank."
This transaction was accounted for using the purchase method of accounting.
Consequentially, the results of operations contained herein include Santa Monica
Bank only from the date of the SMB Acquisition.
On October 23, 1998, the Company consummated the BKLA Acquisition, whereby
BKLA was merged with and into SMB, with SMB being the surviving corporation in a
transaction accounted for using the pooling-of-interests method of accounting.
References to SMB refer to the merged entity (including Western Bank and Santa
Monica Bank from the dates of their respective acquisitions) except where
indicated.
Each of the CCB Merger, the SCB Merger, the BKLA Acquisition and the PNB
Merger were accounted for using the pooling-of-interests method of accounting.
Accordingly, all accompanying financial information has been restated to combine
the consolidated financial information of CCB, SC Bancorp, BKLA and PNB with
that of the Company. The consolidated financial information of CCB was combined
with that of the Company in restated consolidated financial statements filed in
a Current Report on Form 8-K on July 15, 1997. The consolidated financial
information of SC Bancorp was combined with that of the Company in supplemental
consolidated financial statements filed in a Current Report on Form 8-K on
October 24, 1997. The consolidated financial information of BKLA was combined
with that of the Company in restated consolidated financial statements filed in
a Current Report on Form 8-K on November 12, 1998. For further information
regarding the acquisition history of the Company, see "Item 1.
Business--Strategic Evolution."
SELECTED FINANCIAL DATA
The following tables and data set forth statistical information relating to
the Company and its subsidiaries for each of the years in the five-year period
ended December 31, 1998. Such tables and data reflect (i) the combination of the
Company with CCB, SC Bancorp, BKLA and PNB on June 4, 1997, October 10, 1997,
October 23, 1998 and December 30, 1998, respectively, each in a merger accounted
for as a pooling-of-interests, and (ii) the acquisition of Western Bank and
Santa Monica Bank from the dates of such acquisitions. The following summary
financial data was derived from the audited Consolidated Financial Statements of
the Company, which reflect the effect of the CCB Merger, the SCB Merger, the
BKLA Acquisition and the PNB Merger. This data should be read in conjunction
with the audited Consolidated Financial Statements as of December 31, 1998 and
1997 and for each of the years in the three-year period ended December 31, 1998
and related notes included elsewhere herein. See "Item 8. Financial Statements
and Supplementary Data." All share data has been adjusted to reflect the Reverse
Stock Split.
24
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1998(1) 1997 1996(2) 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENT OF OPERATIONS DATA:
Interest income......................................... $ 181,628 $ 132,309 $ 98,776 $ 82,354 $ 70,269
Interest expense........................................ 48,520 37,333 29,286 25,060 17,798
------------ ------------ ------------ ------------ ------------
Net interest income................................... 133,108 94,976 69,490 57,294 52,471
Provision for loans and lease losses.................... 1,325 4,080 2,671 9,756 4,422
Noninterest income (other than gains or losses on
securities and sale of loans and other assets
transactions)......................................... 27,297 16,805 14,836 15,529 13,010
Gain (losses) on securities transactions................ 1,550 331 276 (789) (49)
Gain on sale of loans and other assets, net............. 16,009 10,300 8,377 503 489
Other noninterest expense............................... 119,990 90,464 70,879 58,767 56,874
Lower of cost or market adjustment on loans............. -- -- -- 756 --
Goodwill amortization................................... 10,252 2,784 1,123 841 211
OREO expense (income)................................... (92) 339 159 3,350 3,534
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes............................ 46,489 24,745 18,147 (933) 880
Income tax expense (benefit)............................ 26,333 12,832 4,601 (1,831) 1,680
------------ ------------ ------------ ------------ ------------
Net income (loss)..................................... $ 20,156 $ 11,913 $ 13,546 $ 898 $ (800)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Comprehensive income (loss)........................... $ 20,942 $ 12,925 $ 12,884 $ 7,101 ($ 3,919)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
PER SHARE DATA
Basic net income (loss) per share....................... $ 1.00 $ 0.83 $ 1.18 $ 0.10 $ (0.10)
Diluted net income (loss) per share(3).................. $ 0.98 $ 0.79 $ 1.14 $ 0.09 $ (0.10)
Cash dividends declared................................. $ 0.675 $ 0.30 $ -- $ -- $ --
Dividend payout ratio................................... 68.9% 38.0% 0.00% 0.00% 0.00%
Book value per share.................................... $ 16.88 $ 12.10 $ 11.57 $ 8.73 $ 9.02
Shares used to compute diluted net income (loss) per
share................................................. 20,611,000 15,036,700 11,899,200 9,674,900 7,773,000
BALANCE SHEET DATA:
Assets.................................................. $ 2,585,880 $ 1,898,417 $ 1,667,816 $ 1,170,922 $ 995,286
Loans and leases net of deferred fees and unearned
income(4)............................................. 1,668,954 1,141,192 992,615 703,180 582,281
Loans held for sale..................................... 130,255 97,211 63,855 51,588 12,448
Allowance for loan and lease losses..................... 26,743 20,271 19,251 18,147 16,475
Securities.............................................. 365,084 275,857 362,325 228,926 269,826
Goodwill................................................ 145,514 36,369 34,630 5,864 2,464
Deposits................................................ 2,172,269 1,675,698 1,460,287 1,046,210 892,901
Borrowings.............................................. 23,722 19,797 31,494 9,202 16,991
Shareholders' equity.................................... 352,075 184,706 160,362 104,847 78,348
ASSET QUALITY
Nonaccrual loans and leases............................. $ 14,929 $ 12,990 $ 22,171 $ 28,387 $ 20,788
OREO.................................................... 4,361 8,212 11,104 6,243 13,652
------------ ------------ ------------ ------------ ------------
Total nonaccrual loans and leases and OREO............ $ 19,290 $ 21,202 $ 33,275 $ 34,630 $ 34,440
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
PERFORMANCE RATIOS:
Return on average assets................................ 0.80% 0.68% 1.04% 0.08% (0.08%)
Return on average shareholders' equity.................. 5.94% 6.91% 11.18% 0.99% (0.97%)
Net interest spread..................................... 4.86% 4.86% 4.74% 4.81% 4.72%
Net interest margin (net interest income/average
interest earning assets).............................. 6.16% 6.14% 6.00% 5.98% 5.71%
Average shareholders' equity to average assets.......... 13.51% 9.89% 9.32% 8.41% 7.88%
ASSET QUALITY RATIOS(4):
Nonaccrual loans and leases to gross loans and leases... 0.89% 1.13% 2.23% 4.02% 3.56%
Nonaccrual loans and leases and OREO to total assets.... 0.75% 1.12% 2.00% 2.96% 3.46%
Allowance for loan and lease losses to gross loans and
leases................................................ 1.60% 1.77% 1.93% 2.57% 2.82%
Allowance for loan and lease losses to nonaccrual loans
and leases............................................ 179% 156% 87% 64% 79%
Net charge-offs to average loans and leases............. 0.23% 0.46% 0.87% 1.55% 2.25%
</TABLE>
- ------------------------------
(1) Includes the accounts and operating results of Santa Monica Bank since the
January 27, 1998 acquisition date.
(2) Includes the accounts and operating results of Western since the September
30, 1996 acquisition date.
(3) Excludes stock options as common stock equivalents in 1994 as the effect
thereof was anti-dilutive.
(4) Includes only loans held for investment.
25
<PAGE>
BALANCE SHEET ANALYSIS
OVERVIEW
The Company had total assets of approximately $2.6 billion at December 31,
1998 as compared to total assets of approximately $1.9 billion at December 31,
1997. At January 31, 1998, the Company had total assets of approximately $2.7
billion after giving effect to the SMB Acquisition. The Company's total deposits
increased from approximately $1.7 billion at December 31, 1997 to approximately
$2.2 billion at December 31, 1998. The SMB Acquisition added approximately $584
million of deposits as of January 31, 1998. Common shareholders' equity
increased $167.4 million from approximately $184.7 million at December 31, 1997
to $352.1 million at December 31, 1998. Of this increase, approximately $150
million was related to equity transactions associated with the SMB Acquisition.
Following is an analysis of the Company's assets and liabilities as of December
31, 1998, including a discussion of capital activities and liquidity.
CAPITAL ACTIVITIES
In August 1997 the Company instituted a quarterly dividend and thereafter
declared the following dividends through the date hereof.
<TABLE>
<CAPTION>
RECORD DATE PAY DATE AMOUNT PER SHARE
- ---------------------- ---------------------- -----------------
<S> <C> <C>
November 10, 1997 December 10, 1997 $ 0.15
February 27, 1998 March 27, 1998 $ 0.15
June 5, 1998 June 26, 1998 $ 0.15
August 28, 1998 September 25, 1998 $ 0.15
December 4, 1998 December 24, 1998 $ 0.225
March 5, 1999 March 26, 1999 $ 0.225
</TABLE>
For a more detailed description of the Company's dividends, See "Item 1.
Business--Capital Transactions--DIVIDENDS" and "Item 5. Market For
Registration's Common Stock and Related Security Holder Matters--DIVIDENDS."
On December 30, 1998, the Company consummated the PNB Merger, pursuant to
which, 2,779,733 shares of Company Common Stock were issued as consideration.
(For further information on the PNB Merger, see "Item 1. Business--Strategic
Evolution--PNB MERGER" and Note 2 of Notes to Consolidated Financial Statements
contained in "Item 8. Financial Statements and Supplementary Data.")
On October 23, 1998, the Company consummated the BKLA Acquisition, pursuant
to which, approximately 2,214,350 shares of Company Common Stock (prior to
adjustment for fractional shares) were issued as consideration. (For further
information on the BKLA Acquisition, see "Item 1. Business-- Strategic
Evolution--BKLA ACQUISITION" and Note 2 of Notes to Consolidated Financial
Statements contained in "Item 8. Financial Statements and Supplementary Data.")
On January 27, 1998, the Company consummated 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 SMB Common
Stock issued and outstanding at the time was converted into the right to receive
either (i) $28.00 in cash or (ii) 0.875 shares of Company Common Stock. Of the
7,084,244 shares of SMB Common Stock outstanding at the time of the SMB
Acquisition, approximately 57.2 percent elected to receive the Cash
Consideration, resulting in a payment of approximately $113,451,000 in the
aggregate, and approximately 42.8 percent received the Stock Consideration
resulting in the issuance of approximately 2,653,000 shares of Company Common
Stock. In order to fund a part of the Cash Consideration payments, the Company
issued an additional 2,327,550 shares of Company Common Stock in the 1998
Private Placement for $65,171,400 in the aggregate. Accordingly, in the
aggregate, approximately 4,980,550 shares of Company Common Stock were
26
<PAGE>
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. In conjunction with the SMB Acquisition, the
Company and Santa Monica Bank incurred after-tax merger costs of approximately
$8.4 million, representing $2.7 million in investment banking fees and other
acquisition costs including filing and professional fees, employment
compensation, and costs of computer conversions and consolidation. These
expenses were capitalized as part of goodwill. See "Item 1. Business--Strategic
Evolution--SMB ACQUISITION" and Note 2 of Notes to Consolidated Financial
Statements contained in "Item 8. Financial Statements and Supplementary Data".
On October 10, 1997, the Company consummated the SCB Merger, pursuant to
which, approximately 3,555,500 shares of Company Common Stock (prior to
adjustment for fractional shares) were issued as consideration. (For further
information on the SCB Merger, see "Item 1. Business--Strategic Evolution-- SCB
MERGER" and Note 2 of Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data").
On June 4, 1997, the Company consummated the CCB Merger, pursuant to which,
3,043,226 shares of Company Common Stock were issued as consideration. In
addition, on June 3, 1997, in connection with the CCB Merger, the Company
completed the Reverse Stock Split. (For further information on the CCB Merger,
see "Item 1. Business--Strategic Evolution--CCB MERGER" and Note 2 of Notes to
Consolidated Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data.") All share amounts herein have been restated to give effect
to the Reverse Stock Split. See "Item 1. Business-- Capital
Transactions--REVERSE STOCK SPLIT."
On September 30, 1996, the Company acquired all of the issued and
outstanding shares of Western Bank. The Company funded the purchase price with
the issuance of approximately 3,076,045 shares of Company Common Stock in the
1996 Private Placement from which the Company raised approximately $42.2
million, net of approximately $0.9 million in issuance costs, and from the
proceeds of a three year loan of $26.5 million from The Northern Trust Company.
A $15.5 million dividend was declared by Western Bank concurrently with the
completion of the Western Acquisition and paid to the Company, which was used to
reduce the $26.5 million note to $11.0 million. See "Item 1. Business--Strategic
Evolution--WESTERN ACQUISITION," "Item 1. Business--Capital
Transactions--CAPITAL RAISING TRANSACTIONS" and Note 2 of Notes to Consolidated
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data".
CASH LIQUIDITY
The Company defines "Cash Liquidity" as cash and cash equivalents plus
securities and loans available for sale less pledged assets and the reserve
requirement divided by total deposits and borrowings less assets, mainly
securities and loans, pledged for deposit balances. The Company manages Cash
Liquidity on a consolidated basis and will sell or borrow federal funds between
the Banks and will participate loans based upon the liquidity needs of each of
the Banks subject to certain regulatory limitations. At December 31, 1998, Cash
Liquidity at the Company was 25 percent. During 1998, the Company consistently
maintained Cash Liquidity of approximately 25 percent or greater, which was a
product of increasing demand for loans despite high underwriting standards
established during the latter part of a major recession. The Company was also
hesitant to commit liquid funds to mid- to long-term investments during a period
when the yield curve was relatively flat and in a historically low interest rate
environment such as existed during most of 1998, and in anticipation of
increased funding needs due to expected growth in the loan portfolio of the
Company.
The primary sources of liquidity of Western Bancorp, on a stand alone basis,
are the receipt of dividends from the Banks, the ability to raise capital (See
"--CAPITAL ACTIVITIES") and a revolving line of credit (See "--BORROWINGS"). The
availability of dividends from the Banks is limited by various statutes and
27
<PAGE>
regulations of state and federal law. California law restricts the amount
available for cash dividends by state-chartered banks to the lesser of retained
earnings or the bank's net income for its last three fiscal years (less any
distributions to shareholders made during such period). In the event a bank is
unable to pay cash dividends due to insufficient retained earnings or net income
for its last three fiscal years, cash dividends may be paid under certain
circumstances with the prior approval of the DFI. In conjunction with the
acquisition of SMB on January 27, 1998, the Company received regulatory approval
to take dividends from SCB and SMB in the amount of $9 million and $45 million,
respectively. During 1998 the Company received regulatory approval to take
additional dividends of $8.4 million and $10.0 million from SCB and SMB,
respectively. Based on the retained earnings and net income and distributions
made to shareholders for the three fiscal years ending December 31, 1998, the
Banks must obtain prior approval from the DFI in order to pay dividends. (See
Note 9 of Notes to Consolidated Financial Statements contained in "Item 8.
Financial Statements and Supplementary Data", "Item 5. Market for Company Common
Stock and Related Security Holder Matters--Dividends" and "--Liquidity, Interest
Rate Risk and Market Risk").
INVESTMENT PORTFOLIO
The carrying value of securities available for sale increased approximately
$135 million from $220 million at December 31, 1997 to $355 million at December
31, 1998. This increase is due primarily to the SMB Acquisition which added
approximately $89 million in securities available for sale and from transferring
approximately $79.0 million of securities held to maturity to the available for
sale portfolio after the BKLA Acquisition. The amortized cost of the securities
transferred was $79.4 million, which represented the entire held to maturity
portfolio at such time, and the related unrealized loss of $187,000, net of tax,
was included in shareholders' equity.
The carrying value of securities held to maturity and securities available
for sale at the dates indicated are summarized in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities held to maturity:
US Government securities................................................... $ -- $ 24,966 $ 1,147
US Agency securities....................................................... -- 17,962 3,989
Mortgaged-backed securities................................................ -- 5,210 1,921
---------- ---------- ----------
Total debt securities...................................................... $ -- $ 48,138 $ 7,057
---------- ---------- ----------
---------- ---------- ----------
Securities available for sale:
US Government securities................................................... $ 68,912 $ 108,550 $ 177,546
US Agency securities or insured obligations................................ 142,748 55,549 97,491
Mortgaged-backed securities................................................ 77,900 53,642 61,836
State and political subdivisions........................................... 5,374 1,220 411
Other debt securities...................................................... 59,354 -- 1,449
---------- ---------- ----------
Total debt securities...................................................... 354,288 218,961 338,733
Mutual funds............................................................... -- -- 9,078
Other equity securities.................................................... 1,036 1,062 783
---------- ---------- ----------
Total...................................................................... $ 355,324 $ 220,023 $ 348,594
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
28
<PAGE>
The following table shows the maturities of debt securities available for
sale at December 31, 1998 (Dollars in thousands):
<TABLE>
<CAPTION>
1 YEAR THRU 5 YEARS THRU
TOTAL 1 YEAR OR LESS 5 YEARS 10 YEARS
-------------------- -------------------- ---------------------- ----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- --------- --------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Government securities............. $ 68,912 4.66% $ 58,842 4.68% $ 10,070 4.56% $ -- --
US Agency or insured obligations..... 142,748 4.82% 120,189 4.75% 22,076 5.10% 483 8.14%
Mortgage-backed Securities........... 77,900 6.11% 10,353 5.75% 26,083 5.74% 1,979 6.38%
Other debt securities................ 64,728 5.92% 27,311 4.39% 2,214 3.29% 446 4.14%
--------- --------- ----------- -----------
Total.............................. $ 354,288 5.27% $ 216,695 4.73% $ 60,443 5.22% $ 2,908 6.33%
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Amortized cost..................... $ 353,172 5.81% $ 216,272 5.48% $ 60,268 5.56% $ 2,857 5.94%
--------- --------- ----------- -----------
--------- --------- ----------- -----------
<CAPTION>
OVER 10 YEARS
----------------------
AMOUNT YIELD
----------- ---------
<S> <C> <C>
US Government securities............. $ -- --
US Agency or insured obligations..... -- --
Mortgage-backed Securities........... 39,485 6.43%
Other debt securities................ 34,757 7.31%
-----------
Total.............................. $ 74,242 6.84%
-----------
-----------
Amortized cost..................... $ 73,775 6.99%
-----------
-----------
</TABLE>
At December 31, 1998, the Company did not have investments in securities
issued by any one non-federal issuer which exceeded ten percent of shareholders'
equity.
The Banks do not have securities trading accounts and do not intend to trade
securities. For further information, see Note 4 of Notes to Consolidated
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data".
LOAN AND LEASE PORTFOLIO
The Company, through the Banks, concentrates its lending activities in four
principal areas.
(1) REAL ESTATE LOANS. Real estate loans are comprised of construction
loans, miniperm loans collateralized by first or junior trust deeds on specific
properties and equity lines of credit. The properties collateralizing real
estate loans are principally located in the Company's primary market areas of
Los Angeles, Orange and San Diego counties in California and the contiguous
communities. The construction loans are comprised of loans on residential and
income producing properties that generally have terms of less than two years and
typically bear an interest rate that floats with the prime rate or other
established index. The miniperm loans finance the purchase and/or ownership of
income producing properties. Miniperm loans are generally made with an
amortization schedule ranging from fifteen to thirty years with a lump sum
balloon payment due in one to ten years. Equity lines of credit are revolving
lines of credit collateralized by junior trust deeds on real properties. They
bear a rate of interest that floats with the prime rate, LIBOR, or other
established index and have maturities of five to seven years. The Company also
makes a small number of loans on 1-4 family residential properties and 5 or more
unit residential properties. From time to time, the Company purchases
participation interests in loans made by other institutions. These loans are
subject to the same underwriting criteria and approval process as loans made
directly by the Company. The Banks' real estate portfolio is subject to certain
risks, including (i) a possible downturn in the Southern California economy such
as that which occurred during the early 1990s, (ii) interest rate increases due
to inflation, (iii) reduction in real estate values in Southern California, and
(iv) continued increase in competitive pricing and loan structure. The Banks
strive to reduce the exposure to such risks by (i) reviewing each loan request
and renewal individually, (ii) using a dual signature approval system, whereby
both the marketing and credit administration departments must approve each
request individually, and (iii) following strict written loan policies,
including, among other factors, minimum collateral requirements and maximum
loan-to-value ratio requirements. Each loan request is reviewed on the basis of
the Bank's ability to recover both principal and interest in view of the
inherent risks.
(2) COMMERCIAL LOANS. Commercial loans are made to finance operations, to
provide working capital or for specific purposes, such as to finance the
purchase of assets, equipment or inventory. Since a borrower's cash flow from
operations is generally the primary source of repayment, the Company's policies
provide specific guidelines regarding required debt coverage and other important
financial ratios. Commercial loans include lines of credit and commercial term
loans. Lines of credit are extended to
29
<PAGE>
businesses or individuals based on the financial strength and integrity of the
borrower and are generally (with some exceptions) collateralized by short term
assets such as accounts receivable and inventory (monitored by the Company's
asset based lending department), equipment or real estate and generally have a
maturity of one year or less. Such lines of credit bear an interest rate that
floats with the prime rate, LIBOR, or other established index. Commercial term
loans are typically made to finance the acquisition of fixed assets, to
refinance short term debt originally used to purchase fixed assets or, in rare
cases, to finance the purchase of businesses. Commercial term loans generally
have terms from one to five years. Commercial term loans may be collateralized
by the asset being acquired or other available assets and bear interest which
either floats with the prime rate, LIBOR, or other established index or is fixed
for the term of the loan. The Banks' portfolio of commercial loans is subject to
certain risks, including (i) a possible downturn in the Southern California
economy which could potentially be brought on by large companies or industries
leaving the state, (ii) possible higher interest rates, and (iii) the possible
deterioration of companies' financial capabilities over time. The Banks strive
to reduce the exposure to such risks through (i) a dual signature approval
system, whereby both the marketing and credit administration departments must
approve each credit request individually, and (ii) following strict written loan
policies. In addition, loans based on short term asset values are monitored on a
monthly or quarterly bases. In general, the Banks receive and review financial
statements of borrowing customers on an ongoing basis during the term of the
relationship and respond to any deterioration noted.
(3) RESIDENTIAL MORTGAGE LOANS. Residential mortgage loans originated by
SCB's mortgage division include conventional, jumbo, and FHA and VA guaranteed
loans. The Mortgage Division operates both wholesale and retail departments,
although the wholesale division accounts for the majority of the loan volume.
The wholesale business is generated through a professional commissioned sales
staff which services an extensive network of over 1,500 wholesale mortgage loan
brokers. All of the mortgage loans the Mortgage Division originates are sold to
institutional investors. These loans are funded by SCB and generally are sold
within 30 days after funding. The Company does not retain the servicing on the
mortgage loans it sells. Over 95 percent of the mortgage loans originated by the
Mortgage Division are considered by the market to be A rated loans. The Mortgage
Division also originates and sells a small number of sub-prime A- rated loans.
For additional information regarding the Mortgage Division, see "Item I.
Business--Business of the Company--THE MORTGAGE DIVISION" and Note 21 to the
Consolidated Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data".
(4) CONSUMER LOANS AND LEASES. Consumer loans include personal loans, auto
loans, boat loans, home improvement loans, equipment loans, revolving lines of
credit and other loans typically made by banks to individual borrowers. The
Company also makes leases on new and used automobiles. These leases may be
closed-end or commercial leases, have terms of one to five years and bear
interest at a fixed rate. The Banks' consumer loan portfolio is subject to
certain risks, including (i) the high amount of credit offered to consumers in
the market, (ii) the possibility of higher interest rates due to possible
inflation, and (iii) the consumer bankruptcy laws which allow consumers to
discharge certain debts. The Banks strive to reduce the exposure to such risks
through (i) the use of standardized credit scoring techniques which are
continually updated in light of any recent trends and (ii) the direct approval
of loans in excess of $100,000 by credit administration department using a dual
signature system of approval and strict adherence to written credit policies.
In addition to the dual signature method of loan approval and strict
adherence to written lending policies, all major loan commitments are reviewed
after approval, on a monthly basis, by an outside, independent loan review team.
30
<PAGE>
The following table sets forth the amount of loans and leases outstanding at
the end of the following periods including loans and leases available for sale,
according to the type of loan. The Company's lending activities are
predominantly in Southern California, and the Company has no foreign loans.
<TABLE>
<CAPTION>
LOANS AND LEASES OUTSTANDING AT DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan type:
Real estate construction....................... $ 193,378 $ 91,314 $ 78,539 $ 46,255 $ 44,199
Real estate mortgage........................... 739,551 498,598 398,300 243,270 220,132
Commercial..................................... 581,708 453,843 399,525 324,450 242,196
Leases......................................... 1,551 1,934 3,027 3,463 4,159
Installment and other.......................... 157,462 98,940 116,447 87,946 73,705
------------ ------------ ---------- ---------- ----------
Gross loans and leases......................... 1,673,650 1,144,629 995,838 705,384 584,391
------------ ------------ ---------- ---------- ----------
Less:
Unearned lease income.......................... (190) (226) (364) (399) (544)
Deferred loan fees............................. (4,506) (3,211) (2,859) (1,805) (1,566)
Allowance for loan and lease losses............ (26,743) (20,271) (19,251) (18,147) (16,475)
------------ ------------ ---------- ---------- ----------
Net loans and leases......................... $ 1,642,211 $ 1,120,921 $ 973,364 $ 685,033 $ 565,806
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
Loans available for sale......................... $ 130,255 $ 97,211 $ 63,855 $ 51,588 $ 12,448
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
</TABLE>
Gross loans increased $529 million from $1.14 billion at December 31, 1997
to $1.67 billion at December 31, 1998 and the allowance for loan and lease
losses increased approximately $6.5 million from $20.3 million at December 31,
1997 to $26.7 million at December 31, 1998. The increase in loans and leases
during 1998 is attributable primarily to the SMB Acquisition which added
approximately $396 million of loans. The growth and quality achieved in the loan
portfolio in 1998 and 1997 is also attributable to the continued growth of the
Southern California economy and the associated borrowing requirements of the
Company's customers to participate in that growth. The growth in the allowance
for loan and lease losses during 1998 is attributable primarily to the SMB
Acquisition which added approximately $8.7 million to the allowance.
With certain exceptions, a bank is permitted under California law to make
"secured loans" (as defined for regulatory purposes) to a single borrower in
aggregate amounts up to 25 percent of the sum of shareholders' equity (excluding
goodwill and the effect of the unrealized gain or loss on securities available
for sale included in shareholders' equity), allowance for loan and lease losses,
capital reserves, if any, and debentures, if any, and up to 15 percent of such
sum for the aggregate of "unsecured loans" (as defined for regulatory purposes).
As of December 31, 1998 these consolidated lending limits for the Banks were
approximately $58.2 million for secured loans, and approximately $34.9 million
for unsecured loans. The Company sells participations in loans between its
subsidiaries and to outside parties where necessary to stay within lending
limits or otherwise to limit the Company's exposure in particular credits. Where
deemed appropriate to better utilize available funds, the Company may purchase
participations in loans. At December 31, 1998, there are no loans outstanding to
a single borrower which exceed these limits.
MORTGAGE LOANS HELD FOR SALE. Through PNB Mortgage, a division of SCB, the
Company operates a residential mortgage division for the origination and sale of
mortgage loans on a servicing-released basis. A substantial portion of all
mortgage loans originated are in Los Angeles, Orange, Riverside, and San Diego
counties in California and are sold to institutional investors.
During 1998, PNB Mortgage originated approximately $1.6 billion in mortgage
loans compared to $1.1 billion for 1997. Approximately 49 percent of the
mortgage loan volume originated in 1998 by PNB
31
<PAGE>
Mortgage consisted of purchase money loans, and approximately 51 percent
consisted of loan refinances. Approximately 73 percent of the mortgage loan
volume originated in 1997 by PNB Mortgage consisted of purchase money loans and
approximately 27 percent consisted of loan refinances. The increase in loan
refinancing from 1997 to 1998 is largely due to the low interest rate
environment which existed during 1998, and there can be no assurance that the
low interest rate environment will continue in the future.
SEGMENT INFORMATION
The Company operates in two business segments: banking and mortgage banking.
These segments are managed separately because each requires different levels of
resources and serves 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
the 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, litigation settlement costs and
merger costs are allocated to the banking segment as such expenses relate either
to acquisitions of banking organizations or banking in general.
The mortgage banking segment originates residential mortgage loans for sale
to third parties, which are funded by the banking segment, on a
servicing-released basis 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, 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 net
revenue of the segment. The Company does not allocate either the interest income
on mortgage loans held for sale or the interest expense related to the cost of
funds of the mortgage banking segment's originations. There are no other
intersegment sales, revenues or transfers.
The following schedules reconcile significant portions, but not all, of both
the banking and mortgage banking segments' financial information.
32
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------ ------------------------------------ ----------------------
MORTGAGE CONSOLIDATED MORTGAGE CONSOLIDATED MORTGAGE
BANKING BANKING COMPANY BANKING BANKING COMPANY BANKING BANKING
--------- ----------- ------------ --------- ----------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income
(excluding provision for
loan and lease
losses)................. $ 133,108 $ -- $ 133,108 $ 94,976 $ -- $ 94,976 $ 69,490 $ --
Provision for loan and
lease losses............ 1,325 -- 1,325 4,080 -- 4,080 2,671 --
Provision for losses on
sold loans.............. -- 1,701 1,701 -- 276 276 -- 1,080
Gain on sale of loans..... 717 15,292 16,009 716 9,584 10,300 1,128 7,249
Other non-interest
income.................. 21,304 7,543 28,847 11,797 5,339 17,136 11,232 3,880
Salaries and benefits..... 43,987 11,221 55,208 34,128 7,664 41,792 30,377 5,514
Depreciation and
amortization............ 5,025 261 5,286 3,285 179 3,464 3,037 155
Litigation settlements.... 4,100 -- 4,100 -- -- -- 950 --
Merger related costs...... 17,938 -- 17,938 14,201 -- 14,201 -- --
Income before taxes....... 40,535 5,954 46,489 20,410 4,335 24,745 15,408 2,739
Income taxes.............. 23,832 2,501 26,333 11,011 1,821 12,832 3,451 1,150
Net income................ 16,703 3,453 20,156 9,399 2,514 11,913 11,957 1,589
Additions to fixed
assets.................. 21,032 361 21,393 1,976 144 2,120 6,689 249
Total assets.............. $2,447,004 $ 138,876 $2,585,880 $1,797,241 $ 101,176 $1,898,417 $1,601,563 $ 66,253
<CAPTION>
CONSOLIDATED
COMPANY
------------
<S> <C>
Net interest income
(excluding provision for
loan and lease
losses)................. $ 69,490
Provision for loan and
lease losses............ 2,671
Provision for losses on
sold loans.............. 1,080
Gain on sale of loans..... 8,377
Other non-interest
income.................. 15,112
Salaries and benefits..... 35,891
Depreciation and
amortization............ 3,912
Litigation settlements.... 950
Merger related costs...... --
Income before taxes....... 18,147
Income taxes.............. 4,601
Net income................ 13,546
Additions to fixed
assets.................. 6,938
Total assets.............. $1,667,816
</TABLE>
The mortgage banking segment derives its revenue from noninterest income,
which is primarily gain on sale of loans and processing fees collected for
originations. Gains on sale of loans and noninterest income in the mortgage
banking segment have each grown steadily from 1996 to 1998. Gain on sale of
loans for the year ended December 31, 1996, 1997 and 1998 was $7.2 million, $9.6
million and $15.3 million, respectively, and other noninterest income was $3.9
million, $5.3 million and $7.5 million for the same time periods, respectively.
The increase in mortgage banking revenues was offset partially by an increase in
certain operating expenses, the largest component being salary and benefits,
which was $5.5 million, $7.7 million and $11.2 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
The banking segment derives its revenue mainly from interest income received
on loans and investments. Net interest income has increased from $69.5 million
for the year ended December 31, 1996 to $133.1 million for the year ended
December 31, 1998, such increase being attributable primarily to the increase in
the Company's assets resulting from the Western Acquisition and SMB Acquisition.
The banking segment's growth in revenue is also offset partially by an increase
in operating expenses, the largest component being salary and benefits, which
increased from $30.4 million to $44.0 million for the year ended December 31,
1996 to December 31, 1998. In addition, the banking segment has absorbed the
costs of mergers and litigation, as much of these expenses directly related to
the banking segment.
In the ordinary course of business, PNB Mortgage has liability under
representations and warranties made to purchasers and insurers of mortgage
loans. Under certain circumstances, PNB Mortgage may become liable for the
unpaid principal and interest on defaulted loans (whether recourse or
non-recourse) or other loans if there has been a breach of representations or
warranties.
Until September 30, 1996, substantially all mortgage loans were sold with a
recourse provision. After October 1, 1996, the majority of the loans sold were
without a recourse provision. Generally, loans sold under the recourse provision
are required to be repurchased by PNB Mortgage if the loan becomes delinquent
within two to six months of funding. PNB Mortgage has the choice to not
repurchase the loan; however, in the event that PNB Mortgage elects not to
repurchase the loan, PNB Mortgage must indemnify the investor for any and all
costs associated with the investors collection of the loan. During 1997, PNB
Mortgage chose to indemnify the majority of the loans subject to a recourse
provision.
Management is continually assessing its risks associated with both
representations and warranties and the recourse provisions on mortgage loans
sold and has established an accrued liability for the estimated
33
<PAGE>
future losses. Management believes that this risk has been adequately provided
for in the Company's financial statements. Management uses its best judgment in
establishing this liability; however, this liability is an estimate which is
inherently uncertain and depends on the outcome of future events. Although the
Company believes that this estimated liability is adequate at December 31, 1998,
there can be no assurance that this estimated liability will be adequate to
cover future losses. The following is a summary of transactions affecting this
estimated liability for the years indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at the beginning of the period............................. $ 382 $ 461 $ 232
Provision for losses............................................. 1,701 276 1,080
Charges, net of recoveries (806) (355) (851)
--------- --------- ---------
Balance at the end of the period................................... $ 1,277 $ 382 $ 461
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table indicates the obligations which have been incurred in
connection with representations and warranties and the recourse provision for
the years indicated. It generally takes nine to twelve months after loans are
funded to incur a loss.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ------------ ----------
(IN THOUSANDS, EXCEPT FOR THE NUMBER
OF LOANS)
<S> <C> <C> <C>
Number of loans repurchased/indemnified................. 64 44 93
Dollar volume of loans repurchased/indemnified.......... $ 8,438 $ 5,553 $ 10,914
</TABLE>
Mortgage loans held for sale are reported at the lower of cost or market. A
portion of mortage loans held for sale are not funded until PNB Mortgage obtains
a purchase commitment from a third party. The risk specifically associated with
this portion of mortgage loans held for sale is that PNB Mortgage will fail to
deliver the loans to the purchaser by the commitment date. Policies and
procedures are in place to insure that all mortgage loans held for sale are
shipped to the purchaser within the required time frames. The total amount of
mortgage loans which had purchase commitments at December 31, 1998, 1997 and
1996 were $84,989,000 $59,592,000 and $38,690,000, respectively.
