-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GYg0zTA7gDKCl/JVW4Yovaff9PES8UQx+vQ5b6FQqJuEmtxf2idAeZ9d+mfb+LTJ JaSXJb/etdWdQpx9Low1NA== 0001047469-98-011733.txt : 19980327 0001047469-98-011733.hdr.sgml : 19980327 ACCESSION NUMBER: 0001047469-98-011733 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN BANCORP CENTRAL INDEX KEY: 0000721670 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953863296 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13551 FILM NUMBER: 98574602 BUSINESS ADDRESS: STREET 1: 4100 NEWPORT PLACE SUITE 900 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7148632300 MAIL ADDRESS: STREET 1: 4100 NEWPORT PLACE SUITE 900 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FORMER COMPANY: FORMER CONFORMED NAME: MONARCH BANCORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K
(MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-13551 ------------------------ WESTERN BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 95-3863296 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4100 NEWPORT PLACE, SUITE 900, NEWPORT BEACH 92660 (Address of principal executive offices) (Zip Code)
Registrant's telephone number: (714) 863-2300 ------------------------ 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 13, 1998 was in excess of $384,100,000. Number of registrant's shares of Common Stock outstanding as of March 13, 1998 was 15,678,960 Documents incorporated by reference: NONE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 10-K CROSS-REFERENCE INDEX This Annual Report and Form 10-K incorporate into a single document the requirements of the accounting profession and the Securities and Exchange Commission, including a comprehensive explanation of 1997 results.
PAGE --- 10-K Cross-Reference Index................................................................................. i Table of Defined Terms..................................................................................... iii PART I ITEM 1. Business......................................................................................... 1 General................................................................................................ 1 Strategic Evolution.................................................................................... 2 Capital Transactions................................................................................... 4 Management Changes..................................................................................... 5 Business of the Company................................................................................ 6 Statistical Disclosure................................................................................. 9 Supervision and Regulation............................................................................. 9 ITEM 2. Properties....................................................................................... 19 SCB Properties......................................................................................... 19 SMB Properties......................................................................................... 20 ITEM 3. Legal Proceedings................................................................................ 20 General................................................................................................ 20 PDI Litigation......................................................................................... 21 FIP Litigation......................................................................................... 21 First Pension Litigation............................................................................... 22 ITEM 4. Submission of Matter to a Vote of Security Holders............................................... 23 SCB Merger............................................................................................. 23 SMB Acquisition........................................................................................ 23 PART II.................................................................................................... 23 ITEM 5. Market for Company's Common Stock and Related Security Holder Matters............................ 23 Marketplace Designation and Sales Price Information.................................................... 23 Dividends.............................................................................................. 24 Recent Sales of Unregistered Securities................................................................ 24 ITEM 6, 7 & 7A. Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; and Quantitative and Qualitative Disclosure About Market Risk................... 25 Overview............................................................................................... 25 Selected Financial Data................................................................................ 25 Balance Sheet Analysis................................................................................. 27 Liquidity, Interest Rate Risk and Market Risk.......................................................... 40 Results of Operations.................................................................................. 43 Recent Accounting Pronouncements....................................................................... 50 Year 2000 Risks and Preparedness....................................................................... 50
i
PAGE --- ITEM 8. Financial Statements and Supplementary Data...................................................... 52 Contents............................................................................................... 52 Independent Auditors' Reports.......................................................................... 53 Consolidated Balance Sheets............................................................................ 58 Consolidated Statements of Operations.................................................................. 59 Consolidated Statements of Changes in Shareholders' Equity............................................. 60 Consolidated Statements of Cash Flows.................................................................. 61 Notes to Consolidated Financial Statements............................................................. 63 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............ 98 PART III................................................................................................... 98 ITEM 10. Directors and Executive Officers of the Company................................................. 98 Directors.............................................................................................. 98 Committees of the Board of Directors................................................................... 100 Executive Officers..................................................................................... 101 ITEM 11. Executive Compensation.......................................................................... 102 Executive Compensation................................................................................. 102 Compensation of Directors.............................................................................. 104 Employment Arrangements................................................................................ 104 Executive Severance Plan............................................................................... 106 Board of Directors Report on Executive Compensation.................................................... 106 Performance Graph...................................................................................... 107 Section 16 Reporting................................................................................... 108 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................. 108 ITEM 13. Certain Relationships and Related Transactions.................................................. 110 Banking Transactions................................................................................... 110 Insurance Contracts.................................................................................... 110 Investment Banking Services............................................................................ 110 The 1998 Private Placement............................................................................. 111 ITEM 14. Exhibits and Reports on Form 8-K................................................................ 112 Exhibits............................................................................................... 112 Reports on Form 8-K.................................................................................... 114 Signatures............................................................................................. 115
ii TABLE OF DEFINED TERMS
PAGE 1995 Act................................................................................................... 18 1995 Private Placement..................................................................................... 5 1995 Private Placement Shares.............................................................................. 5 1996 Private Placement..................................................................................... 4 1996 Private Placement Investors........................................................................... 5 1996 Private Placement Shares.............................................................................. 4 1998 Private Placement..................................................................................... 4 1998 Private Placement Investors........................................................................... 4 1998 Private Placement Shares.............................................................................. 4 Amendment.................................................................................................. 23 Annual Report.............................................................................................. 2 Bank Defendants............................................................................................ 22 Bank Merger................................................................................................ 25 Banking Consolidation Bill................................................................................. 17 Banks...................................................................................................... 1 BHC Act.................................................................................................... 1 BIF........................................................................................................ 17 Board ..................................................................................................... 1 Cash Consideration......................................................................................... 3 Cash Liquidity............................................................................................. 28 CCB........................................................................................................ 2 CCB Merger................................................................................................. 2 CCB Private Placement...................................................................................... 5 CGCL....................................................................................................... 4 CMOs....................................................................................................... 29 Company.................................................................................................... 1 Company Common Stock....................................................................................... 2 Comptroller................................................................................................ 12 CRA........................................................................................................ 12 Credit Agreement........................................................................................... 24 Department................................................................................................. 17 DFI........................................................................................................ 11 DSL........................................................................................................ 17 Evan's Action.............................................................................................. 22 FASB....................................................................................................... 67 FDIC....................................................................................................... 9 FDICIA..................................................................................................... 12 Federal Banking Agencies................................................................................... 12 FFIEC...................................................................................................... 30 FIP........................................................................................................ 21 FIRREA..................................................................................................... 11 FRB........................................................................................................ 11 Fund....................................................................................................... 5 Holding Company Support Agreement.......................................................................... 78 Initial Shares............................................................................................. 21 Interstate Act............................................................................................. 17 IRC........................................................................................................ 81 KSOP....................................................................................................... 86