Loans in process for which interest rates were committed to the mortgage
broker/borrower totaled $60,923,000, $38,465,000 and $27,174,000 as of December
31, 1998, 1997 and 1996. At December 31, 1998, 1997 and 1996, PNB Mortgage had
$73,500,000, $56,000,000 and $43,000,000, respectively of mandatory forward
commitments to sell whole loans relating to its unfunded pipeline of rate-locked
loans and unallocated funded loans held for sale. Gains and losses on mandatory
forward commitments are realized in the period when the related loans are sold.
Unrealized gains and losses on forward commitments are included in the lower of
cost or market valuation for mortgage loans held for sale. At December 31, 1998,
1997 and 1996, the unrealized (loss)/gain on PNB Mortgage mandatory forward
commitments was ($116,000), ($286,000) and $270,000, respectively.
MATURITIES OF LOANS AND LEASES. As is customary in the banking industry,
loans that meet sound underwriting criteria can be renewed by mutual agreement
between the Company and the borrower.
34
<PAGE>
Because the Company is unable to estimate the extent to which its borrowers will
renew their loans, the table below is based on contractual maturities of loans
held for investment at December 31, 1998:
<TABLE>
<CAPTION>
ONE YEAR
ONE YEAR OR THROUGH 5 OVER 5
LESS YEARS YEARS TOTAL
----------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate construction.................. $ 131,998 $ 28,566 $ 32,814 $ 193,378
Real estate mortgage...................... 92,691 164,574 482,286 739,551
Commercial................................ 262,538 190,992 128,178 581,708
Installment, leases, and other............ 20,657 42,866 95,490 159,013
----------- ---------- ---------- ------------
Total................................. $ 507,884 $ 426,998 $ 738,768 $ 1,673,650
----------- ---------- ---------- ------------
----------- ---------- ---------- ------------
Loan maturing after one year with:
Fixed interest rates.................... $ 210,102 $ 373,012
Variable interest rates................. 216,896 365,756
---------- ----------
Total................................. $ 426,998 $ 738,768
---------- ----------
---------- ----------
</TABLE>
Due to the nature of Company's mortgage banking operations, loans held for
sale are generally sold within 30 days. Therefore the contractual maturity of
these loans are considered to be one year or less with respect to the Company.
These loans consist mainly of fixed rate products.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES. The following table
shows the Company's nonaccrual, past due and restructured loans and leases held
for investment.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS AND LEASES:
Real estate construction................................. $ -- $ 387 $ 1,031 $ 6,674 $ 7,730
Real estate mortgage..................................... 8,614 8,863 16,043 17,161 4,110
Commercial............................................... 4,907 3,324 3,737 4,288 8,443
Leases................................................... -- -- -- 27 --
Installment and others................................... 1,408 416 1,360 237 505
--------- --------- --------- --------- ---------
Total.................................................. $ 14,929 $ 12,990 $ 22,171 $ 28,387 $ 20,788
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total nonaccrual loans and leases as a percentage of gross
loans and leases......................................... 0.89% 1.13% 2.23% 4.02% 3.56%
Allowance for loan and lease losses to nonaccrual loans and
leases................................................... 179% 156% 87% 64% 79%
LOANS PAST DUE 90 DAYS OR MORE ON ACCRUAL STATUS:
Real estate mortgage..................................... $ 825 $ 160 $ 174 $ 328 $ 979
Commercial............................................... 135 185 296 -- 1,014
Installment and other.................................... 47 18 -- 54 46
--------- --------- --------- --------- ---------
Total.................................................... $ 1,007 $ 363 $ 470 $ 382 $ 2,039
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RESTRUCTURED LOANS:
On accrual status........................................ $ 5,599 $ 7,209 $ 6,219 $ 4,528 $ 3,262
On nonaccrual status (1)................................. 1,303 6,346 5,170 168 8,024
--------- --------- --------- --------- ---------
Total.................................................. $ 6,902 $ 13,555 $ 11,389 $ 4,696 $ 11,286
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Included in nonaccrual loans above.
35
<PAGE>
Nonaccrual loans increased by $1.9 million from $13.0 million at December
31, 1997 to $14.9 million at December 31, 1998. The increase was due in a large
part to the inclusion of $2.1 million in nonaccrual loans acquired through the
SMB Acquisition which was accounted for as a purchase. During the period,
nonaccrual loans increased by $1.9 million at SMB while nonaccrual loans
decreased by $2.1 million at SCB. Total nonaccrual loans and leases as a
percentage of gross loans and leases decreased from 1.13 percent at December 31,
1997 to 0.89 percent at December 31, 1998.
There are no commitments to lend additional funds to borrowers listed as
nonaccrual or past due 90 days or more.
The Company's policy concerning nonperforming loans is to cease accruing
interest, and to charge off all accrued and unpaid interest on loans which are
past due as to principal and/or interest for at least 90 days, or at such
earlier time as management determines timely collection of the interest to be in
doubt. However, in certain circumstances loans which are past due 90 days or
more may continue accruing interest or interest may not be charged off when the
related loans are well secured or in the process of being collected. When the
Company receives cash on nonaccrual loans or leases, the Company's policy is to
record such receipts first as a reduction to the principal and then as interest
income. A nonperforming loan or lease may be returned to accrual status if the
loan or lease performs for a period of six months.
The Company has not been active in areas that involve hazardous waste. Based
on a general survey of the loan portfolios of the Banks, credit reviews during
regulatory examinations conversations with local appraisers, and the type of
lending currently and historically done by the Banks, the Company does not
believe that it is exposed to any material loss or liability related to
environmental issues as of the date hereof. Based on such reviews, one loan with
a principal balance of $2.8 million was identified to be impacted by hazardous
material during 1998. The loan was charged off and the note subsequently sold to
an outside party, resulting in a partial recovery.
POTENTIAL PROBLEM LOANS AND IMPAIRED LOANS. "Impaired loans" are
commercial, commercial real estate, and individually significant mortgage and
consumer loans for which it is probable that the Company will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. The category of "impaired loans" is not coextensive with the category
of "nonaccrual loans," although the two categories overlap. Generally,
nonaccrual loans are considered impaired loans. Nonaccrual loans are loans on
which the accrual of interest is discontinued when collectibility of principal
or interest is uncertain or payments of principal or interest have become
contractually past due 90 days. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if (i) it is probable that the Company
will collect all amounts due in accordance with the contractual terms of the
loan or (ii) the loan is not a commercial, commercial real estate or an
individually significant mortgage or consumer loan. Factors considered by
management in determining impairment include payment status and collateral
value. The amount of impairment for these types of impaired loans is determined
by the difference between the present value of the expected cash flows related
to the loan, using the original contractual interest rate, and its recorded
value, or, as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral. Mortgage and consumer loans which are not
individually significant are measured for impairment collectively. Loans that
experience insignificant payment delays and insignificant shortfalls in payment
amounts generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in relation to
the principal and interest owed.
36
<PAGE>
At December 31, 1998 and 1997, impaired loans and leases and the related
specific loan and lease loss allowances were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------------------
ALLOWANCE
FOR LOAN
RECORDED AND LEASE NET
INVESTMENT LOSSES INVESTMENT
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowance................................... $ 10,920 $ 3,254 $ 7,666
Without specific allowance................................ 12,954 -- 12,954
----------- ----------- -----------
$ 23,874 $ 3,254 $ 20,620
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------
ALLOWANCE
FOR LOAN
RECORDED AND LEASE NET
INVESTMENT LOSSES INVESTMENT
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowance................................... $ 7,634 $ 1,418 $ 6,216
Without specific allowance................................ 12,713 -- 12,713
----------- ----------- -----------
$ 20,347 $ 1,418 $ 18,929
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
At December 31, 1998 and 1997 the Company had identified impaired loans with
a recorded investment of approximately $23.9 million and $20.3 million,
respectively. An allowance of $3.3 million and $1.4 million, representing the
difference between the value of collateral supporting these loans and their
outstanding balance, is included in the allowance for loan and lease losses at
December 31, 1998 and 1997, respectively. For further information on loans and
leases, see Note 5 of Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data."
Except as reflected above, management is not aware of any borrowers who are
experiencing severe financial difficulties, or who, in the normal course of
business, represent any identified loss potential. The Company monitors all
loans and completes a monthly internal watch list report, which is inclusive of
both loans past due and borrowers that have been identified for closer
monitoring.
LOAN CONCENTRATIONS. Approximately 56 percent of the Company's loan
portfolio held for investment at December 31, 1998 consisted of real
estate-related loans, including construction loans, miniperm loans, real estate
mortgage loans and commercial loans secured by real estate. Moreover, the
Company's lending activities are predominantly in Southern California with the
majority of loans concentrated in Los Angeles and Orange County in California.
Consequently, the results of the operations and financial condition of the
Company are dependent upon the general trends in the Los Angeles, Orange and San
Diego Counties in California and Southern California economies and residential
and commercial real estate markets. In addition, the concentration of the
Company's operations in Southern California exposes it to greater risk than
other banking companies with a wider geographic base in the event of
catastrophes, such as earthquakes, fires and floods in this region. Other than
this geographical and real estate concentration, the Company considers the loan
portfolios to be diverse, and there are no specific concentrations to any one
borrower or group of borrowers that are engaged in similar activities which
would cause them to be similarly impacted by economic or other considerations.
37
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR LOAN AND LEASE LOSSES HELD
FOR INVESTMENT
The following table summarizes loan balances, loans charged off, the
provision for loan and lease losses charged to expense, the allowance, and loan
recoveries. The allowance for loan and lease losses applies only to loans and
leases held for investment and therefore the following analysis does not include
loans available for sale.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDING DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of the year............. $ 20,271 $ 19,251 $ 18,147 $ 16,475 $ 25,028
Loans and leases charged off:
Real estate construction..................... 152 -- 1,017 807 4,842
Real estate mortgage......................... 3,341 2,594 3,778 6,396 6,159
Commercial................................... 2,592 4,270 2,954 3,501 4,655
Leases....................................... -- -- 27 11 48
Installment and other........................ 1,126 611 583 1,014 679
------------ ------------ ---------- ---------- ----------
Total loans and leases charged off......... 7,211 7,475 8,359 11,729 16,383
------------ ------------ ---------- ---------- ----------
Recoveries on loans and leases charged off:
Real estate construction..................... 38 55 17 103 354
Real estate mortgage......................... 1,729 377 387 671 697
Commercial................................... 1,319 1,900 1,089 834 2,121
Leases....................................... -- -- -- 34 52
Installment and other........................ 615 201 138 254 184
------------ ------------ ---------- ---------- ----------
Total recoveries on loans and leases
charged off.............................. 3,701 2,533 1,631 1,896 3,408
------------ ------------ ---------- ---------- ----------
Net loans and leases charged off........... 3,510 4,942 6,728 9,833 12,975
------------ ------------ ---------- ---------- ----------
Provision charged to operating expense......... 1,325 4,080 2,671 9,756 4,422
Addition to allowance due to:
Acquisitions................................. 8,657 1,882 5,041 1,132 --
Loan portfolio purchases..................... -- -- 120 617 --
------------ ------------ ---------- ---------- ----------
Balance at the end of the year................... $ 26,743 $ 20,271 $ 19,251 $ 18,147 $ 16,475
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
Loans:
Average loans and leases outstanding during
year......................................... $ 1,499,622 $ 1,078,120 $ 769,770 $ 635,259 $ 577,332
Gross loans and leases at end of year.......... $ 1,673,650 $ 1,144,629 $ 995,838 $ 705,384 $ 584,391
Ratios:
Net loans and leases charged off to average
loans and leases............................. 0.23% 0.46% 0.87% 1.55% 2.25%
Allowance as a percentage of end of year loans
and leases................................... 1.60% 1.77% 1.93% 2.57% 2.82%
</TABLE>
The allowance for loan and lease losses increased $6.5 million from $20.3
million at December 31, 1997 to $26.7 million at December 31, 1998. Net loans
and leases charged off decreased $1.4 million from $4.9 million at December 31,
1997 to $3.5 million at December 31, 1998 and the provision charged to operating
expense decreased $2.8 million from $4.1 million for the year ended December 31,
1997 to $1.3 million for the year ended December 31, 1998.
38
<PAGE>
The Company's local markets were severely affected by recession in 1993
through 1995, and in several instances borrowers who had never reported
financial difficulties as well as borrowers whose loans were past due declared
bankruptcy. During 1996 the economy started a slow recovery which was evidenced
by the decrease in net charge-offs for 1998 and 1997.
The allowance for loan and lease losses as a percentage of year-end loans
and leases declined from 1.77 percent at December 31, 1997 to 1.60 percent at
December 31, 1998 along with a decline in the percentage of net loans and leases
charged off to average loans and leases from 0.46 percent for the year ended
December 31, 1997 to 0.23 percent for the year ended December 31, 1998. While
the allowance for loan and lease losses as a percentage of year-end loans and
leases has declined, the allowance for loan and lease losses as a percentage of
nonaccrual loans has increased from 156.1 percent to 179.1 percent from December
31, 1997 to December 31, 1998, respectively.
The following table reflects management's allocation of the allowance for
loan and lease losses by loan category and the ratio of loans and leases in each
category to total loans and leases at December 31 for each of the last five
years in relation to the loans and leases held for investment:
<TABLE>
<CAPTION>
ALLOWANCE AS OF DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real Estate Construction......................... $ 4,033 $ 1,050 $ 784 $ 1,472 $ 3,083
Real Estate Mortgage............................. 7,800 4,959 7,452 5,417 4,935
Commercial....................................... 10,163 6,636 4,355 4,784 3,426
Leases........................................... 30 47 47 47 88
Installment and other............................ 3,121 1,331 1,266 1,778 1,956
Not allocated.................................... 1,596 6,248 5,347 4,649 2,987
------------ ------------ ----------- ----------- -----------
Total........................................ $ 26,743 $ 20,271 $ 19,251 $ 18,147 $ 16,475
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
LOANS AND LEASES AT DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real Estate Construction......................... $ 193,378 $ 91,314 $ 78,539 $ 46,255 $ 44,199
Real Estate Mortgage............................. 739,551 498,598 398,300 243,270 220,132
Commercial....................................... 581,708 453,843 399,525 324,450 242,196
Leases........................................... 1,551 1,934 3,027 3,463 4,159
Installment and other............................ 157,462 98,940 116,447 87,946 73,705
------------ ------------ ---------- ---------- ----------
Total........................................ $ 1,673,650 $ 1,144,629 $ 995,838 $ 705,384 $ 584,391
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF LOANS AND LEASES TO TOTAL LOANS AND LEASES AT
DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Real Estate Construction......................... 12% 8% 8% 7% 8%
Real Estate Mortgage............................. 44% 43% 40% 35% 37%
Commercial....................................... 35% 40% 40% 46% 41%
Leases........................................... 0% 0% 0% 0% 1%
Installment and other............................ 9% 9% 12% 12% 13%
----- ----- ----- ----- -----
Total........................................ 100% 100% 100% 100% 100%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
The allowance for loan and lease losses allocated to the loan and lease
categories shown above is based on previous loan and lease loss experience, the
level of nonaccrual loans, management's review of
39
<PAGE>
classified loans, evaluation of the current loan portfolio, and anticipated
economic conditions. While the allowance for loan and lease losses is allocated
to specific loans and to portfolio segments, the allowance is general in nature
and is available for the portfolio in its entirety.
The Company has an established monitoring system for its loans and leases in
order to identify impaired loans and potential problem loans and to permit
periodic evaluation of impairment and the adequacy of allowance for loan and
lease losses in a timely manner. All problem loans and leases are monitored on a
monthly basis making appropriate adjustments to grade classifications where
necessary. This monitoring system and allowance methodology includes a
loan-by-loan and lease-by-lease analysis for all classified loans and leases as
well as loss factors for the balance of the portfolio that are based on
migration analysis relative to both the classified and the unclassified portion
of the portfolio. This analysis includes such factors as historical loss
experience, current portfolio delinquencies, and risk levels of classified loans
and leases and particular loan and lease categories.
The Company is required under applicable law and regulations to review its
assets on a regular basis and to classify them as "pass," "special mention,"
"substandard," "doubtful," or "loss." An asset which possesses no apparent
weakness or deficiency is designated "pass." An asset which possesses weaknesses
or deficiencies deserving close attention is designated as "special mention." An
asset, or a portion thereof, is generally classified as "substandard" if it
possesses a well-defined weakness which could jeopardize the timely liquidation
of the asset or realization of the collateral at the asset's book value.
Substandard assets are characterized by the possibility that the institution
will sustain some loss if the deficiencies are not corrected. An asset, or
portion thereof, is classified as "doubtful" if a probable loss of principal
and/or interest exists but the amount of the loss, if any, is subject to the
outcome of future events, which are undeterminable at the time of
classification. If an asset, or portion thereof, is classified as "loss," it
will be immediately charged against the allowance for loan and lease losses.
On a quarterly basis, senior management and the board of directors of the
Company review the adequacy of the allowance for loan and lease losses. Special
Asset Credit Reports ("SAC Reports") are prepared and reviewed by senior
management for each loan and lease on the Company's classified asset listing.
SAC Reports include all pertinent details about the loan or lease, a write-up of
the current status, steps being taken to correct any problems, a detailed
workout plan and recommendations as to a classification of the loans and leases
as "pass," "special mention," "substandard," "doubtful," or "loss."
Based on the foregoing discussion and all of the factors analyzed by
management in determining the adequacy of the allowance for loan and lease
losses, management believes that the allowance is adequate at December 31, 1998.
Management utilizes its best judgment in providing for possible loan and lease
losses and establishing the allowance for loan and lease losses. However, the
allowance is an estimate which is inherently uncertain and depends on the
outcome of future events. Although the Company believes that its allowance for
loan and lease losses is adequate, there can be no assurance that the allowance
will be adequate to cover future loan and lease losses.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of real estate acquired
through foreclosure or through the receipt of a deed in lieu of foreclosure.
These assets are recorded at the lower of the carrying value of the loan or the
fair value of the related real estate, less estimated selling costs. The excess
carrying value, if any, over the fair market value of the asset received is
charged to the allowance for loan and lease losses at the time of acquisition.
Any subsequent decline in the fair market value of the OREO is recognized as a
charge to operations and a corresponding decrease to the OREO asset. Gains from
sales and operating expenses associated with OREO assets are included in
operations when realized.
40
<PAGE>
The following table summarizes the Company's net OREO portfolio:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Other Real Estate Owned........................................ $ 4,361 $ 8,212 $ 11,104 $ 6,243 $ 13,652
Percent of Total Assets........................................ 0.17% 0.43% 0.67% 0.53% 1.37%
</TABLE>
DEPOSITS
In 1995, the Banks along with banks in Southern California, progressively
increased deposit rates which had been held low in 1994 due to the lack of
competition for deposits at a time when banks were still operating with low or
lower than normal loan demand. Starting in mid-1995 and continuing into 1998,
the Banks along with banks in Southern California, have generally become much
more aggressive in pricing time deposits, but have yet to make a significant
increase in the rate paid on interest-bearing transactional accounts.
The Company provides a range of deposit types to meet the needs of the local
communities. Time deposits, which are normally sensitive to competitive rate
changes, are generally used to expand or contract the overall liability position
needed to meet the various management ratios established for liquidity, capital,
loans to deposits, and other funding measurements. With the PNB Merger, the
Company reports brokered deposits; however, the Company did not have brokered
deposits at December 31, 1998 and expects to utilize the Bank's funding sources
without brokered deposits in the future. Deposits increased approximately $497
million, or 30 percent, from $1.7 billion at December 31, 1997 to $2.2 billion
at December 31, 1998. This growth was attributable primarily to the SMB
Acquisition which increased deposits $584 million, offset partially by deposit
run-off due to branch closures, repricing higher costing deposits downward, and
eliminating brokered deposits at year-end.
The following table shows the average amount of interest-bearing and
noninterest-bearing deposits and rates for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 AVERAGE 1997 AVERAGE 1996 AVERAGE
----------------------- ----------------------- -----------------------
BALANCE RATE BALANCE RATE BALANCE RATE
------------ --------- ------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits............... $ 781,919 0.00% $ 543,988 0.00% $ 393,227 0.00%
Interest-bearing demand deposits........... 754,254 2.67% 508,693 2.73% 263,957 2.74%
Savings deposits........................... 183,210 3.16% 132,320 3.08% 192,212 2.65%
Time deposits.............................. 379,600 5.04% 339,937 5.13% 300,155 5.24%
Brokered deposits.......................... 20,808 5.74% 6,759 5.61% -- --
------------ ------------ ------------
Total(1)............................... $ 2,119,791 2.18% $ 1,531,697 2.34% $ 1,149,551 2.44%
------------ --------- ------------ --------- ------------ ---------
------------ --------- ------------ --------- ------------ ---------
</TABLE>
- ------------------------
(1) Includes noninterest-bearing deposits for both amounts and rates. Rates
represent weighted averages. The increase in average deposits from 1996 to
1997 is mostly due to the Western Acquisition and Western Bank's deposits
included in the average balance for the entire year versus 3 months of 1996.
The increase in average deposits from 1997 to 1998 is primarily due to the
SMB Acquisition in early 1998.
41
<PAGE>
The following table shows the contractual maturity schedule of time
certificates of deposit of $100,000 or more as of December 31, 1998 (in
thousands):
<TABLE>
<S> <C>
3 months or less.................................................. $ 126,571
Over 3 months through 6 months.................................... 47,123
Over 6 months through 12 months................................... 28,404
Over 1 year....................................................... 5,695
---------
Total......................................................... $ 207,793
---------
---------
</TABLE>
BORROWINGS
On September 30, 1996, the Company borrowed $26.5 million from The Northern
Trust Company under a three year revolving credit agreement. Concurrent with the
acquisition of Western Bank, the Company reduced the loan by $15.5 million as a
result of a dividend in the same amount from Western Bank and retained a credit
line of $11.0 million. See "Item 1. Business--Strategic Evolution--WESTERN
ACQUISITION." In 1997 the credit line was increased to $13.0 million. The
balance at December 31, 1998 and 1997 was $1.0 million and $7.1 million,
respectively, and the interest rate was 6.38 percent and 7.02 percent,
respectively. The highest amount outstanding during 1998 and 1997 was $9.3
million and $12.2 million, respectively; the average balance outstanding during
1998 and 1997 was $5.2 million and $9.6 million, respectively; and the average
interest rate paid in 1998 and 1997 was 7.05 percent and 7.07 percent,
respectively.
On January 26, 1998, the Company executed a Third Amendment to the Revolving
Credit Agreement that, among other things, increased the line of credit from
$13.0 million to $17.5 million and adjusted certain of the financial covenants
in the revolving credit agreement to reflect the Company's larger size. The
revolving loan agreement expires on September 25, 1999.
The Company has a mortgage note payable related to the purchase of a parking
lot in 1990, which matures in June 2001. The outstanding balance at December 31,
1998 was $1.9 million, and bears interest at 1.5% over Bank of America's prime
rate; the interest rate at December 31, 1998 was 9.25 percent.
The Banks participate in other borrowing programs including Federal Home
Loan Bank advances and Treasury, Tax and Loan Notes through the Federal Reserve
Bank. For further information, see Note 8 of the Notes to the Consolidated
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
LIQUIDITY, INTEREST RATE RISK AND MARKET RISK
Major sources of liquidity for the Banks include deposits, maturities and
sales of securities, loan repayments, and, in the case of SCB, the sale of loans
available for sale. Deposits are a volatile source of funds because of changing
conditions in the interest rate markets and competition. The ability to sell
securities without significant loss is subject to changing market conditions.
Loan repayments are dependent on the financial wherewithal of the Company's
borrowers.
The sources of liquidity of Western Bancorp, on a stand alone basis, 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 and
covenants in the Company's debt instruments. See "Item 5. Market for Company
Common Stock and Related Security Holder Matters--Dividends."
Management believes that current levels and sources of liquidity are
sufficient to meet Western Bancorp's and the Banks' commitments. Management
utilizes its best judgment in determining levels and sources of liquidity.
However, liquidity requirements of the Company are inherently uncertain and
depend on the outcome of future events. Consequently, there can be no assurance
that the current levels and sources of liquidity will be sufficient to meet the
Company's requirements. For further information on
42
<PAGE>
commitments, see Notes 11 and 14 of Notes to Consolidated Financial Statements
contained in "Item 8. Financial Statements and Supplementary Data".
In a rising interest rate environment, when rate sensitive assets ("RSA")
exceed rate sensitive liabilities ("RSL"), assets re-price to higher interest
rates faster than liabilities re-price, resulting in a net interest margin that
tends to rise. When RSL exceed RSA, net interest margin will tend to fall in the
same interest rate environment. The opposite effect on the net interest margin
occurs in a decreasing interest rate environment. As a rule, the Company works
to keep the cumulative difference between RSA and RSL as low as possible over a
one year cycle. The following table for the Company breaks down RSA and RSL at
December 31, 1998 based on the earliest possible repricing dates for variable
rate instruments, or for fixed rate assets and liabilities, on scheduled
maturities. In the past few years, various models and rate sensitive studies
have focused on the interest rate risk characteristics of interest-bearing
transactional accounts. Based on historical reviews and documentation, it
appears that these accounts do not have the same degree of short-term interest
rate sensitivity associated with loans that are tied to any immediate change in
prime rate or to short-term investments such as Federal funds sold. The
following table makes certain assumptions as to the interest rate sensitivity of
savings accounts that have limited rate fluctuation during the past three years,
as to money market accounts which are based on a tiered rate structure depending
on the account deposit level, and as to NOW accounts that have had very little
price fluctuation in the past three years:
<TABLE>
<CAPTION>
90 DAYS OR
LESS 90-365 DAYS 1-5 YEARS 5+ YEARS TOTAL
-------------- ----------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal funds sold........................... $ 92,752 $ -- $ -- $ -- $ 92,752
Securities................................... 161,556 81,832 56,453 54,367 354,208
FRB and FHLB stocks.......................... 9,760 -- -- -- 9,760
Loans and leases............................. 712,878 302,319 285,955 502,753 1,803,905
-------------- ----------- ----------- ---------- ------------
Total RSA................................ 976,946 384,151 342,408 557,120 2,260,625
Savings...................................... -- -- 165,202 40,444 $ 205,646
NOW accounts................................. -- -- 215,137 52,668 $ 267,805
Money-market................................. 233,276 116,638 116,638 -- 466,552
Time certificates of deposit of $100,000 or
more....................................... 127,515 74,583 5,210 485 207,793
Time certificates of deposit less than
$100,000................................... 72,393 65,852 16,014 1,249 155,508
Borrowings................................... 4,258 1,000 1,940 16,524 23,722
-------------- ----------- ----------- ---------- ------------
Total RSL................................ 437,442 258,073 520,141 111,370 1,327,026
-------------- ----------- ----------- ---------- ------------
Net RSA-RSL............................ $ 539,504 $ 126,078 $ (177,733) $ 445,750 $ 933,599
-------------- ----------- ----------- ---------- ------------
-------------- ----------- ----------- ---------- ------------
Cumulative RSA-RSL........................... $ 665,582 $ 487,849 $ 933,599
----------- ----------- ----------
----------- ----------- ----------
Cumulative as a percentage of total assets... 20.86% 25.74% 18.87% 36.10% 36.10%
-------------- ----------- ----------- ---------- ------------
-------------- ----------- ----------- ---------- ------------
</TABLE>
43
<PAGE>
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1998. Market risk sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments. For further information on the fair value of
financial instruments as of December 31, 1998, see Note 15 of the Notes to
Consolidated Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE AT DECEMBER 31, 1998(1)
----------------------------------------------------------------------------------------
TOTAL FAIR
1999 2000 2001 2002 2003 THEREAFTER BALANCE VALUE
--------- --------- --------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Loans Receivable
FIXED RATE:
Construction............ $ 12,356 $ 1,082 $ 1,340 $ 351 $ 330 $ 6,216 $ 21,675 $ 21,162
Average interest
rate................ 9.04% 8.50% 9.15% 7.91% 7.91% 8.07% 8.69%
Real
Estate--Residential... 12,974 9,203 8,745 8,180 7,358 105,938 152,398 149,175
Average interest
rate................ 7.79% 7.58% 7.55% 7.64% 7.40% 7.23% 7.35%
Real
Estate--Commercial.... 59,700 33,830 48,841 29,754 39,608 167,542 379,275 382,317
Average interest
rate................ 7.58% 8.42% 8.59% 8.50% 8.34% 8.24% 8.23%
Commercial.............. 66,099 31,375 14,082 14,848 21,605 33,291 181,300 177,500
Average interest
rate................ 7.42% 8.47% 8.69% 8.59% 8.28% 8.47% 8.11%
Installment and other... 13,026 10,097 11,883 11,235 8,250 39,508 93,999 92,623
Average interest
rate................ 7.31% 9.35% 9.26% 9.09% 8.95% 9.11% 8.91%
VARIABLE RATE:
Construction............ 124,215 23,930 4,369 1,647 1,052 16,490 171,703 161,399
Average interest
rate................ 8.94% 8.12% 9.16% 8.73% 8.85% 8.85% 8.86%
Real
Estate--Residential... 3,084 1,575 1,897 1,586 976 12,490 21,608 20,436
Average interest
rate................ 9.10% 8.46% 8.71% 8.31% 8.26% 8.35% 8.64%
Real
Estate--Commercial.... 71,662 35,122 23,461 27,987 17,356 140,937 316,525 312,999
Average interest
rate................ 8.87% 8.73% 8.72% 9.02% 8.62% 8.58% 8.51%
Commercial.............. 223,366 50,204 31,268 29,781 26,852 38,937 400,408 389,173
Average interest
rate................ 8.87% 8.86% 9.00% 9.15% 8.93% 8.96% 8.97%
Installment and other... 16,431 8,176 8,853 4,652 4,248 22,654 65,014 62,722
Average interest
rate................ 9.38% 8.96% 9.09% 9.06% 8.92% 8.49% 8.93%
Federal Funds Sold........ 92,752 -- -- -- -- -- 92,752 92,752
Average interest
rate................ 4.75% --% --% --% --% 4.75% 4.75%
FRB and FHLB Stock........ -- -- -- -- -- 9,760 9,760 9,760
Average interest
rate................ --% --% --% --% --% 5.88% 5.88%
Investment Securities..... 240,503 24,781 4,790 4,333 23,819 55,982 354,208 355,324
Average interest
rate................ 5.48% 5.74% 6.21% 6.22% 5.24% 7.10% 5.76%
--------- --------- --------- --------- --------- ----------- --------- ---------
Total interest-sensitive
assets.................. $ 936,168 $ 229,375 $ 159,529 $ 134,354 $ 151,454 $ 649,745 $2,260,625 $2,227,342
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
INTEREST-SENSITIVE
LIABILITIES:
Deposits:
NOW..................... $ -- $ 80,342 $ 80,342 $ 26,780 $ 26,780 $ 53,561 $ 267,805 $ 267,805
Average interest
rate................ --% 1.15% 1.15% 1.15% 1.15% 1.15% 1.15%
Savings................. -- 61,694 61,694 20,565 20,565 41,128 $ 205,646 205,646
Average interest
rate................ --% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15%
Money-market............ 233,276 116,638 116,638 -- -- -- 466,552 466,552
Average interest
rate................ 2.42% 2.42% 2.42% --% --% --% 2.42%
Certificates--Fixed..... 335,691 11,340 8,215 1,209 777 1,544 358,776 363,106
Average interest
rate................ 4.77% 4.81% 4.38% 5.79% 5.18% 4.48% 4.79%
Certificates--Variable... 4,424 83 12 6 -- -- 4,525 4,530
Average interest
rate................ 4.29% 4.82% 4.75% 5.35% --% --% 4.31%
Borrowings:
Other................... 5,258 -- 1,940 -- -- 16,524 23,722 23,722
Average interest
rate................ 4.54% --% 9.25% --% --% 5.97% 5.92%
--------- --------- --------- --------- --------- ----------- --------- ---------
Total interest-sensitive
liabilities............. $ 578,649 $ 270,097 $ 268,841 $ 48,560 $ 48,122 $ 112,757 $1,327,026 $1,331,361
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
</TABLE>
- ------------------------------
(1) The Company used certain assumptions to estimate fair values and expected
maturities. For loans, expected maturities are contractual maturities
adjusted for estimated prepayments of principal based on market indicators.
Investment securities, except for mortgage-backed securities, are at quoted
market rates and stated maturities. Expected maturities of mortgage-backed
securities are based upon cashflow projections for principal prepayments.
For loan fair value computations, the Company used a discounted cashflow
model with discount rates based upon prevailing market rates for similar
types of loans, incorporating adjustments for credit risk. For deposit
liabilities, fair values were calculated using discounted cashflow models
based on market interest rates for different product types and maturity
dates for which the deposits are held.
44
<PAGE>
RESULTS OF OPERATIONS
Banking is a business that depends largely on rate differentials. A major
portion of the Company's consolidated earnings result from the difference
between the interest rates the Banks' receive from credit extended to their
customers and securities held in the Banks' portfolios versus the interest rates
the Banks pay to customers on deposits, principally savings and time deposits,
and other borrowings. The price of the Banks' loan products is influenced
principally by the demand for such loans, the supply of money for lending
purposes, and competitive factors. In general, the interest rates the Banks'
receive and pay are highly sensitive to many factors that are beyond the control
of the Company such as federal economic and tax policies, the general supply of
money in the economy, government budgetary actions, and the actions of the
Federal Reserve Board. Accordingly, the earnings and growth of the Banks are
subject to, among others, the influence of local, domestic and foreign economic
conditions, including recession, unemployment, inflation and fluctuating market
interest rates. See "Item 1. Business--Competition" and "Item 1.
Business--Supervision and Regulation".
NET INCOME
Consolidated net income for the year ended December 31, 1998 was
$20,156,000, or $0.98 per diluted share. This compares with consolidated net
income of $11,913,000, or $0.79 per diluted share for the year ended December
31, 1997 and a net income for the year ended December 31, 1996 of $13,546,000 or
$1.14 per diluted share.
Due to the acquisition activity of the Company during 1998 and 1997, there
was a significant amount of merger costs which are one-time in nature and are
not part of ongoing operating results. See "Item 1. Business--Strategic
Evolution" and Note 2 of Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data." In addition, since the
Western Acquisition and the SMB Acquisition were consummated using the purchase
method of accounting, expenses include goodwill amortization which is also a
non-operating expense. As the following table indicates, on an
45
<PAGE>
operating basis, the financial results of the Company have improved
significantly for the year ended December 31, 1998 over the years ended December
31, 1997 and 1996:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND PERCENTAGES)
<S> <C> <C> <C>
INCOME:
Net income................................................. $ 20,156 $ 11,913 $ 13,546
ADJUSTMENTS TO NET INCOME TO DERIVE OPERATING INCOME:
Litigation settlement costs.............................. 4,100 -- 950
Merger costs............................................. 17,938 14,201 --
Litigation settlement and merger costs tax benefit....... (6,571) (2,382) (394)
--------- --------- ---------
After tax litigation settlement and merger costs......... 15,467 11,819 556
Goodwill amortization.................................... 10,252 2,784 1,123
--------- --------- ---------
OPERATING INCOME......................................... $ 45,875 $ 26,516 $ 15,225
--------- --------- ---------
--------- --------- ---------
PER SHARE INFORMATION:
Number of shares (weighted average)........................ 20,085 14,431 11,517
Diluted shares............................................. 20,611 15,037 11,899
Basic net income per share................................. $ 1.00 $ 0.83 $ 1.18
Diluted net income per share............................... $ 0.98 $ 0.79 $ 1.14
OPERATING PER SHARE EARNINGS:
Basic net income per share............................... $ 2.28 $ 1.84 $ 1.32
Diluted net income per share............................. $ 2.23 $ 1.76 $ 1.28
PROFITABILITY MEASURES
Return on average assets................................... 0.80% 0.68% 1.04%
Return on equity........................................... 5.94% 6.91% 11.18%
OPERATING PROFITABILITY MEASURES:
Return on average tangible assets........................ 1.93% 1.55% 1.18%
Return on equity......................................... 13.5% 15.4% 12.6%
Efficiency ratio......................................... 55.0% 62.6% 75.4%
</TABLE>
The improvement in operating earnings is a result of the Company's focus on
making its operations more efficient and leveraging management and back room
operations. As the continued consolidation of operations of the entities
acquired in 1996, 1997 and in 1998 is carried out, it is expected that the
operating results will continue to improve. However, there can be no assurance
that the Company will be able to successfully consolidate the operations of the
entities acquired or that any reductions in operating costs will result
therefrom.
The Company continues to consider acquisition opportunities that fit
strategic and/or economic goals of the Company and, if the Company realizes such
an acquisition opportunity, the Company will continue to have merger costs which
will affect reported net income.
46
<PAGE>
NET INTEREST INCOME
The following table provides information on net interest income for the past
three fiscal years, setting forth average balances of interest-earning assets
and interest-bearing liabilities, the income earned and expense recorded thereon
and the resulting average yield-cost ratios:
<TABLE>
<CAPTION>
INTEREST RATES AND INTEREST RATE DIFFERENTIAL FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INCOME/ AVERAGE BALANCE INCOME/ YIELD/
(1) EXPENSE YIELD/ COST (1) EXPENSE COST
---------- ---------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-bearing deposits with
banks............................... $ 1,816 $ 92 5.07% $ 14 $ 1 7.14%
Securities held to maturity........... -- -- -- 29,452 1,788 6.07%
Securities available for sale......... 323,918 18,572 5.73% 293,833 17,079 5.81%
Federal funds sold.................... 215,118 11,481 5.34% 104,712 5,802 5.54%
Loans and leases (net of deferred fees
and costs)(2)....................... 1,621,528 151,483 9.34% 1,117,911 107,639 9.63%
---------- ---------- ---------- ----------
Interest earning assets............. 2,162,380 181,628 8.40% 1,545,922 132,309 8.56%
---------- ----------
NONINTEREST-EARNING ASSETS
Cash and due from banks............... 159,423 119,131
Premises and equipment (net).......... 34,074 18,030
Other real estate owned............... 7,406 11,803
Goodwill.............................. 140,904 33,596
Other assets(4)....................... 8,942 13,591
---------- ----------
Total assets........................ $2,513,129 $1,742,073
---------- ----------
---------- ----------
INTEREST-BEARING LIABILITES
Interest-bearing demand deposits...... $ 754,254 $ 20,106 2.67% $ 508,693 $ 13,900 2.73%
Savings deposits...................... 183,210 5,794 3.16% 132,320 4,078 3.08%
Time deposits......................... 400,408 20,319 5.07% 346,696 17,823 5.14%
Federal funds purchased............... -- -- -- 2,964 168 5.67%
Notes payable and other borrowings.... 34,140 2,301 6.74% 18,961 1,364 7.19%
---------- ---------- ---------- ----------
Interest-bearing liabilities........ 1,372,012 48,520 3.54% 1,009,634 37,333 3.70%
---------- ----------
NONINTEREST-BEARING LIABILITIES AND
EQUITY
Noninterest-bearing demand............ 781,919 543,988
Noninterest-bearing liabilities....... 19,609 16,107
Shareholders equity................... 339,589 172,344
---------- ----------
Total liabilities & shareholders'
equity................................ $2,513,129 $1,742,073
---------- ----------
---------- ----------
Net interest income..................... $ 133,108 $ 94,976
---------- ----------
---------- ----------
Net interest margin on interest-earning
assets(3)............................. 6.16% 6.14%
----------- ----------
----------- ----------
Net interest spread..................... 4.86% 4.86%
----------- ----------
----------- ----------
<CAPTION>
1996
----------------------------------
AVERAGE AVERAGE
BALANCE INCOME/ YIELD/
(1) EXPENSE COST
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-bearing deposits with
banks............................... $ 847 $ 47 5.55%
Securities held to maturity........... 8,011 516 6.44%
Securities available for sale......... 256,571 14,792 5.77%
Federal funds sold.................... 80,570 4,330 5.37%
Loans and leases (net of deferred fees
and costs)(2)....................... 811,627 79,091 9.74%
---------- ----------
Interest earning assets............. 1,157,626 $ 98,776 8.53%
----------
NONINTEREST-EARNING ASSETS
Cash and due from banks............... 87,028
Premises and equipment (net).......... 15,949
Other real estate owned............... 9,651
Goodwill.............................. 9,140
Other assets(4)....................... 21,394
----------
Total assets........................ $1,300,788
----------
----------
INTEREST-BEARING LIABILITES
Interest-bearing demand deposits...... $ 263,957 $ 7,229 2.74%
Savings deposits...................... 192,212 5,087 2.65%
Time deposits......................... 300,155 15,720 5.24%
Federal funds purchased............... 463 26 5.62%
Notes payable and other borrowings.... 15,914 1,224 7.69%
---------- ----------
Interest-bearing liabilities........ 772,701 29,286 3.79%
----------
NONINTEREST-BEARING LIABILITIES AND
EQUITY
Noninterest-bearing demand............ 393,227
Noninterest-bearing liabilities....... 13,657
Shareholders equity................... 121,203
----------
Total liabilities & shareholders'
equity................................ $1,300,788
----------
----------
Net interest income..................... $ 69,490
----------
----------
Net interest margin on interest-earning
assets(3)............................. 6.00%
----------
----------
Net interest spread..................... 4.74%
----------
----------
</TABLE>
- ------------------------------
(1) Average balances are computed primarily on daily balances during the period.
When such balances are not available, averages are computed on a monthly
basis. Average balances include the effect of discounts and premiums on
loans, investment securities, deposits and borrowings acquired in
acquisitions, as well as deferred loan fees.
(2) Nonaccrual loans are included in the average balances for the periods;
however, interest on such loans has been excluded in computing the average
yields for the periods. The average allowance for loan and lease losses is
included in other assets.
(3) The net interest margin on interest-earning assets for a period is net
interest income divided by average interest-earning assets.
(4) Other assets includes the allowance for loan and lease losses.
47
<PAGE>
The following table sets forth changes in interest income and interest
expense, and the amount of change attributable to variances in volume, rates and
the combination of volume and rates. The Company has no tax-exempt assets.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
COMPARED TO 1997 COMPARED TO 1996
-------------------------------------------- ----------------------------------------------
TOTAL TOTAL
INCREASE VOLUME INCREASE VOLUME
(DECREASE) VOLUME RATE & RATE (DECREASE) VOLUME RATE & RATE
----------- --------- --------- --------- ----------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on
loans................. $ 43,844 $ 48,498 $ (3,242) $ (1,412) $ 28,548 $ 29,832 $ (893) $ (391)
Interest-bearing
deposits with banks... 91 129 -- (38) (46) (46) 13 (13)
Securities held to
maturity.............. (1,788) (1,788) -- -- 1,272 1,381 (30) (79)
Securities available for
sale.................. 1,493 1,748 (235) (20) 2,287 2,150 103 34
Federal funds sold...... 5,679 6,116 (209) (228) 1,472 1,296 137 39
----------- --------- --------- --------- ----------- --------- --------- -----
Total interest
income.............. 49,319 54,703 (3,686) (1,698) 33,533 34,613 (670) (410)
INTEREST EXPENSE:
Interest-bearing demand
deposits.............. 6,206 6,704 (305) (193) 6,671 6,706 (26) (9)
Saving deposits......... 1,716 1,567 106 43 (1,009) (1,587) 827 (249)
Time deposits........... 2,496 2,761 (243) (22) 2,103 2,439 (300) (36)
Federal funds
purchased............. (168) (168) -- -- 142 141 -- 1
Notes payable and other
borrowings............ 937 1,091 (85) (69) 140 234 (80) (14)
----------- --------- --------- --------- ----------- --------- --------- -----
Total interest
expense............. 11,187 11,955 (527) (241) 8,047 7,933 421 (307)
----------- --------- --------- --------- ----------- --------- --------- -----
Net interest income....... $ 38,132 $ 42,748 $ (3,159) $ (1,457) $ 25,486 $ 26,680 $ (1,091) $ (103)
----------- --------- --------- --------- ----------- --------- --------- -----
----------- --------- --------- --------- ----------- --------- --------- -----
</TABLE>
INTEREST INCOME
Interest income increased by $49.3 million for the year ended December 31,
1998 compared to 1997 and $33.5 million for the year ended December 31, 1997
compared to 1996. The increase for 1998 compared to 1997 is due largely to the
increase in average earning assets resulting from the SMB Acquisition. Due to
the purchase accounting for the SMB Acquisition, which was consummated on
January 27, 1998, average earning assets for Santa Monica Bank are only in the
1998 average totals for eleven months and not in 1997 at all. The increase in
interest income from the year ended December 31, 1996 to the year ended December
31, 1997 is mostly a result of the increase in average earning assets as a
result of the Western Acquisition. Due to the use of purchase accounting for the
Western Acquisition, Western Bank's average balances are not included with the
Company until October 1, 1996.
INTEREST EXPENSE
Interest expense increased by $11.2 million for the year ended December 31,
1998 compared with the year ended December 31, 1997 and increased by $8.0
million for the year ended December 31, 1997
48
<PAGE>
compared to the year ended December 31, 1996. The increase in interest expense
in 1998 and 1997 compared to the respective prior years is due mostly to the
increase in average interest-bearing liabilities as a result of the SMB
Acquisition and the Western Acquisition. Due to the use of purchase accounting
for the SMB Acquisition and the Western Acquisition, Santa Monica Bank's average
balances are not included until February 1, 1998 and Western Bank's average
balances are not included with the Company until October 1, 1996.
NONINTEREST INCOME
ANALYSIS OF 1998 VERSUS 1997. The following table sets forth the details of
noninterest income for the years ended December 31, 1998 and December 31, 1997.
As Santa Monica Bank was acquired on January 27, 1998, the results for 1998 only
includes eleven months of noninterest income from Santa Monica Bank and 1997
does not include any noninterest income from Santa Monica Bank. For purposes of
this analysis, the "Pro Forma Company" column for 1997 combines the historical
results for the Company for 1997 with SMB's results for the same period. The
"Pro Forma Company" column for 1998 combines the historical results for the
Company for 1998 with Santa Monica Bank's results for January 1998.
<TABLE>
<CAPTION>
1997 1998
------------------------------------------- ---------------------------------------------
CONSOLIDATED SANTA MONICA PRO FORMA CONSOLIDATED SANTA MONICA BANK PRO FORMA
COMPANY BANK COMPANY COMPANY JANUARY 1998 COMPANY
------------- --------------- ----------- ------------- ----------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service charges and fees on
deposits........................ $ 6,989 $ 3,207 $ 10,196 $ 10,804 $ 268 $ 11,072
Trust fees........................ -- 3,354 3,354 3,494 284 3,778
Escrow fees....................... 827 -- 827 972 -- 972
Mortgage-related fees and
commissions..................... 5,339 -- 5,339 7,543 -- 7,543
Other fees........................ 2,599 471 3,070 3,167 43 3,210
Gain on securities available for
sale............................ 331 13 344 1,550 -- 1,550
Gain on sale of loans............. 10,300 -- 10,300 16,009 -- 16,009
Other income...................... 1,051 229 1,280 1,317 19 1,336
------------- ------ ----------- ------------- ----- -----------
Total noninterest income........ $ 27,436 $ 7,274 $ 34,710 $ 44,856 $ 614 $ 45,470
------------- ------ ----------- ------------- ----- -----------
------------- ------ ----------- ------------- ----- -----------
<CAPTION>
INCREASE
(DECREASE)
PRO FORMA
COMPANY
-----------
<S> <C>
Service charges and fees on
deposits........................ $ 876
Trust fees........................ 424
Escrow fees....................... 145
Mortgage-related fees and
commissions..................... 2,204
Other fees........................ 140
Gain on securities available for
sale............................ 1,206
Gain on sale of loans............. 5,709
Other income...................... 56
-----------
Total noninterest income........ $ 10,760
-----------
-----------
</TABLE>
On a pro forma basis with Santa Monica Bank total noninterest income
increased approximately $10.8 million from $34.7 million to $45.5 million, or 31
percent, from the year ended December 31, 1997 to the year ended December 31,
1998. The majority of this increase, $2.2 million in other mortgage-related
income and $5.7 million in gain on sale of loans, reflects the growth in the
mortgage orgination business of PNB Mortgage. Mortgage originations were
approximately $1.6 billion in 1998 versus $1.1 billion in 1997. Trust fees grew
approximately $424,000, or 12.6 percent, over the same period due to the growth
in the stock market in general and also to the increase in the amount of trust
assets under administration at the Company. Security gains were $1.5 million in
1998 versus $344,000 in 1997.
49
<PAGE>
ANALYSIS OF 1997 VERSUS 1996. The following table sets forth the details of
noninterest income for the years ended December 31, 1997 and December 31, 1996.
As Western Bank was acquired on October 1, 1996, the results for 1996 only
includes three months of noninterest income for Western Bank, while 1997
includes a full year of noninterest income for Western Bank. The "Consolidated
Company without Western Bank" includes the same entities for both years.
<TABLE>
<CAPTION>
1996 1997
----------------------------------------- ----------------------------------------- INCREASE
CONSOLIDATED CONSOLIDATED (DECREASE)
COMPANY COMPANY WITHOUT
WESTERN WITHOUT CONSOLIDATED WESTERN WITHOUT CONSOLIDATED WESTERN
BANK WESTERN BANK COMPANY BANK WESTERN BANK COMPANY BANK
----------- ------------- ------------- ----------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges and fees
on deposits and other
fees................... $ 315 $ 8,278 $ 8,593 $ 665 $ 8,923 $ 9,588 $ 645
Escrow fees.............. -- 781 781 -- 827 827 46
Mortgage-related fees and
commissions............ -- 3,880 3,880 -- 5,339 5,339 1,459
Gain on securities
available for sale..... 267 9 276 107 224 331 215
Gain on sale of loans.... -- 8,377 8,377 -- 10,300 10,300 1,923
Other income............. 23 1,559 1,582 386 665 1,051 (894)
----- ------------- ------------- ----------- ------------- ------------- -----------
Total noninterest
income............... $ 605 $ 22,884 $ 23,489 $ 1,158 $ 26,278 $ 27,436 $ 3,394
----- ------------- ------------- ----------- ------------- ------------- -----------
----- ------------- ------------- ----------- ------------- ------------- -----------
</TABLE>
On a pro forma basis without Western Bank, total noninterest income for the
Company increased approximately $3.4 million from $22.9 million to $26.3
million, or 14.8 percent, from the year ended December 31, 1996 to the year
ended December 31, 1997. The majority of this increase, $1.5 million in
mortgage-related fees and commissions and $1.9 million in gain on sale of loans,
reflects the growth in the mortgage orgination business of PNB Mortgage.
Mortgage originations were approximately $1.1 billion in 1997 versus $0.8
billion in 1996. Security gains were $224,000 in 1997 versus $9,000 in 1996.
Other income decreased approximately $900,000 from 1996 to 1997; this decrease
consists of several smaller items, none of which are material.
50
<PAGE>
NONINTEREST EXPENSE
ANALYSIS OF 1998 VERSUS 1997. The following table sets forth the details of
noninterest expense for the years ended December 31, 1998 and December 31, 1997.
The SMB Acquisition was consummated on January 27, 1998; therefore, the results
for 1998 only includes eleven months of noninterest expense from Santa Monica
Bank, and the results for 1997 does not include noninterest expense from Santa
Monica Bank. For purposes of this analysis, the "Pro Forma Company" column for
1997 combines the historical results for the Company for 1997 with Santa Monica
Bank's results for the same period. The "Pro Forma Company" column for 1998
combines the historical results for the Company for 1998 with Santa Monica
Bank's results for January 1998.
<TABLE>
<CAPTION>
1998
1997 --------------------------------------
------------------------------------ SANTA INCREASE
SANTA MONICA BANK (DECREASE)
CONSOLIDATED MONICA PRO FORMA CONSOLIDATED JANUARY PRO FORMA PRO FORMA
COMPANY BANK COMPANY COMPANY 1998 COMPANY COMPANY
------------ --------- ----------- ------------ ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits...... $ 41,792 $ 14,530 $ 56,322 $ 55,208 $ 1,112 $ 56,320 $ (2)
Occupancy.................. 11,669 4,425 16,094 14,884 370 15,254 (840)
Advertising and business
development.............. 1,760 844 2,604 1,709 58 1,767 (837)
Other real estate owned.... 339 (547) (208) (92) 9 (83) 125
Professional services...... 4,910 1,444 6,354 3,910 73 3,983 (2,371)
Telephone, stationery and
supplies................. 3,797 632 4,429 4,334 55 4,389 (40)
Data processing............ 2,744 210 2,954 2,515 17 2,532 (422)
Customer services cost..... 2,687 265 2,952 3,454 8 3,462 510
Regulatory assessments..... 676 108 784 324 9 333 (451)
Other...................... 6,228 2,239 8,467 11,614 222 11,836 3,369
------------ --------- ----------- ------------ ----------- ----------- -----------
Total operating
noninterest expense.... 76,602 24,150 100,752 97,860 1,933 99,793 (959)
Goodwill amortization...... 2,784 7,977 10,761 10,252 665 10,917 156
Litigation settlement
costs.................... -- -- -- 4,100 -- 4,100 4,100
Merger-related costs....... 14,201 1,052 15,253 17,938 429 18,367 3,114
------------ --------- ----------- ------------ ----------- ----------- -----------
Total noninterest
expense................ $ 93,587 $ 33,179 $ 126,766 $ 130,150 $ 3,027 $ 133,177 $ 6,411
------------ --------- ----------- ------------ ----------- ----------- -----------
------------ --------- ----------- ------------ ----------- ----------- -----------
</TABLE>
On a pro forma basis with Santa Monica Bank total operating noninterest
expense decreased approximately $1.0 million from $100.8 million to $99.8
million, or 1.0 percent, from the year ended December 31, 1997 compared to the
year ended December 31, 1998. Salaries and benefits were essentially flat from
the year ended December 31, 1997 to the year ended December 31, 1998. Salary and
benefits at PNB Mortgage grew by approximately $3.6 million over the same period
due to the growth in the mortgage origination business. Therefore, salaries and
benefits at the rest of the Company declined by $3.6 million due to improvements
in efficiency resulting from centralization of several functions. Occupancy
decreased by approximately $800 thousand, or 5.2 percent, as a result of closing
and consolidating several branches during the year. Professional services
declined by approximately $2.4 million, or 37.3 percent due to the resolution of
major pieces of litigation, lower legal expenses required in the credit area and
the reduction in accounting, tax, audit and other professional fees related to
the consolidation of several banks into the Company. Data processing for the
Company decreased approximately $400 thousand, or 14.3 percent from 1997 to
1998. The decrease is a result of consolidating operations at the various banks
that became part of
51
<PAGE>
the Company in 1997 and 1998. Customer services costs increased as a result of
customers paying for more services through the maintenance of balances at the
Banks. Other expense increased approximately $3.4 million from 1997 to 1998;
this increase consists of several smaller items, none of which are material.
Nonoperating noninterest expense increased by approximately $7.4 million
from 1997 to 1998. Of this amount, $4.1 million related primarily to the
settlement of two major pieces of litigation during the year.
ANALYSIS OF 1997 VERSUS 1996. The following table sets forth the details of
noninterest expense for the years ended December 31, 1997 and December 31, 1996.
The Western Acquisition was consummated on October 1, 1996; therefore, the
results for 1996 only include three months of noninterest expense for Western
Bank, while the results for 1997 includes a full year of noninterest expense for
Western Bank. The "Consolidated Company without Western Bank" column includes
the same entities for both years.
<TABLE>
<CAPTION>
1996 1997
--------------------------------------- ------------------------------------- INCREASE
CONSOLIDATED CONSOLIDATED (DECREASE)
COMPANY COMPANY WITHOUT
WESTERN WITHOUT CONSOLIDATED WESTERN WITHOUT CONSOLIDATED WESTERN
BANK WESTERN BANK COMPANY BANK WESTERN BANK COMPANY BANK
----------- ------------ ------------ --------- ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits... $ 2,025 $ 33,866 $ 35,891 $ 5,520 $ 36,272 $ 41,792 $ 2,406
Occupancy............... 373 10,496 10,869 1,254 10,415 11,669 (81)
Advertising and business
development........... 27 1,650 1,677 228 1,532 1,760 (118)
Other real estate
owned................. (158) 317 159 (24) 363 339 46
Professional services... 301 5,995 6,296 442 4,468 4,910 (1,527)
Telephone, stationery
and supplies.......... 143 3,158 3,301 392 3,405 3,797 247
Data processing......... 186 1,419 1,605 667 2,077 2,744 658
Customer services
cost.................. 210 1,339 1,549 651 2,036 2,687 697
Regulatory
assessments........... 39 1,506 1,545 82 594 676 (912)
Other................... 162 7,034 7,196 1,206 5,022 6,228 (2,012)
----------- ------------ ------------ --------- ------------ ------------ -----------
Total operating
noninterest
expense............. 3,308 66,780 70,088 10,418 66,184 76,602 (596)
Goodwill amortization... 499 624 1,123 1,997 787 2,784 163
Litigation settlement
costs................. -- 950 950 -- -- -- (950)
Merger-related costs.... -- -- -- -- 14,201 14,201 14,201
----------- ------------ ------------ --------- ------------ ------------ -----------
Total noninterest
expense............. $ 3,807 $ 68,354 $ 72,161 $ 12,415 $ 81,172 $ 93,587 $ 12,818
----------- ------------ ------------ --------- ------------ ------------ -----------
----------- ------------ ------------ --------- ------------ ------------ -----------
</TABLE>
On a pro forma basis without Western Bank total operating noninterest
expense decreased approximately $596,000 from $66.8 million to $66.2 million, or
0.9 percent, from the year ended December 31, 1996 to the year ended December
31, 1997. Salaries and benefits increased by approximately $2.4 million from the
year ended December 31, 1996 to the year ended December 31, 1997. Salary and
benefits at PNB Mortgage grew by approximately $2.7 million over the same period
due to the growth in
52
<PAGE>
the mortgage origination business. Professional services declined by
approximately $1.5 million, or 25.5 percent due to lower legal expenses required
in the credit area and the reduction in accounting, tax, audit and other fees
related to the consolidation of several banks into the Company. Data processing
for the Company increased approximately $658,000, or 46.4 percent from 1996 to
1997. The increase is a result of expense increases at the banks acquired in
1996 and 1997 prior to the operations consolidations which took place in 1998.
Customer services costs increased as a result of customers paying for more
services through the maintenance of balances at the Banks. Other expense
declined approximately $2.0 million from 1996 to 1997; this decrease consists of
several smaller items, none of which are material.
Nonoperating noninterest expense increased by approximately $13.4 million
from 1996 to 1997. Of this amount, $14.2 million are merger-related costs for
the CCB Merger and the SCB Merger. There were no merger-related costs in 1996.
INCOME TAXES
The Company's effective income tax rates were 56.6 percent, 51.9 percent,
and 25.4 percent for the years ending December 31, 1998, 1997 and 1996,
respectively. The difference from the expected rate of 35 percent in 1998 and
1997 is largely the result of non-deductible merger costs and non-deductible
goodwill amortization. The difference from the expected rate of 35 percent in
1996 relates to state income taxes and the non-deductibility of goodwill for tax
purposes, offset by a reduction in the deferred tax valuation allowance. At
December 31, 1998, the Company had a net deferred tax asset of approximately
$12.5 million. Management has determined that realization of the deferred tax
asset is more likely than not based on current and expected taxable income. For
further information on income taxes, see Note 10 of Notes to Consolidated
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data".
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data" for information on current
accounting pronouncements and their impact on the Company's consolidated
financial statements.
YEAR 2000 READINESS DISCLOSURE
Many existing computer programs use only two digits to identify a year in a
data field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000 or
possibly earlier. The Year 2000 issue affects the Company in that the financial
services business is highly dependent on computer applications in a variety of
ways, including the following: (i) the Company relies on computer systems in
almost all aspects of its business, including the processing of deposits, loans
and other services and products offered to customers as well as for certain
environmental issues such as heating, ventilation and air conditioning in the
buildings in which the Company conducts its business, the failure of which in
connection with the Year 2000 could cause systemic disruptions and failures in
the products and services offered by the Company; (ii) other banks, clearing
houses and vendors whose products and services the Company uses are at risk of
systemic disruptions and potential failures in the event that such entities have
not adequately addressed their Year 2000 issues prior to the Year 2000; (iii)
the creditworthiness of borrowers of the Company and the stability of deposits
of the Company might be diminished by significant disruptions of their business
as a result of their own or others' failure to address adequately the Year 2000
issue prior to the Year 2000; and (iv) federal banking agencies have issued
interagency guidance on the business-wide risk posed to financial institutions
by the Year 2000 problem pursuant to which the federal banking agencies may take
supervisory action against financial institutions that fail to address
appropriately Year 2000 issues prior to the Year 2000, including formal and
53
<PAGE>
informal enforcement actions, the denial of applications to the federal banking
agencies, civil money penalties and a reduction in the management component
rating of the institution's composite rating.
In order to address the Year 2000 issues facing the Company, the management
of the Company initiated a program to prepare the Company's computer systems and
applications for the Year 2000 (the "Year 2000 Plan"). As the primary focus of
the Year 2000 Plan, the Company has converted the Banks to target systems
identified and believed to be Year 2000 ready. The Year 2000 Plan distinguishes
between mission critical computer systems and applications and other computer
systems and applications. Pursuant to the Year 2000 Plan, an application or
system is mission critical if it is vital to the successful continuance of a
core business activity. In addition, an application may be mission critical if
it interfaces with a designated mission critical system. The Company has divided
its Year 2000 Plan into five phases, and the Company charts its 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 March 18, 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% 98%
Validation.................................................................... 72% 48%
Implementation................................................................ 77% 76%
</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 all phases of
its Year 2000 Plan by June 30, 1999. The Company expects to incur internal staff
costs as well as consulting and other expenses related to infrastructure and
facilities enhancements necessary to prepare for the Year 2000. Validation and
conversion of primary system applications and hardware is expected to cost
approximately $1.1 million, of which approximately $345,000 has been spent
through March 1, 1999. The remainder is expected to be spent in 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.
As a part of the Year 2000 Plan, the Company is not only undertaking the
infrastructure and facilities enhancement and validation it believes necessary
to ensure that the Company is adequately prepared for the Year 2000, but the
Company is also communicating with its vendors upon whose services the Company
relies to ensure that such vendors are taking appropriate steps to address their
Year 2000 issues. In addition, as part of the credit review process, the Company
is communicating with its major borrowers in an effort to ensure that such
borrowers have taken appropriate steps to address their Year 2000 issues and
will not be materially affected by any Year 2000 problems. The Company is
communicating with its major deposit customers as well in an effort to ensure
deposit stability. In addition, the Company is developing a liquidity plan
designed to address the estimated cash needs of its customers. The development
of this liquidity plan includes an analysis of customers with historically large
cash needs to estimate potential cash needs related to the Year 2000.
The Company is also preparing contingency plans to try to minimize the harm
to the Company in the event that the Company or any or all of the third parties
with which it interacts is unable to attain Year
54
<PAGE>
2000 readiness. The contingency plans being prepared are system and application
specific and are intended to ensure that in the event that one or more of such
systems and/or applications fail by or at the Year 2000, the Company will be
able to engage in its core business functions in spite of such failure.
Among the efforts undertaken by the Company to prepare for the occurrence of
Year 2000 is an analysis of the most reasonably likely worst case scenarios for
the Year 2000. These scenarios have been analyzed in terms of impact on the
Company and steps that can be taken to mitigate the potential problems. While
not an exhaustive list, the scenarios that have been analyzed by the Company and
the contingency plans that have been developed include the following:
<TABLE>
<CAPTION>
OCCURRENCE POTENTIAL CONTINGENCY PLAN
- ------------------------------------ ---------------------------------------------------------------------------
<S> <C>
Failure of core accounting systems All core accounting systems have been and are being tested several times
starting in 1998 and throughout 1999 to ensure their viability at the
century date changes. Hard copies of key reports will be produced prior to
January 1, 2000.
Power failure at the operations The Company is currently analyzing the option of the installation of a
center generator to ensure uninterrupted power at its operations center.
Telecommunications is unavailable The Company is preparing contingency plans to run the branches without
connection to the Company's systems including ground transportation to move
work and information between locations.
Substantial withdrawal of deposits The Company is putting various contingency funding mechanisms in place
by customers including federal funds lines, shortening the maturity of securities, FHLB
advances and the use of the Federal Reserve discount window.
Substantial increased cash needs by The Company is analyzing customer deposit history to estimate additional
customers cash needs, if any.
Miscellaneous occurrences which The Company is ensuring that key personnel are available before and after
require additional personnel to January 1, 2000.
remedy
</TABLE>
Although the Company believes that its Year 2000 Plan and other steps being
taken are adequate to ensure that it will not be materially affected by the Year
2000 problem, there can be no assurance that the Year 2000 Plan and the
Company's other Year 2000 remedial and contingency plans will fully protect the
Company from the risks associated with the Year 2000 problem. The analysis of,
and preparation for, the Year 2000 and related problems necessarily rely on a
variety of assumptions about future events, and there can be no assurance that
the Company's management has accurately predicted such future events or that the
remedial and contingency plans of the Company will adequately address such
future events. In the event that the businesses of the Company, vendors of the
Company or customers of the Company are disrupted as a result of the Year 2000
problem, such disruption could have a material adverse effect on the Company.
The foregoing discussion is Year 2000 disclosure, subject to the provisions
of the Year 2000 Information and Readiness Disclosure Act.
55
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Reports................................................................................ 57
Consolidated Balance Sheets.................................................................................. 63
Consolidated Statements of Operations........................................................................ 64
Consolidated Statements of Comprehensive Income.............................................................. 65
Consolidated Statements of Changes in Shareholders' Equity................................................... 66
Consolidated Statements of Cash Flows........................................................................ 67
Notes to Consolidated Financial Statements................................................................... 69
</TABLE>
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Western Bancorp:
We have audited the accompanying consolidated balance sheets of Western
Bancorp and subsidiaries (the "Company") as of December 31, 1998 and 1997, and
the related consolidated statements of operations, statements of comprehensive
income, changes in shareholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We did not audit the 1996 consolidated financial statements of California
Commercial Bankshares, acquired by the Company on June 4, 1997 in a
pooling-of-interests, which statements reflect total assets constituting 21.1%
and net interest income and net income constituting 28.7% and 28.0%,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for California Commercial
Bankshares, is based solely on the report of the other auditors.
We did not audit the 1996 consolidated financial statements of SC Bancorp,
acquired by the Company on October 10, 1997 in a pooling-of-interests, which
statements reflect total assets constituting 28.5% and net interest income and
net income constituting 33.7% and 32.9%, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for SC Bancorp, is based solely on the report of the other
auditors.
We did not audit either the 1996 or 1997 financial statements of Bank of Los
Angeles, acquired by the Company on October 10, 1998 in a pooling-of-interests,
which statements reflect total assets constituting 14.3% at December 31, 1997,
net interest income constituting 11.5% and 10.8% for 1997 and 1996,
respectively, and net income constituting 31.3% and 7.4% for 1997 and 1996,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Bank of Los Angeles, is based
solely on the report of the other auditors.
We did not audit either the 1996, 1997 or 1998 consolidated financial
statements PNB Financial Group, acquired by the Company on December 30, 1998 in
a pooling-of-interests, which statements reflect total assets constituting 11.3%
and 12.8% at December 31, 1998 and 1997, respectively, net interest income
constituting 11.2%, 13.0% and 14.5% for 1998, 1997 and 1996, respectively, and
net income constituting 38.4%, 42.1% and 26.3% for 1998, 1997 and 1996,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for PNB Financial Group, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
57
<PAGE>
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Western Bancorp and subsidiaries as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
February 3, 1999
58
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
SC Bancorp:
We have audited the consolidated statements of operations, changes in
shareholders' equity and cash flows SC Bancorp and its subsidiary (the
"Company") for the year ended December 31, 1996 (such consolidated financial
statements are not included herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of SC Bancorp
and its subsidiary for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
January 24, 1997
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and shareholders of
California Commercial Bankshares:
We have audited the consolidated statements of operations, changes in
shareholders' equity and cash flows of California Commercial Bankshares and
subsidiaries (the "Company") for the year ended December 31, 1996 (such
consolidated financial statements are not included herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of California
Commercial Bankshares and subsidiaries for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
January 24, 1997
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Bank of Los Angeles
West Hollywood, California
We have audited the balance sheet of Bank of Los Angeles as of December 31,
1997, and the related statements of operations, changes in shareholders' equity
and statements of cash flows for the two-year period then ended. These financial
statements, which are not presented separately herein, are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as will as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bank of Los Angeles as of
December 31, 1997, and the results of its operations, changes in its
shareholders' equity and its statements of cash flows for the two-year period
then ended, in conformity with generally accepted accounting principles.
/s/ Vavrinek, Trine, Day & Co., LLP
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
January 23, 1998
61
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PNB Financial Group
Newport Beach, California
We have audited the consolidated balance sheets of PNB Financial Group and
subsidiary as of December 30, 1998 and December 31, 1997, and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the period ended December 30, 1998 and the years ended
December 31, 1997 and 1996. These consolidated financial statements, which are
not presented separately herein, are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PNB
Financial Group and subsidiary as of December 30, 1998 and December 31, 1997,
and the results of their operations and their cash flows for the period ended
December 30, 1998 and the years ended December 31, 1997 and 1996 in conformity
with generally accepted accounting principles.
As explained in Note 13 to the consolidated financial statements, the
stockholders of the Company entered into a merger agreement with Western Bancorp
which was consummated on December 30, 1998. These consolidated financial
statements have been prepared immediately prior to the consummation of the
transaction and do not include any adjustments to reflect the merger or the new
owner's intentions.