iii
PAGE Monarch.................................................................................................... 1 NBSC....................................................................................................... 3 New Note................................................................................................... 78 Non-Competition Period..................................................................................... 105 Note....................................................................................................... 2 NQSO....................................................................................................... 93 OREO....................................................................................................... 38 OTS........................................................................................................ 12 PDI........................................................................................................ 21 PDI Litigation............................................................................................. 21 Parent Company............................................................................................. 28 Plan....................................................................................................... 93 Regulation D............................................................................................... 4 Reverse Stock Split........................................................................................ 4 Rights Offering............................................................................................ 5 Rouseau Action............................................................................................. 22 RSA........................................................................................................ 40 RSL........................................................................................................ 40 SAC Reports................................................................................................ 38 SAIF....................................................................................................... 17 Salary Continuation Agreement.............................................................................. 104 SCB........................................................................................................ 1 SCB Meeting................................................................................................ 23 SCB Merger................................................................................................. 3 Second Amendment........................................................................................... 77 Severence Plan............................................................................................. 106 Securities Act............................................................................................. 4 SFAS 123................................................................................................... 67 SFAS 125................................................................................................... 67 SFAS 129................................................................................................... 67 SFAS 130................................................................................................... 68 SFAS 131................................................................................................... 68 SFAS 132................................................................................................... 68 Shareholder................................................................................................ 78 SMB........................................................................................................ 1 SMB Acquisition............................................................................................ 3 SMB Common Stock........................................................................................... 3 SMB Meeting................................................................................................ 23 SMB Merger................................................................................................. 23 Standby Agreements......................................................................................... 4 Stock Consideration........................................................................................ 3 Support Agreement.......................................................................................... 78 Western.................................................................................................... 1 Western Acquisition........................................................................................ 2 Year 2000 Plan............................................................................................. 50 Zwick Action............................................................................................... 22
iv 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 ("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, 1997, the Company had total assets of $1.4 billion in its two banking subsidiaries, Western Bank ("Western" and, from and after the consummation of the SMB Acquisition described herein, "SMB") and Southern California Bank ("SCB"). The Company's principal business is to provide, through its two banking subsidiaries, financial services throughout Southern California. The Company has no industry segments other than banking. 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, the Company has served the western part of Los Angeles County through SMB, a California state-chartered bank and wholly- owned subsidiary of the Company, with total assets at January 31, 1998 of approximately $1.2 billion. The Company serves Orange County and parts of southern Los Angeles County and northern San Diego County through SCB, a California state-chartered bank and wholly-owned subsidiary of the Company, with total assets at January 31, 1998 of approximately $882 million (SCB together with Western prior to January 27, 1998 and with SMB from January 27, 1998, collectively, the "Banks"). 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 and real estate loans, providing trust and escrow services, and making other investments. 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 and requests beyond the lending limits of the Banks are arranged through correspondent banks. In addition, SMB maintains a trust department established in 1968 with over $732 million in assets under management at January 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, from 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, and 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 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." Ultimately, the Company is committed to building a network of 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 Company's target market area extends to San Luis Obispo County on the North, the desert communities on the East, and San Diego on the South. The strategy for serving the Company's target markets is the delivery of a finely-focused set of value-added products and services 1 that satisfy the primary needs of the Company's targeted customers, emphasizing superior service and relationships rather than transaction volume. In order to serve the Company's targeted markets and customers within those markets effectively, the Company intends to continue to grow both through internal growth of the Banks and through the acquisition of additional financial institutions or branches of other financial institutions within the markets targeted by the Company. 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 (the "Western Acquisition"), a California state-chartered bank operating in the western part of Los Angeles County. At that time, Western 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, 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. 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. The Company funded the purchase price in the Western Acquisition with (i) the issuance of approximately 3.1 million shares of common stock of the Company ("Company Common Stock") in a private placement for approximately $42.2 million, net of approximately $0.9 million in issuance costs incurred in such private placement, 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 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 to Belle Plaine Partners, Inc. and incurred $700 thousand in other acquisition related costs. Following consummation of the Western Acquisition, Western was operated as a wholly-owned subsidiary of the Company, servicing targeted customers of the Company in the western part of Los Angeles. CCB MERGER 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 2 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 with seven branch offices including its headquarters in Newport Beach. On June 3, 1997, the Company Common Stock was designated for quotation on the Nasdaq National Market-Registered Trademark-. 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, 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 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, with 21 branch offices as of December 31, 1997, including its head office in Newport Beach. On January 31, 1998, SCB closed two of its branches, and SCB intends to close three additional branches in the first quarter of 1998, leaving 16 branches. 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, 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 to 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 (the "SMB Acquisition"). As part of the SMB Acquisition, the name of Western was changed to "Santa 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 57.3 percent elected to receive the Cash Consideration, resulting in a payment of $113,722,700 in the aggregate, and approximately 42.7 percent received the Stock Consideration resulting in the issuance of approximately 2,646,000 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 4,973,550 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. 3 The SMB Acquisition will be accounted for using the purchase method of accounting. At December 31, 1997, based on unaudited data heretofore made available to the Company, SMB had total assets of $678 million, deposits of $593 million, shareholders' equity of $81 million and approximately 7.1 million shares of SMB Common Stock outstanding For the year ended December 31, 1997, Santa Monica Bank reported net income and net income per share of approximately $10.9 million and $1.54, respectively. CAPITAL TRANSACTIONS DIVIDENDS 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 and $0.15 per share payable on March 27, 1998 to shareholders of record on February 27, 1998. Because the Company must comply with the California General Corporation Law ("CGCL") and applicable federal and state banking regulations 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." 