/s/ McGladery & Pullen, LLP
Anaheim, California
January 20, 1999
62
<PAGE>
WESTERN BANCORP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 3).................. $ 131,787 $ 135,287
Federal funds sold................................ 92,752 168,257
----------- -----------
Total cash and cash equivalents............. 224,539 303,544
Federal Reserve Bank and Federal Home Loan Bank
Stock, at cost.................................. 9,760 7,696
Securities held to maturity; fair value of $48,247
(Note 4)........................................ -- 48,138
Securities available for sale; amortized cost of
$354,208 and $220,215 (Note 4).................. 355,324 220,023
----------- -----------
Total securities............................ 365,084 275,857
Loans and leases held for investment, net (Notes
5, 8, and 12)................................... 1,642,211 1,120,921
Loans held for sale, net (Note 5)................. 130,255 97,211
Premises and equipment (Note 6)................... 33,536 17,429
Other real estate owned........................... 4,361 8,212
Deferred tax asset, net (Note 10)................. 12,497 9,812
Goodwill (Note 2)................................. 145,514 36,369
Accrued interest receivable....................... 10,864 10,710
Other assets...................................... 17,019 18,352
----------- -----------
Total assets................................ $ 2,585,880 $ 1,898,417
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing............................. $ 868,965 $ 643,871
Interest-bearing demand......................... 734,357 467,424
Savings......................................... 205,646 191,510
Time certificates of deposit less than
$100,000...................................... 155,508 204,919
Time certificates of deposit of $100,000 or
more.......................................... 207,793 167,974
----------- -----------
Total deposits (Note 7)..................... 2,172,269 1,675,698
Borrowings (Note 8)............................... 23,722 19,797
Accrued interest payable.......................... 2,628 3,012
Other liabilities................................. 35,186 15,204
----------- -----------
Total liabilities........................... 2,233,805 1,713,711
Commitments and contingencies (Notes 11 and 14)
Shareholders' equity (Notes 9, 16 and 18):
Preferred stock; 5,000,000 shares authorized,
none issued................................... -- --
Common stock, no par value; 100,000,000 shares
authorized;
20,858,512 and 15,260,501 issued and outstanding
at December 31, 1998 and 1997, respectively... 322,566 159,811
Retained earnings............................... 28,856 25,028
Accumulated other comprehensive
income--unrealized gain (loss) on securities
available for sale, net of taxes.............. 653 (133)
----------- -----------
Total shareholders' equity.................. 352,075 184,706
----------- -----------
Total liability and shareholders' equity.... $ 2,585,880 $ 1,898,417
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
63
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans and leases......................................... $ 151,483 $ 107,639 $ 79,091
Interest on interest bearing deposits in other banks.......................... 92 1 47
Interest on investment securities............................................. 18,572 18,867 15,308
Interest on Federal funds sold................................................ 11,481 5,802 4,330
--------- --------- ---------
Total interest income..................................................... 181,628 132,309 98,776
Interest expense:
Deposits...................................................................... 46,219 35,801 28,036
Other borrowings and interest-bearing liabilities............................. 2,301 1,532 1,250
--------- --------- ---------
Total interest expense.................................................... 48,520 37,333 29,286
--------- --------- ---------
Net interest income............................................................. 133,108 94,976 69,490
Provision for loan and lease losses (Note 5).................................... 1,325 4,080 2,671
--------- --------- ---------
Net interest income after provision for loan and lease losses................... 131,783 90,896 66,819
--------- --------- ---------
Noninterest income:
Service charges, commissions and fees......................................... 25,980 15,754 13,254
Gain on sale of securities available for sale (Note 4)........................ 1,550 331 276
Gain on sale of loans......................................................... 16,009 10,300 8,377
Other......................................................................... 1,317 1,051 1,582
--------- --------- ---------
Total noninterest income.................................................. 44,856 27,436 23,489
--------- --------- ---------
Noninterest expense:
Salaries and benefits......................................................... 55,208 41,792 35,891
Occupancy..................................................................... 14,884 11,669 10,869
Advertising and business development.......................................... 1,709 1,760 1,677
Other real estate owned....................................................... (92) 339 159
Professional services......................................................... 3,910 4,910 6,296
Telephone, stationery and supplies............................................ 4,334 3,797 3,301
Goodwill amortization......................................................... 10,252 2,784 1,123
Data processing............................................................... 2,515 2,744 1,605
Customer services cost........................................................ 3,454 2,687 1,549
Regulatory assessments........................................................ 324 676 1,545
Litigation settlement costs (Note 11)......................................... 4,100 -- 950
Merger related costs (Note 2)................................................. 17,938 14,201 --
Other......................................................................... 11,614 6,228 7,196
--------- --------- ---------
Total noninterest expense................................................. 130,150 93,587 72,161
--------- --------- ---------
Income before income taxes...................................................... 46,489 24,745 18,147
Income taxes (Note 10).......................................................... 26,333 12,832 4,601
--------- --------- ---------
Net income................................................................ $ 20,156 $ 11,913 $ 13,546
--------- --------- ---------
--------- --------- ---------
Per share information (Note 20)
Weighted-average number of common shares outstanding.......................... 20,085 14,431 11,517
Basic net income per share.................................................... $ 1.00 $ 0.83 $ 1.18
Diluted common shares outstanding............................................. 20,611 15,037 11,899
Diluted net income per share.................................................. $ 0.98 $ 0.79 $ 1.14
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
64
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income....................................................................... $ 20,156 $ 11,913 $ 13,546
Other comprehensive income, net of related income taxes:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period...................... 693 1,156 (1,103)
Less reclassification of realized losses (gains) included in income.......... 93 (144) 441
--------- --------- ---------
Total...................................................................... 786 1,012 (662)
--------- --------- ---------
Comprehensive income............................................................. $ 20,942 $ 12,925 $ 12,884
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
65
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
---------------------- RETAINED COMPREHENSIVE DEFERRED CHARGE TOTAL
SHARES AMOUNT EARNINGS INCOME RELATED TO KSOP EQUITY
----------- --------- ----------- --------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995, as previously
reported................................... 7,294 $ 68,705 $ 9,594 $ (539) $ (132) $ 77,628
Adjustment for the BKLA
pooling-of-interests..................... 927 16,111 (4,260) 140 -- 11,991
Adjustment for the PNB
pooling-of-interests..................... 2,516 16,134 (822) (84) -- 15,228
----------- --------- ----------- ------- ----- ---------
Balance at December 31, 1995, as
restated................................. 10,737 100,950 4,512 (483) (132) 104,847
Repayment on KSOP debt..................... -- -- -- -- 132 132
Unrealized depreciation on investment
securities available for sale, net....... -- -- -- (662) -- (662)
Stock options exercised.................... 78 390 -- -- -- 390
Tax benefits of stock options exercised.... -- 51 -- -- -- 51
Issuance of common stock................... 3,076 42,213 -- -- -- 42,213
Repurchase of shares....................... (28) (155) -- -- -- (155)
Net income................................. -- -- 13,546 -- -- 13,546
----------- --------- ----------- ------- ----- ---------
Balance at December 31, 1996................. 13,863 143,449 18,058 (1,145) -- 160,362
Unrealized appreciation on investment
securities available for sale, net....... -- -- -- 1,012 -- 1,012
Stock options exercised.................... 217 980 -- -- -- 980
Warrants exercised......................... 43 315 -- -- -- 315
Shares issued for SCB Options related to
the SCB Merger........................... 138 -- -- -- -- --
Tax benefits of stock options
exercised.............................. -- 2,045 -- -- -- 2,045
Shares issued in mergers................. 1,065 14,392 -- -- -- 14,392
Repurchase of shares..................... (66) (1,370) -- -- -- (1,370)
Net income............................... -- -- 11,913 -- -- 11,913
Dividends declared at $0.30 per share.... -- -- (4,943) -- -- (4,943)
----------- --------- ----------- ------- ----- ---------
Balance at December 31, 1997................. 15,260 159,811 25,028 (133) -- 184,706
Unrealized appreciation on investment
securities available for sale, net....... -- -- -- 786 -- 786
Stock options exercised.................... 260 987 -- -- -- 987
Warrants exercised......................... 278 2,464 -- -- -- 2,464
Shares issued for BKLA Options related to
the BKLA Merger.......................... 81 -- -- -- -- --
Tax benefits of stock options exercised.... -- 1,840 -- -- -- 1,840
Shares issued in private placement......... 2,328 65,171 -- -- -- 65,171
Shares issued in SMB Acquisition........... 2,653 84,908 -- -- -- 84,908
Repurchase of shares....................... (1) (29) -- -- -- (29)
Net income................................. -- -- 20,156 -- -- 20,156
Stock dividend............................. -- 7,414 (7,414) -- -- --
Dividends declared at $0.675 per share..... -- -- (8,914) -- -- (8,914)
----------- --------- ----------- ------- ----- ---------
Balance at December 31, 1998................. 20,859 $ 322,566 $ 28,856 $ 653 $ -- $ 352,075
----------- --------- ----------- ------- ----- ---------
----------- --------- ----------- ------- ----- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
66
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income........................................................... $ 20,156 $ 11,913 $ 13,546
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan and lease losses.................................. 1,325 4,080 2,671
Benefit for deferred income taxes.................................... 975 191 336
Provision for losses on other real estate owned...................... 212 210 767
Provision for indemnification losses................................. 1,701 276 1,080
Depreciation and amortization........................................ 5,286 3,464 3,192
(Accretion) amortization of discounts and premiums on
investment securities, net......................................... (1,557) 134 906
Goodwill amortization................................................ 10,252 2,784 1,123
Gain on sale of loans................................................ (16,009) (10,300) (8,377)
Loans originated for sale............................................ (1,574,628) (1,128,338) (815,018)
Proceeds from sale of loans originated for sale...................... 1,556,876 1,105,281 806,137
(Gain) on sale of other real-estate owned............................ (832) (839) (1,732)
(Gain) on sale of securities available for sale...................... (1,550) (331) (276)
Net increase (decrease) in other liabilities......................... 9,427 624 (452)
Net (increase) decrease in other assets.............................. 3,442 4,004 (82)
------------ ------------ -----------
Net cash provided by (used in) operating activities................ 15,076 (6,847) 3,821
------------ ------------ -----------
Cash flows from investing activities:
Securities held to maturity:
Proceeds from maturities of mortgage-backed securities............. 11,472 3,838 --
Proceeds from maturities of other securities....................... 73,505 4,127 5,267
Purchases of securities............................................ (115,614) (30,598) (4,880)
Securities available for sale:
Proceeds from maturities of mortgage-backed securities............. 31,168 12,264 17,545
Purchases of mortgage backed securities............................ (40,992) -- --
Proceeds from maturities of other securities....................... 210,796 202,738 86,000
Proceeds from sales of other securities............................ 102,698 10,598 36,641
Purchases of other securities...................................... (266,543) (90,695) (137,029)
Purchases of FRB and FHLB stocks..................................... (2,064) (221) (3,298)
Net increase in loans and leases..................................... (136,309) (103,528) (95,341)
Additions to other real-estate owned................................. 185 (86) (263)
Proceeds from sales of other real estate owned....................... 8,237 16,738 10,853
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
67
<PAGE>
WESTERN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
Additions to premises and equipment, net of proceeds from sales...... (5,065) (1,824) (1,839)
<S> <C> <C> <C>
Increase in assets and liabilities due to acquisitions:
Securities available for sale...................................... $ (89,238) $ (5,845) $ (134,394)
Securities held to maturity........................................ -- (17,990) (988)
Loans and leases................................................... (387,609) (62,952) (198,418)
Other assets....................................................... (7,595) (3,684) (15,392)
Premises and equipment............................................. (16,328) (296) (5,099)
Deposits........................................................... 584,095 112,491 353,111
Other liabilities.................................................. 7,948 322 3,932
Goodwill........................................................... (119,656) (4,315) (29,841)
------------ ------------ -----------
Net cash provided by (used in) investing activities.............. (156,909) 41,082 (113,433)
------------ ------------ -----------
Cash flow from financing activities:
Net increase (decrease) in deposits.................................. (87,524) 98,284 63,329
Increase (decrease) in borrowings.................................... 3,925 (9,883) 20,259
Purchase of treasury shares.......................................... (29) (1,370) (155)
Dividends paid....................................................... (8,914) (2,722) --
Acquisition of Santa Monica Bank..................................... 84,908 -- --
Proceeds from issuance of common stock and exercise of options and
warrants, net of issuance costs.................................... 70,462 17,442 42,654
------------ ------------ -----------
Net cash provided by financing activities.......................... 62,828 101,751 126,087
Net increase (decrease) in cash and cash equivalents................... (79,005) 135,986 16,475
Cash and cash equivalents at the beginning of the year................. 303,544 167,558 151,083
------------ ------------ -----------
Cash and cash equivalents at the end of the year....................... $ 224,539 $ 303,544 $ 167,558
------------ ------------ -----------
------------ ------------ -----------
Supplemental disclosure of cash flow information:
Property acquired through foreclosure................................ $ 2,711 $ 13,171 $ 12,101
Loans to facilitate the sale of other real estate owned.............. $ 2,049 $ 7,959 $ 5,359
Transfer of securities held to maturity to available-for-sale........ $ 79,372 $ 2,933 $ --
Tax benefits for exercise of non-qualified stock options............. $ 1,840 $ 2,045 $ 51
Cash paid for
Interest........................................................... $ 48,904 $ 37,062 $ 29,371
Taxes.............................................................. $ 21,849 $ 9,448 $ 6,071
Acquisitions:
Fair value of assets acquired.......................................... $ 794,782 $ 127,568 $ 425,762
Common stock issued to former shareholders of acquiree................. (84,908) (14,392) --
Cash paid.............................................................. (117,831) -- (68,719)
------------ ------------ -----------
Liabilities assumed................................................ $ 592,043 $ 113,176 $ 357,043
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
68
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
WESTERN BANCORP--ACQUISITIONS
Western Bank was acquired by Western Bancorp (the "Company") on September
30, 1996 (the "Western Acquisition") and was accounted for as a purchase.
Accordingly, results of operations presented herein include Western Bank only
from the date of acquisition. On June 4, 1997, California Commercial Bankshares
("CCB") merged with and into the Company (the "CCB Merger"), and in connection
therewith, Monarch Bank ("Monarch"), a wholly-owned subsidiary of the Company
prior to the CCB Merger, merged with and into National Bank of Southern
California, a wholly-owned subsidiary of CCB prior to such merger ("NBSC"). On
October 10, 1997, SC Bancorp merged with and into the Company (the "SCB
Merger"). On December 15, 1997, NBSC merged with and into Southern California
Bank ("SCB"), a wholly-owned subsidiary of SC Bancorp prior to the SCB Merger.
On January 27, 1998 the Company acquired Santa Monica Bank through the merger of
Santa Monica Bank with and into Western Bank (the "SMB Acquisition"). The SMB
Acquisition was accounted for as a purchase. Accordingly, results of operations
presented herein include Santa Monica Bank only from the date of acquisition. At
the time of the SMB Acquisition, Western Bank changed its name to Santa Monica
Bank ("SMB"). On October 23, 1998 the Company acquired Bank of Los Angeles
("BKLA") through the merger of BKLA with and into SMB (the "BKLA Acquisition").
On December 30, 1998 PNB Financial Group ("PNB") merged with and into the
Company (the "PNB Merger"). The PNB Merger, the BKLA Acquisition, the SCB Merger
and the CCB Merger were each accounted for by the pooling-of-interests method of
accounting, and accordingly, the financial information for all periods presented
herein has been restated to present the combined consolidated financial
condition and results of operations of the Company, CCB, SC Bancorp, BKLA and
PNB as if the CCB Merger, the SCB Merger, the BKLA Acquisition and the PNB
Merger had each been in effect for all periods presented. Further details
pertaining to the Western Acquisition, the CCB Merger, the SCB Merger, the SMB
Acquisition, the BKLA Acquisition and the PNB Merger are presented in Note 2 of
Notes to Consolidated Financial Statements.
BASIS OF PRESENTATION
The accounting and reporting policies of the Company and its wholly-owned
subsidiaries, SCB and SMB (together, the "Banks"), Venture Partners, Inc. and M.
B. Mortgage Company, Inc. (inactive) are in accordance with generally accepted
accounting principles and conform to general practices within the banking
industry. All significant inter-company balances and transactions have been
eliminated.
On June 3, 1997, the Company completed an 8.5-to-1 reverse stock split (the
"Reverse Stock Split"). All share amounts herein have been restated to give
effect to the Reverse Stock Split.
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the 1998 presentation.
NATURE OF OPERATIONS
The Company conducts business through the Banks. SCB is a full service bank
with 15 branch offices, and SMB is a full service bank with 16 branch offices,
in each case, as of December 31, 1998. On December 30, 1998, the Company
acquired Pacific through the PNB Merger. Pacific had three branch offices and
nine mortgage offices. The Banks are subject to the laws of the State of
California and federal regulations governing the financial services industry.
The Company is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended, and is subject to regulation and supervision by
69
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WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
the Federal Reserve Board. The primary areas served by the Banks are San Diego,
Orange and Los Angeles counties in California.
The Company operates in two business segments: banking and mortgage banking.
These segments are managed separately because each requires different levels of
resources and serves different markets. The mortgage banking segment was
acquired through the PNB Merger, which was consummated on December 30, 1998.
ESTIMATES
The preparation of the 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 loans held for sale, the carrying value of other real estate
owned, the carrying value of the deferred tax asset, and the liability for
recourse and representations and warranties related to loans sold.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include the
balance sheet captions "Cash and due from banks" and "Federal funds sold."
SECURITIES
Securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and carried at amortized cost.
Securities that are purchased and held principally for the purpose of selling
them in the near term are classified as "trading" and carried at fair value,
with unrealized gains and losses included in operations. Securities not
classified as either "held to maturity" or "trading" are classified as
"available for sale" and carried at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders'
equity in accumulated other comprehensive income. If a decline in the fair
market value of a security below its amortized cost is judged by management to
be other than temporary, the cost basis of the security is written down to fair
value and the amount of the writedown is included in operations. The Company's
investments in Federal Reserve Bank and Federal Home Loan Bank Stock are carried
at cost as these equity securities are not readily marketable.
Premiums and discounts on securities are recognized in the statement of
operations using a method that approximates the level-yield method over the
lives of the securities. Gains and losses on securities are recognized when
realized with the cost basis of securities sold determined on a specific
identification basis.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are
capitalized at origination and the net amount deferred is accreted or amortized
into interest income over the contractual lives of the loans using the interest
method.
70
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WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained at a level believed by
management to be adequate to meet reasonably foreseeable loan and lease losses
on the basis of many factors including the risk characteristics of the
portfolio, underlying collateral, current and anticipated economic conditions
that may affect the borrower's ability to pay, specific problem loans and trends
in loan delinquencies and charge-offs. Losses on loans and leases are provided
for under the allowance method of accounting. The allowance is increased by
provisions charged to income and reduced by loan and lease charge-offs, net of
recoveries. Loans and leases, including impaired loans, are charged off in whole
or in part when, in management's opinion, collectibility is not probable.
While management uses available information to establish the allowance for
loan and lease losses, future additions to the allowance may be necessary if
economic developments differ substantially from the assumptions used in making
the evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowances for loan
and lease losses. Such agencies may require the Banks to recognize additions to
the allowance based on judgments different from those of management.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to contractual
terms of the loan agreement. The category of "impaired loans" is not coextensive
with the category of "nonaccrual loans," although the two categories overlap.
Generally, nonaccrual loans are considered impaired loans. Nonaccrual loans are
loans on which the accrual of interest is discontinued when collectibility of
principal or interest is uncertain or payments of principal or interest have
become contractually past due 90 days. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility while
not classifying the loan as impaired if (i) it is probable that the Company will
collect all amounts due in accordance with the contractual terms of the loan or
(ii) the loan is not a commercial, commercial real estate or an individually
significant mortgage or consumer loan. Factors considered by management in
determining impairment include payment status and collateral value. The amount
of impairment for these types of impaired loans is determined by the difference
between the present value of the expected cash flows related to the loan, using
the original contractual interest rate, and its recorded value, or, as a
practical expedient in the case of collateralized loans, the difference between
the fair value of the collateral and the recorded amount of the loan. When
foreclosure is probable, impairment is measured based on the fair value of the
collateral. Mortgage and consumer loans which are not individually significant
are measured for impairment collectively. Loans that experience insignificant
payment delays and insignificant shortfalls in payment amounts generally are not
classified as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower's prior payment record, and
the amount of the shortfall in relation to the principal and interest owed.
INTEREST ON LOANS
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The Company's policy concerning nonperforming loans is to
cease accruing interest, and to charge off all accrued and unpaid interest on
loans which are past due as to principal and/or interest for at least 90 days,
or at such earlier time as management determines timely collection of the
interest to be in doubt.
71
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
However, in certain circumstances, loans which are past due 90 days or more may
continue accruing interest or interest may not be charged off when the related
loans are well secured or in the process of being collected. When the Company
receives cash on nonaccrual loans or leases, the Company's policy is to record
such receipts first as a reduction to the principal and then as interest income.
A nonperforming loan or lease may be returned to accrual status if the loan or
lease performs for a period of at least six months.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or market
value based on commitments from investors to purchase such loans or in the
absence of such commitments based on prevailing market conditions. Nonrefundable
fees and direct costs associated with the origination of mortgage loans held for
sale are deferred and recognized when the related loans are sold.
Mandatory forward sales commitments, which are derivative financial
instruments, are used to hedge the value of loans held for sale and the pipeline
of loan applications in process from changes due to interest rate movements.
Realized hedging gains and losses arising during the commitment and warehousing
period are deferred to the extent they offset unrealized gains or losses on the
related loan positions and recognized when the related loans are sold. When
unrealized hedging losses cause the carrying value of loans held for sale and in
the pipeline to be in excess of estimated market value, such losses are
recognized in earnings immediately.
LOAN SALES
Loans are sold on a servicing-released basis. Gains or losses resulting from
sales of loans are recognized at the date of settlement and are based on the
difference between the cash received and the carrying value of the related loans
less related transaction costs.
A transfer of financial assets in which control is surrendered is accounted
for as a sale to the extent that consideration other than beneficial interests
in the transferred assets is received in the exchange. Liabilities and
derivative financial instruments issued or obtained by the transfer of financial
assets are measured at fair value, if practicable. Assets or other retained
interests received by the transfer are measured by allocating the previous
carrying value between the asset sold and the asset or retained interest
received, if any, based on their relative fair values at the date of sale.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of real estate acquired
through foreclosure. These assets are recorded initially at the lower of the
carrying value of the receivable or the fair market value less selling costs of
the related real estate. The excess carrying value, if any, over the fair market
value of the asset received is charged to the allowance for loan and lease
losses at the time of acquisition. Any subsequent decline in the fair market
value of the OREO is recognized as a charge to expense and a corresponding
decrease in the OREO asset. Gains from sales and operating expenses associated
with OREO assets are included in operations when realized.
72
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization which are charged to expense on a straight-line basis over the
estimated useful lives of the assets or the terms of the leases if shorter.
GOODWILL
Goodwill is amortized to expense using the straight-line method over its
estimated useful life, not to exceed fifteen years. On an ongoing basis,
management reviews the valuation and amortization of goodwill. During this
review, management estimates the value of the Company's goodwill, taking into
consideration any events and circumstances that might have diminished its value.
If the value of goodwill has been impaired, the excess value will be written-off
through a charge to the statement of operations.
INTEREST RATE SWAP AGREEMENTS
Interest rate swaps are used to hedge an identified and specific portion of
the Company's balance sheet. Income or expense associated with these agreements,
which are intended to modify the interest-rate characteristics of
interest-bearing assets, are accounted for on a settlement accounting basis and
are recognized as an adjustment to interest income, based on the interest rates
currently in effect for such contracts. SCB uses hedge accounting treatment,
which requires identification of the assets or liabilities to be hedged and
linking the swap to the specified assets or liabilities. The notional amount of
interest rate swaps are not reflected in the Consolidated Financial Statements,
but are disclosed in Note 14 of the Notes to Consolidated Financial Statements.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
NET INCOME PER SHARE
Basic net income per share of common stock is calculated using the
weighted-average number of common shares outstanding during the year. Diluted
net income per share is calculated using on the weighted-average number of
common shares outstanding during the year plus common stock equivalents (stock
options and warrants) using the treasury stock method.
RECOURSE AND REPRESENTATION AND WARRANTY LIABILITY FOR LOANS SOLD
In the ordinary course of business, the Company has liability under
representations and warranties made to purchasers and insurers of mortgage
loans. Under certain circumstances, the Company may
73
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
become liable for the unpaid principal and interest on defaulted loans (whether
recourse or non-recourse) or other loans if there has been a breach of
representations or warranties.
The recourse and representation and warranty liability for loans sold is
maintained at a level believed by management to be adequate to meet reasonably
foreseeable losses for recourse and breaches of representations and warranties
made to purchasers and insurers of mortgage loans. Additions to this reserve are
charged to income and this reserve is classified in other liabilities as it
relates primarily to the exposure of off-balance sheet mortgage loans that have
been sold.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," during 1998 and has elected to present a
separate statement of comprehensive income. Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances, excluding those resulting from investments
by and distributions to owners. Comprehensive income generally includes net
income, foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on investments in certain debt and equity
investments (i.e., securities available for sale).
STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock--Based Compensation,"
which establishes financial accounting and reporting standards for stock-based
employee compensation plans. This statement encourages all entities to adopt a
new method of accounting to measure compensation cost of all employee stock
compensation plans based on the estimated fair value of the award at the date it
is granted. Companies are, however, allowed to continue to measure compensation
cost for those plans using the intrinsic value-based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net income and
earnings per share as if this statement had been adopted. The Company elected to
continue accounting for stock options under the intrinsic value method and has
provided the pro forma disclosure in Note 18 of Notes to Consolidated Financial
Statements.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the reporting of information
about operating segments by public business enterprises in their annual and
interim financial reports issued to shareholders.
SFAS 131 requires that a public business enterprise report financial and
descriptive information, including profit or loss, certain specific revenue and
expense items, and segment assets, about its reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 was effective for the Company beginning January 1, 1998. Management
has concluded that the Company operates in two segments: banking and mortgage
banking. The adoption of SFAS 131 does
74
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
not have an impact on the Company's financial position or results of operations,
as this statement relates to disclosure requirements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and other
Post-retirement Benefits" ("SFAS 132"). SFAS 132 standardizes disclosure
requirements for pensions and other post-retirement benefits and requires
additional disclosure on changes in benefit obligations and fair values of plan
assets in order to facilitate financial analysis. SFAS 132 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS 132 does
not have an impact on the Company's results of operations or financial position
as this statement relates to disclosure requirements. The Company adopted SFAS
132 on January 1, 1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or unrecognized firm commitment or (b) a hedge of
the exposure to variable cash flows of a forecasted transaction. Under SFAS 133,
an entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the
entity's approach to managing risk. SFAS 133 is effective for all quarters of
fiscal years beginning after June 15, 1999. The Company is in the process of
evaluating the financial impact, if any, of the adoption of SFAS 133.
In October 1998 the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS 134"). SFAS 134 amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities, classify the resulting mortgage-backed securities or other
retained interests as a trading security. SFAS 134 conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. SFAS 134 is effective for the first interim period beginning
after December 31, 1998. Adoption of SFAS 134 is not expected to have a material
effect on the Company's results of operations or financial position.
NOTE 2--ACQUISITIONS
WESTERN BANK
On September 30, 1996, the Company completed the acquisition of Western Bank
in which Western Bank became a wholly-owned subsidiary of the Company. The
Company paid $17.25 per share, or approximately $61.1 million, for the 3,543,156
outstanding shares of common stock of Western Bank and an additional $5.5
million related to the outstanding stock options of Western Bank. The net
consideration for the acquisition of Western Bank was thus approximately $66.6
million. The acquisition was accounted for under the purchase method of
accounting which resulted in approximately $30.0 million of goodwill being
recorded.
75
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
The Company funded the purchase price with the issuance of approximately
3,076,045 shares of common stock of the Company ("Company Common Stock") in a
private placement pursuant to which the Company raised approximately $42.2
million, net of approximately $0.9 million in issuance costs, and from the
proceeds of a three year loan of $26.5 million from The Northern Trust Company.
A $15.5 million dividend was declared by Western Bank concurrently with the
completion of the acquisition and paid to the Company; the proceeds of such
dividend were used to reduce the $26.5 million note to $11.0 million. The pro
forma results of operations as if the acquisition of Western Bank had been
effective at the beginning of 1996 is presented in this footnote under the
caption "Pro Forma Information for Purchase Acquisitions".
CCB MERGER
On June 4, 1997, CCB merged with and into the Company in a transaction
accounted for using the pooling-of-interests method of accounting. In the CCB
Merger, 3,043,226 shares of Company Common Stock were issued to holders of
common stock of CCB based on a 1-for-1 exchange ratio (after giving effect to
the Reverse Stock Split) and all of the outstanding shares of common stock of
CCB were canceled. The financial information for all periods presented has been
restated to present the combined consolidated financial condition and results of
operations of the Company and CCB as if the CCB Merger had been in effect for
all periods presented. At the date of the CCB Merger, the Company charged to
expense merger costs of approximately $3.0 million (after tax), representing
investment banking, filing and professional fees; employee compensation and
severance; and costs of computer conversions.
Separately reported net interest income and net income for CCB for the
quarter ended March 31, 1997, were $5,089,000 and $939,000, respectively.
Separately reported net income and net income for the Company for the quarter
ended March 31, 1997 were $5,871,000 and $893,000, respectively. On a combined
basis, giving effect to the CCB merger as a pooling-of-interests, the Company's
restated net interest income and net income were $10,960,000 and $1,832,000,
respectively, for the quarter ended March 31, 1997. These amounts are unaudited.
SCB MERGER
SC Bancorp merged with and into the Company in a transaction accounted for
using the pooling-of-interests method of accounting on October 10, 1997. In the
SCB Merger approximately 3,555,500 shares of Company Common Stock (prior to
adjustment for fractional shares) were issued based on a 0.4556-for-1 exchange
ratio and all of the outstanding shares of common stock of SC Bancorp were
cancelled. The financial information for all periods presented herein has been
restated to present the combined consolidated financial condition and results of
operations of the Company and SC Bancorp as if the SCB Merger had been in effect
for all periods presented. At the date of the SCB Merger, the Company charged to
expense merger costs of approximately $8.8 million (after tax), representing
investment banking, filing and professional fees; compensation and severance
costs; termination of an interest rate swap; branch closure expense; and costs
of computer conversions.
Separately reported net interest income and net income for SC Bancorp for
the nine months ended September 30, 1997, were $18,842,000 and $4,014,000,
respectively. Separately reported net interest income and net income for the
Company for the nine months ended September 30, 1997 were $34,066,000 and
$3,514,000, respectively. On a combined basis, giving effect to both the CCB
Merger and the SCB Merger as pooling-of-interests, the Company's restated net
interest income and net income were
76
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
$52,908,000 and $7,528,000, respectively, for the nine months ended September
30, 1997. These amounts are unaudited.
SMB ACQUISITION
On January 27, 1998, the Company acquired Santa Monica Bank through the
merger of Santa Monica Bank with and into Western Bank (the "SMB Acquisition").
As part of the SMB Acquisition, the name of Western Bank was changed to "Santa
Monica Bank." 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 Company Common Stock (the "Stock
Consideration"). 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 received the Stock Consideration
resulting in the issuance of approximately 2,653,000 shares of Company Common
Stock. In order to fund a part of the Cash Consideration payments, the Company
issued an additional 2,327,550 shares of Company Common Stock to certain private
investors for $65,171,400 in the aggregate. Accordingly, in the aggregate,
approximately 4,980,550 shares of Company Common Stock were issued in connection
with the SMB Acquisition. The total value of the consideration paid in the SMB
Acquisition was approximately $198.4 million in Company Common Stock and cash.
In conjunction with the SMB Acquisition, the Company and Santa Monica Bank
incurred after-tax merger costs of approximately $8.4 million, representing $2.7
million in investment banking fees paid to Belle Plaine Partners, Inc. and other
acquisition-related costs including filing and professional fees; employee
compensation, and costs of computer conversions and consolidation. These
expenses were capitalized.
The SMB Acquisition was accounted for using the purchase method of
accounting. The pro forma results of operations as if the acquisition of Santa
Monica Bank had been effective at the beginning of 1997 is presented in this
footnote under the caption "Pro Forma Information for Purchase Acquisitions".
BKLA ACQUISITION
On October 23, 1998, the Company acquired all of the issued and outstanding
shares of common stock of BKLA ("BKLA Common Stock") through the merger of BKLA
with and into SMB with SMB being the surviving corporation. The exchange ratio
was 0.4224 shares of Company Common Stock issued for each share of BKLA Common
Stock, pursuant to which, approximately 2,214,350 shares of Company Common Stock
were issued as consideration to holders of BKLA Common Stock and all of the
outstanding shares of common stock of BKLA were canceled. The financial
information for all periods presented 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 for all periods presented. At
the date of the BKLA Acquisition, the Company charged to expense merger costs of
$8.1 million (after tax), representing investment banking, filing and
professional fees; employee compensation and severance; branch closure costs and
costs of computer conversions and consolidation.
Separately reported net interest income and net income for BKLA for the
quarter ended September 30, 1998, would have been $3,705,000 and $964,000,
respectively. Separately reported net interest income and net income for the
Company for the quarter ended September 30, 1998, were $26,742,000 and
$6,625,000, respectively. On a combined basis, giving effect to the BKLA
Acquisition as a
77
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
pooling-of-interests, the Company's restated net interest income and net income
were $30,447,000 and $7,589,000, respectively, for the quarter ended September
30, 1998. These amounts are unaudited.
ACQUISITIONS BY BKLA
In the past three years BKLA, prior to the acquisition of BKLA by the
Company, completed two purchase transactions resulting in the issuance of shares
of BKLA Common Stock. The share counts of BKLA Common Stock in the following
discussion have been adjusted for the exchange ratio of 0.4224 used in the BKLA
Acquisition.
BKLA completed the American West Bank acquisition on March 31, 1997 and the
Culver National Bank acquisition on December 31, 1997, both accounted for as
purchases. In completing these acquisitions, BKLA issued 577,629 and 488,010
common shares, respectively. The pro forma results of operations as if these
acquisitions had been effective at the beginning of 1996 is presented in this
footnote under the caption "Pro Forma Information for Purchase Acquisitions".
PNB MERGER
On December 30, 1998, PNB Financial Group, Inc., a bank holding company
("PNB"), 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 issued and outstanding shares of common stock of
PNB were cancelled. The financial information for all periods presented herein
has been restated to present the combined financial condition and results of
operations of the Company and PNB as if the PNB Merger had been in effect for
all periods presented. At the date of the PNB Merger, the Company charged to
expense merger costs of approximately $4.6 million (after tax), representing
investment banking, filing and professional fees; employee compensation and
severance; branch closure expense and costs of computer conversions.
Separately reported net interest income and net income for PNB for the
quarter ended September 30, 1998, were $3,850,000 and $2,025,000, respectively.