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. 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") of the Securities Act. 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 are officers, directors and/or shareholders of the Company (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 ("Standby Agreements"). Pursuant to the Standby Agreement, the Company has agreed to file under the Securities Act, by no later than June 26, 1998, 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 3,076,000 shares (the "1996 Private Placement Shares") of Company Common Stock for $14.025 per share in a private placement (the "1996 Private Placement") for net proceeds of approximately $42,213,000. 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 are officers, directors and/or shareholders 4 of the Company (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. The warrants expire on September 30, 2001. Such warrants were issued as payment of a portion of Belle Plaine Partners, Inc. advisory fees. Belle Plaine Financial, L.L.C. is an entity affiliated with John M. Eggemeyer. 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 $5,669,000. 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. 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 $3,200,000, CCB contributed $2,900,000 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. 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 (4) shares of Company Common Stock for each share of Company Common Stock held. Shares of Company Common Stock for which shareholders 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, directors of the Company, are 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. For additional information regarding capital activities, see "Item 6, 7 and 7A. Selected Financial Data and 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." 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, 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. 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 executive management to fill out its senior management team. Suzanne R. Brennan, formerly a Senior Vice President of U.S. Bancorp, was hired as Executive Vice President of Operations. Robert M. Borgman, President of National Business Finance, Inc., a factoring 5 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. 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. 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, trust, escrow, banking 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 are 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 Master Card credit cards. Similar to other state-chartered banks of their size, the Banks can provide investment and international banking services through correspondent banks. The Company, through the Banks, concentrates its lending activities in three principal areas: (1) Real Estate Loans. Real estate loans are comprised of construction loans, miniperm loans collateralized by first or junior trust deeds on specific properties and equity lines of credit. The properties collateralizing real estate loans are principally located in the Company's primary market areas of Los Angeles, Orange and San Diego counties and the contiguous communities. The construction loans are comprised of loans on residential and income producing properties generally have terms of less than two years and typically bear an interest rate that floats with the prime rate or other established index. The miniperm loans finance the purchase and/or ownership of income producing properties. Miniperm loans are generally made with an amortization schedule ranging from fifteen to thirty years with a lump sum balloon payment due in one to ten years. Equity lines of credit are revolving lines of credit collateralized by junior trust deeds on real properties. They bear a rate of interest that floats with the prime rate, LIBOR, or other established index and have maturities of five to seven years. The Company also makes a small number of loans on 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. (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 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 6 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. (3) Consumer Loans and Leases. Consumer loans include personal loans, auto loans, boat loans, home improvement loans, equipment loans, revolving lines of credit and other loans typically made by banks to individual borrowers. The Company also makes leases on new and used automobiles. These leases may be closed-end or commercial leases, have terms of one to five years and bear interest at a fixed rate. 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 its strengthened capital base will permit an acceleration of efforts to achieve growth and greater diversification of both the Banks' loan portfolios and deposit bases and new sources of fee income. Possible avenues of growth and future diversification include expanded days and hours of operation, new types of lending, brokerage, annuity and mutual funds products, as well as the acquisition of additional financial institutions or branches of other financial institutions, in cities and areas adjoining the Company's current market area. Examples of 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; (iii) asset based lending services and cash management services through departments acquired in the SCB Merger; and (v) trust services through departments acquired in the SMB Acquisition. See "--Strategic Evolution." However, there can be no assurance that the Company will be able to acquire additional financial institutions or expand or diversify its services or market area. MARKET AREA SMB's primary market area is the western part of Los Angeles County. As of March 15, 1998 SMB had 13 branch offices, including branch offices in Santa Monica, Westwood, Malibu, Pacific Palisades, Marina Del Rey, Beverly Hills, Century 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. As of March 15, 1998 SCB had 6 branch offices in southern Los Angeles County, 12 branch offices throughout Orange County and 1 in northern San Diego County. SCB has plans to close three branches in Orange County by the end of the first quarter of 1998. 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. 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 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 7 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 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. See "--Supervision and Regulation.") 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. 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 recently enacted 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. (See "--Supervision and Regulation.") Economic factors, along with legislative and technological changes, will have an ongoing impact on the competitive environment within the financial services industry. As a major and 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 through internal growth and acquisitions of additional financial institutions or branches of other financial institutions, 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. 8 EMPLOYEES As of January 31, 1998, SCB had 350 full time equivalent employees, SMB had 368 full time equivalent employees, and the Company had 9 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 and 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 affect on the business and earnings of the Company. The following is a summary of significant statutes, regulations, and policies that currently apply to the operation of banking institutions. This summary is qualified in its entirety by reference to the full text of such statutes, regulations or policies. 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 9 "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. 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. As a bank holding company, the Company is required to file reports with the Board and to provide such additional information as the Board may require. The Board also has the authority to examine the Company and each of its subsidiaries with the cost thereof to be borne by the Company. 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 BHC Act also prohibits a bank holding company or any of its subsidiaries from acquiring voting shares or substantially all the assets of any bank located in a state other than the state in which the operations of the bank holding company's banking subsidiaries are principally conducted unless certain requirements are met. (See "--INTERSTATE BANKING AND BRANCHING.") 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 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. 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 5. Market for Company Common Stock and Related Security Holder Matters--Dividends." The Company's primary sources of income are the receipt of dividends from the Banks and interest income on its investments. The availability of dividends from the Banks are limited by various statutes and regulations of state and federal law. California law restricts the amount available for cash dividends by 10 state-chartered banks to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event a bank has no retained earnings or net income for its last three fiscal years, cash dividends may be paid in an amount not exceeding the net income for such bank's last preceding fiscal year only after obtaining the prior approval of the California Department of Financial Institutions (the "DFI"). 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 Board's and/or the FDIC's opinion, constitutes 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 the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. REGULATION OF THE BANKS Banks are extensively regulated under both federal and state law. See "--FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991." 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. 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 reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends and locations of branch offices. Further, the Banks are required to maintain certain levels of capital. CAPITAL ADEQUACY GUIDELINES. With the enactment of the Financial Institution Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the Company and the Banks are subject to certain capital requirements and standards. The FDIC has issued guidelines to implement the risk-based capital requirements. The guidelines are intended to establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet items into account in assessing capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Under these guidelines, assets and credit equivalent amounts of off-balance sheet items, such as letters of credit and outstanding loan commitments, are assigned to one of several risk categories, which range from 0 percent for risk-free assets, such as cash and certain U.S. Government securities, to 100 percent for relatively high-risk assets, such as loans and investments in fixed assets, premises and other real estate owned. The aggregated dollar amount of each category is then multiplied by the risk-weight associated with that category. The resulting weighted values from each of the risk categories are then added together to determine the total risk-weighted assets. A banking organization's qualifying total capital consists of two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier 1 capital consists primarily of common stock, related surplus and retained earnings, qualifying non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries. Intangibles, such as goodwill, are generally deducted from Tier 1 capital; however, purchased mortgage servicing rights and purchased credit card relationships may be included, subject to certain limitations. At least 50 percent of the banking organization's total regulatory capital must consist of Tier 1 capital. 11 Tier 2 capital may consist of (i) the allowance for possible loan and lease losses in an amount up to 1.25 percent of risk-weighted assets; (ii) perpetual preferred stock, cumulative perpetual preferred stock and long-term preferred stock and related surplus; (iii) hybrid capital instruments (instruments with characteristics of both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) eligible term subordinated debt and intermediate-term preferred stock with an original maturity of five years or more, including related surplus, in an amount up to 50 percent of Tier 1 capital. The inclusion of the foregoing elements of Tier 2 capital are subject to certain requirements and limitations of the federal banking agencies. The FDIC has also adopted a minimum leverage capital ratio of Tier 1 capital to average total assets of 3 percent for the highest rated banks. This leverage capital ratio is only a minimum. Institutions experiencing or anticipating significant growth or those with other than minimum risk profiles are expected to maintain capital well above the minimum level. Furthermore, higher leverage capital ratios are required to be considered well capitalized or adequately capitalized under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"). The Regulatory Capital Guidelines as well as the actual capitalization for SCB, Western and the Company as of December 31, 1997 follow:
REQUIREMENT ACTUAL -------------------------- ---------------------------------- ADEQUATELY WELL COMPANY CAPITALIZED CAPITALIZED WESTERN SCB CONSOLIDATED ----------- ------------- --------- --------- ------------ (GREATER THAN OR EQUAL TO) Tier 1 risk-based capital ratio................... 4.00% 6.00% 10.85% 10.41% 9.66% Total risk-based capital.......................... 8.00% 10.00% 12.10% 11.66% 10.91% Tier 1 leverage capital ratio..................... 4.00% 5.00% 7.43% 8.22% 7.33%
COMMUNITY REINVESTMENT ACT AND FAIR LENDING REQUIREMENTS. The Banks are subject to certain fair lending requirements and reporting obligations involving lending operations and Community Reinvestment Act ("CRA") activities. CRA generally requires the Board, the Comptroller of the Currency ("Comptroller"), the Office of Thrift Supervision ("OTS") and the FDIC (collectively, the "Federal Banking Agencies") to evaluate the record of financial institutions in meeting the credit needs of their local community, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the Federal Banking Agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. The Federal Banking Agencies adopted a performance-based evaluation system which bases CRA ratings on an institutions' actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. LOANS TO AFFILIATES. Banks are subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, its affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of such affiliates. Such restrictions prevent affiliates from borrowing from the Banks unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Banks in any other affiliate is limited to 10 percent of such subsidiary bank's capital and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20% of such subsidiary bank's capital and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving other controlling persons of the Banks. Additional restrictions on transactions with affiliates may be imposed on the Banks under the prompt corrective action provisions of the FDICIA. 12 POTENTIAL ACTIONS. Commercial banking organizations, such as the Banks, may be subject to potential enforcement actions by the Board, the FDIC and the DFI for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits, the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions of FDICIA. On December 19, 1991, FDICIA was enacted into law. Set forth below is a brief discussion of certain portions of this law and implementing regulations that have been adopted or proposed by the Federal Banking Agencies. STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the Federal Banking Agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating to internal controls, loan documentation, credit underwriting, interest rate exposure and asset growth. Standards must also be prescribed for classified loans, earnings and the ratio of market value to book value for publicly traded shares. FDICIA also requires the Federal Banking Agencies to issue uniform regulations prescribing standards for real estate lending that are to consider such factors as the risk to the deposit insurance fund, the need for safe and sound operation of insured depository institutions and the availability of credit. Further, FDICIA requires the Federal Banking Agencies to establish standards prohibiting compensation, fees and benefit arrangements that are excessive or could lead to financial loss. SAFETY AND SOUNDNESS STANDARDS. In February 1995, the Federal Banking Agencies adopted final guidelines establishing standards for safety and soundness, as required by FDICIA. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Guidelines for asset quality and earnings standards will be adopted in the future. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate Federal Banking Agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. PROMPT CORRECTIVE REGULATORY ACTION. FDICIA requires each Federal Banking Agency to take prompt corrective action to correct the problems of insured depository institutions that fall below one or more prescribed minimum capital ratios. The purpose of this law is to resolve the problems of insured depository institutions at the least possible long-term cost to the appropriate deposit insurance fund. The law requires each Federal Banking Agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized (significantly exceeding the required minimum capital requirements), adequately capitalized (meeting the required capital requirements), undercapitalized (failing to meet any one of the capital requirements), significantly undercapitalized (significantly below any one capital requirement) and critically undercapitalized (failing to meet all capital requirements). Under final regulations adopted by the Federal Banking Agencies implementing the prompt corrective action provisions of FDICIA, an insured depository institution are deemed to be: - "well capitalized" if it (i) has total risk-based capital of 10 percent or greater, Tier 1 risk-based capital of 6 percent or greater and a leverage capital ratio of 5 percent or greater and (ii) is not 13 subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; - "adequately capitalized" if it has total risk-based capital of 8 percent or greater, Tier 1 risk-based capital of 4 percent or greater and a leverage capital ratio of 4 percent or greater (or a leverage capital ratio of 3 percent or greater if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); - "undercapitalized" if it has total risk-based capital that is less than 8 percent, Tier 1 risk-based capital that is less than 4 percent or a leverage capital ratio that is less than 4 percent (or a leverage capital ratio that is less than 3 percent if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); - "significantly undercapitalized" if it has total risk-based capital that is less than 6 percent, Tier 1 risk-based capital that is less than 3 percent or a leverage capital ratio that is less than 3 percent; and - "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2 percent. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized or undercapitalized, may be reclassified to the next lower capital category if the appropriate Federal Banking Agency, after notice and opportunity for hearing, (i) determines that the institution is in an unsafe or unsound condition or (ii) deems the institution to be engaging in an unsafe or unsound practice and not to have corrected the deficiency. At each successive lower capital category, an insured depository institution is subject to more restrictions and Federal Banking Agencies are given less flexibility in deciding how to address the problems associated with such category. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate Federal Banking Agency, subject to asset growth restrictions, and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate Federal Banking Agency within 45 days after becoming undercapitalized. The appropriate Federal Banking Agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is based on realistic assumptions and (iii) is likely to succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate Federal Banking Agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt correction action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, or a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; 14 (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers, subject to certain grandfather provisions for those elected prior to enactment of FDICIA; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate Federal Banking Agency. Although the appropriate Federal Banking Agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate Federal Banking Agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate Federal Banking Agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. The FDIC has adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0 percent for assets with low credit risk, such as certain U.S. Treasury securities, to 100 percent for assets with relatively high credit risk, such as business loans. In addition to the risk-based guidelines, the FDIC requires banks to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a bank rated in the highest of the five categories used by the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total assets is 3 percent. For all banks not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3 percent minimum, or 4 percent to 5 percent. In addition to these uniform risk- based capital guidelines and leverage ratios that apply across the industry, the FDIC has the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. In August 1995, the Federal Banking Agencies adopted final regulations specifying that the agencies will include, in their evaluations of a bank's capital adequacy, an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The final regulations, however, do not include a measurement framework for assessing the level of a bank's exposure to interest rate risk, which is the subject of a proposed policy statement issued by the Federal Banking Agencies concurrently with the final regulations. The proposal would measure interest rate risk in relation to the effect of a 200 basis point change in market interest rates on the economic value of a bank. Banks with high levels of measured exposure or weak management systems generally will be required to hold additional capital for interest rate risk. The specific amount of capital that may be needed would be determined on a case-by-case basis by the examiner and the appropriate Federal Banking Agency. 15 In January 1995, the Federal Banking Agencies issued a final rule relating to capital standards and the risks arising from the concentration of credit and nontraditional activities. Institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities and who fail to adequately manage these risks, will be required to set aside capital in excess of the regulatory minimums. The Federal Banking Agencies have not imposed any quantitative assessment for determining when these risks are significant, but have identified these issues as important factors they will review in assessing an individual bank's capital adequacy. In December 1993, the Federal Banking Agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss allowances to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified as loss; (b) 50 percent of assets classified as doubtful; (c) 15 percent of assets classified as substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. OTHER ITEMS. FDICIA also, among other things, (i) limits the percentage of interest paid on brokered deposits and limits the unrestricted use of such deposits to only those institutions that are well capitalized; (ii) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (iii) eliminates "pass through" deposit insurance for certain employee benefit accounts unless the depository institution is well capitalized or, under certain circumstances, adequately capitalized; (iv) prohibits insured state chartered banks from engaging as principal in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (v) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution's tangible, core and risk-based capital; and (vi) provides that, subject to certain limitations, any federal savings association may acquire or be acquired by any insured depository institution. In addition, the FDIC has issued final and proposed regulations implementing provisions of FDICIA relating to powers of insured state banks. Final regulations issued in October 1992 prohibit insured state banks from making equity investments of a type, or in an amount, that are not permissible for national banks. In general, equity investments include equity securities, partnership interests and equity interests in real estate. Under the final regulations, non-permissible investments were to be divested by no later than December 19, 1996. The Banks have no such non-permissible investments. Regulations issued in December 1993 prohibit insured state banks from engaging as principal in any activity not permissible for a national bank without FDIC approval. The proposal also provides that subsidiaries of insured state banks may not engage as principal in any activity that is not permissible for a subsidiary of a national bank, without FDIC approval. REAL ESTATE LENDING AND APPRAISAL. In December 1992, the Federal Banking Agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. Appraisals for "real estate related financial transactions" must be conducted by either state-certified or state-licensed appraisers for transactions in excess of certain amounts. State-certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for "complex" 1-4 family residential properties of $250,000 or more. A state-licensed appraiser is required for all other appraisals. However, appraisals performed in connection with "federally related transactions" must now comply with the Federal Banking Agencies' appraisal standards. Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing of real property, and the use of real property or interests in real property as security for a loan or investment, including mortgage backed securities. 16 PREMIUMS FOR DEPOSIT INSURANCE. Federal law has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90 percent of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. The FDIC also has authority to impose special assessments against insured deposits. The FDIC implemented a final risk-based assessment system, as required by FDICIA, effective January 1, 1994, under which an institution's premium assessment is based on the probability that the deposit insurance fund will incur a loss with respect to the institution, the likely amount of any such loss, and the revenue needs of the deposit insurance fund. As long as BIF's reserve ratio is less than a specified "designated reserve ratio," or 1.25 percent, the total amount raised from BIF members by the risk-based assessment system may not be less than the amount that would be raised if the assessment rate for all BIF members were .023 percent of deposits. The FDIC, effective September 15, 1995, lowered assessments from their rates of $.23 to $.31 per $100 of insured deposits to rates of $.04 to $.31, depending on the condition of the bank, as a result of the re-capitalization of the BIF. On November 15, 1995, the FDIC voted to drop its premiums for well capitalized banks to zero effective January 1, 1996. Other banks will be charged risk-based premiums up to $.27 per $100 of deposits. BANKING CONSOLIDATION BILL Governor Pete Wilson signed Assembly Bill 3351 (the "Banking Consolidation Bill"), authored by Assemblyman Ted Weggeland and sponsored by the California State Banking Department (the "Department"), effective July 1, 1997, which creates the DFI to be headed by a Commissioner of Financial Institutions out of the existing Department which regulates state-chartered commercial banks and trust companies in California. The Banking Consolidation Bill, among other provisions, also (i) transfers regulatory jurisdiction over state chartered savings and loan associations from the Department of Savings and Loans ("DSL") to the newly created DFI and abolishes the DSL; (ii) transfers regulatory jurisdiction over state-chartered industrial loan companies and credit unions from the Department of Corporations to the DFI; and (iii) establishes within the DFI separate divisions for credit unions, commercial banks, industrial loan companies and savings and loans. As the Banking Consolidation Bill has only recently been enacted, it is impossible to predict with any degree of certainty what impact it will have on the banking industry in general and the Banks in particular. SAVINGS ASSOCIATION INSURANCE FUND Congress has recently passed, and President Clinton has signed into law, provisions to strengthen the Savings Association Insurance Fund (the "SAIF") and to repay outstanding bonds that were issued to re-capitalize the SAIF's successor as a result of payments made due to the insolvency of savings and loan associations and other federally insured savings institutions in the late 1980's and early 1990's. The new law required savings and loan associations to bear the cost of re-capitalizing the SAIF and, after January 1, 1997, banks must contribute towards paying off the financing bonds, including interest. In 2000 (or upon the earlier merger, as currently proposed, of the BIF and SAIF), the banking industry will assume the bulk of the payments. Additionally, the new law provides "regulatory relief" for the banking industry by eliminating approximately 30 laws and regulations. The costs and benefits of the new law to the Banks can not currently be accurately predicted. INTERSTATE BANKING AND BRANCHING On September 29, 1994, the President signed into law the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Under the Interstate Act, beginning one year after 17 the date of enactment, a bank holding company that is adequately capitalized and managed may obtain regulatory approval to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon consummation, it would control (a) more than 10 percent of the total amount of deposits of insured depository institutions in the United States or (b) 30 percent or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirement and conditions as for a merger transaction. Effective October 2, 1995, California adopted legislation which "opts California into" the Interstate Act. However, the California legislation restricts out of state banks from purchasing branches or starting a de novo branch to enter the California banking market. Such banks may proceed only by way of purchases of whole banks. The Interstate Act is likely to increase competition in the Banks' market areas especially from larger financial institutions and their holding companies. It is difficult to assess the impact such increased competition will likely have on the Banks' operations. On September 28, 1995, Governor Wilson signed Assembly Bill 1482, the Caldera, Weggeland, and Killea California Interstate Banking and Branching Act of 1995 (the "1995 Act"). The 1995 Act, which was filed with the Secretary of State as Chapter 480 of the California Statutes of 1995, became operative on October 2, 1995. The 1995 Acts opts in early for interstate branching, allowing out-of-state banks to enter California by merging or purchasing a California bank or industrial loan company which is at least five years old. Also, the 1995 Act repeals the California Interstate (National) Banking Act of 1986, which regulated the acquisition of California banks by out-of-state bank holding companies. In addition, the 1995 Act permits California state banks, with the approval of the DFI, to establish agency relationships with FDIC-insured banks and savings associations. Finally, the 1995 Act provides for regulatory relief, including (i) authorization for the DFI to exempt banks from the requirement of obtaining approval before establishing or relocating a branch office or place of business, (ii) repeal of the requirement of directors' oaths (California Financial Code Section 682), and (iii) repeal of the aggregate limit on real estate loans (California Financial Code Section 1230). 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 enviromental laws is through its lending activities. Based on a general survey of the loan portfolios of the Banks, conversations with local authorities and appraisers, and the type of lending currently and historically done by the Banks, the Company is not reasonably exposed to any significant loss or liability related to such enviromental laws. The Banks have generally not made the types of loans generally 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. 18 ITEM 2. PROPERTIES SCB PROPERTIES SCB's principal office is located at 4100 Newport Place, Suite 900, Newport Beach, California. In total, as of December 31, 1997, SCB had twenty-one (21) branch offices and two other properties, seven (7) of which were owned and sixteen (16) of which were leased. As part of the merger of NBSC with and into SCB, SCB consolidated certain operations and discontinued operations at six (6) locations, five (5) of which were branch offices, in the first quarter of 1998. 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 El Toro, California 9042 Garfield Avenue Huntington Beach, California 4180 La Jolla Village Drive, Suites 125 and 430 La Jolla, California LEASED PROPERTIES 16420 Valley View Avenue* La Mirada, California 401 Glenneyre Street Laguna Beach, California 30000 Town Center Drive Laguna Niguel, California 4100 Newport Place Newport Beach, California 3951 South Plaza Drive Santa Ana, California Branch DISCONTINUED PROPERTIES 8010 Santa Ana Canyon Road Anaheim Hills, California 17330 Brookhurst Street Fountain Valley, California 17252 Armstrong Avenue* Irvine, California 2101 West Imperial Highway La Habra, California 23521 Paseo de Valencia Laguna Hills, California 625 The City Drive South Orange, California * Non-branch property. 19 SMB PROPERTIES SMB's principal office is located at 1251 Fourth Street, Santa Monica, California. In total, as of January 27, 1998 SMB had thirteen (13) branch offices and eight (8) other properties, ten (10) of which were owned and eleven (11) of which were leased. Prior to the acquisition of SMB on January 27, 1998, Western had five (5) branch offices, one (1) of which was owned and four (4) of which 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 Corner of 5th and Arizona* Santa Monica, California 1401 Wilshire Boulevard Santa Monica, California 4700 Lincoln Boulevard Marina del Rey, California 1261-1267 Westwood Boulevard* Los Angeles, California LEASED PROPERTIES 9444 Wilshire Boulevard Beverly Hills, California 15910 Ventura Boulevard Encino, California 1888 Century Park East, Suites 110 & 409 Los Angeles, California 1251 Westwood Boulevard Los Angeles, California (Ground lease) 12100 Wilshire Boulevard Los Angeles, California 23705 West Malibu Road Malibu, California 15245 Sunset Boulevard Pacific Palisades, California 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 * Non-branch property. For additional information regarding properties of the Company and of the Banks, see "Item 8. Financial Statements and Supplementary Data." 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 incurrence of the loss is probable. Set forth below is a brief summary of the status of certain pending legal proceedings to which the Company and/or the Banks are subject. Management believes that the reserves which it has established for these matters are adequate at this time. However, litigation is inherently uncertain and no assurance can 20 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 number 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 $25 million (the original claim alleged $45 million and was reduced during discovery) in damages due to lost opportunities, breach of contract, loss of goodwill and damage to their reputation due to the inability to use the $12,301,113. Additional claims for an unspecified amount of punitive damages, consequential damages and incidental damages have been alleged. Discovery has not yet been completed. Trial is anticipated to take place in the fourth quarter of 1998. FIP LITIGATION Financial Institution Partners, L.P. v. California Commercial Bankshares et al., is an action filed by Financial Institution Partners, L.P. (collectively with its purported assignee, Hovde Capital, Inc., "FIP") on December 19, 1996 in the United States District Court for the Central District of California. The dispute arose from the purchase by FIP in December 1995 of 288,888 shares of common stock of CCB (the "Initial Shares") in a private placement at $6.75 per share ($1,949,994 in the aggregate), and FIP's agreement to purchase an additional 266,659 shares of common stock of CCB on or prior to May 5, 1996, subject to satisfaction of certain closing conditions, including the receipt of required regulatory approval, if any. 