Separately reported net interest income and net income for the Company including
BKLA for the quarter ended September 30, 1998, were $30,447,000 and $7,589,000,
respectively. On a combined basis, giving effect to the PNB Merger as a
pooling-of-interests, the Company restated net interest income and net income
were $34,297,000 and $9,614,000, respectively, for the quarter ended September
30, 1998. These amounts are unaudited.
78
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
SEPARATE COMPANY INFORMATION FOR POOLING-OF-INTEREST ACQUISITIONS
The following table presents certain financial data reported separately by
each company and on a combined basis for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net interest income:
The Company............................................... $ 118,174 $ 71,676 $ 8,545
CCB....................................................... -- -- 19,964
SC Bancorp................................................ -- -- 23,417
BKLA...................................................... -- 10,923 7,474
PNB....................................................... 14,934 12,377 10,090
---------- --------- ---------
Combined.................................................. $ 133,108 $ 94,976 $ 69,490
---------- --------- ---------
---------- --------- ---------
Net income:
The Company............................................... $ 12,409 $ 3,162 $ 738
CCB....................................................... -- -- 3,796
SC Bancorp................................................ -- -- 4,455
BKLA...................................................... -- 3,731 1,001
PNB....................................................... 7,747 5,020 3,556
---------- --------- ---------
Combined.................................................. $ 20,156 $ 11,913 $ 13,546
---------- --------- ---------
---------- --------- ---------
Issuance of common stock:
The Company............................................... $ 152,912 $ 715 $ 42,213
CCB....................................................... -- -- 281
SC Bancorp................................................ -- -- 80
BKLA...................................................... -- 14,519 --
PNB....................................................... 8,032 453 29
---------- --------- ---------
Combined.................................................. $ 160,944 $ 15,687 $ 42,603
---------- --------- ---------
---------- --------- ---------
</TABLE>
PRO FORMA INFORMATION FOR PURCHASE ACQUISITIONS
The following table presents unaudited pro forma results of operations of
the Company for the years ended December 31, 1998, 1997 and 1996 as if the
acquisition of Santa Monica Bank had been effective at the beginning of 1997,
and as if the acquisitions of Culver National Bank, American West Bank and
Western Bank had been effective at the beginning of 1996. The unaudited pro
forma combined summary of operations is intended for informational purposes only
and is not necessarily indicative of the future operating results of the Company
or operating results that would have occurred had these acquisitions been in
effect for all the years presented.
79
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
UNAUDITED PRO FORMA
COMBINED SUMMARY OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest income.............................................................. $ 185,559 $ 184,256 $ 129,228
Interest expense............................................................. 49,716 54,039 39,370
---------- ---------- ----------
Net interest income........................................................ 135,843 130,217 89,858
Provision for loan and lease losses.......................................... 1,405 4,340 3,689
---------- ---------- ----------
Net interest income after provision for loan and lease losses.............. 134,438 125,877 86,169
Noninterest income........................................................... 45,470 35,097 26,060
Noninterest expense.......................................................... 133,177 132,206 91,263
---------- ---------- ----------
Income before income taxes................................................. 46,731 28,768 20,966
Income taxes................................................................. 26,694 16,896 6,229
---------- ---------- ----------
Net income................................................................. $ 20,037 $ 11,872 $ 14,737
---------- ---------- ----------
---------- ---------- ----------
Net income per share:
Basic...................................................................... $ 0.98 $ 0.59 $ 0.99
Diluted.................................................................... $ 0.95 $ 0.57 $ 0.97
Weighted average shares outstanding:
Basic...................................................................... 20,500.0 20,044.0 14,885.8
Diluted.................................................................... 21,026.1 20,649.7 15,268.1
</TABLE>
80
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
MERGER RELATED COSTS
As a result of the SMB Acquisition, the BKLA Acquisition and the PNB Merger,
the Company incurred certain merger-related costs in 1998. These costs are
described below:
<TABLE>
<CAPTION>
REMAINING
BKLA PNB TOTAL SMB ACCRUAL AT
OTHER ACQUISITION MERGER EXPENSE ACQUISITION(1) TOTAL DECEMBER 31, 1998
----------- -------------- --------- --------- ------------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment banking fees
(2).................. $ -- $ 1,411 $ 1,505 $ 2,916 $ 3,602 $ 6,518 $ 532
Other professional
services (2)......... 312 1,668 1,394 3,374 1,717 5,091 705
Compensation related
expense.............. -- 3,643 763 4,406 3,204 7,610 4,543
Branch closure
expense.............. -- 3,330 1,579 4,909 -- 4,909 2,922
Conversion and other
costs................ -- 1,741 592 2,333 2,106 4,439 3,259
----- ------- --------- --------- ------------- --------- -------
Total merger-related
costs.............. $ 312 $ 11,793 $ 5,833 $ 17,938 $ 10,629 $ 28,567 $ 11,961
----- ------- --------- --------- ------------- --------- -------
----- ------- --------- --------- ------------- --------- -------
</TABLE>
- ------------------------
(1) Merger-related costs for the SMB Acquisition were capitalized in goodwill.
Of these expenses, approximately $1.5 million were incurred in 1997.
(2) These costs are considered nondeductible expenses for purposes of
calculating after-tax merger costs.
As a result of the CCB Merger and the SCB Merger, the Company incurred
certain merger-related costs in 1997. These costs are described below:
<TABLE>
<CAPTION>
REMAINING
ACCRUAL AT
CCB MERGER SCB MERGER TOTAL DECEMBER 31, 1997
------------- ----------- -------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment banking fees........ $ 1,400 $ 3,520 $ 4,920 $ --
Other professional services.... 697 1,960 2,657 174
Compensation related expense... 1,055 2,769 3,824 1,521
Conversion costs............... 252 753 1,005 780
Branch closure expense......... -- 790 790 790
Termination of interest rate
swap......................... -- 446 446 --
Other.......................... -- 559 559 200
------ ----------- ------- ------
Total merger-related costs... $ 3,404 $ 10,797 $ 14,201 $ 3,465
------ ----------- ------- ------
------ ----------- ------- ------
</TABLE>
81
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain average reserve balances with the
Federal Reserve Bank based on a percentage of deposits. The total average amount
of those reserve balances for the year ended December 31, 1998 was approximately
$60.9 million.
NOTE 4--SECURITIES
Investment securities at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available for sale:
US Government securities................... $ 68,614 $ 298 $ -- $ 68,912
US Agency securities or insured
obligations.............................. 142,663 145 (60) 142,748
Mortgage-backed securities................. 77,719 345 (164) 77,900
State and political subdivisions........... 5,186 188 -- 5,374
Other debt securities...................... 58,990 536 (172) 59,354
---------- ----------- ----- ----------
Total debt securities.................... 353,172 1,512 (396) 354,288
Other equity securities.................... 1,036 -- -- 1,036
---------- ----------- ----- ----------
Total.................................... $ 354,208 $ 1,512 $ (396) $ 355,324
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
Investment securities at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities held to maturity:
US Government securities................... $ 24,966 $ 48 -- $ 25,014
US Agency securities....................... 17,962 67 -- 18,029
Mortgaged-backed securities................ 5,210 -- (6) 5,204
---------- ----- ----- ----------
Total debt securities.................... $ 48,138 $ 115 $ (6) $ 48,247
---------- ----- ----- ----------
---------- ----- ----- ----------
Securities available for sale:
US Government securities................... $ 108,266 $ 288 $ (4) $ 108,550
US Agency securities or insured
obligations.............................. 55,603 91 (145) 55,549
Mortgage-backed securities................. 54,115 106 (579) 53,642
State and political subdivisions........... 1,169 51 -- 1,220
---------- ----- ----- ----------
Total debt securities.................... 219,153 536 (728) 218,961
Other equity securities.................... 1,062 -- -- 1,062
---------- ----- ----- ----------
Total.................................. $ 220,215 $ 536 $ (728) $ 220,023
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
82
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SECURITIES (CONTINUED)
The amortized cost and estimated fair value of debt securities at December
31, 1998, by contractual maturity, are shown below. Mortgage-backed securities
included in available for sale portfolios which are not due at a single maturity
date are allocated over several maturity groupings based on anticipated
maturities of the underlying assets. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less............................................. $ 216,272 $ 216,695
Due after one year through five years............................... 60,268 60,443
Due after five years through ten years.............................. 2,857 2,908
Due after ten years................................................. 73,775 74,242
---------- ----------
$ 353,172 $ 354,288
---------- ----------
---------- ----------
</TABLE>
Gross gains and losses on sale of available for sale securities were
$1,586,000 and $36,000, respectively, for 1998, and $342,000 and $11,000
respectively, for 1997. Gross gains and losses were $293,000 and $17,000
respectively, for 1996.
Investment securities available for sale with a carrying amount of
approximately $8.8 million and $24.7 million were pledged as collateral to
secure public deposits at December 31, 1998 and 1997, respectively.
In conjunction with the BKLA Acquisition on November 13, 1998, the Company
reclassified BKLA's entire securities held to maturity portfolio to available
for sale. The amortized cost at the date of transfer was $79.4 million and the
fair value was $79.0 million. The unrealized loss was recorded in shareholders'
equity. In December 1997, in conjunction with the merger between NBSC and SCB,
SCB and Western Bank reclassified their entire held to maturity investment
portfolios to available for sale. The held to maturity investment securities
were transferred to available for sale at their then fair market values; the
amortized cost of the securities transferred was $2.9 million and the related
unrealized net gain recorded in equity was $35,000.
NOTE 5--LOANS AND LEASES
LOANS AND LEASES
Most of the loans and leases made by the Company are to customers located in
San Diego, Orange and Los Angeles counties. Mortgage and construction loans are
collateralized by real estate trust deeds. The Company generally requires
security in the form of assets, including real estate, for commercial and
installment loans. The ability of the Company's customers to honor their loan
agreements is dependent
83
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
upon the general economy of the Company's market areas and the financial
strength of the customer. The distribution of the Company's loan and lease
portfolio is as follows:
<TABLE>
<CAPTION>
LOANS AND LEASES
OUTSTANDING AT DECEMBER
31,
--------------------------
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Loan type:
Real estate construction........................................ $ 193,378 $ 91,314
Real estate mortgage............................................ 739,551 498,598
Commercial...................................................... 581,708 453,843
Leases.......................................................... 1,551 1,934
Installment and other........................................... 157,462 98,940
------------ ------------
Gross loans and leases........................................ 1,673,650 1,144,629
Less:
Unearned lease income........................................... (190) (226)
Deferred loan fees.............................................. (4,506) (3,211)
Allowance for loan and lease losses............................. (26,743) (20,271)
------------ ------------
Net loans and leases held for investment...................... 1,642,211 1,120,921
Loans held for sale............................................... 130,255 97,211
------------ ------------
Total loans....................................................... $ 1,772,466 $ 1,218,132
------------ ------------
------------ ------------
</TABLE>
LOANS HELD FOR SALE
In the ordinary course of business, SCB has liability under representations
and warranties made to purchasers and insurers of mortgage loans sold. Under
certain circumstances, SCB may become liable for the unpaid principal and
interest on defaulted loans (whether recourse or non-recourse) or other loans if
there has been a breach of representations or warranties.
Until September 30, 1996, substantially all mortgage loans were sold with a
recourse provision. After October 1, 1996, the majority of the loans sold were
without a recourse provision. Generally, loans sold under the recourse provision
are required to be purchased back by SCB if the loan becomes delinquent within
two to six months of funding. SCB has the choice to not repurchase the loan;
however, in the event that SCB elects not to repurchase the loan, SCB must
indemnify the investor for any and all costs associated with the investors
collection of the loan. During 1997, SCB chose to indemnify the majority of the
loans subject to a recourse provision. SCB estimates its loss exposure to loans
sold under the recourse and representation and warranty provisions and has
recorded this estimated liability at December 31, 1998, and 1997. Provision for
losses are charged to operations and the estimated liability is classified in
other
84
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
liabilities. The following is a summary of transactions affecting this estimated
liability for the three years ended December 31:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at the beginning of the period............................ $ 382 $ 461 $ 232
Provision for losses............................................ 1,701 276 1,080
Charges net of recoveries....................................... (806) (355) (851)
--------- --------- ---------
Balance at the end of the period.................................. $ 1,277 $ 382 $ 461
--------- --------- ---------
--------- --------- ---------
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses for the three years ended
December 31, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at the beginning of the period....................... $ 20,271 $ 19,251 $ 18,147
Loans and leases charged off:
Real estate mortgage and construction...................... 3,493 2,594 4,795
Commercial................................................. 2,592 4,270 2,954
Installment and other...................................... 1,126 611 610
--------- --------- ---------
Total loans and leases charged off....................... 7,211 7,475 8,359
Recoveries on loans and leases charged off:
Real estate mortgage and construction...................... 1,767 432 404
Commercial................................................. 1,319 1,900 1,089
Installment and other...................................... 615 201 138
--------- --------- ---------
Total recoveries on loans and leases charged off......... 3,701 2,533 1,631
--------- --------- ---------
Net loans and leases charged off......................... 3,510 4,942 6,728
Provision charged to operating expense....................... 1,325 4,080 2,671
Other additions due to:
Acquisitions............................................... 8,657 1,882 5,041
Loan portfolio purchases................................... -- -- 120
--------- --------- ---------
Balance at the end of the period............................. $ 26,743 $ 20,271 $ 19,251
--------- --------- ---------
--------- --------- ---------
</TABLE>
85
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND LEASES (CONTINUED)
CREDIT QUALITY
A summary of loans on which the accrual of interest has been discontinued at
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans and leases:
Real estate construction................................... $ -- $ 387 $ 1,031
Real estate mortgage....................................... 8,614 8,863 16,043
Commercial................................................. 4,907 3,324 3,737
Installment and others..................................... 1,408 416 1,360
--------- --------- ---------
Total........................................................ $ 14,929 $ 12,990 $ 22,171
--------- --------- ---------
--------- --------- ---------
</TABLE>
If interest on nonaccrual loans and leases had been recognized at the
original interest rates, interest income would have increased approximately
$1,126,000, $946,000 and $1,509,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
The Company has no commitments to lend additional funds to borrowers whose
loans were classified as nonaccrual.
At December 31, 1998 and 1997, impaired loans and the related specific
allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------
ALLOWANCE FOR
RECORDED LOAN AND LEASE NET
INVESTMENTS LOSSES INVESTMENTS
----------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances.................... $ 10,920 $ 3,254 $ 7,666
Without specific allowances................. 12,954 -- 12,954
----------- ------ -------
Total impaired loans and leases........... $ 23,874 $ 3,254 $ 20,620
----------- ------ -------
----------- ------ -------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------
ALLOWANCE FOR
RECORDED LOAN AND LEASE NET
INVESTMENTS LOSSES INVESTMENTS
----------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
With specific allowances.................... $ 7,634 $ 1,418 $ 6,216
Without specific allowances................. 12,713 -- 12,713
----------- ------ -------
Total impaired loans and leases........... $ 20,347 $ 1,418 $ 18,929
----------- ------ -------
----------- ------ -------
</TABLE>
The average recorded net investment in impaired loans and leases for the
years ended December 31, 1998, 1997 and 1996 was approximately $20,387,000,
$21,894,000 and $22,357,000, respectively. Interest income on impaired loans and
leases of approximately $105,000, $870,000 and $737,000 was recognized in 1998,
1997 and 1996, respectively.
86
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land and building................................................... $ 18,815 $ 12,944
Furniture, fixtures and equipment................................... 24,463 17,843
Leasehold improvements.............................................. 10,149 8,954
---------- ----------
Total premises and equipment...................................... 53,427 39,741
Less accumulated depreciation and amortization...................... (19,891) (22,312)
---------- ----------
Total premises and equipment, net................................. $ 33,536 $ 17,429
---------- ----------
---------- ----------
</TABLE>
NOTE 7--DEPOSITS
At December 31, 1998, the scheduled contractual maturities of certificates
of deposit were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------
(IN THOUSANDS)
<S> <C>
1999.................................................................... $ 340,115
2000.................................................................... 11,423
2001.................................................................... 8,227
2002.................................................................... 1,215
2003 and thereafter..................................................... 2,321
--------
$ 363,301
--------
--------
</TABLE>
NOTE 8--BORROWINGS
At December 31, 1998 and 1997, borrowings were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
FHLB advances........................................................... $ 16,524 $ 5,000
Notes payable........................................................... 2,940 7,080
Treasury Tax and Loan note.............................................. 4,258 5,868
Capital lease obligation................................................ -- 1,849
--------- ---------
Total borrowings.................................................... $ 23,722 $ 19,797
--------- ---------
--------- ---------
</TABLE>
REVOLVING LINE OF CREDIT
The Company maintains a revolving line of credit with The Northern Trust
Company which was established on September 30, 1996. The balance at December 31,
1998 and 1997 was $1.0 million and $7.1 million, respectively, and the interest
rate was 6.38 percent and 7.02 percent, respectively. The highest amount
outstanding during 1998 and 1997 was $9.3 million and $12.2 million,
respectively; the average balance outstanding during 1998 and 1997 was $5.2
million and $9.6 million, respectively; and the average rate paid in 1998 and
1997 was 7.05 percent and 7.07 percent, respectively. The revolving credit
agreement expires on September 25, 1999.
87
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--BORROWINGS (CONTINUED)
In January 1998, the Company executed a Third Amendment to the Revolving
Credit Agreement increasing the credit line to $17.5 million and modifying
certain covenants to reflect the Company's larger size. The loan agreement
contains covenants which impose certain restrictions on activities of the
Company and its financial condition. Such covenants include minimum net worth
ratios, maximum debt ratios, a minimum return on average assets, a dividend
limitation and minimum and maximum credit quality ratios. As of December 31,
1998 and 1997, the Company, and where applicable, its subsidiaries, were in
compliance with each of such covenants or the Company has obtained the
appropriate waivers from The Northern Trust Company. Shares of common stock of
SMB, with a carrying value of approximately $58.0 million, have been pledged as
collateral against the note payable to The Northern Trust Company.
MORTGAGE NOTE
SMB has a mortgage note payable for $1.9 million as of December 31, 1998
related to the purchase of a parking lot in 1990. The note terms provide for a
30-year amortization and an interest rate of Bank of America prime plus 1.5
percent; the interest rate at December 31, 1998 was 9.25 percent. The note
matures in June 2001.
FEDERAL HOME LOAN BANK LINES OF CREDIT
The Banks each have a line of credit with the Federal Home Loan Bank of San
Francisco ("FHLB"). The maximum amount the Banks may borrow under these
agreements is limited to the lesser of a percentage of eligible collateral as
established in the respective agreements or a certain percentage of each Bank's
total assets (30 percent of SCB's total assets and 25 percent of SMB's total
assets). At December 31, 1998, the maximum amount SCB and SMB were allowed to
borrow from the FHLB was zero and $21.1 million, respectively. SCB did not have
any assets pledged at that point in time and therefore no available credit. SMB
had certain loans and securities pledged with a carrying value of $26.7 million
and FHLB advances outstanding in the amount of $16.5 million at December 31,
1998. The advances have various maturity dates, which range from March 2005
through August 2013, and interest rates ranging from 5.78 percent to 6.16
percent. SMB had available credit of $4.6 million as of December 31, 1998.
At December 31, 1997, the maximum amount SCB was allowed to borrow from the
FHLB was $19.3 million. SCB had certain loans and securities pledged with a
carrying value of $41.5 million and FHLB overnight advances outstanding in the
amount of $5.0 million at December 31, 1997. The interest rate was 6.57 percent
(the FHLB daily reference rate) for the overnight advances and SCB had available
credit of $14.3 million at December 31, 1997. SMB did not participate in this
program as of December 31, 1997.
FEDERAL FUNDS ARRANGEMENTS WITH COMMERCIAL BANKS
Under separate agreements with various commercial banks, SCB and SMB may
borrow through federal funds lines of credit an aggregate of up to $70.5 million
and $34.0 million, respectively, at December 31, 1998. As of December 31, 1997
the federal funds arrangements allowed SCB and SMB to borrow $56.5 million and
$22.0 million, respectively. Federal funds arrangements are subject to the terms
of the individual arrangements and may be terminated at the discretion of the
correspondent bank. There were no amounts outstanding on these lines of credit
at December 31, 1998 and 1997.
88
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--BORROWINGS (CONTINUED)
TREASURY, TAX AND LOAN NOTE
SCB participates in the Treasury, Tax and Loan ("TT&L") Note program and has
a limit of $16.5 million at the Federal Reserve Bank. The outstanding balance
was $4.3 million and $5.9 million at December 31, 1998 and 1997, respectively,
and the interest rate was 4.1 percent and 5.3 percent, respectively. The TT&L
Note balance fluctuates based on the amounts deposited by customers and the
amounts called for payment by the Federal Reserve Bank. The average TT&L Note
balance for 1998 and 1997 was $6.6 million and $3.2 million, respectively.
NOTE 9--SHAREHOLDERS' EQUITY
ACQUISITION-RELATED TRANSACTIONS. In conjunction with the SMB Acquisition
the Company issued approximately 2,653,000 shares of Company Common Stock. In
order to fund a part of the Cash Consideration payments in the SMB Acquisition,
the Company issued an additional 2,327,550 shares of Company Common Stock to
certain private investors for $65,171,400 in the aggregate. Accordingly, in the
aggregate approximately 4,980,550 shares of Company Common Stock were issued in
connection with the SMB Acquisition.
As part of the September 30, 1996 acquisition of Western, the Company sold
approximately 3,076,045 shares of Company Common Stock in a private placement
for net proceeds of approximately $42,213,000. Pursuant to this equity
transaction, the Company issued to parties related to Belle Plaine Financial,
L.L.C., 92,275 warrants to acquire Company Common Stock at $16.83 per share. The
warrants expire on September 30, 2001.
BKLA completed the American West Bank acquisition on March 31, 1997 and the
Culver National Bank acquisition on December 31, 1997, both accounted for as
purchases. In completing these acquisitions, BKLA issued 577,629 and 488,010
common shares, respectively; these share counts of BKLA Common Stock have been
adjusted for the exchange ratio of 0.4224 used in the BKLA Acquisition.
RESTRICTIONS ON PAYMENTS OF DIVIDENDS
Holders of Company Common Stock are entitled to receive dividends declared
by the Board of Directors out of funds legally available therefor under the laws
of the State of California and certain federal laws and regulations governing
the banking and financial services business. The Company's ability to pay
dividends is also limited by the Third Amendment to Revolving Credit Agreement,
dated January 26, 1998, between the Company and The Northern Trust Company,
which provides that the Company may not declare or pay any dividend other than
dividends payable in Company Common Stock or in the ordinary course of business
not to exceed 50 percent of net income per fiscal quarter of the Company before
goodwill amortization and any restructuring charges incurred in connection with
any merger, consolidation or other restructuring contemplated by the Agreement
and Plan of Merger, dated as of July 30, 1997 and Restated as of November 20,
1997, by and among the Company, Western Bank and Santa Monica Bank or similar
transactions. In addition, the Banks are subject to certain restrictions under
the laws of the State of California and certain federal laws and regulations
governing banks which limit their ability to transfer funds to the Company
through inter-company loans, advances, or cash dividends.
89
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal..................................................... $ 19,872 $ 9,025 $ 2,898
State....................................................... 7,436 3,616 993
--------- --------- ---------
Total..................................................... 27,308 12,641 3,891
--------- --------- ---------
Deferred expense (benefit):
Federal..................................................... (963) 358 269
State....................................................... (12) (167) 441
--------- --------- ---------
Total..................................................... (975) 191 710
--------- --------- ---------
Total income taxes...................................... $ 26,333 $ 12,832 $ 4,601
--------- --------- ---------
--------- --------- ---------
</TABLE>
Tax benefits associated with the exercise of nonqualified stock options of
$1,840,000, $2,045,000 and $51,000 for 1998, 1997 and 1996, respectively, are
reflected in the Consolidated Statements of Changes in Shareholders' Equity.
The provision for income taxes differs from that which would result from
applying the U.S. statutory rate of 35% in 1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense at statutory rate................. $ 16,271 $ 8,661 $ 6,351
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefits................ 4,826 2,242 932
Amortization of goodwill................................... 3,440 739 210
Non-deductible merger expenses............................. 2,274 2,750 --
Change in valuation allowance.............................. -- -- (2,466)
Other, net................................................. (478) (1,560) (426)
--------- --------- ---------
Total income tax expense..................................... $ 26,333 $ 12,832 $ 4,601
--------- --------- ---------
--------- --------- ---------
</TABLE>
90
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1998 and 1997
are presented below.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for losses......................................... $ 4,475 $ 1,856
Post retirement benefits............................................................... 3,323 1,266
Merger costs........................................................................... 3,300 358
State taxes............................................................................ 1,810 826
Contingencies.......................................................................... 860 895
Depreciation........................................................................... 816 228
Loss on loans carried at market value for tax purposes................................. 783 273
Net operating loss carryovers.......................................................... 339 2,888
Interest on nonaccrual loans........................................................... 162 354
Other real estate owned................................................................ 112 226
Purchase accounting adjustments........................................................ -- 1,109
Unrealized loss on investment securities............................................... -- 59
Other.................................................................................. 592 56
--------- ---------
Total deferred tax assets............................................................ 16,572 10,394
Valuation allowance.................................................................. -- --
--------- ---------
Net deferred tax assets............................................................ 16,572 10,394
--------- ---------
Deferred tax liabilities:
Purchase accounting adjustments........................................................ (3,027) --
Unrealized gain on investment securities............................................... (463) --
FHLB stock dividends................................................................... (382) (290)
Accretion.............................................................................. (121) (113)
Leases................................................................................. (82) (179)
--------- ---------
Total deferred tax liabilities....................................................... (4,075) (582)
--------- ---------
Net deferred tax asset............................................................. $ 12,497 $ 9,812
--------- ---------
--------- ---------
</TABLE>
Realization of the net deferred tax assets may be based on utilization of
carrybacks to prior taxable periods, anticipation of future taxable income and
the utilization of tax planning strategies. Management believes that it is more
likely than not that the deferred tax assets will be fully realized. Therefore,
no valuation allowance for deferred tax assets has been recorded at December 31,
1997 and 1998.
On December 31, 1998, the Company had $807,000 and $800,000 of Federal and
California net operating loss carryovers, respectively, that have various
expiration dates beginnng in the year 2002 through the year 2009. Management
believes that the Federal and California net operating losses will be realized.
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company and the Banks conduct operations from leased facilities under
operating leases which expire on various dates and which contain certain renewal
options. Future minimum rental payments
91
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
required under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Year ended December 31:
1999........................................................................ $ 6,570
2000........................................................................ 5,925
2001........................................................................ 4,983
2002........................................................................ 3,490
2003........................................................................ 2,331
Thereafter.................................................................. 3,694
-------
Total..................................................................... $ 26,993
-------
-------
</TABLE>
Rental expense was $6,012,000 in 1998, $5,098,000 in 1997 and $4,100,000 in
1996. Rental expense for 1996 includes that for Western Bank since the date of
its acquisition, and rental expense for 1998 includes that for Santa Monica Bank
since the date of its acquisition.
Sublease rental income for the years ended December 31, 1998, 1997 and 1996
totaled approximately $494,000, $194,000 and $155,000, respectively.
LITIGATION
GENERAL. From time to time, the Company and the Banks are party to claims
and legal proceedings arising in the ordinary course of business. Management of
the Company evaluates the Company's and/or the Banks' exposure to the cases
individually and in the aggregate and provides for potential losses on such
litigation if the amount of the loss is determinable and if the occurence of the
loss is probable.
Set forth below is a brief summary of the status of certain pending legal
proceedings to which the Company and/or the Banks are subject. Management
believes that the liability which it has established for these matters is
adequate as of the date hereof. However, litigation is inherently uncertain and
no assurance can be given that this or any other litigation will not result in
any loss which might be material to the Company and/or the Banks.
PDI LITIGATION. NBSC v. Vincent E. Galewick, Performance Development, Inc.
et al. (the "PDI Litigation"), is an interpleader action filed by NBSC on August
22, 1995 in the Orange County Superior Court. The dispute arose from a demand by
the California Department of Corporations under California Government Code
Section 7480 on August 17, 1995 for the identification of account names and
account numbers associated with Vincent Galewick and Performance Development,
Inc. (collectively "PDI"). As a result of receipt of a declaration by the
California Department of Corporations under California Financial Code Section
952, NBSC froze $12,301,113 in PDI's accounts. On August 21, 1995, a temporary
restraining order was issued restraining PDI and others from transferring funds.
NBSC was thereafter threatened by various parties with lawsuits for refusal to
release the funds, and an attack was made on the applicability of the temporary
restraining order to the funds. NBSC deposited the funds with the Orange County
Superior Court and filed the interpleader action to allow the court to determine
the disposition of the funds. In response, the defendants filed a cross
complaint against NBSC alleging damages due to lost opportunities, breach of
contract, loss of goodwill and damage to their reputation due to the inability
to use the $12,301,113. Additional claims for an unspecified amount of punitive
damages, consequential damages and incidental damages were asserted. On November
9, 1998, the Company entered into a Settlement
92
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Agreement and Mutual Release with the various plaintiffs in the PDI litigation,
the terms of which are confidential pursuant to the agreement. The financial
impact of this settlement has been included in the Consolidated Financial
Statements.
FIP LITIGATION. Financial Institution Partners, L.P. v. California
Commercial Bankshares et al., is an action filed by Financial Institution
Partners, L.P. (collectively with its purported assignee, Hovde Capital, Inc.,
"FIP") on December 19, 1996 in the United States District Court for the Central
District of California. The dispute arose from the purchase by FIP in December
1995 of 288,888 shares of common stock of CCB (the "Initial Shares") in a
private placement at $6.75 per share ($1,949,994 in the aggregate), and FIP's
agreement to purchase an additional 266,659 shares of common stock of CCB ("CCB
Common Stock") on or prior to May 5, 1996, subject to satisfaction of certain
closing conditions, including the receipt of required regulatory approval, if
any.
FIP informed CCB on April 30, 1996 that it had been informed that no
regulatory approval was required for the purchase of additional shares of common
stock of CCB. Nevertheless, FIP did not purchase any additional shares of CCB
Common Stock pursuant to the agreement and has alleged, among other things, that
CCB failed to cooperate fully in the due diligence review of CCB that FIP
alleges was a condition precedent to its purchase of those additional shares. On
June 11, 1996, FIP requested that CCB either (a) amend the agreement to allow
FIP until December 31, 1996 to purchase additional shares of CCB Common Stock at
an increased purchase price based upon the earnings of CCB from June 1, 1996
through November 30, 1996, or (b) repurchase the Initial Shares for an amount
equal to the purchase price, plus $6.00 per share, plus 9 percent interest, plus
FIP's legal, accounting and due diligence expenses. On June 28, 1996, CCB
informed FIP that its rights to purchase additional shares had expired under the
terms of the parties' agreement and declined either to amend the agreement or
repurchase the Initial Shares.
On December 19, 1996, FIP filed a complaint in the United States District
Court for the Central District of California against CCB, NBSC and certain of
their respective officers and directors alleging claims for breach of contract
(declaratory relief and specific performance), violation of the Securities
Exchange Act and Rule 10b-5 thereunder, intentional misrepresentation, negligent
misrepresentation, suppression of fact and breach of contract (rescission,
restitution and damages). On August 20, 1997, FIP filed a Third Amended
Complaint adding the Company as a defendant and alleging additional claims for
breach of contact (right of first refusal) and civil violation of California
Penal Code Section 496. The complaint seeks rescission of FIP's purchase of the
Initial Shares, consequential damages in excess of $1,650,000 and punitive
damages. In the alternative, FIP seeks a declaratory judgment requiring CCB to
sell an additional 266,659 shares to FIP at $6.75 per share if FIP determines it
wishes to purchase such shares and requiring CCB and the Company to comply with
the terms of the agreement, which FIP contends provides it with a right of first
refusal as to any offers by defendants of shares of CCB Common Stock in an
amount necessary to maintain FIP's agreed beneficial ownership interest in CCB.
FIP's complaint does not specify which company's stock it believes it currently
has a right of refusal to purchase, or whether the number of shares it believes
it has a right, or right of first refusal, to purchase is subject to adjustment
as a result of the CCB Merger.
In an order dated June 30, 1998, the court dismissed FIP's claim to an
ongoing right of first refusal in CCB Common Stock and/or Company Common Stock.
The Company's management considers FIP's remaining claims to be without merit.
The action has been scheduled for trial in the third quarter of 1999.
93
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
FIRST PENSION LITIGATION
ROUSEAU ACTION. Rousseau et al. v. Rancho Vista National Bank et al., is an
action brought in the San Diego Superior Court on October 23, 1995 by a class of
investors who invested pension funds with First Pension, a pension plan
administrator, alleging claims against various banks who dealt with First
Pension (the "Rouseau Action"). The plaintiffs have stated claims for fraud and
deceit, aiding and abetting fraud and deceit, breach of fiduciary duty,
constructive fraud and aiding and abetting constructive fraud against a number
of financial institutions (the "Bank Defendants"), including SCB as successor to
Monarch and NBSC. NBSC and certain of its officers were named as defendants,
based on the fact that First Pension deposited investor pension funds into an
account at NBSC of which NBSC agreed to be custodian. The plaintiffs allege
losses of over $130 million due to the combined alleged wrongdoing of the Bank
Defendants. No specific damage claim was alleged against NBSC.
EVANS ACTION. Evans v. Home Bank et al., is a suit brought by the receiver
for First Pension and related entities in the Central District of California
based on the same allegations as in the Rousseau Action (the "Evans Action").
The receiver alleges that NBSC and Monarch improperly delegated their respective
fiduciary duties as a custodian of pension funds to First Pension and failed to
ensure that all pension assets were transferred to the successor custodian.
Plaintiffs did not allege a specific damage claim against NBSC or Monarch.
ZWICK ACTION. Beverly Zwick v. Monarch Bank et al., is a class action
brought in the San Diego Superior Court (the "Zwick Action"). The plaintiffs are
a class of investors whose funds were deposited by First Pension in custodial
accounts held at Monarch. The plaintiffs stated claims for negligence, fraud and
aiding and abetting constructive fraud against Monarch and the Company.
Plaintiffs claim that Monarch knew or should have known that principals of First
Pension were periodically stealing funds from the custodial accounts through
transferring authorized withdrawals to bogus accounts from which the funds were
eventually stolen. The damages alleged by the plaintiffs exceed $2,000,000.
SETTLEMENT. On February 13, 1998, the Company entered into a Settlement
Agreement and Mutual Release, pursuant to which the Company and SCB, as
successors to Monarch and NBSC, were released from all claims raised in the
Rousseau Action, the Evans Action and the Zwick Action and the Company has paid
$1.1 million to be allocated among the various plaintiffs. The impact of this
settlement has been included in the foregoing Consolidated Financial Statements.