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 common stock of CCB 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 of 1934 and Rule 10b-5 thereunder, intentional misrepresentation, negligent misrepresentation, suppression of fact and breach of contract (rescission, restitution and damages). On August 20, 1997, FIP filed a Third Amended Complaint adding the Company as a defendant and alleging additional claims for breach of contact (right of first refusal) and civil violation of Penal Code Section 496. The complaint 21 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 common stock of CCB 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. On September 19, 1997, the Company filed an answer to the complaint. The Company believes that FIP's claims are without merit, that FIP has not been damaged but in fact has earned a substantial profit from its purchase of the Initial Shares, that FIP breached its agreement with CCB, and that FIP has no contractual right or right of first refusal to purchase any shares of Company Common Stock. 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 have not alleged a specific damage claim against NBSC or Monarch. ZWICK ACTION Beverly Zwick v. Monarch Bank et al., is a class action brought in the San Diego Superior Court (the "Zwick Action"). The plaintiffs are a class of investors whose funds were deposited by First Pension in custodial accounts held at Monarch. The plaintiffs stated claims for negligence, fraud and aiding and abetting constructive fraud against Monarch and the Company. Plaintiffs claim that Monarch knew or should have known that the now incarcerated principals of First Pension were periodically stealing funds from the custodial accounts through transferring authorized withdrawals to bogus accounts from which the funds were eventually stolen. The damages alleged by the plaintiffs exceed $2,000,000. SETTLEMENT On February 13, 1998, the Company entered into a Settlement Agreement and Mutual Release, pursuant to which the Company and SCB, as successors to Monarch and NBSC, were released from all claims raised in the Rousseau Action, the Evans Action and the Zwick Action and the Company will pay $1.1 million to be allocated among the various plaintiffs. Before this settlement becomes final, the 22 settlement agreement must be approved by the courts in the various actions. The impact of the settlement has been included in the 1997 consolidated financial statements. See "Item 8. Financial Statements and Supplementary Data." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS SCB MERGER A special meeting of shareholders of the Company was held on October 10, 1997 (the "SCB Meeting") to consider and vote upon (i) a proposal to approve the principal terms of a proposed merger of SCB with and into the Company; and (ii) to consider and vote upon an amendment to the Company's Bylaws (the "Amendment") to change the authorized number of Directors from a minimum of seven (7) and a maximum of thirteen (13) to a minimum of nine (9) and a maximum of sixteen (16). The total number of shares of Company Common Stock outstanding as of the record date for the SCB Meeting was 7,071,973 shares, each having one vote. The total number of shares of Company Common Stock represented at the SCB Meeting by valid proxy and in person was 5,253,756, which number represented a quorum. 5,234,711 shares of Company Common Stock voted for approval of the principal terms of the SCB Merger, and 1,645 shares of Company Common Stock voted against approval of the principal terms of the SCB Merger. 16,556 shares of Company Common Stock abstained. In addition, 5,220,884 shares of Company Common Stock voted for approval of the Amendment, and 1,546 shares of Company Common Stock voted against approval of the Amendment. 31,326 shares of Company Common Stock abstained. SMB ACQUISITION A special meeting of shareholders of the Company was held on December 23, 1997 (the "SMB Meeting") to consider and vote upon a proposal to approve the principal terms of a proposed merger of SMB with Western (the "SMB Merger"). The total number of shares of Company Common Stock outstanding as of the record date for the SMB Meeting was 10,657,262 shares, each having one vote. The total number of shares of Company Common Stock represented at the SMB Meeting by valid proxy and in person was 7,830,918, which number represented a quorum. 7,810,142 shares of Company Common Stock were voted for approval of the principal terms of the SMB Merger, and 3,513 shares of Company Common Stock were voted against approval of the principal terms of the SMB Merger. 17,263 shares of Company Common Stock abstained. 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 13, 1998 was approximately 2,190. 23 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, 1996:
APPROXIMATE SALES PRICES QUARTER ENDED -------------------- (LAST TRADING DAY) HIGH LOW - --------------------------------------------------------------------------- --------- --------- March 31, 1996............................................................. $ 11.05 $ 8.93 June 30, 1996.............................................................. 17.00 8.50 September 30, 1996......................................................... 14.88 8.50 December 31, 1996.......................................................... 29.75 13.86 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
On March 13, 1998, the approximate high and low trade price for Company Common Stock was $39.25 and $38.88, respectively. DIVIDENDS Holders of Company Common Stock are entitled to receive dividends declared by the Board of Directors of the Company 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. See "Item I. Business--Supervision and Regulation--DIVIDENDS." In addition, the right of holders of Company Common Stock to receive dividends declared by the Company will be subject to the rights of holders of any preferred stock of the Company that may be issued after the date hereof. The Company's ability to pay dividends is also limited by the Third Amendment to Revolving Credit Agreement, dated as of January 26, 1998, between the Company and The Northern Trust Company (the "Credit Agreement") 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 and Santa Monica Bank or similar transactions. The Company had not paid any dividends since its formation on May 20, 1983; however, on August 20, 1997, the Board of Directors of the Company approved the institution of a quarterly dividend. A dividend of $0.15 per share of Company Common Stock was paid on December 10, 1997 to shareholders of record on November 10, 1997. In addition, the Company declared a dividend of $0.15 per share of Company Common Stock payable on March 27, 1998 to shareholders of record on February 27, 1997. See "Item I. Business--Capital Transactions--DIVIDENDS." Because the Company must comply with the CGCL, banking regulations and, if in effect at the applicable time, the Credit Agreement when paying dividends, there can be no assurance that the Company will continue to pay dividends at this level, if at all. See "Item 1. Business--Supervision and Regulation--DIVIDENDS" and "Item 6 & 7. Selected Financial Data and Management's Discussion and Analysis of Financial Condition and Results of Operations--Balance Sheet Analysis--LIQUIDITY." RECENT SALES OF UNREGISTERED SECURITIES For a discussion of recent sales of unregistered Company Common Stock, see "Item I. Business-- Capital Transactions--CAPITAL RAISING TRANSACTIONS." 24 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 the Banks. SCB was acquired by the Company in 1997, and thereafter the Company merged NBSC, into which Monarch had previously been merged, into SCB in connection with transactions that were accounted for under the pooling-of-interests method of accounting. The Company acquired Santa Monica Bank in January 1998 through the merger of Santa Monica Bank with and into Western, with Western being the surviving corporation. In connection with the SMB Acquisition, Western changed its name to "Santa Monica Bank." However, because the financial data presented below is as of and for the years and periods ended on or prior to December 31, 1997, the financial data of Santa Monica Bank is not included herein unless otherwise indicated. The Company acquired Western on September 30, 1996 in a transaction which was accounted for using the purchase method of accounting. Consequently, the results of operations contained herein include Western only from the date of the Western Acquisition. 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. 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 "Bank Merger"). The Bank Merger was consummated on December 15, 1997. References to SCB refer to the merged entity except where indicated. Each of the CCB Merger and the SCB 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 and SC Bancorp 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. 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, 1997. Such tables and data reflect the combination of the Company with both CCB and SC Bancorp on June 4, 1997 and October 10, 1997, respectively, each in a merger accounted for as a pooling-of-interests. The following summary financial data was derived from the audited Consolidated Financial Statements of the Company, which reflect the effect of both the CCB Merger and the SCB Merger. This data should be read in conjunction with the audited Consolidated Financial Statements as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 and related notes included elsewhere herein. See "Item 8. Financial Statements and Supplementary Data." All share data has been adjusted to reflect the Reverse Stock Split. 25
DECEMBER 31, -------------------------------------------------------------------- 1997 1996(1) 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) CONDENSED STATEMENT OF OPERATIONS DATA: Interest income......................................... $ 101,034 $ 74,237 $ 62,629 $ 53,079 $ 57,722 Interest expense........................................ 29,358 22,311 19,804 13,388 18,677 ------------ ------------ ------------ ------------ ------------ Net interest income..................................... 71,676 51,926 42,825 39,691 39,045 Provision for loan and lease losses..................... 2,800 1,018 8,564 3,510 17,919 Non-interest income (other than gains or losses on securities and sale of loans and other assets transactions)......................................... 9,266 8,929 8,373 8,256 8,757 Gains (losses) on securities transactions............... 342 281 (692) (24) 7,114 Gain on sale of loans and other assets, net............. 78 665 145 215 -- Other non-interest expense.............................. 62,977 47,268 40,952 37,879 40,770 Lower of cost or market adjustment on loans............. -- -- 756 -- -- Goodwill amortization................................... 2,538 1,004 821 211 167 OREO expense (income)................................... 242 (134) 3,080 3,145 4,888 ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes............................ 12,805 12,645 (3,522) 3,393 (8,828) Income tax expense (benefit)............................ 9,643 3,656 (1,733) 1,680 (1,979) ------------ ------------ ------------ ------------ ------------ Income (loss) before cumulative effect of a change in accounting principle.................................. 3,162 8,989 (1,789) 1,713 (6,849) Cumulative effect of change in accounting principle..... -- -- -- -- (41) ------------ ------------ ------------ ------------ ------------ Net income (loss)..................................... $ 3,162 $ 8,989 $ (1,789) $ 1,713 $ (6,890) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ PER SHARE DATA (2)(3): Basic net income (loss) per share....................... $ 0.30 $ 1.11 $ (0.28) $ 0.34 $ (1.68) Diluted net income (loss) per share..................... $ 0.29 $ 1.09 $ (0.28) $ 0.33 $ (1.68) Cash dividends declared................................. $ 0.30 -- -- -- -- Dividend payout ratio................................... 100.0% -- -- -- -- Book value per share.................................... $ 12.18 $ 12.36 $ 10.64 $ 10.52 $ 12.59 Shares used to compute diluted net income (loss) per share................................................. 10,731,581 8,248,398 6,486,936 5,150,707 4,093,434 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA: Assets.................................................. $ 1,383,510 $ 1,338,913 $ 866,385 $ 759,194 $ 799,558 Loans and leases net of deferred fees and unearned income (4)............................................ 880,734 817,358 543,042 439,241 460,975 Allowance for loan and lease losses..................... 15,894 15,757 13,130 12,115 19,077 Securities.............................................. 207,514 332,818 184,978 220,095 248,879 Goodwill................................................ 30,430 32,968 4,131 2,464 2,616 Deposits................................................ 1,226,793 1,177,014 774,057 675,971 731,829 Borrowings.............................................. 12,751 20,290 7,366 15,161 10,168 Shareholders' equity.................................... 129,655 129,047 77,628 62,274 51,572 ------------ ------------ ------------ ------------ ------------ ASSET QUALITY: Nonaccrual loans and leases............................. $ 7,488 $ 16,157 $ 17,303 $ 16,814 $ 27,996 OREO.................................................... 6,261 7,082 4,388 9,130 9,715 ------------ ------------ ------------ ------------ ------------ Total nonaccrual loans and leases and OREO............ $ 13,749 $ 23,239 $ 21,691 $ 25,944 $ 37,711 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ PERFORMANCE RATIOS: Return on average assets................................ 0.23% 0.90% (0.21)% 0.22% (0.79)% Return on average shareholders' equity.................. 2.37% 9.78% (2.59)% 2.65% (12.54)% Net interest spread..................................... 4.79% 4.64% 4.62% 4.91% 4.20% Net interest margin..................................... 5.99% 5.88% 5.78% 5.74% 4.93% Average shareholders' equity to average assets.......... 9.82% 9.25% 8.31% 8.20% 6.26% ASSET QUALITY RATIOS: Nonaccrual loans and leases to gross loans and leases... 0.85% 1.97% 3.18% 3.81% 6.05% Nonaccrual loans and leases and OREO to total assets.... 0.99% 1.74% 2.50% 3.42% 4.72% Allowance for loan and lease losses to total loans and leases................................................ 1.80% 1.92% 2.41% 2.75% 4.12% Allowance for loan and lease losses to nonaccrual loans and leases............................................ 212% 98% 76% 72% 68% Net charge-offs to average loans and leases............. 0.31% 0.59% 1.68% 2.43% 2.50%