SMART CLOTHES LITIGATION
Smart Clothes, Inc. v. World Trade Bank, et al., is an action arising from a
lending relationship which originated between World Trade Bank ("WTB") and Smart
Clothes, Inc. ("Smart Clothes"). BKLA acquired the relationship as a result of
its acquisition of WTB on November 15, 1995. Plaintiffs asserted seven causes of
action, including (1) breach of loan agreement; (2) promissory estoppel; (3)
intentional misrepresentation and concealment; (4) negligent misrepresentation
and concealment; (5) rescission of guarantee; (6) reformation; and (7)
interference with contractual relations. Plaintiffs sought damages of at least
$30,000,000, based upon claims of lost profits.
On October 23, 1998, BKLA entered into a settlement agreement and mutual
release with plaintiffs; the terms which are confidential pursuant to the
agreement. The impact of this settlement has been included in the Consolidated
Financial Statements.
94
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--RELATED PARTY TRANSACTIONS
The Company had loans outstanding to principal officers and directors and
their affiliated companies which were made substantially on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other borrowers and do not involve more than the
normal risks of collectibility. An analysis of the activity with respect to such
loans to related parties is as follows for the years ended December 31:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Balance at the beginning of the period.................................. $ 4,802 $ 10,097
New loans............................................................... 6,315 3,869
Repayments.............................................................. (2,848) (7,538)
Changes due to officer/director resignations............................ (7,815) (1,626)
--------- ---------
Balance at the end of the period........................................ $ 454 $ 4,802
--------- ---------
--------- ---------
</TABLE>
In addition to the $454,000 of related party loans outstanding at December
31, 1998, there were $101,000 in undisbursed commitments. In addition to the
repayments of $2,848,000 during 1998 there is a decrease of $7,815,000 due to a
reduction in the number of related parties due to the BKLA Acquisition and PNB
Merger. In addition, principal officers and directors in the aggregate had $3.3
million in deposits with the Banks at December 31, 1998.
On January 1, 1996, the Company engaged one of its directors, who did not
stand for reelection at the 1998 meeting of shareholders, as a financial
advisor. The engagement agreement provides for a monthly fee of $3,000 plus
expenses beginning January 1, 1996. The agreement may be terminated by either
the Company or the director upon 30 days written notice.
Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. are entities
related to a director of the Company. Belle Plaine Partners, Inc. serves as
financial advisor to the Company under an engagement letter dated May 17, 1995.
The agreement may be terminated by either party upon 30 days written notice. In
that capacity, Belle Plaine Partners, Inc. was paid fees of approximately $1.4
million for evaluating and identifying potential acquisitions including the
acquisition of Western which closed September 30, 1996. The Company also paid
Belle Plaine Partners, Inc. fees of approximately $1.35 million and $1.8 million
in connection with the CCB Merger and SCB Merger, respectively. In 1998, the
Company paid Belle Plaine Partners, Inc. $2.7 million in connection with the SMB
Acquisition. In early 1999 the Company paid Belle Plaine Partners, Inc. $711,000
and $753,000 in connection with the BKLA Acquisition and the PNB Merger,
respectively. These amounts were accrued as of December 31, 1998. Belle Plaine
Financial, L.L.C. was engaged by the Company to raise capital to consummate the
acquisition of Western. Belle Plaine Financial, L.L.C. was paid $863,000 for its
services and was reimbursed for expenses incurred in the course of that
engagement. In addition Belle Plaine Financial, L.L.C. assisted in the raising
of capital for the Company in connection with the SMB Acquisition for which it
did not receive a fee.
As part of the cost of raising equity in September of 1995, 48,400 warrants
were issued to parties related to Belle Plaine Partners, Inc., including 40,425
to then directors of the Company. The exercise price of $13.77 was 20% higher
than the price at which the equity was raised. As part of the cost of the equity
raised in 1996 for the Western Acquisition, 92,275 warrants were issued to
parties related to Belle Plaine Partners, Inc., including 33,557 to the
Company's largest shareholder and 28,089 to a director of the Company. The
exercise price of $16.83 was 20% higher than the price at which the equity was
raised.
95
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--RELATED PARTY TRANSACTIONS (CONTINUED)
The lease for one of SMB's branches is with American West Associates, a
general partnership consisting of, among others, former directors of BKLA. In
the opinion of management, the terms of this lease are no less favorable to SMB
than a similar lease with an unrelated third party.
Scott Burford, the president of Burford Capital and son of the former
Chairman of BKLA, provided consulting services to BKLA through GBS Financial in
connection with the BKLA Acquisition. GBS Financial entered into an agreement
with BKLA pursuant to which GBS Financial received a fee of $700,000 for its
services in connection with the acquisition of BKLA, which was paid to GBS
Financial upon consummation of the BKLA Acquisition.
NOTE 13--BENEFIT PLANS
On May 16, 1995, the Board of Directors of the Company approved the 1995
Directors Deferred Compensation Plan which was approved by shareholders on July
17, 1995. This plan is effective for fees earned on and after July 1, 1995. No
compensation has been awarded under this plan.
During 1992 the Company adopted an employee stock ownership and salary
deferral plan ("KSOP"). No contributions were made by the Company to the KSOP in
1997 and 1996. In September of 1996 the Company froze the KSOP and recorded a
related expense of approximately $189,000 for repayment of a loan and other
expenses. The loan was classified in other liabilities as of December 31, 1996
and was paid off in January of 1997.
Each of Monarch, Western, NBSC, SCB, Santa Monica Bank, BKLA and PNB had
401(k) plans covering substantially all employees. Amounts contributed to such
plans by such banks and charged to expense were approximately $752,000, $414,000
and $374,000 in 1998, 1997 and 1996, respectively. The Company has merged such
401(k) plans into a single plan.
In 1987, CCB purchased cost recovery life insurance with aggregate death
benefits in the amount of $2,473,000 on the lives of the senior management
participants. The Company, as successor to CCB, is the sole owner and
beneficiary of such policies, which were purchased to fund CCB's obligation
under separate deferred compensation arrangements. The cash surrender values of
these policies, classified as other assets, at December 31, 1998 and 1997 were
$1,429,000 and $1,415,000, respectively, and the obligation under deferred
compensation agreements, classified as other liabilities, were $623,000 and
$568,000, respectively.
The Company, as successor to SC Bancorp, has established deferred
compensation plans which permit certain directors and management employees to
defer portions of their compensation and earn interest at a predetermined amount
above a specified interest rate index on the deferred amounts. Expense incurred
on deferred balances was approximately $172,000, $220,000, and $177,000 in 1998,
1997 and 1996, respectively. The deferred compensation liability at December 31,
1998 and 1997 was approximately $1.7 million and $1.9 million, respectively, of
which $763,000 and $938,000, respectively, represented principal, and was
classified with other liabilities in the accompanying consolidated balance
sheets. Approximately $921,000 and $932,000 represented accrued interest payable
at December 31, 1998 and 1997, respectively, and was also classified as other
liabilities in the accompanying consolidated balance sheets. In conjunction with
the plans, the Company purchased life insurance policies on the participants
with the Company as beneficiary. The cash surrender values of the life insurance
policies were included in other assets in the accompanying consolidated balance
sheets and totaled approximately $4.4 million and $3.9 million at December 31,
1998 and 1997, respectively.
96
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--BENEFIT PLANS (CONTINUED)
As part of the BKLA Acquisition, SMB inherited certain life insurance
policies related to former BKLA officers and directors who are no longer
affiliated with the Company. These policies had a cash surrender value of $1.5
million at December 31, 1998 and 1997 and all obligations associated with these
policies had been paid off prior to the BKLA Acquisition.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
SMB provides post-retirement health care benefits to some former and current
Santa Monica Bank employees. Employees hired before January 1, 1992 are eligible
for retiree medical and dental benefits when they reach age 65 or at age 62 with
15 years of service. Employees hired during calendar year 1992 are eligible for
retiree medical and dental benefits when they reach age 62 with at least 15
years of service. Employees hired on or after January 1, 1993 are not eligible
for retirement benefits. A person with a title of Director for 5 years
immediately before the date of retirement will automatically qualify for
benefits regardless of the person's age at retirement.
The health care benefits for retirees and eligible dependents are the same
as for active employees and subject to the same limitations and exclusions. The
maximum monthly employer contribution for single retirees is $300 and retirees
with dependents is $600. The cost of such benefits, which are primarily health
care, is recognized in the financial statements throughout an employee's
service. The components of periodic net benefit cost, the change in benefit
obligation and the change in plan assets for 1998 using a discount rate of 6.75
percent are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost......................................................... $ 73
Interest cost........................................................ 185
------
Total expense...................................................... $ 258
------
------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning of the year...................... $ 3,043
Service cost......................................................... 73
Interest cost........................................................ 185
Actuarial gain....................................................... (816)
Benefits paid........................................................ (101)
------
Benefit obligation at the end of the year............................ $ 2,384
------
------
CHANGE IN PLAN ASSETS
Fair value of plan assets at the beginning of the year............... $ --
Employer contribution................................................ 101
Benefits paid........................................................ (101)
------
Fair value of plan assets at the end of the year..................... $ --
------
Funded status........................................................ $ 2,384
Unrecognized cumulative gains........................................ 816
------
Accrued post retirement benefit cost................................. $ 3,200
------
------
</TABLE>
97
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--BENEFIT PLANS (CONTINUED)
For measurement purposes, a 10% annual rate of increase in the cost of
health care benefits was assumed for 1999 decreasing gradually to 3.75% in 2012
and thereafter.
The effect of a one-percentage-point change in assumed medical cost trend
rates would have the following effects:
<TABLE>
<CAPTION>
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total service and interest cost components....... $ -- $ --
Effect on post retirement benefit obligation............... $ 22 $ (19)
</TABLE>
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
LENDING COMMITMENTS
The Banks are parties to financial instruments with off-balance sheet risk
in the normal course of business in meeting the financial needs of their
customers. These financial instruments consist primarily of commitments to
extend credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Banks have in particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The same
credit policies are used in making commitments and conditional obligations as
those used for on-balance sheet instruments.
The Company had the following commitments to extend credit at December 31:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Loan commitments...................................................... $ 667,591 $ 371,974
Standby letters of credit............................................. 13,857 15,482
---------- ----------
$ 681,448 $ 387,456
---------- ----------
---------- ----------
</TABLE>
In addition to the amounts above, approximately $17,978,000 and $7,450,000
in consumer credit card and overdraft commitments were outstanding as of
December 31, 1998 and 1997. Loan commitment arrangements represent commercial
lines of credit with variable interest rates determined at the time funds are
drawn by adding an interest spread to an agreed upon index. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract; they generally have
fixed expiration dates or other termination clauses and may require a fee. The
total commitment amount generally represents future cash requirements. However,
many commitments expire without being used. Standby letters of credit are
conditional commitments issued by the Company to guarantee performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers.
98
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
FORWARD COMMITMENTS
SCB enters into financial arrangements to mitigate the exposure to
fluctuating interest rates in the origination and selling of mortgage loans.
These financial instruments include commitments to fund mortgage loans and
mandatory forward commitments. These instruments involve, to varying degrees,
elements of credit and interest rate risk. Interest rate risk is managed by SCB
by entering into loan sale agreements with investment bankers and with investors
meeting the credit standards of SCB. At any time, the exposure to SCB, in the
event of default by the counterparty under a mandatory forward commitment, is
the difference between the contract price and current market value.
Until a rate commitment is extended by SCB to a mortgage broker/borrower,
there is no interest rate risk to SCB. SCB reduces interest rate exposure by
limiting these rate commitments to varying periods of less than sixty days.
Loans in process for which interest rates were committed to the mortgage broker/
borrower totaled $60,923,000 as of December 31, 1998. These commitments, as well
as $43,736,000 of uncommitted mortgage loans held for sale, are hedged by
mandatory forward commitments.
At December 31, 1998 and 1997, SCB had $73,500,000 and $56,000,000,
respectively, of mandatory forward commitments to sell whole loans relating to
the unfunded pipeline of rate-locked loans and loans held for sale not committed
to investors. Gains and losses on mandatory forward commitments are realized in
the period the commitment is terminated. Unrealized gains and losses on forward
commitments are included in the lower of cost or market valuation for loans held
for sale. At December 31, 1998, the unrealized loss on the Bank's mandatory
forward commitments was $116,000. The Bank has also $84,989,000 of loans that
have been funded and pending purchase by an investor at December 31, 1998 and
$59,592,000 at December 31, 1997.
INTEREST RATE SWAPS
As a result of the PNB Merger, SCB is now party to an interest rate swap
agreement with a total notional principal amount of $20,000,000. Management
entered into the agreement to reduce the impact of decreasing interest rates on
its balance sheet. The agreement effectively transfers interest rate risk on a
portion of the excess of interest bearing assets over interest bearing
liabilities. The agreement provides for SCB to pay a variable rate of prime on
the notional amount with the counterparty paying a fixed rate. The agreement
terminates in April 2000 and requires SCB to maintain collateral with the
counterparty totaling 2% of the notional amount. In accordance with the
agreement, approximately $400,000 of securities was pledged at December 31, 1998
by SCB. For the years ended December 31, 1998, 1997, and 1996, net interest
income of $123,000, $10,000 and $37,000, respectively, from this swap agreement
is included in interest income on loans in the consolidated statements of
operations.
Although the current asset/liability management philosophy of the Company
does not include holding interest rate swap contracts for the management of
interest rate risk, SCB has decided to maintain the swap agreement while
revisiting the internal policy. This evaluation will result in either the
termination of the agreement or a revision to the asset/liability policy to
incorporate these types of interest-rate risk management vehicles.
SCB, prior to the SCB merger, entered into two interest rate swap agreements
with notional principal amounts of $50 million and $25 million. These agreements
were intended to mitigate interest rate fluctuations on SCB's floating rate loan
portfolio. In January 1997 the swap with the notional principal amount of $25
million matured. In conjunction with the SCB Merger, in the fourth quarter of
1997, the Company terminated the $50 million swap. The costs associated with the
termination of the $50 million
99
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
notional principal swap was $446,000 and is included in merger-related costs for
the year ended December 31, 1997. For the years ended December 31, 1997 and
1996, net interest expense of $410,000 and $563,000, respectively, from these
swap agreements is included in interest income on loans in the consolidated
statements of operations.
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair
100
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
value estimates are made at a specific point in time based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Because no
readily discernible market value exists for a large portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature, involve uncertainties and matters of judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in the estimates.
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash and due from banks, and federal funds sold, are
considered to approximate fair value. The fair value of investment securities is
generally based on quoted market prices. The fair value of loans is estimated
using a combination of techniques, including discounting estimated future cash
flows and quoted market prices of similar instruments, where available, taking
into consideration the varying degrees of credit risk. The carrying amounts of
accrued interest receivable are considered to approximate fair value.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand is considered
to approximate fair value. For fixed maturity deposits, fair value is estimated
by discounting estimated future cash flows using currently offered rates for
deposits of similar remaining maturities. The fair value of notes payable is
based on rates currently available to the Company for debt with similar terms
and remaining maturities. As notes payable re-price daily, the carrying value
approximates fair value. The carrying amounts of other short-term borrowings and
accrued interest payable are considered to approximate fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of credit
is estimated using the fees currently charged to enter into similar agreements.
The fair value of these financial instruments is not material. The fair value of
unfunded mortgage loan commitments is estimated by taking into account the rates
being demanded on mortgage loans without the value of servicing. The fair value
of portfolio loan commitments is based on fees currently charged to enter into
similar agreements taking into account the remaining terms of the agreements and
the counterparty credit standings. The fair value of the interest rate swap is
estimated based on the present value of the payments currently being received
over the swap's contractual life. Changes in the interest rate will have a
significant effect on the swap's fair value.
101
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of financial instruments at December 31, 1998 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
CARRYING
VALUE FAIR VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1998
Financial Assets:
Cash and due from banks........................................................... $ 131,787 $ 131,787
Federal funds sold................................................................ 92,752 92,752
Securities........................................................................ 365,084 365,084
Loans and leases, net............................................................. 1,772,466 1,769,506
Accrued interest receivable....................................................... 10,864 10,864
Financial Liabilities:
Deposits.......................................................................... $ 2,172,269 $ 2,176,604
Borrowings........................................................................ 23,722 23,722
Accrued interest payable.......................................................... 2,628 2,628
Off-balance sheet financial instruments:
Mandatory forward commitments..................................................... $ -- $ (116)
Mortgage loan commitments......................................................... -- 523
Interest rate swap................................................................ 401
Portfolio loan commitments........................................................ -- (201)
DECEMBER 31, 1997
Financial Assets:
Cash and due from banks........................................................... $ 135,287 $ 135,287
Federal funds sold................................................................ 168,257 168,257
Securities........................................................................ 275,857 275,966
Loans and leases, net............................................................. 1,218,132 1,216,437
Accrued interest receivable....................................................... 10,710 10,710
Financial Liabilities:
Deposits.......................................................................... $ 1,675,698 $ 1,676,990
Borrowings........................................................................ 19,797 19,797
Accrued interest payable.......................................................... 3,012 3,012
Off-balance sheet financial instruments:
Mandatory forward commitments..................................................... $ -- $ (286)
Mortgage loan commitments......................................................... -- 345
Interest rate swap................................................................ -- 194
Portfolio loan commitments........................................................ -- (178)
</TABLE>
NOTE 16--REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by Federal and State of California banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, specific capital guidelines
102
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--REGULATORY MATTERS (CONTINUED)
that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items, as calculated under regulatory accounting practices,
must be met. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. The Company and the Banks were considered well-capitalized at
December 31, 1998.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum ratios based on average
and risk weighted assets as set forth below. Actual capital ratios for the
Company and the Banks as of December 31, 1998 are also shown in the table:
<TABLE>
<CAPTION>
REQUIREMENT ACTUAL
------------------------ ---------------------------------------------
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED SMB SCB PACIFIC CONSOLIDATED
----------- ----------- --------- --------- --------- ------------
(GREATER THAN OR EQUAL
TO)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based capital ratio.......... 4.00% 6.00% 10.15% 9.35% 13.91% 10.20%
Total risk-based capital................. 8.00% 10.00% 11.40% 10.49% 15.04% 11.45%
Tier 1 leverage capital ratio............ 4.00% 5.00% 8.45% 8.76% 10.49% 8.83%
</TABLE>
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash and due from banks................................................................. $ 1,932 $ 785
Loans, net.............................................................................. 1,008 1,285
Other real estate owned................................................................. 83 83
Investments in subsidiaries............................................................. 351,826 189,519
Other investments....................................................................... 975 1,000
Other assets............................................................................ 4,426 3,493
---------- ----------
Total assets.......................................................................... $ 360,250 $ 196,165
---------- ----------
Liabilities:
Note payable............................................................................ $ 1,000 $ 7,080
Other liabilities....................................................................... 7,175 4,379
---------- ----------
Total liabilities..................................................................... 8,175 11,459
Shareholders' equity...................................................................... 352,075 184,706
---------- ----------
Total liability and shareholders' equity.............................................. $ 360,250 $ 196,165
---------- ----------
---------- ----------
</TABLE>
103
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENT OF OPERATIONS
Interest income.................................................................. $ 196 $ 79 $ 301
Management fees.................................................................. -- 510 527
Gain on sale of loans............................................................ -- 229 --
Dividend income from subsidiaries................................................ 72,400 14,000 --
Other income..................................................................... 81 -- --
--------- --------- ---------
Total income................................................................... 72,677 14,818 828
--------- --------- ---------
Interest expense................................................................. 394 730 465
Merger costs..................................................................... 8,308 9,537 --
Other expense.................................................................... 4,640 2,823 2,020
--------- --------- ---------
Total expense.................................................................. 13,342 13,090 2,485
--------- --------- ---------
Income (loss) before income taxes and equity in undistributed earnings of
subsidiaries................................................................. 59,335 1,728 (1,657)
Income taxes..................................................................... (3,181) (1,857) (846)
--------- --------- ---------
Income (loss) before equity in undistributed earnings of subsidiaries............ 62,516 3,585 (811)
Equity in undistributed income (distribution in excess of income) of
subsidiaries................................................................... (42,360) 8,328 14,357
--------- --------- ---------
Net income....................................................................... $ 20,156 $ 11,913 $ 13,546
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
----------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENT OF CASH FLOWS
Net income.................................................................... $ 20,156 $ 11,913 $ 13,546
Gain on sale of loans......................................................... -- (229) --
Change in other assets........................................................ (886) (701) (1,034)
Change in other liabilities................................................... 2,796 (337) 982
Subsidiary dividends in excess of undistributed earnings of subsidiaries...... 42,360 (8,328) (14,357)
Other operating activities.................................................... (21) 295 346
----------- --------- ----------
Cash flows provided by (used in) operating activities....................... 64,405 2,613 (517)
----------- --------- ----------
Acquisition of Santa Monica Bank, including acquisition costs................. (117,831) -- --
Acquisition of Western Bank, including acquisition costs...................... -- -- (53,154)
Proceeds from sale of loans................................................... -- 332 4,924
Increase in investment in subsidiaries........................................ (1,143) -- --
</TABLE>
104
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
----------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Other investing activities.................................................... 277 (2,108) (738)
----------- --------- ----------
Cash flows provided by (used in) investing activities....................... (118,697) (1,776) (48,968)
----------- --------- ----------
Proceeds from issuance of common stock, net of issuance costs, and from
exercise of common stock options and warrants............................... 70,462 2,470 42,625
Repurchases of common stock................................................... (29) (849) --
Dividends paid................................................................ (8,914) (2,722) --
Issuance (repayments) of debt................................................. (6,080) (6,270) 11,000
Other financing activities.................................................... -- (420) (259)
----------- --------- ----------
Cash flows provided by (used in) financing activities....................... 55,439 (7,791) 53,366
----------- --------- ----------
Net increase (decrease) in cash............................................... 1,147 (6,954) 3,881
Cash beginning of the year.................................................... 785 7,739 3,858
----------- --------- ----------
Cash end of the year.......................................................... $ 1,932 $ 785 $ 7,739
----------- --------- ----------
----------- --------- ----------
</TABLE>
NOTE 18--STOCK OPTION PLAN AND WARRANTS
At the time of the CCB Merger, all outstanding stock options of CCB were
converted into stock options of the Company at an exchange rate of 1-for-1. At
the time of the SCB Merger, all outstanding stock options of SC Bancorp were
converted into shares of Company Common Stock based upon the difference, if
positive, between $14.25 and the exercise price of each SC Bancorp option
divided by $31.28. 246,401 options were converted into shares of Company Common
Stock as a result of the SCB Merger. At the time of the BKLA Acquisition, all
outstanding stock options of BKLA were converted into shares of Company Common
Stock based on the difference, if positive, between $18.00 and the exercise
price of each BKLA Option divided by $42.61. 81,215 options were converted into
shares of Company Common Stock as a result of the BKLA Acquisition. At the time
of the PNB Merger, all outstanding options of PNB were converted into stock
options of the Company at an exchange rate of 1-for-1. The following disclosures
reflect the combination of the Company, CCB, SC Bancorp BKLA and PNB stock
option data.
The Company has a stock option plan (the "Plan") pursuant to which the
Company's Board of Directors may grant stock options to officers, directors and
key employees. The Plan authorizes grants of options to purchase shares of
authorized but un-issued Company Common Stock. Stock options are granted with an
exercise price greater than or equal to the stock's fair market value at the
date of grant. Qualified stock options typically have 5-year terms and vest over
a three year period from the date of grant. The Company's non-qualified stock
options ("NQSO") typically have 5-year and 10-year terms and vest over a three
year period from the date of grant. As of December 31, 1998, of the 1,000,000
options then authorized for grant, there were 656,554 options available for
grant under the Plan. SCB's NQSO had 10-year terms and vested over a five year
period from the date of grant. All of SC Bancorp's NQSO vested at the SCB Merger
and were converted into shares of Company Common Stock. In addition, during 1997
the Company issued 19,803 options outside of the Plan to certain officers and
directors of the Company at an exercise price less than the Company Common
Stock's fair market value at the date of grant resulting in
105
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
compensation expense of $254,000 included in merger costs. The following table
summarizes the activity relating to the Company's stock options for the years
indicated.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year................................... 956,710 $ 13.16 978,126 $ 8.62 835,100 $ 7.23
Options granted.......................... 149,436 28.34 459,072 19.50 279,922 13.12
Options exercised........................ (265,797) 4.59 (221,666) 4.84 (88,667) 5.51
Options forfeited........................ (48,815) 24.45 (12,304) 12.29 (4,281) 13.77
Options converted to shares related to
mergers................................ (135,020) 17.13 (246,401) 13.70 -- --
Options expired.......................... (6,115) 8.47 (117) 13.77 (18,948) 11.86
Options cancelled........................ -- -- -- -- (25,000) 5.83
----------- ----------- -----------
Options outstanding at end of year....... 650,399 $ 18.54 956,710 $ 13.16 978,126 $ 8.62
----------- ----------- -----------
----------- ----------- -----------
Options exercisable at end of year..... 400,521 $ 12.29 369,598 $ 6.22 586,004
----------- ----------- -----------
----------- ----------- -----------
Weighted average grant date fair value of
options granted during the year........ $ 7.35 $ 7.28 $ 8.25
----------- ----------- ------
----------- ----------- ------
</TABLE>
The fair market value of options granted during 1998, 1997 and 1996 was
estimated using the Black-Scholes option-pricing model. The following
assumptions were incorporated into the valuation calculation: (i) an option
contract life of 2 1/2 to 10 years, (ii) a stock price volatility of 40% based
on daily market prices for the preceding five year period, (iii) dividends of
$0.90 per share per annum, and (iv) a risk-free interest rate of 5.2% to 7.9%.
The table below provides the range of exercise prices, weighted-average
exercise prices and weighted-average remaining contractual lives for options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
WEIGHTED-AVG.
NUMBER REMAINING WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- ------------------------------------- -------------- ------------- ------------- ------------- -------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
<S> <C> <C> <C> <C> <C>
$3.04 to $10.00...................... 260,890 7.5 years $ 8.61 260,890 $ 8.61
$13.77 to $19.64..................... 148,576 7.2 years 15.06 92,891 14.97
$25.00 to $29.88..................... 38,638 8.8 years 25.39 36,638 25.14
$31.75 to $33.00..................... 202,295 4.2 years 32.55 10,102 36.04
------- -------------
$3.04 to $33.00...................... 650,399 6.5 years $ 18.54 400,521 $ 12.29
------- -------------
------- -------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its Plan. Accordingly, no compensation cost
has been recognized for its stock option plans
106
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED)
in the consolidated financial statements. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
dates for awards under the plan consistent with the method of SFAS No. 123, the
Company's net income and earnings per share for 1998, 1997 and 1996 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
-------------------------------
<S> <C> <C> <C>
Net Income:
As reported................................................ $ 20,156 $ 11,913 $ 13,546
Pro forma.................................................. 18,595 10,835 13,210
Basic net income per share
As reported................................................ 1.00 0.83 1.18
Pro forma.................................................. 0.93 0.75 1.15
Diluted net income per share
As reported................................................ 0.98 0.79 1.14
Pro forma.................................................. 0.90 0.72 1.11
</TABLE>
The pro forma amounts shown above may not be representative of the effects
on reported net income for future periods.
In connection with the BKLA Acquisition, the Company issued 156,116 warrants
to acquire Company Common Stock to holders of warrants to acquire common stock
of BKLA based on the exchange ratio of 0.4224 used in the BKLA Acquisition. At
December 31, 1998, 1997 and 1996, there were also exercisable warrants
outstanding of 140,675, 418,549 and 432,273, respectively, and the weighted
average exercise price of those warrants exercisable was $15.81, $11.21 and
$11.14, respectively. Of the warrants outstanding on December 31, 1998, 48,400
expire on September 30, 2000 and 92,275 expire on September 30, 2001.
107
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED:
--------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31,
1998 1998 1998 1998
--------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income.................................................... $ 42,616 $ 46,591 $ 46,707 $ 45,714
Interest expense................................................... 11,652 12,401 12,410 12,057
--------- ---------- --------- ----------
Net interest income................................................ 30,964 34,190 34,297 33,657
Provision for loan and lease losses................................ 300 350 375 300
--------- ---------- --------- ----------
Net interest income after provision for loan and lease losses...... 30,664 33,840 33,922 33,357
Other income....................................................... 9,159 11,101 11,582 13,014
Merger costs....................................................... -- (79) (60) (17,799)
Goodwill amortization.............................................. (2,073) (2,725) (2,722) (2,732)
Other expenses..................................................... (23,025) (24,907) (24,278) (29,750)
--------- ---------- --------- ----------
Income (loss) before income taxes.................................. 14,725 17,230 18,444 (3,910)
Income taxes....................................................... 6,776 8,124 8,830 2,603
--------- ---------- --------- ----------
Net income (loss).................................................. $ 7,949 $ 9,106 $ 9,614 $ (6,513)
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Shares outstanding
Basic............................................................ 18,568.6 20,451.9 20,548.3 20,741.3
Diluted.......................................................... 19,232.6 21,127.2 21,110.5 21,065.4
Net income per share:
Basic............................................................ $ 0.43 $ 0.45 $ 0.47 $ (0.31)
Diluted.......................................................... $ 0.41 $ 0.43 $ 0.46 $ (0.31)
Dividends per common share declared and paid....................... $ 0.15 $ 0.15 $ 0.15 $ 0.225
Common stock price range:
High............................................................. $ 43.50 $ 47.88 $ 43.13 $ 33.56
Low.............................................................. $ 30.75 $ 39.50 $ 28.88 $ 25.50
</TABLE>
108
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED:
----------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31
1997 1997 1997 1997
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income................................................... $ 30,122 $ 32,835 $ 34,329 $ 35,023
Interest expense.................................................. 8,670 9,239 9,603 9,821
---------- ---------- ---------- ----------
Net interest income............................................... 21,452 23,596 24,726 25,202
Provision for loan and lease losses............................... 885 1,120 1,295 780
---------- ---------- ---------- ----------
Net interest income after provision for loan and lease losses..... 20,567 22,476 23,431 24,422
Other income...................................................... 6,263 6,643 6,956 7,574
Merger costs...................................................... (66) (3,404) -- (10,731)
Goodwill amortization............................................. (666) (706) (707) (705)
Other expenses.................................................... (18,679) (19,560) (19,287) (19,076)
---------- ---------- ---------- ----------
Income before income taxes........................................ 7,419 5,449 10,393 1,484
Income taxes...................................................... 3,111 3,183 4,069 2,469
---------- ---------- ---------- ----------
Net income (loss)................................................. $ 4,308 $ 2,266 $ 6,324 $ (985)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares outstanding
Basic........................................................... 13,911.6 14,512.7 14,546.2 14,744.8
Diluted......................................................... 14,499.2 15,157.1 15,293.1 15,391.1
Net income per share:
Basic........................................................... $ 0.31 $ 0.16 $ 0.43 $ (0.07)
Diluted......................................................... $ 0.30 $ 0.15 $ 0.41 $ (0.07)
Dividends per common share declared and paid...................... $ -- $ -- $ -- $ 0.15
Common stock price range:
High............................................................ $ 34.00 $ 37.19 $ 33.25 $ 33.88
Low............................................................. $ 19.13 $ 28.63 $ 28.63 $ 29.88
</TABLE>
NOTE 20--NET INCOME PER SHARE
The following is a summary of the calculation of basic and diluted net
income per share for the three years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income................................................... $ 20,156 $ 11,913 $ 13,546
--------- --------- ---------
Weighted average shares outstanding.......................... 20,085 14,431 11,517
Basic net income per share................................... 1.00 $ 0.83 $ 1.18
--------- --------- ---------
Weighted average shares outstanding.......................... 20,085 14,431 11,517
Effect of dilutive stock options and warrants................ 526 606 382
--------- --------- ---------
Diluted shares outstanding................................... 20,611 15,037 11,899
--------- --------- ---------
--------- --------- ---------
Diluted net income per share................................. $ 0.98 $ 0.79 $ 1.14
--------- --------- ---------
--------- --------- ---------
</TABLE>
109
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21--SEGMENT DATA
SEGMENT INFORMATION
The Company operates in two business segments: banking and mortgage banking.
These segments are managed separately because each requires different levels of
resources and serves 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
the 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, litigation settlement costs and
merger costs are allocated to the banking segment as such expenses relate either
to acquisitions of banking organizations or banking in general.
The mortgage banking segment originates residential mortgage loans for sale
to third parties which are funded by the banking segment on a servicing-released
basis 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, 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 net
revenue of the segment. The Company does not allocate either the interest income
on mortgage loans held for sale or the interest expense related to the cost of
funds of the mortgage banking segment's originations. There are no other
intersegment sales, revenues or transfers.
110
<PAGE>
WESTERN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21--SEGMENT DATA (CONTINUED)
The following schedules reconcile significant portions, but not all, of both
the banking and mortgage banking segments' financial information.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------ ------------------------------------ ----------------------
MORTGAGE CONSOLIDATED MORTGAGE CONSOLIDATED MORTGAGE
BANKING BANKING COMPANY BANKING BANKING COMPANY BANKING BANKING
--------- ----------- ------------ --------- ----------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income
(excluding provision for
loan and lease
losses)................. $ 133,108 $ -- $ 133,108 $ 94,976 $ -- $ 94,976 $ 69,490 $ --
Provision for loan and
lease losses............ 1,325 -- 1,325 4,080 -- 4,080 2,671 --
Provision for losses on
sold loans.............. -- 1,701 1,701 -- 276 276 -- 1,080
Gain on sale of loans..... 717 15,292 16,009 716 9,584 10,300 1,128 7,249
Other non-interest
income.................. 21,304 7,543 28,847 11,797 5,339 17,136 11,232 3,880
Salaries and benefits..... 43,987 11,221 55,208 34,128 7,664 41,792 30,377 5,514
Depreciation and
amortization............ 5,025 261 5,286 3,285 179 3,464 3,037 155
Litigation settlements.... 4,100 -- 4,100 -- -- -- 950 --
Merger related costs...... 17,938 -- 17,938 14,201 -- 14,201 -- --
Income before taxes....... 40,535 5,954 46,489 20,410 4,335 24,745 15,408 2,739
Income taxes.............. 23,832 2,501 26,333 11,011 1,821 12,832 3,451 1,150
Net income................ 16,703 3,453 20,156 9,399 2,514 11,913 11,957 1,589
Additions to fixed
assets.................. 21,032 361 21,393 1,976 144 2,120 6,689 249
Total assets.............. $2,447,004 $ 138,876 $2,585,880 $1,797,241 $ 101,176 $1,898,417 $1,601,563 $ 66,253
<CAPTION>
CONSOLIDATED
COMPANY
------------
<S> <C>
Net interest income
(excluding provision for
loan and lease
losses)................. $ 69,490
Provision for loan and
lease losses............ 2,671
Provision for losses on
sold loans.............. 1,080
Gain on sale of loans..... 8,377
Other non-interest
income.................. 15,112
Salaries and benefits..... 35,891
Depreciation and
amortization............ 3,912
Litigation settlements.... 950
Merger related costs...... --
Income before taxes....... 18,147
Income taxes.............. 4,601
Net income................ 13,546
Additions to fixed
assets.................. 6,938
Total assets.............. $1,667,816
</TABLE>
111
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
At the Company's 1998 Annual Meeting held April 30, 1998, the following
individuals were elected to the Company's Board of Directors: Aubrey L. Austin,
Rice E. Brown, John M. Eggemeyer, William C. Greenbeck, Robert L. McKay, Hugh S.