- ------------------------------ (1) Includes the accounts and operating results of Western since the September 30, 1996 acquisition date. (2) Excludes stock options as common stock equivalents in 1995 and 1993 as the effect thereof was antidilutive. (3) The Company adopted SFAS No. 128 on December 31, 1997. Diluted net income per share for all prior periods has been restated to reflect adoption of SFAS No. 128. See Note 1 of Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." (4) Does not include loans available for sale. 26 BALANCE SHEET ANALYSIS OVERVIEW The Company had total assets of approximately $1.4 billion at December 31, 1997 as compared to total assets of approximately $1.3 billion at December 31, 1996. At January 31, 1998, the Company had total assets of approximately $2.1 billion after giving effect to the SMB Acquisition. Historical amounts have been restated for the CCB Merger and the SCB Merger through the use of pooling-of-interests accounting. See "Item 1. Business--Strategic Evolution." The Company's total deposits increased from approximately $1.18 billion at December 31, 1996 to approximately $1.23 billion at December 31, 1997 and, after giving effect to the SMB Acquisition, to approximately $1.78 billion at January 31, 1998. Common Shareholders' Equity has increased from approximately $129.0 million at December 31, 1996 to $129.7 million at December 31, 1997 and to $281.1 million at January 31, 1998. On July 30, 1997, the Company, Western and Santa Monica Bank entered into a definitive agreement for the merger of Santa Monica Bank with a subsidiary of the Company, subject to approval by the banking regulators and shareholders of both companies. On January 27, 1998, the Company consummated the SMB Acquisition through the merger of Santa Monica Bank with and into Western. As part of the SMB Acquisition, the name of Western 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 acquisition, approximately 57.3 percent elected to receive the Cash Consideration, resulting in a payment of $113,722,700 in the aggregate, and 42.7 percent received the Stock Consideration, resulting in the issuance of approximately 2,646,000 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 4,973,550 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 will be accounted for using the purchase method of accounting. At December 31, 1997, based on unaudited data heretofore made available to the Company SMB had total assets of $678 million, deposits of $593 million, shareholders' equity of $81 million and approximately 7.1 million shares of SMB Common Stock outstanding. For the year ended December 31, 1997, SMB reported net income and net income per share of approximately $10.9 million and $1.54, respectively. Following is an analysis of the Company's assets and liabilities as of December 31, 1997. Because the SMB Acquisition was consummated on January 27, 1998, the following analysis does not include a discussion of SMB unless otherwise indicated. CAPITAL ACTIVITIES In August 1997 the Company instituted a quarterly dividend and thereafter declared a dividend of $0.15 per share payable on December 10, 1997 to shareholders of record on November 10, 1997. In November 1997 the Company declared a dividend of $0.15 payable on March 27, 1998 to shareholders of record February 27, 1998. 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 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.") 27 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 an 8.5 to 1 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. The Company funded the purchase price with the issuance of 3,076,045 shares of Company Common Stock in the 1996 Private Placement from which the Company raised approximately $42.2 million, net of approximately $0.9 million in issuance costs, and from the proceeds of a three year loan of $26.5 million from The Northern Trust Company. A $15.5 million dividend was declared by Western concurrently with the completion of the Western Acquisition and paid to the Company, which was used to reduce the $26.5 million note to $11 million. 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." In the third quarter of 1995, the Company issued and sold 339,635 shares of Company Common Stock pursuant to the Rights Offering. The net proceeds from the Rights Offering were $3.5 million which increased the Company's capital. See "Item 1. Business--Capital Transactions--CAPITAL RAISING TRANSACTIONS." On March 31, 1995, the Company completed the 1995 Private Placement in which 534,958 shares of Company Common Stock were issued from which it raised approximately $6.1 million. Proceeds from the offering were used: (i) to pay approximately $470 thousand in offering expenses; (ii) to increase the Company's investment in Monarch by $3.6 million; and (iii) $54 thousand to retire Company debt. Approximately $2.1 million in cash from such proceeds was retained by the Company for future operating needs or investments. The capital increase for Monarch was sufficient to comply fully with the terms of certain regulatory orders to increase its leverage capital ratio to 7.0 percent or more. See "Item 1. Business--Capital Transactions--CAPITAL RAISING TRANSACTIONS." In November 1995, CCB sold 474,000 shares of CCB Common Stock, no par value, in the CCB Private Placement at $6.75 per share for the purpose of contributing most of the proceeds into NBSC as additional capital. Of the total proceeds of $3.2 million, CCB invested $2.9 million in NBSC as paid in capital in December 1995. The increased capital allowed CCB and NBSC to meet certain regulatory commitments to increase capital, provided an additional source of funds that could be used to fund earning assets, and to allow for possible future growth opportunities. See "Item 1. Business--Capital Transactions--CAPITAL RAISING TRANSACTIONS" and Notes 2 and 9 of Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." CASH LIQUIDITY The Company defines "Cash Liquidity" at the Banks as cash and cash equivalents and securities available for sale less pledged securities and reserve requirement divided by total deposits, treasury, tax and loan borrowings and other borrowings less securities pledged for deposit balances. During 1997, the Banks consistently maintained cash liquidity of approximately 25 percent or greater, which was a product of low demand for loans and high underwriting standards established during the latter part of a major recession. The Banks were also hesitant to commit liquid funds to mid- to long-term investments during a period when the yield curve was relatively flat such as existed during most of 1997, and in anticipation of increased funding needs as the loan portfolios of the Banks grow. The primary sources of liquidity of the Company on a stand alone basis (the "Parent Company") are the receipt of dividends from the Banks, the ability to raise capital (See "--CAPITAL ACTIVITIES") and a revolving line of credit (See "--BORROWINGS"). The availability of dividends from the Banks is limited by 28 various statutes and regulations of state and federal law. (See Note 9 of Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" and "Item 1. Business-- Supervision and Regulation--DIVIDENDS"). California law restricts the amount available for cash dividends by state-chartered banks to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event a bank has no retained earnings or net income for its last three fiscal years, cash dividends may be paid in an amount not exceeding the net income for such bank's last preceding fiscal year only after obtaining the prior approval of the DFI. In conjunction with the acquisition of SMB on January 27, 1998, the Company received approval to take additional dividends from SCB and SMB. In January 1998, dividends of $9 million and $45 million were taken from SCB and SMB, respectively. INVESTMENT PORTFOLIO The fair value of securities available for sale decreased approximately $118 million from $320.3 million at December 31, 1996 to $201.9 million at December 31, 1997. This decrease is largely attributable to increased loan production and an increase in federal funds investments. The fair value of securities available for sale at the dates indicated are summarized in the table below:
DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) U.S. Government securities............................... $ 107,536 $ 168,353 $ 45,452 U.S. Agency securities or insured obligations............ 53,515 92,393 65,783 Mortgage-backed securities............................... 39,633 48,290 54,353 Other debt securities.................................... 1,220 1,860 416 ---------- ---------- ---------- Total debt securities.................................. 201,904 310,896 166,004 Mutual funds............................................. -- 9,078 9,240 Other equity securities.................................. -- 283 250 ---------- ---------- ---------- Total.................................................. $ 201,904 $ 320,257 $ 175,494 ---------- ---------- ---------- ---------- ---------- ----------
In 1997, to bring all Banks under the Company's asset/liability management philosophy, the Banks reclassified their entire held-to-maturity portfolio to available-for-sale. At that time, the Banks collectively held approximately $2.9 million in municipal, treasury note, collateralized mortgage obligations ("CMOs") and agency securities as held-to-maturity. The following table shows the maturities of debt securities available for sale at December 31, 1997 (Dollars in thousands):
1 YEAR THRU 5 YEARS THRU TOTAL 1 YEAR OR LESS 5 YEARS 10 YEARS ---------------------- ------------------------ ------------------------ ------------------------ AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD --------- ----- ----------- ----- ----------- ----- ----------- ----- US Government securities... $ 107,536 5.87% $ 62,128 5.90% $ 45,408 5.83% $ -- -- US Agency or insured obligations.............. 53,515 6.09% 20,457 5.77% 32,448 6.29% -- -- Mortgage-backed Securities............... 39,633 6.56% 12,168 7.05% 16,149 6.42% 6,146 6.29% Other debt securities...... 1,220 4.31% -- -- 365 3.81% 404 4.27% --------- ----------- ----------- ----------- Total.................... $ 201,904 6.05% $ 94,753 6.02% $ 94,370 6.08% $ 6,550 6.17% --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- Amortized cost........... $ 202,064 $ 94,837 $ 94,496 $ 6,615 --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- OVER 10 YEARS ------------------------ AMOUNT YIELD ----------- ----- US Government securities... -- -- US Agency or insured obligations.............. 610 6.09% Mortgage-backed Securities............... 5,170 6.16% Other debt securities...... 451 4.76% ----------- Total.................... $ 6,231 6.05% ----------- ----------- Amortized cost........... $ 6,116 ----------- -----------