Smith, Jr., Mark H. Stuenkel, Matthew P. Wagner, and Dale E. Walter. Mr. Austin
resigned from the Board of Directors as of September 30, 1998. Arnold C. Hahn,
Executive Vice President and Chief Financial Officer of the Company, was
appointed director in September 1998 to fill the vacancy created by Mr. Austin's
resignation. Upon consummation of the BKLA Acquisition on October 23, 1998,
Adriana M. Boeka was appointed to the Board of Directors of the Company. Upon
consummation of the PNB Merger on December 30, 1998, Allen C. Barbieri was
appointed to the Board of Directors. Mr. Barbieri resigned from the Board of
Directors as of January 15, 1999, and on February 25, 1999 Bernard E. Schneider
was appointed to the Board of Directors to fill the vacancy created by Mr.
Barbieri's resignation. Also on February 25, 1999 Mr. David I. Rainer was
appointed to the Board of Directors.
The following table sets forth as to each individual nominated by the Board
of Directors to stand for election to the Board of Directors of the Company at
the 1999 Annual Meeting of Shareholders, such person's age, such person's
position with the Company and the period during which such person has served as
a director of the Company. Each director elected at the 1999 Annual Meeting of
Shareholders will be elected to hold office until the next annual meeting of
shareholders.
<TABLE>
<CAPTION>
DIRECTOR
OF
COMPANY
NAME AGE POSITION WITH COMPANY SINCE
- --------------------------------- --- ----------------------------------------------------------------- -------
<S> <C> <C> <C>
Adriana M. Boeka................. 47 Director 1998
Rice E. Brown.................... 60 Director 1988
John M. Eggemeyer................ 53 Director 1997
William C. Greenbeck............. 51 Director 1997
Arnold C. Hahn................... 47 Director, Executive Vice President and Chief Financial Officer 1998
Robert L. McKay.................. 68 Director 1997
David I. Rainer.................. 41 Director, President and Chief Executive Officer of SMB 1999
Bernard E. Schneider............. 52 Director 1999
Hugh S. Smith, Jr................ 68 Chairman and Director 1996
Mark H. Stuenkel................. 46 Director, President and Chief Executive Officer of SCB 1997
Matthew P. Wagner................ 42 Director, President and Chief Executive Officer 1996
Dale E. Walter................... 64 Director 1996
</TABLE>
ADRIANA M. BOEKA has been a principal of the The Manex Group, a management
consulting firm since 1995. Ms. Boeka served as Chairman of the Board of Bank of
Los Angeles from October 1997 through October 1998 and Senior Vice
President/Division Manager of Bank of California from 1987 through 1995.
RICE E. BROWN, MSFS is a registered investment advisor, registered
principal, President and a director of the firm Rice Brown Financial Services,
Inc. which has been in business for over 35 years. His primary
112
<PAGE>
focus is in the area of money management using fee asset basis and estate
planning. He is also the former President of the National Association of Life
Underwriters, a Washington, D.C. based professional money management group.
JOHN M. EGGEMEYER is an investor and advisor to financial institutions. From
1992 to 1994, Mr. Eggemeyer was a principal of Mabon Securities Corp., an
investment bank. From 1990 to the present, Mr. Eggemeyer has been the President
of Belle Plaine Partners, Inc. He is also the President of Castle Creek Capital
L.L.C., a registered bank holding company, and Belle Plaine Financial L.L.C., a
registered broker/dealer. He currently serves as a Director for each of the
following companies: the Company, Rancho Santa Fe National Bank, and TCF
Financial Corporation.
WILLIAM C. GREENBECK, a developer and manager of industrial and commercial
real property, has been a Managing General Partner of Downey Land Limited since
1975. Mr. Greenbeck served as a Director and Secretary of SC Bancorp from 1981
to 1997; he also served on the Board of SCB from 1982 to 1997 and from 1984 to
1997 served as its Secretary.
ARNOLD C. HAHN has served as Executive Vice President and Chief Financial
Officer of the Company since November 1996 and as director since September 1998.
Mr. Hahn also serves on the Board of Directors of each of the Banks. Mr. Hahn
served as Secretary of the Company from November 1996 to October 1997. Prior to
joining the Company, Mr. Hahn spent 6 years as a Senior Vice President of
Finance for U.S. Bancorp in Minneapolis, Minnesota. Prior to joining U.S.
Bancorp, Mr. Hahn was a partner with Ernst & Young L.L.P.
ROBERT L. MCKAY has been a private investor in Orange County, California
since 1981 where he oversees his investments in venture capital and real estate.
From 1966 to 1981, Mr. McKay was President of Taco Bell, Inc. From 1982 to 1997,
Mr. McKay served as a Director of CCB.
DAVID I. RAINER has served as President, Chief Executive Officer and
Director of SMB since February 1999. Mr. Rainer has also served as a Director of
the Company since February 1999. Mr. Rainer was appointed Executive Vice
President of California United Bank in June 1992 and assumed the position of
Chief Operating Officer in late 1992. He assumed the additional title of
President of California United Bank in February 1994 and President and Chief
Operating Officer of CU Bancorp in 1995, a position he held until joining SMB.
He was elected to the Board of Directors of CU Bancorp and California United
Bank in 1993. From July 1989 to June 1992, Mr. Rainer was employed by Bank of
America (Security Pacific National Bank) where he was a Senior Vice President.
From March 1989 to July 1989 Mr. Rainer was a Senior Vice President with Faucet
& Company. From July 1982 to March 1989, Mr. Rainer was employed by Wells Fargo
Bank, where he held the positions of Vice President and Manager.
BERNARD E. SCHNEIDER was appointed to the Board of Directors of the Company
in February 1999. Mr. Schneider is a partner and an attorney with the
international law firm of McDermott, Will and Emery, joining the firm in
September 1993. Mr. Schneider was Chairman of the Board of PNB from 1996 to 1998
and of Pacific from 1993 to 1998.
HUGH S. SMITH, JR. currently serves as the Chairman of the Board of the
Company, Chairman of the Board of SCB and director of SMB. From September 1996
to December 1997, Mr. Smith also served as Chief Executive Officer of the
Company. Prior to September 30, 1996, Mr. Smith was Chairman of the Board and
Chief Executive Officer of Western Bank, a position he held for 23 years.
MARK H. STUENKEL currently serves as a director of the Company and President
and Chief Executive Officer of SCB and is a member of the Board of Directors of
SCB. Mr. Stuenkel joined NBSC as a Senior Credit Officer in 1982. In 1988, he
was named President of NBSC and in 1997 was named to the additional position of
Chief Executive Officer. Mr. Stuenkel also served as Senior Vice President of
CCB from 1982 to 1991 and as Executive Vice President from 1991 to 1997. Prior
to joining CCB and NBSC in 1982, Mr. Stuenkel held various positions with
Security Pacific National Bank.
113
<PAGE>
MATTHEW P. WAGNER currently serves as a director and the President and Chief
Executive Officer of the Company. In February 1997, Mr. Wagner was appointed to
the post of President of the Company, and in December 1997 he was appointed
Chief Executive Officer of the Company. Mr. Wagner also serves on the Board of
Directors of each of the Banks. In October 1996, Mr. Wagner was elected
President and Chief Executive Officer of Western Bank, positions he held until
January 1998. Prior to joining the Company in 1996, Mr. Wagner was an Executive
Vice President with U.S. Bancorp in Minneapolis, Minnesota since 1991 and Senior
Vice President since 1985.
DALE E. WALTER has over 35 years of banking experience having served as
Chief Executive Officer of several Southern California independent banks. Mr.
Walter served as President and Chief Executive Officer of the Bank of Industry
from 1980 to June 1992; as Chairman and Chief Executive Officer of Commerce
Bancorp from January 1993 to July 1994; and as President and Chief Executive
Officer of Guardian Bank from October 1994 to February 1995. From February 1996
to the present, Mr. Walter has operated a wholesale golf travel company. Mr.
Walter currently serves as a Director of First Community Bank of the Desert.
COMMITTEES OF THE BOARD OF DIRECTORS
During 1998, the Board of Directors of the Company held sixteen (16)
meetings. All Directors attended at least 75 percent of the Board meetings of
the Company during the time they were directors of the Company.
AUDIT COMMITTEE
As of the date hereof, the Audit Committee of the Board of Directors
consists of Adriana M. Boeka, Rice E. Brown, John M. Eggemeyer, William C.
Greenbeck, Robert L. McKay, Bernard E. Schneider, and Dale E. Walter. The Audit
Committee recommends to the Board of Directors for its approval a certified
public accounting firm to conduct the Company's annual audit. The Audit
Committee will also (i) confer from time to time with the Company's certified
public accountants regarding their audit work and the details thereof, (ii)
review management letters of the Company's certified public accounting firm,
(iii) meet and consult with the Company's executive and financial officers to
discuss accounting policies, (iv) review staffing of the Company's accounting
and financial departments and make recommendations to the Board of Directors
relating to these departments, and (v) provide assistance and recommendations to
the Board of Directors with respect to the general financial needs, policies and
practices of the Company. The Audit Committee had ten (10) meetings in 1998.
TRUST EXECUTIVE COMMITTEE
As of the date hereof, the Trust Executive Committee of the Board of
Directors consists of John M. Eggemeyer, William C. Greenbeck, David I. Rainer,
Hugh S. Smith Jr., Matthew P. Wagner, and Mark H. Stuenkel. The Trust
Committee's primary responsibility is to review and approve the administration
of the fiduciary responsibilities of SMB in the operation of its Trust
Department and to ensure sound banking practices in the operation of the Trust
Department. The Trust Committee also (i) appointed a Trust Administration and
Investment Committee to oversee real and personal property held in fiduciary
capacity, (ii) ensures the operation of the Trust Department separate and apart
from every other department at SMB, (iii) ensures the maintenance of separate
sets of books and records for the Trust Department, (iv) approved an SMB officer
for the administration of the Trust Department, (v) annually reviews the assets
of each trust account, (vi) approves all purchases, sales and changes in trust
assets, (vii) approves the opening and closing of all trust accounts, (viii)
provides for annual audit of the Trust Department, and (ix) periodically reports
on its activities to the Board of Directors. The Trust Executive Committee has
delegated certain of its duties to the Trust Administration and Investment
Committee. The Trust Executive Committee had ten (10) meetings in 1998.
114
<PAGE>
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors as of the date hereof
consists of John M. Eggemeyer, William C. Greenbeck and Dale E. Walter.
It is the duty of the Compensation Committee to administer the Company's
compensation system and various incentive plans, including its stock option plan
and its annual performance bonus plan. In addition, the Compensation Committee
reviews compensation levels of members of management, evaluates the performance
of management, considers management succession and related matters. The
Compensation Committee reviews with the Board in detail all aspects of
compensation for senior officers.
The Compensation Committee has reviewed the compensation for Matthew P.
Wagner, Chief Executive Officer of the Company, and each of the four highest
paid executive officers for 1998 and has reported to the Board that in the
Compensation Committee's opinion, the compensation of all officers is reasonable
in view of the Company's consolidated performance and the contribution of those
officers to that performance. In doing so, the Compensation Committee takes into
account how compensation compares to compensation paid by competing companies as
well as the Company's performance and economic conditions in the Company's
service area. Members of the Compensation Committee have also reviewed
compensation surveys and analysis by an executive compensation consulting firm.
The Company has adopted a compensation system for its executive officers,
among others, designed to communicate and encourage a community banking focus,
create an ownership culture, encourage team orientation, be competitive in the
marketplace, reward performance and contributions, and be easy to understand and
simple to administer. This compensation system is intended to link compensation
of the executive officers of the Company to the strategic business direction of
the Company and to key organizational goals. In order to achieve these goals,
the Company's compensation system for its executive officers provides for base
salaries below the median base salary for comparable positions at a peer group
of comparable financial institutions with significant upside potential based on
performance through annual cash bonus plans and stock option grants. The annual
target cash bonus for the executive officers is based primarily on achievement
of the Company's financial goals and other strategic objectives. The measures of
achievement include earnings per share, return on equity, return on assets and
other strategically important achievements. The target cash bonus for the
Company's Chief Executive Officer and the other executive officers are a
percentage of base salary tied to achievement of the Company's financial plan.
In addition, the Compensation Committee considers stock option grants to the
Chief Executive Officer and the other executive officers based on the
achievement of certain financial and strategic goals.
Following the close of 1998, the Compensation Committee reviewed the
Company's 1998 fiscal year financial results compared with planned results and
strategic objectives achieved compared with planned objectives. In particular
and in addition to financial results reviewed, the Compensation Committee
considered the consummation of each of the SMB Acquisition, the BKLA
Acquisition, and the PNB Merger, each of which was consummated in 1998, the
operational consolidation of NBSC, SCB, SMB, Western Bank and BKLA onto the
Company's operational platform, each of which was successfully completed in
1998, the significant improvement in the credit quality of the loan portfolios
at the Banks during 1998, the execution of the Company's Year 2000 Plan during
1998, and the review of certain key performance measures such as return on
assets, efficiency ratio, return on equity and earnings per share. Although the
Compensation Committee determined that performance-based cash bonuses would not
be paid to any of the named executive officers, other than to Mr. Stuenkel to
whom the Company was contractually obligated to pay a cash bonus of $92,112, in
light of the achievement of certain financial and strategic objectives of the
Company, the Compensation Committee approved the following grants of
115
<PAGE>
immediately vested stock options with an exercise price of $31.375 and 1999
compensation levels to the named executive officers:
<TABLE>
<CAPTION>
SECURITIES 1999
NAME AND TITLE UNDERLYING OPTIONS COMPENSATION
- ----------------------------------------------------------- ------------------ -------------
<S> <C> <C>
Matthew P. Wagner,
President and Chief Executive Officer..................... 100,000 $ 358,000
Suzanne R. Brennan,
Executive Vice President--Operations...................... 35,000 $ 157,000
Arnold C. Hahn,
Executive Vice President and Chief Financial Officer...... 50,000 $ 176,000
Hugh S. Smith, Jr.
Chairman of the Board..................................... -- $ 187,000
Mark H. Stuenkel,
President--Southern California Bank And Chief Executive
Officer................................................... 30,000 $ 199,650
</TABLE>
The Compensation Committee approved the foregoing stock option grants and
salaries in lieu of approving performance-based cash bonuses for fiscal 1998,
and in recognition that the base salaries of the named executive officers and
certain other of the executive officers were below the median base salary for
comparable positions at a peer group of comparable financial institutions during
the 1998 fiscal year. In addition, in light of her contributions in connection
with the operational conversions completed during 1998 and accomplishments in
connection with the Company's Year 2000 Plan, the Compensation Committee
approved a cash bonus to Ms. Brennan, Executive Vice President--Operations, of
$56,000.
This Compensation Committee report was completed by the Compensation
Committee as of March 1, 1999. The members of the Compensation Committee filing
this report were John M. Eggemeyer, William C. Greenbeck and Dale E. Walter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On May 20, 1998, the Company formed the Compensation Committee and appointed
John M. Eggemeyer, William C. Greenbeck and Dale F. Walter as members of the
Compensation Committee. No member of the Compensation Committee is a current or
former officer of the Company. However, from 1981 to 1997 Mr. Greenbeck served
as Secretary of SC Bancorp which merged with and into the Company in October
1997. Mr. Eggemeyer is a principal of Belle Plaine Partners, Inc. and Belle
Plaine Financial L.L.C., each of which provided investment banking services to
the Company during the 1998 fiscal year. See "Item 13. Certain Relationships and
Related Transactions--Investment Banking Services" for a more detailed
description of the services provided by, and fees paid to, Belle Plaine
Partners, Inc. and Belle Plaine Financial L.L.C. In addition, each of Mr.
Eggemeyer and Mr. Walter were 1998 Private Placement Investors in the 1998
Private Placement. See "Item 13. Certain Relationships and Related
Transactions-- The 1998 Private Placement".
116
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth as to each of the persons who currently
serves as an Executive Officer of the Company, such person's age, such person's
current position with the Company, and the period during which the person has
served in such position:
<TABLE>
<CAPTION>
YEAR
HIRED
BY
NAME AGE POSITION WITH COMPANY COMPANY
- --------------------------------- --- ----------------------------------------------------------------- -------
<S> <C> <C> <C>
Robert M. Borgman................ 51 Executive Vice President and Chief Credit Officer 1997
Suzanne R. Brennan............... 48 Executive Vice President--Operations 1997
Julius G. Christensen............ 33 Executive Vice President, General Counsel and Secretary 1997
Arnold C. Hahn................... 47 Executive Vice President and Chief Financial Officer 1996
David I. Rainer.................. 41 President and Chief Executive Officer of SMB 1999
Hugh S. Smith.................... 68 Chairman of the Board 1996
Mark H. Stuenkel................. 46 President and Chief Executive Officer of SCB 1982
Matthew P. Wagner................ 42 President and Chief Executive Officer 1996
</TABLE>
ROBERT M. BORGMAN is currently an Executive Vice President and the Chief
Credit Officer of the Company. Mr. Borgman also serves on the Board of Directors
of each of the Banks. Prior to joining the Company in August 1997, Mr. Borgman
was the founder, President and Chief Executive Officer of National Business
Finance, Inc., a national commercial finance and factoring organization
headquartered in Denver, Colorado from 1987 to 1997. During the period from 1978
to 1987, Mr. Borgman held the position of Senior Vice President and Manager of
Commercial Lending at First Interstate Bank of Denver.
SUZANNE R. BRENNAN has served as Executive Vice President--Operations of the
Company since July 1997. Ms. Brennan also serves on the Board of Directors of
each of the Banks. Prior to joining the Company, Ms. Brennan was the Senior Vice
President of Corporate Trust Operations at U.S. Bancorp in Minneapolis,
Minnesota since October 1994. From November 1986 to October 1994, Ms. Brennan
managed securities processing for U.S. Bancorp. She also has managerial
operations experience with the Federal Reserve Bank of Minneapolis and the
University of Minnesota.
JULIUS G. CHRISTENSEN has served as Executive Vice President and General
Counsel of the Company since September 1997 and as Secretary of the Company
since October 1997. Mr. Christensen also serves on the Board of Directors of
each of the Banks. Prior to joining the Company, Mr. Christensen was in practice
with the law firm of Sullivan & Cromwell engaged in merger and acquisitions and
securities law practice since September 1995. From 1992 to 1995, Mr. Christensen
was a candidate for a Jurist Doctorate degree from Harvard Law School and
received that degree in June 1995.
ARNOLD C. HAHN has served as Executive Vice President and Chief Financial
Officer of the Company since November 1996 and as a director of the Company
since September 1998. Mr. Hahn also serves on the Board of Directors of each of
the Banks. Mr. Hahn served as Secretary of the Company from November 1996 to
October 1997. Prior to joining the Company, Mr. Hahn spent six years as a Senior
Vice President of Finance for U.S. Bancorp in Minneapolis, Minnesota. Prior to
joining U.S. Bancorp, Mr. Hahn was a partner with Ernst & Young L.L.P.
117
<PAGE>
HUGH S. SMITH, JR. currently serves as the Chairman of the Board of the
Company, Chairman of the Board of SCB and a director of SMB. From September 1996
to December 1997, Mr. Smith also served as Chief Executive Officer of the
Company. Prior to September 30, 1996, Mr. Smith was Chairman of the Board and
Chief Executive Officer of Western Bank, a position he held for 23 years.
DAVID I. RAINER has served as President and Chief Executive Officer and
Director of SMB since February 1999. Mr. Rainer has also served as a Director of
the Company since February 1999. Mr. Rainer was appointed Executive Vice
President of California United Bank in June 1992 and assumed the position of
Chief Operating Officer in late 1992. He assumed the additional title of
President of California United Bank in February 1994 and President and Chief
Operating Officer of CU Bancorp in 1995, a position he held until joining SMB.
He was elected to the Board of Directors of CU Bancorp and California United
Bank in 1993. From July 1989 to June 1992, Mr. Rainer was employed by Bank of
America (Security Pacific National Bank) where he was a Senior Vice President.
From March 1989 to July 1989 Mr. Rainer was a Senior Vice President with Faucet
& Company. From July 1982 to March 1989, Mr. Rainer was employed by Wells Fargo
Bank, where he held the positions of Vice President and Manager.
MARK H. STUENKEL currently serves as President and Chief Executive Officer
of SCB and is a member of the Board of Directors of the Company and SCB. Mr.
Stuenkel joined NBSC as a Senior Credit Officer in 1982. In 1988, he was named
President of NBSC and in 1997 was named to the additional position of Chief
Executive Officer. Mr. Stuenkel also served as Senior Vice President of CCB from
1982 to 1991 and as Executive Vice President from 1991 to 1997. Prior to joining
CCB and NBSC in 1982, Mr. Stuenkel held various positions with Security Pacific
National Bank.
MATTHEW P. WAGNER is the President and Chief Executive Officer of the
Company. In February 1997, Mr. Wagner was appointed to the post of President of
the Company, and in December 1997 he was appointed to the additional post of
Chief Executive Officer of the Company. Mr. Wagner also serves on the Board of
Directors of the Company and each of the Banks. In October 1996, Mr. Wagner was
elected President and Chief Executive Officer of Western Bank, positions he held
until January 1998. Prior to joining the Company in 1996, Mr. Wagner was an
Executive Vice President with U.S. Bancorp in Minneapolis, Minnesota since 1991
and a Senior Vice President since 1985.
118
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table reflects all compensation paid to Matthew P. Wagner, the
Chief Executive Officer of the Company, and the four other most highly
compensated executive officers receiving a total annual salary and bonus of
$100,000 or more.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION
- ------------------------------
(A) LONG TERM COMPENSATION
ANNUAL COMPENSATION -------------------------------------------
--------------------------------------------------
YEAR SALARY ($) BONUS ($) OTHER ANNUAL AWARDS PAYOUTS
--------- ----------- ----------- COMP ($)(1) ---------------------------- -------------
------------- SECURITIES LTIP PAYOUTS
(B) (C) (D) RESTRICTED UNDERLYING ($)
(E) STOCK AWARD(S) OPTIONS/ -------------
($) SARS (#)
--------------- ----------- (H)
(F) (G)
<S> <C> <C> <C> <C> <C> <C> <C>
Matthew P. Wagner ............ 1998 275,000 -- -- -- -- (2) --
President and Chief 1997 175,000 175,000 -- -- 21,000 --
Executive Officer 1996 43,750 100,000 58,823
Suzanne R. Brennan ........... 1998 140,000 56,000 -- -- -- (4) --
Executive Vice 1997 63,179 40,000 -- -- 9,188 --
President--Operations
Arnold C. Hahn ............... 1998 150,000 -- -- -- -- (5) --
Executive Vice President and 1997 150,000 120,000 -- -- 15,000 --
Chief Financial Officer 1996 25,029 100,000 -- -- 15,882 --
Hugh S. Smith, Jr. ........... 1998 187,144 -- -- -- -- --
Chairman of the Board 1997 187,000 40,000 -- -- 23,529 --
1996 188,260 50,000 -- -- -- --
Mark H. Stuenkel(6) .......... 1998 181,500 92,112 -- -- -- (7) --
President and Chief 1997 163,414 83,738 -- -- 32,647 --
Executive Officer of SCB 1996 161,027 76,125 -- -- -- --
<CAPTION>
NAME AND PRINCIPAL POSITION
- ------------------------------
(A)
ALL OTHER
COMP ($)
-----------
(I)
<S> <C>
Matthew P. Wagner ............ --
President and Chief 200,000(3)
Executive Officer --
Suzanne R. Brennan ........... --
Executive Vice --
President--Operations
Arnold C. Hahn ............... --
Executive Vice President and --
Chief Financial Officer --
Hugh S. Smith, Jr. ........... --
Chairman of the Board --
--
Mark H. Stuenkel(6) .......... --
President and Chief --
Executive Officer of SCB --
</TABLE>
- ------------------------
(1) None of the named executive officers had other annual compensation in excess
of $50,000 or 10 percent of the total annual salary and bonus reported for
any of the years shown.
(2) Mr. Wagner was granted 100,000 immediately vested options on January 15,
1999 as compensation for services rendered in the 1998 fiscal year. See
"--Committees of the Board of Directors--REPORT ON EXECUTIVE COMPENSATION".
(3) The amount reflects reimbursement of costs incurred in connection with Mr.
Wagner's relocation to California.
(4) Ms. Brennan was granted 35,000 immediately vested options on January 15,
1999 as compensation for services rendered during the 1998 fiscal year. See
"--Committees of the Board of Directors--REPORT ON EXECUTIVE COMPENSATION".
(5) Mr. Hahn was granted 50,000 immediately vested options on January 15, 1999
as compensation for services rendered during the 1998 fiscal year. See
"--Committees of the Board of Directors--REPORT ON EXECUTIVE COMPENSATION".
(6) Mr. Stuenkel joined the Company as President and Chief Executive Officer of
NBSC on June 4, 1997 as part of the CCB Merger. Mr. Stuenkel's compensation,
including amount of bonus, is prescribed in the Salary Continuation
Agreement entered into between NBSC and Mr. Stuenkel. (See
119
<PAGE>
"--Employment Agreements"). Mr. Stuenkel's compensation includes amounts
received from CCB prior to the CCB Merger.
(7) Mr. Stuenkel was granted 30,000 immediately vested options on January 15,
1999 as compensation for services rendered during the 1998 fiscal year. See
"--Committees of the Board of Directors--REPORT ON EXECUTIVE COMPENSATION".
OPTIONS/SARS GRANTS IN LAST FISCAL YEAR
No individual grants of options or grants of stock appreciation rights
("SARs") were made during the year ending December 31, 1998 to any of the named
executive officers. However, options were granted to certain executive officers,
including the named executive officers, in January 1999 as compensation for
services rendered in the 1998 fiscal year. See "--Committees of the Board of
Directors--"COMPENSATION COMMITTEE REPORT."
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table lists the aggregate number of unexercised options and
the value of unexercised in-the-money options at December 31, 1998. The Company
has not granted stock appreciation rights.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END AT FY-END (#)
NAME -------------------------- --------------------------
- --------------------------- (D) (E)
(A) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
SHARES ACQUIRED VALUE ----------- ------------- ----------- -------------
ON EXERCISE (#) REALIZED
--------------- ($)
(B) -----------
(C)
<S> <C> <C> <C> <C> <C> <C>
Suzanne R. Brennan......... -- -- 3,062 6,126
Arnold C. Hahn............. -- -- 15,588 15,294 161,255 80,628
Hugh S. Smith, Jr.......... -- -- 8,556 7,843 130,308 119,449
Mark H. Stuenkel........... 11,250 293,175 35,882 21,765 629,026 113,062
Matthew P. Wagner.......... -- -- 46,216 33,607 597,260 298,615
</TABLE>
LONG TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
No Long Term Incentive Plan Awards were made during the 1998 Fiscal Year to
any of the named executive officers.
COMPENSATION OF DIRECTORS
The Board of Directors of the Company approved the following fees to be paid
to outside directors of the Company during the year ended December 31, 1998:
<TABLE>
<S> <C>
Annual Retainer: $5,000 and options equal to $15,000 divided by
the market price of Company Common Stock at
the time of grant
Regular Meeting Fee: $750
Special Meeting Fee: $300
Committee Meeting Fee: $300
</TABLE>
During 1998, directors' fees were paid and options granted according to the
above schedule.
On January 14, 1999, the Executive Committee of the Board of Directors
approved a procedure by which each outside director of the Company may elect
during the first quarter of each fiscal year to receive either cash compensation
pursuant to the foregoing schedule of fees or compensation in the form of
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options to acquire shares of Company Common Stock ("Stock-Based Compensation")
for service on the Board of Directors for that fiscal year. Such election is
irrevocable for such fiscal year. In the event that a Director elects
Stock-Based Compensation, such Director shall receive 3,000 stock options to
vest on December 31 of such year with an exercise price equal to the closing
price as of the January 15, or the next trading day, of such year; provided,
however, that in the event that such Director does not attend 75% of the Board
of Directors' meetings and Committee meetings for which such Director is a
Committee member, the 3,000 options granted for that fiscal year shall be
cancelled and such Director will receive cash compensation for the meetings
actually attended during such year according to the above schedule.
On May 16, 1995, the Board of Directors approved the 1995 Directors Deferred
Compensation Plan which was approved by shareholders on July 17, 1995. The plan
is effective for fees earned on and after July 1, 1995. No compensation has been
awarded under the plan.
EMPLOYMENT ARRANGEMENTS
The company has entered into or assumed through acquisitions certain
employment contracts, including the following:
MARK H. STUENKEL
In 1988 NBSC entered into an Executive Salary Continuation Agreement with
Mr. Stuenkel (the "Salary Continuation Agreement") the terms of which the
Company agreed to honor as part of the CCB Merger. Pursuant to the Salary
Continuation Agreement, Mr. Stuenkel is entitled to receive benefits upon his
retirement, death or disability or upon termination of service with SCB prior
thereto unless Mr. Stuenkel's employment with SCB is terminated either (i)
voluntarily by Mr. Stuenkel, other than for "good reason" (as defined in the
Salary Continuation Agreement) or (ii) by SCB for "cause" (as defined in his
Salary Continuation Agreement), in which case no benefits or payments will be
paid pursuant to the Salary Continuation Agreement. Mr. Stuenkel's retirement
benefits are fully vested in the Salary Continuation Agreement.
Under the terms of the Salary Continuation Agreement, Mr. Stuenkel or his
estate will be entitled to receive $62,500 annually, for a period of fifteen
years after his retirement from SCB or upon his death. If Mr. Stuenkel's
employment with SCB is terminated because of disability prior to retirement, Mr.
Stuenkel (or his estate) will be entitled to receive his benefits under the
Salary Continuation Agreement upon retirement or death or to elect to receive a
disability benefit in an amount equal to the present value of Mr. Stuenkel's
retirement benefits under his Salary Continuation Agreement. The Salary
Continuation Agreement also had provisions which became effective upon the
occurrence of a Change in Control (as defined therein) of CCB or NBSC. In such
event, the Salary Continuation Agreement provided that it would become an
employment agreement with a three-year term. The CCB Merger constituted a Change
of Control; therefore, the Salary Continuation Agreement became an Employment
Agreement with a three-year term pursuant to which, during such period of
employment Mr. Stuenkel is entitled to receive $165,000 per year as annual base
salary, as well as regular bonuses and other benefits. Such amount is in
addition to the amounts that he would be paid under the Salary Continuation
Agreement upon retirement. The Salary Continuation Agreement also provides for
Mr. Stuenkel to receive salary and bonus increases annually and all non-cash
forms of compensation and benefits which he received prior to the Change in
Control during such term.
If Mr. Stuenkel either terminates his employment for "good reason" or is
terminated by SCB for any reason other than "cause," then SCB is required to pay
cash compensation to Mr. Stuenkel during his remaining term; provided that Mr.
Stuenkel will receive no less than two times the annual compensation to which he
otherwise would be entitled. Moreover, all employee benefit plans and programs
in which Mr. Stuenkel is entitled to participate will continue for the remainder
of Mr. Stuenkel's term and
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Mr. Stuenkel will continue to be entitled to receive his retirement, death and
disability benefits as provided in the Salary Continuation Agreement.
EXECUTIVE SEVERANCE PLAN
On March 19, 1998, the Company adopted the Company Executive Severance Plan
(the "Severance Plan") pursuant to which certain executives of the Company and
the Banks, including the named executive officers of the Company, will be
entitled to receive a severance payment from the Company if within 24 months
after a Change of Control (as defined in the Severance Plan) an eligible
executive's employment with the Company or one of its subsidiaries terminates
for any reason other than (i) death, (ii) disability, (iii) termination by the
Company or one of its subsidiaries for Just Cause (as defined in the Severance
Plan), (iv) retirement in accordance with the normal policy of the Company, (v)
voluntary termination by such executive for other than Good Reason (as defined
in the Severance Plan), or (vi) the sale by the Company or the Bank which
employed the executive before such sale, if the executive has been offered
employment with the purchaser on substantially the same terms and conditions
under which such executive was employed prior to the sale. The amount of the
Severance Payment (as defined in the Severance Plan) under the Severance Plan
will be equal to such executive's Compensation (as defined in the Severance
Plan) multiplied by a multiplier ranging from 1 to 3 depending on the
executive's employee grade. In addition, if an executive becomes eligible for a
Severance Payment, such executive will also be entitled to welfare benefits for
the Severance Period (as defined in the Severance Plan) applicable to such
executive. In order to become eligible for Severance Payments under the
Severance Plan, the executive must execute and deliver a Release (as defined in
the Severance Plan).
PERFORMANCE GRAPH
The Company Common Stock trades on the Nasdaq National
Market-Registered Trademark- under the symbol "WEBC." Prior to June 3, 1997,
trading in the Company's Common Stock occurred solely "over the counter," and
was not extensive. Consequently, sales price information prior to that date
consists largely of quotations by dealers making a market in Company Common
Stock and may not represent actual transactions. In addition, trading in Company
Common Stock prior to June 3, 1997 was limited in volume and may not be a
reliable indication of its market value. As a result, the sales price
information for Company Common Stock in the following graph for 1994 reflects
inter-dealer prices, without adjustments for mark-ups, mark-downs or commissions
and may not represent actual transactions. The sales price information for 1995
and 1996 reflects the sales price of Company Common Stock in certain private
placements, which the Company believes is the most reliable indicator of the
value of Company Common Stock available at the time. See "Item 1.
Business--Capital Transactions." The sales price information for 1997 and 1998
reflects trades of Company Common Stock on the Nasdaq National
Market-Registered Trademark-.
122
<PAGE>
The following graph shows the cumulative total return on Company Common
Stock with a comparable return on the indicated indices for the last five fiscal
years. The total return on Company Common Stock is determined based on the
change in the price of Company Common Stock and assumes reinvestment of all
dividends and an original investment of $100. The total return on the indicated
indices also assume reinvestment of dividends and an original investment in each
index of $100 on December 31, 1993.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEBC NASDAQ BANK INDEX
<S> <C> <C>
1993 100 100
1994 100 100
1995 113 148
1996 138 196
1997 325 328
1998 293 325
</TABLE>
SECTION 16 REPORTING
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and the beneficial owners of more than ten percent of Company
Common Stock to file with the Securities and Exchange Commission reports of
initial ownership and reports of changes in ownership of Company Common Stock
and other equity securities of the Company. Because of the complexity of the
reporting rules, the Company has assumed responsibility for preparing and filing
all reports required to be filed under Section 16(a) by the directors and
executive officers. The Company believes that during the last fiscal year all
Section 16(a) filing requirements applicable to its directors and executive
officers were complied with, except for the failure to file certain Forms 4 for
Robert M. Borgman, Suzanne R. Brennan, and John M. Eggemeyer. Once the omissions
were discovered the relevant forms were filed promptly.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The shares of Company Common Stock constitute the only outstanding class of
voting securities of the Company. As of March 1, 1999, there were 20,891,784
shares of Company Common Stock outstanding and entitled to vote and
approximately 2,900 shareholders of record.
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The following table lists any known shareholders with beneficial ownership
of five percent or more of the outstanding Company Common Stock and the
beneficial ownership of Company Common Stock of all directors and executive
officers of the Company and all current executive officers and directors of the
Company as a group. Information with respect to beneficial ownership is based
upon the Company's records and data supplied to the Company by its shareholders
as of March 1, 1999. All shares are Company Common Stock, the only class of
security outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENT OF
NAME, TITLE AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
- ----------------------------------------------------------------------------- ---------------------- -------------
<S> <C> <C> <C>
Castle Creek Capital Partners Fund I(2) ..................................... Shares 2,256,132
6051 El Tordo Warrants 33,557
Rancho Santa Fe, California 92067 --------
2,289,689 10.9%
Franklin Mutual Advisors, Inc.(3) ........................................... Shares 1,685,481 8.1%
51 John F. Kennedy Parkway
Shorthills, New Jersey
Adriana M. Boeka ............................................................ Shares 29,649
Director Options --
2049 Century Park East, #1100 Total --------
Los Angeles, California 90067 29,649 0.1%
Robert M. Borgman ........................................................... Shares 2,000
Executive Vice President and Chief Credit Officer Options 38,999
4100 Newport Place, Suite 900 Total --------
Newport Beach, California 92660 40,999 0.2%
Suzanne R. Brennan .......................................................... Shares 1,100
Executive Vice President--Operations Options 38,062
16420 Valley View Street Total --------
La Mirada, California 90638 39,162 0.2%
Rice E. Brown ............................................................... Shares 1,574
Director Options 1,730
27127 Calle Arroya, Suite 1907 Total --------
San Juan Capistrano, California 92675 3,304 *
Julius G. Christensen ....................................................... Shares --
Executive Vice President, General Counsel and Secretary Options 28,667
4100 Newport Place, Suite 900 Total --------
Newport Beach, California 92660 28,667 0.1%
John M. Eggemeyer(4) ........................................................ Shares 2,537,350
Director Options 945
6051 El Tordo Warrants 91,312
Rancho Santa Fe, California 92066 Total --------
2,629,607 12.5%
William C. Greenbeck(5) ..................................................... Shares 63,845
Director Options 820
9530 East Imperial Highway Total --------
Downey, California 90242 64,665 0.3%
Arnold C. Hahn .............................................................. Shares 6,978
Director, Executive Vice President and Chief Financial Officer Options 65,588
4100 Newport Place, Suite 900 Total --------
Newport Beach, California 92660 72,566 0.3%
</TABLE>
124
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENT OF
NAME, TITLE AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
- ----------------------------------------------------------------------------- ---------------------- -------------
Robert L. McKay ............................................................. Shares 739,936
Director Options 813
11551 Plantero Drive Total --------
Santa Ana, California 92705 740,749 3.5%
<S> <C> <C> <C>
Bernard E. Schneider ........................................................ Shares 23,000
Director Options 10,000
1301 Dove Street, 5th Floor Total --------
Newport Beach, California 92660 33,000 0.2%
Hugh S. Smith Jr. ........................................................... Shares 22,644
Director Options 8,556
1251 Westwood Boulevard Total --------
Los Angeles, California 90024 31,200 0.1%
Mark H. Stuenkel ............................................................ Shares 28,149
Director, President and Chief Executive Officer of SCB Options 65,882
4100 Newport Place, Suite 900 Total --------
Newport Beach, California 92660 94,031 0.4%
Matthew P. Wagner ........................................................... Shares 29,278
Director, President and Chief Executive Officer Options 146,216
1251 Westwood Boulevard Total --------
Los Angeles, California 90024 175,494 0.8%
Dale E. Walter .............................................................. Shares 11,358
Director Options 1,142
50855 Washington Street, Suite C-211 Total --------
La Quinta, California 92253 12,500 0.1%
Directors and Executive Officers as a group ................................. Shares 3,496,861
Options 407,420
Warrants 91,312
Total --------
3,995,593 18.7%
All Directors as a group .................................................... Shares 3,493,761
Options 301,692
Warrants 91,312
Total --------
3,886,765 18.3%
</TABLE>
- ------------------------
* Beneficial ownership does not exceed one percent of common stock
outstanding.
(1) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship,
or otherwise has or shares: (a) voting power, which includes the power to
vote, or to direct the voting power, of such security; and/or (b) investment
power, which includes the power to dispose, or to direct the disposition of,
such security. Beneficial owner also includes any person who has the right
to acquire beneficial ownership of such security as defined above within 60
days. Ownership includes vested stock options and warrants.
(2) The Fund is the beneficial owner of 2,256,332 shares of Company Common Stock
and 33,557 warrants. Mr. Eggemeyer, a Director of the Company, is a
principal of the Fund.
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<PAGE>
(3) Shares of Company Common Stock beneficially owned by Franklin Mutual
Advisors, Inc. are held in various investment funds.
(4) Includes 945 shares of Company Common Stock which may be purchased on the
exercise of stock options, 57,755 shares of Company Common stock which may
be purchased on the exercise of warrants and 2,256,332 shares and 33,557
warrants owned by the Fund and 241,143 shares owned by Castle Creek Capital
Partners Fund II (together with the Fund, the "Funds") of which Mr.
Eggemeyer is a principal. Mr. Eggemeyer disclaims any beneficial ownership
of the shares of Company Common Stock held by the Funds except to the extent
of his interest in the Funds.
(5) Includes 41,065 shares of Company Common Stock for which Mr. Greenbeck has
sole power of investment and sole power to vote and 22,780 shares of Company
Common Stock for which Mr. Greenbeck shares the power of investment and the
power to vote with Ted Mooschekian, General partner of Downy Land Limited.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BANKING TRANSACTIONS
Some of the directors and executive officers of the Company and the Banks,
and the companies with which they are associated, are customers of, and have had
banking transactions with, the Banks in the ordinary course of the Banks'
business, and the Banks expect to have banking transactions with such persons in
the future.
In the opinion of management of the Company, all loans and commitments to
lend included in such transactions were made in compliance with applicable laws
on substantially the same terms, including interest rates and collateral, as
those prevailing for comparable transactions with other persons of similar
creditworthiness, and did not involve more than a normal risk of collectibility
or present other unfavorable features. The amount of all such loans and credit
extensions, to all executive officers, directors, and principal shareholders of
the Company, together with their associates, was $454,000 million on December
31, 1998, constituting approximately 0.1 percent of the Company's equity capital
accounts on that date.
INVESTMENT BANKING SERVICES
Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. are entities
related to the Funds which held 12.0% percent of the outstanding Company Common
Stock as of March 15, 1999. John M. Eggemeyer, a director of the Company, is a
principal of the Funds, Belle Plaine Partners, Inc. and Belle Plaine Financial
L.L.C.
Belle Plaine Partners, Inc. serves as a financial advisor to the Company
under an engagement letter dated May 17, 1995. In that capacity, Belle Plaine
Partners, Inc. was paid fees of $4.2 million, $3.2 million and $1.4 in 1998 and
1997 and 1996, respectively, for evaluating and identifying potential
acquisitions, including a fee of $1.4 million in connection with the Western
Acquisition which closed on September 30, 1996, a fee of $1.35 million in
connection with the CCB Merger which closed on June 4, 1997, a fee of $1.8
million in connection with the SCB Merger which closed on October 10, 1997, a
fee of $2.7 million in connection with the SMB Acquisition which closed on
January 27, 1998, a fee of $711,000 in connection with the BKLA Acquisition
which closed on October 23, 1998, and a fee of $753,000 in connection with the
PNB Merger which closed on December 30, 1998.
In addition, Belle Plaine Financial L.L.C. was paid approximately $863,000
in 1996 for services rendered in connection with certain capital raising
transactions related to the Company's strategic evolution. See "Item 1.
Business--Strategic Evolution."
126
<PAGE>
THE 1998 PRIVATE PLACEMENT
In order to raise a portion of the capital necessary to fund the payment of
the Cash Consideration in the SMB Acquisition, in November 1997 the Company
entered into Standby Agreements with the 1998 Private Placement Investors,
pursuant to which the 1998 Private Placement Investors committed to purchase a
minimum of approximately 1,962,650 shares of Company Common Stock and to standby
to purchase up to approximately 4,347,300 additional shares of Company Common
Stock if requested to do so by the Company. The purchase price of the 1998
Private Placement Shares was $28.00 per share. The 1998 Private Placement
Investors agreed to pay the purchase price of the 1998 Private Placement Shares
prior to the effective time of the SMB Acquisition. In the 1998 Private
Placement, the Company issued a total of 2,327,550 shares of Company Common
Stock for $65,171,400 in the aggregate. The 1998 Private Placement Shares were
not registered under the Securities Act; however, pursuant to the Standby
Agreements, the Company has filed under the Securities Act a "shelf"
Registration Statement providing for the registration of the Private Placement
Shares. See "Item 1. Business--Strategic Evolution."
Certain directors, executive officers and shareholders holding more than 5
percent of the outstanding Company Common Stock at the time of the 1998 Private
Placement participated in the 1998 Private Placement. The following table sets
forth the number and the dollar value of 1998 Private Placement Shares purchased
by each such person:
<TABLE>
<CAPTION>
1998 PRIVATE PLACEMENT INVESTOR SHARES DOLLARS
- ------------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Castle Creek Capital Partners Fund I-L.P.......................... 528,900 $ 14,809,200
Digange, Joseph J................................................. 4,450 124,600
Eggemeyer, John M................................................. 5,900 165,200
Franklin Mutual Advisers, Inc..................................... 528,900 14,809,200
Hahn, Arnold C.................................................... 4,700 131,600
Jacoby, William H................................................. 4,300 120,400
McKay, Robert L................................................... 41,500 1,162,000
Rose, John W...................................................... 5,900 165,200
Smith, Hugh S., Jr................................................ 5,900 165,200
Wagner, Matthew P................................................. 9,500 266,000
Walter, Dale E.................................................... 4,300 120,400
Wellington Management Company, LLP................................ 424,000 11,872,000
---------- -------------
TOTAL........................................................... 1,568,250 $ 43,911,000
---------- -------------
---------- -------------
</TABLE>
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<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
- ------
<C> <S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of December
19, 1996, by and between Monarch Bancorp and California Commercial
Bankshares. (Appendix C to Registration Statement No. 333-26915 filed on
May 12, 1997 on Form S-4/A and incorporated herein by reference)
2.2 Agreement and Plan of Merger, dated as of March 15, 1997, by and between
Monarch Bank and National Bank of Southern California. (Exhibit 2.3 of
the Company's Annual Report of Form 10-KSB for the fiscal year ended
December 31, 1996 and incorporated herein by this reference)
2.3 Plan of Reorganization, dated as of April 29, 1997, by and between Western
Bancorp and SC Bancorp. (Exhibit A of Registration Statement No.
333-35271 filed on September 10, 1997 on Form S-4/A and incorporated
herein by reference)
2.4 Agreement and Plan of Merger, dated as of November 20, 1997, by and among
Western Bancorp, Western Bank and Santa Monica Bank. (Appendix A to
Registration Statement No. 333-40611 filed on November 21, 1997 on Form
S-4/A and incorporated herein by reference)
2.5 Agreement and Plan of Merger, dated as of October 10, 1997, by and between
SCB and NBSC.
2.6 Agreement and Plan of Merger, dated as of July 16, 1998, by and between
BKLA and SMB. (Appendix A to Registration Statement No. 333-57759 filed
on August 13, 1998 on Form S-4/A and incorporated herein by this
reference).
2.7 Agreement and Plan of Merger, dated as of October 6, 1998, by and between
PNB and SCB. (Appendix A to Registration Statement No. 333-67275 filed
on November 27, 1998 on Form S-4/A 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)
4.1 Warrant Certificate No. 1, dated November 5, 1996, in favor of John M.
Eggemeyer. (Exhibit 4.7 of the Company's Annual Report of Form 10-KSB
for the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.2 Warrant Certificate No. 2, dated November 5, 1996, in favor of William J.
Ruh. (Exhibit 4.8 of the Company's Annual Report of Form 10-KSB for the
fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.3 Warrant Certificate No. 3, dated November 5, 1996, in favor of John W.
Rose. (Exhibit 4.9 of the Company's Annual Report of Form 10-KSB for the
fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.4 Warrant Certificate No. 4, dated November 5, 1996, in favor of Mark G.
Merlo. (Exhibit 4.10 of the Company's Annual Report of Form 10-KSB for
the fiscal year ended December 31, 1996 and incorporated herein by
reference)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- ------
<C> <S> <C>
4.5 Warrant Certificate No. 1, dated November 5, 1996, in favor of Castle
Creek Capital Partners Fund-I. (Exhibit 4.11 of the Company's Annual
Report of Form 10-KSB for the fiscal year ended December 31, 1996 and
incorporated herein by reference)
4.6 Warrant Certificate No. 2, dated November 5, 1996, in favor of John M.
Eggemeyer. (Exhibit 4.12 of the Company's Annual Report of Form 10-KSB
for the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.7 Warrant Certificate No. 3, dated November 5, 1996, in favor of William J.
Ruh. (Exhibit 4.13 of the Company's Annual Report of Form 10-KSB for the
fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.8 Warrant Certificate No. 4, dated November 5, 1996, in favor of Dan Davis.
(Exhibit 4.14 of the Company's Annual Report of Form 10-KSB for the
fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.9 Warrant Certificate No. 5, dated November 5, 1996, in favor of Mark G.
Merlo. (Exhibit 4.15 of the Company's Annual Report of Form 10-KSB for
the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.10 Warrant Certificate No. 6, dated November 5, 1996, in favor of William
Moody. (Exhibit 4.16 of the Company's Annual Report of Form 10-KSB for
the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.11 Warrant Certificate No. 7, dated November 5, 1996, in favor of HCM Castle
Creek, Inc. (Exhibit 4.17 of the Company's Annual Report of Form 10-KSB
for the fiscal year ended December 31, 1996 and incorporated herein by
reference)
4.12 Warrant Certificate No. 8, dated November 5, 1996, in favor of Castle
Creek Financial Investors, Inc. (Exhibit 4.18 of the Company's Annual
Report of Form 10-KSB for the fiscal year ended December 31, 1996 and
incorporated herein by reference)
4.13 Warrant Certificate No. 9, dated November 5, 1996, in favor of Whitecap
Capital, L.L.C. (Exhibit 4.19 of the Company's Annual Report of Form
10-KSB for the fiscal year ended December 31, 1996 and incorporated
herein by reference)
4.14 Warrant Certificate No. 10, dated November 5, 1996, in favor of
Cook-Caslte Creek, Inc. (Exhibit 4.20 of the Company's Annual Report of
Form 10-KSB for the fiscal year ended December 31, 1996 and incorporated
herein by reference)
4.15 Warrant Certificate No. 11, dated November 5, 1996, in favor of Castle
Creek Investors, L.L.C. (Exhibit 4.21 of the Company's Annual Report of
Form 10-KSB for the fiscal year ended December 31, 1996 and incorporated
herein by 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.)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBITS
- ------
<C> <S> <C>
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 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 14A and incorporated herein by 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 21 of the Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data" of this Annual
Report on Form 10-K.)
21.0 Subsidiaries of Western Bancorp.
23.1 Consent of Vavrinek, Trine, Day & Co., LLP (BKLA)
23.2 Consent of KPMG LLP (Western Bancorp)
23.3 Consent of Deloitte & Touche LLP (California Commercial Bankshares)
23.4 Consent of Deloitte & Touche LLP (SC Bancorp)
23.5 Consent of McGladrey & Pullen, LLP (PNB)
27.1 Financial Data Schedule (Fiscal 1998)
27.2 Financial Data Schedule (Fiscal 1996 and fiscal 1997)
27.3 Financial Data Schedule (First, second and third quarters of 1998)
27.4 Financial Data Schedule (First, second and third quarters of 1997)
</TABLE>
REPORTS ON FORM 8-K
On October 5, 1998, the Company filed a Current Report on Form 8-K
announcing that it had entered into an Agreement and Plan of Merger between the
Company and PNB Financial Group, Inc. and enclosing Pro Forma Financial
Statements and Exhibits.
On November 12, 1998, the Company filed a Current Report on Form 8-K
announcing (i) that the BKLA Acquisition had been consummated on October 23,
1998; (ii) the Company's third quarter earnings; and (iii) the Company's
Supplemental Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations reflecting the BKLA
Acquisition.
130
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
WESTERN BANCORP
Date: March 18, 1999 By: /s/ MATTHEW P. WAGNER
-----------------------------------------
Matthew P. Wagner
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MATTHEW P. WAGNER
- ------------------------------ President and Chief March 18, 1999
Matthew P. Wagner Executive Officer
/s/ HUGH S. SMITH, JR.
- ------------------------------ Chairman and Director March 18, 1999
Hugh S. Smith, Jr.
/s/ ADRIANA M. BOEKA
- ------------------------------ Director March 18, 1999
Adriana M. Boeka
/s/ RICE E. BROWN
- ------------------------------ Director March 18, 1999
Rice E. Brown
/s/ JOHN M. EGGEMEYER
- ------------------------------ Director March 18, 1999
John M. Eggemeyer
/s/ WILLIAM C. GREENBECK
- ------------------------------ Director March 18, 1999
William C. Greenbeck
/s/ ARNOLD C. HAHN Executive Vice President,
- ------------------------------ Chief Financial Officer March 18, 1999
Arnold C. Hahn and Director
</TABLE>
131
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ROBERT L. MCKAY
- ------------------------------ Director March 18, 1999
Robert L. McKay
/s/ DAVID I. RAINER
- ------------------------------ Director March 18, 1999
David I. Rainer
/s/ BERNARD E. SCHNEIDER
- ------------------------------ Director March 18, 1999
Bernard E. Schneider
/s/ MARK H. STUENKEL
- ------------------------------ Director March 18, 1999
Mark H. Stuenkel
/s/ DALE E. WALTER
- ------------------------------ Director March 18, 1999
Dale E. Walter
</TABLE>
132
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EXHIBIT 2.5
AGREEMENT AND PLAN OF MERGER
DATED AS OF THE 10th DAY OF OCTOBER 1997
BY AND BETWEEN
SOUTHERN CALIFORNIA BANK
AND
NATIONAL BANK OF SOUTHERN CALIFORNIA
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of the tenth day of October,
1997 (this "Plan"), by and between Southern California Bank, a California
banking corporation ("SC Bank"), and National Bank of Southern California, a
national banking association ("NBSC").
RECITALS:
A. SC BANK. SC Bank is a banking corporation duly incorporated,
validly existing and in good standing under the laws of the State of
California, with its principal executive offices located in Anaheim,
California. As of the date hereof, SC Bank has (i) 1,028,286 authorized
shares of common stock, no par value ("SC Bank Common Stock"), of which no
more than 493,759 shares were outstanding as of the date hereof and (ii) no
other class of capital stock authorized. All of the outstanding shares of
capital stock of SC Bank are owned by Western Bancorp, a California
corporation ("Western").
B. SC BANK RIGHTS, ETC. SC Bank does not have any shares of its
capital stock reserved for issuance, any outstanding option, call or
commitment relating to shares of its capital stock or any outstanding
securities, obligations or agreements convertible into or exchangeable for,
or giving any individual, corporation, partnership, association, trust or
unincorporated organization (hereinafter "Person") any right (including,
without limitation, preemptive rights) to subscribe for or acquire from it,
any shares of its capital stock.
C. NBSC. NBSC is a national banking association duly
incorporated, validly existing and in good standing under the laws of the
United States of America, with its principal executive offices located in
Newport Beach, California. As of the date hereof, NBSC has (i) 562,500
authorized shares of common stock, $5.00 par value ("NBSC Common Stock"), of
which no more than 450,000 shares were outstanding as of the date hereof and
(ii) no other class of capital stock authorized. All of the outstanding
shares of capital stock of NBSC are owned by Western.
D. NBSC RIGHTS, ETC. NBSC does not have any shares of its capital
stock reserved for issuance, any outstanding option, call or commitment
relating to shares of its capital stock or any outstanding securities,
obligations or agreements convertible into or exchangeable for, or giving any
Person any right (including, without limitation, preemptive rights) to
subscribe for or acquire from it, any shares of its capital stock.
<PAGE>
E. APPROVALS. The respective Boards of Directors of SC Bank and
NBSC have, or will have prior to the Effective Time (as defined in Section
6.1 hereof), duly approved this Plan and have, or will have prior to the
Effective Time, duly authorized its execution and delivery, and the sole
shareholder of SC Bank and the sole shareholder of NBSC have, or will have
prior to the Effective Time, approved the terms of this Plan. Accordingly,
no dissenters' rights will be exercised by the sole shareholder of either SC
Bank or NBSC.
In consideration of their mutual promises and obligations
hereunder, the parties hereto adopt and make this Plan and prescribe the
terms and conditions hereof and the manner and basis of carrying it into
effect, which shall be as follows:
ARTICLE I. THE MERGER
SECTION 1.1. STRUCTURE OF THE MERGER. On the Effective Date (as
defined in Section 6.1 hereof), NBSC will merge (the "Merger") with and into
SC Bank, with SC Bank being the surviving corporation (the "Surviving
Corporation"), pursuant to the provisions of, and with the effect provided
in, the California Financial Code and the California General Corporation Law
(the "Banking Law"). The corporate existence of SC Bank and NBSC shall be
merged into and continued in the Surviving Corporation and the Surviving
Corporation shall be deemed to be the same corporation as SC Bank and NBSC.
All rights, franchises, and interests of SC Bank and NBSC in and to every
type of property (real, personal or mixed) and choses in action shall be
transferred to and vested in the Surviving Corporation by virtue of the
Merger and without any deed or other transfer. The Surviving Corporation,
upon the Merger, and without any order or other action on the part of any
court or otherwise, shall hold and enjoy all rights of property, franchises
and interests in any fiduciary capacity, in the same manner and to the same
extent as such rights, franchises and interests were held or enjoyed by SC
Bank or NBSC at the time of the Merger. At the Effective Time, the articles
of incorporation, bylaws and certificate of authority of the Surviving
Corporation shall be the articles of incorporation, bylaws and certificate of
authorization to commence banking of SC Bank immediately prior to the
Effective Time.
SECTION 1.2. EFFECT ON OUTSTANDING SHARES. (a) By virtue of the
Merger, automatically and without any action on the part of the holder
thereof, each share of NBSC Common Stock issued and outstanding at the
Effective Time shall be cancelled automatically.
-2-
<PAGE>
(b) At the Effective Time, the issued and outstanding shares of SC
Bank Common Stock shall constitute all of the issued and outstanding shares
of capital stock of the Surviving Corporation.
SECTION 1.3. ASSUMPTION OF LIABILITIES. The Surviving Corporation
shall be responsible for all of the liabilities of every kind and description
of both SC Bank and NBSC existing as of the Effective Time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
SECTION 2.1. REPRESENTATIONS AND WARRANTIES OF NBSC. NBSC
represents and warrants to SC Bank that the Recitals of this Plan with
respect to NBSC are true and correct.
SECTION 2.2. REPRESENTATIONS AND WARRANTIES OF SC BANK. SC Bank
represents and warrants to NBSC that the Recitals of this Plan with respect
to SC Bank are true and correct.
ARTICLE III. COVENANTS
SECTION 3.1. CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. SC Bank
and NBSC shall (a) as soon as practicable make any filings and applications
required to be filed in order to obtain all approvals, consents and waivers
of governmental authorities necessary or appropriate for the consummation of
the transactions contemplated hereby; (b) cooperate with one another (i) in
promptly determining what filings are required to be made or approvals,
consents or waivers are required to be obtained under any relevant federal,
state or foreign law or regulation and (ii) in promptly making any such
filings, furnishing information required in connection therewith and seeking
timely to obtain any such approvals, consents or waivers; and (c) deliver to
the other copies of the publicly available portions of all such filings and
applications promptly after they are filed.
SECTION 3.2. ADDITIONAL AGREEMENTS. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use its
reasonable best efforts to take promptly, or cause to be taken promptly, all
actions and to do promptly, or cause to be done promptly, all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Plan as soon as practicable,
including using efforts to obtain all necessary actions or non-actions,
extensions, waivers, consents and approvals from all applicable
-3-
<PAGE>
governmental entities, effecting all necessary registrations, applications
and filings (including, without limitation, filings under any applicable
state securities laws) and obtaining any required contractual consents and
regulatory approvals.
SECTION 3.3. DIRECTORS; RESIGNATIONS. The parties agree that the
directors of SC Bank immediately prior to the Effective Time shall continue
to be the directors of the Surviving Corporation at and after the Effective
Time. NBSC shall cause to be delivered to SC Bank at the Effective Time the
resignations of the members of its Board of Directors.
ARTICLE IV. CONDITIONS TO CONSUMMATION
SECTION 4.1. CONSENTS; APPROVALS. SC Bank and NBSC shall have
procured, as necessary, the required approvals, consents or waivers with
respect to this Agreement and the transactions contemplated hereby by (i) the
Board of Governors of the Federal Reserve Board, and (ii) the California
Commissioner of Financial Institutions pursuant to California Law, and all
applicable statutory waiting periods shall have expired; and the parties
shall have procured all other regulatory approvals, consents or waivers of
governmental authorities that are necessary or appropriate to the
consummation of the transactions contemplated by this Agreement.
ARTICLE V. TERMINATION
SECTION 5.1. TERMINATION. This Plan may be terminated, and the
Merger abandoned, prior to the Effective Date, by SC Bank or NBSC, upon
written notice to the other party, if either (i) any approval, consent or
waiver of a governmental authority required to permit consummation of the
Merger or any transaction necessary to consummate the Merger shall have been
denied or (ii) any governmental authority of competent jurisdiction shall
have issued a final, unappealable order enjoining or otherwise prohibiting
consummation of the Merger or any transaction necessary to consummate the
Merger.
SECTION 5.2. EFFECT OF TERMINATION. In the event of the termination
of this Plan as provided above, this Plan shall thereafter become void and,
subject to the provisions of Section 7.1 hereof, there shall be no liability on
the part of any party hereto or their respective officers or directors, except
that any such termination shall be without prejudice to the rights of any party
hereto arising out of the willful
-4-
<PAGE>
breach by any other party of any covenant or willful misrepresentation
contained in this Plan or the Parent Plan.
ARTICLE VI. EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 6.1. EFFECTIVE DATE AND EFFECTIVE TIME. Upon the
satisfaction or waiver of all conditions to the consummation of the Merger,
all documents required to effect the Merger shall be executed in accordance
with all appropriate legal requirements and shall be filed as required by
law, and the Merger provided for herein shall become effective upon such
filing. The "Effective Date" and "Effective Time" shall be the date and
time, respectively, at which the Merger shall become effective in accordance
with Section 4887 of the California Financial Code.
ARTICLE VII. OTHER MATTERS
SECTION 7.1. SURVIVAL. Only those agreements and covenants of the
parties that are by their terms applicable in whole or in part after the
Effective Time shall survive the Effective Time. All other representations,
warranties, agreements and covenants shall be deemed to be conditions of the
Plan and shall not survive the Effective Time. If the Plan shall be
terminated, the agreements of the parties in Section 5.2, this Section 7.1,
Section 7.5 and Section 7.6 hereof shall survive such termination.
SECTION 7.2. WAIVER. Prior to the Effective Time, any provision
of this Plan may be: (i) waived by the party benefitted by the provision; or
(ii) amended or modified at any time (including the structure of the
transaction) by an agreement in writing between the parties hereto approved
by their respective Boards of Directors.
SECTION 7.3. COUNTERPARTS. This Plan may be executed in
counterparts, each of which shall be deemed to constitute an original, but
all of which together shall constitute one and the same instrument.
SECTION 7.4. GOVERNING LAW. This Plan shall be governed by, and
interpreted in accordance with, the laws of the State of California, and to
the extent applicable, federal law.
SECTION 7.5. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATED TO THIS PLAN OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
-5-
<PAGE>
SECTION 7.6. EXPENSES. Each party hereto will bear all expenses
incurred by it in connection with this Plan and the transactions contemplated
hereby.
SECTION 7.7. NOTICES. All notices, requests, acknowledgments and
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, telecopy, telegram or
telex (confirmed in writing) to such party at its address set forth below or
such other address as such party may specify by notice to the other party
hereto.
If to NBSC, to:
National Bank of Southern California
4100 Newport Place
Newport Beach, California 92660
Telecopier:(714) 863-2336
Attention: Mark H. Stuenkel
If to SC Bank, to:
Southern California Bank
4100 Newport Place
Newport Beach, California 92660
Telecopier:(714) 863-2336
Attention: Mark H. Stuenkel
SECTION 7.8. ENTIRE AGREEMENT; ETC. This Plan represents the
entire understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written
agreements heretofore made. All terms and provisions of this Plan shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns. Nothing in this Plan is intended to
confer upon any other Person any rights or remedies of any nature whatsoever
under or by reason of this Plan.
SECTION 7.9. ASSIGNMENT. This Plan may not be assigned by any
party hereto without the written consent of the other parties.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan to be
executed by their duly authorized officers as of the day and year first above
written.
SOUTHERN CALIFORNIA BANK
By:
----------------------------------
Name: Mark H. Stuenkel
Title: President
NATIONAL BANK OF SOUTHERN CALIFORNIA
By:
----------------------------------
Name: William H. Jacoby
Title: Chairman
By:
----------------------------------
Name: Mark H. Stuenkel
Title: President
-7-
<PAGE>
EXHIBIT 21.0
SUBSIDIARIES OF WESTERN BANCORP
-------------------------------------------------------------
Southern California Bank, a California corporation
-------------------------------------------------------------
Santa Monica Bank, a California corporation
-------------------------------------------------------------
Venture Partners, Inc., a California corporation
-------------------------------------------------------------
M.B. Mortgage Company, Inc., a California corporation
-------------------------------------------------------------
WBC Management Company, Inc., a California corporation
-------------------------------------------------------------
SMB Development Company, a California Corporation
-------------------------------------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our Independent Auditors' Report dated
January 23, 1998 regarding the balance sheet of Bank of Los Angeles as of
December 31, 1997 and the related statements of operations, changes
in shareholder's equity and cash flows for each of the two years in the
period ending December 31, 1997, in the Annual Report Pursuant to Section 13
or 15(d) of the Securities and Exchange Act of 1934, Form 10-K, for the year
ended December 31, 1998, dated March 26, 1999 filed by Western Bancorp with
the Securities and Exchange Commission.
VAVRINEK, TRINE, DAY & CO., LLP
Rancho Cucamonga, CA
March 26, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Western Bancorp.
We consent to the incorporation by reference in Western Bancorp's registration
statement on Form S-3 (No. 333-53635) and in the registration statements on
Form S-8 (No. 333-28633, No. 333-44609, No. 333-70441, No. 333-70497, No.
333-70495) of our report dated February 3, 1999, relating to the consolidated
balance sheets of Western Bancorp as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998,
annual report on Form 10-K of Western Bancorp.
Our report, dated February 3, 1999, contains explanatory paragraphs
indicating that we did not audit the 1996 consolidated financial statements
of either California Commercial Bankshares or SC Bancorp, we did not audit
either the 1996 or 1997 financial statements of Bank of Los Angeles, and we
did not audit either the 1996, 1997, or 1998 financial statements of PNB
Financial Group. These entities were acquired by Western Bancorp in
poolings-of-interests transactions in 1997 and 1998. Their financial
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for those
entities in the consolidated financial statements of Western Bancorp, is
based on the reports of the other auditors.
/s/ KPMG LLP
Los Angeles, California
March 26, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-44609 and No. 333-28633 on Form S-8, and No. 333-53635 on Form S-3 of
Western Bancorp of our report, dated January 24, 1997, on the consolidated
statements of operations, changes in shareholders' equity and cash flows of
California Commercial Bancshares and subsidiaries for the year ended December
31, 1996, appearing in this Annual Report on Form 10-K of Western Bancorp for
the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
March 26, 1999
Los Angeles, California
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-44609 and No. 333-28633 on Form S-8, and No. 333-53635 on Form S-3 of
Western Bancorp of our report, dated January 24, 1997, on the consolidated
statements of operations, changes in shareholders' equity and cash flows of
SC Bancorp and its subsidiary for the year ended December 31, 1996, appearing
in this Annual Report on Form 10-K of Western Bancorp for the year ended
December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
March 26, 1999
Los Angeles, California
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated January 20, 1999,
included in this Form 10-k in the previously filed Registration Statements of
Western Bancorp on Form S-8 No. 333-28633, 333-44609, 333-70441, 333-28633 and
333-44609 and on Form S-1 (No. 333-53635).
/s/ McGladrey & Pullen, LLP
Anaheim, California
March 26, 1999
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<PAGE>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<INT-BEARING-DEPOSITS> 697
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<LOANS> 1,799,209
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0
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<PERIOD-START> JAN-01-1997 JAN-01-1996
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<NET-INCOME> 11,913 13,546
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<EPS-DILUTED> .79 1.14
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<ALLOWANCE-DOMESTIC> 25,624 29,157 29,284
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<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 0 0 0
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 0 0 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0
<INVESTMENTS-CARRYING> 0 0 0
<INVESTMENTS-MARKET> 0 0 0
<LOANS> 0 0 0
<ALLOWANCE> 0 0 0
<TOTAL-ASSETS> 0 0 0
<DEPOSITS> 0 0 0
<SHORT-TERM> 0 0 0
<LIABILITIES-OTHER> 0 0 0
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 0 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 0 0 0
<INTEREST-LOAN> 79,020 50,814 24,359
<INTEREST-INVEST> 14,598 9,848 4,813
<INTEREST-OTHER> 5,668 2,295 950
<INTEREST-TOTAL> 97,286 62,957 30,122
<INTEREST-DEPOSIT> 26,358 17,120 8,237
<INTEREST-EXPENSE> 27,512 17,909 8,670
<INTEREST-INCOME-NET> 69,774 45,048 21,452
<LOAN-LOSSES> 3,300 2,005 885
<SECURITIES-GAINS> 331 331 107
<EXPENSE-OTHER> 63,075 43,081 19,411
<INCOME-PRETAX> 23,261 12,868 7,419
<INCOME-PRE-EXTRAORDINARY> 12,898 6,574 4,308
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 12,898 6,574 4,308
<EPS-PRIMARY> .90 .47 .31
<EPS-DILUTED> .86 .45 .30
<YIELD-ACTUAL> 6.15 6.09 6.03
<LOANS-NON> 13,586 17,315 22,114
<LOANS-PAST> 1,732 1,270 882
<LOANS-TROUBLED> 7,532 7,501 5,527
<LOANS-PROBLEM> 18,840 21,125 24,422
<ALLOWANCE-OPEN> 19,251 19,251 19,251
<CHARGE-OFFS> 5,834 4,252 1,168
<RECOVERIES> 1,849 878 301
<ALLOWANCE-CLOSE> 19,609 18,925 19,269
<ALLOWANCE-DOMESTIC> 19,609 18,925 19,269
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