29 The following table shows the carrying amounts of the securities held to maturity at the dates indicated.
DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) U.S. Government securities....................................... $ -- $ 1,147 $ 485 U.S. Agency securities........................................... -- 3,989 4,500 Mortgage-backed securities....................................... -- 1,921 1,676 --------- --------- --------- $ -- $ 7,057 $ 6,661 --------- --------- --------- --------- --------- ---------
At December 31, 1997, the Company did not have investments in securities issued by any one non-federal issuer which exceeded ten percent of shareholders' equity. The Banks may hold derivative securities as part of their investment portfolios. At December 31, 1997, the Bank's held three CMOs with an amortized cost of approximately $1.042 million and a current market value of approximately $1.052 million. The weighted average yield of these investments was 7.19 percent and the weighted average life was 1.88 years as of December 31, 1997. All three CMOs have been tested no less than annually using the Federal Financial Institutions Examination Council ("FFIEC") "High Risk Security Test" and each of the securities has passed the annual tests. This stress test is used by bank regulators to assess the relative risks of investments in CMOs. A security that passes this test is not considered to be "high-risk;" a security that fails the test may be subject to additional regulatory scrutiny, and under the most severe case, the bank could be asked to sell the security. 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 three principal areas (1) REAL ESTATE LOANS. Real estate loans are comprised of construction loans, miniperm loans collateralized by first or junior trust deeds on specific properties and equity lines of credit. The properties collateralizing real estate loans are principally located in the Company's primary market areas of Los Angeles, Orange and San Diego counties and the contiguous communities. The construction loans are comprised of loans on residential and income producing properties generally have terms of less than two years and typically bear an interest rate that floats with the prime rate or other established index. The miniperm loans finance the purchase and/or ownership of income producing properties. Miniperm loans are generally made with an amortization schedule ranging from fifteen to thirty years with a lump sum balloon payment due in one to ten years. Equity lines of credit are revolving lines of credit collateralized by junior trust deeds on real properties. They bear a rate of interest that floats with the prime rate, LIBOR, or other established index and have maturities of five to seven years. The Company also makes a small number of loans on 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 1990's, (ii) interest rate increases due to inflation, (iii) reduction in real estate values in Southern California, and (iv) continued increase in competitive pricing and loan structure. The Banks strive to reduce the exposure to such risks by (i) reviewing each loan request and renewal individually, (ii) using a dual signature approval system, 30 whereby both the marketing and credit administration departments must approve each request individually, and (iii) following strict written loan policies. Each loan request is reviewed on the basis of the Bank's ability to recover both principal and interest in view of the inherent risks. (2) COMMERCIAL LOANS. Commercial loans are made to finance operations, to provide working capital or for specific purposes, such as to finance the purchase of assets, equipment or inventory. Since a borrower's cash flow from operations is generally the primary source of repayment, the Company's policies provide specific guidelines regarding required debt coverage and other important financial ratios. Commercial loans include lines of credit and commercial term loans. Lines of credit are extended to businesses or individuals based on the financial strength and integrity of the borrower and are generally (with some exceptions) collateralized by short term assets such as accounts receivable and inventory (monitored by the Company's asset based lending department), equipment or real estate and generally have a maturity of one year or less. Such lines of credit bear an interest rate that floats with the prime rate, LIBOR, or other established index. Commercial term loans are typically made to finance the acquisition of fixed assets, to refinance short term debt originally used to purchase fixed assets or, in rare cases, to finance the purchase of businesses. Commercial term loans generally have terms from one to five years. Commercial term loans may be collateralized by the asset being acquired or other available assets and bear interest which either floats with the prime rate, LIBOR, or other established index or is fixed for the term of the loan. The Banks' portfolio of commercial loans is subject to certain risks, 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 react to any deterioration noted. (3) CONSUMER LOANS AND LEASES. Consumer loans include personal loans, auto loans, boat loans, home improvement loans, equipment loans, revolving lines of credit and other loans typically made by banks to individual borrowers. The Company also makes leases on new and used automobiles. These leases may be closed-end or commercial leases, have terms of one to five years and bear interest at a fixed rate. 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 with 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. 31 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.
DECEMBER 31, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Real estate construction............................. $ 65,982 $ 59,952 $ 31,403 $ 33,854 $ 45,615 Real estate mortgage................................. 377,293 313,620 188,842 170,731 184,965 Commercial........................................... 362,083 342,737 248,259 174,058 174,143 Leases............................................... 1,934 3,027 3,463 4,159 4,532 Installment and other................................ 76,052 100,456 72,837 58,115 53,430 ---------- ---------- ---------- ---------- ---------- Gross loans and leases............................. 883,344 819,792 544,804 440,917 462,685 ---------- ---------- ---------- ---------- ---------- Less: Unearned lease income.............................. (226) (364) (399) (544) (562) Deferred loan fees................................. (2,384) (2,070) (1,363) (1,132) (1,148) Allowance for loan and lease losses................ (15,894) (15,757) (13,130) (12,115) (19,077) ---------- ---------- ---------- ---------- ---------- Net loans and leases............................. $ 864,840 $ 801,601 $ 529,912 $ 427,126 $ 441,898 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross loans increased $63.6 million from $819.8 million at December 31, 1996 to $883.3 million at December 31, 1997 and the allowance for loan and lease losses increased $137 thousand from $15.8 million at December 31, 1996 to $15.9 million at December 31, 1997. The increase in loans and leases during 1997 is attributable primarily to the continued growth of the Southern California economy and the associated borrowing requirements of the Company's customers to participate in that growth. The minimal growth in the allowance for loan and lease losses during 1997 is attributable primarily to a significant reduction in non-performing loans and leases during the period. With certain exceptions, a bank is permitted under California law to make loans to a single borrower in aggregate amounts up to 25 percent of the sum of shareholders' equity (excluding goodwill and the effect of the unrealized gain or loss on securities available for sale included in shareholders' equity), allowance for loan and lease losses, capital reserves, if any, and debentures, if any, for "secured loans" (as defined for regulatory purposes), and up to 15 percent of such sum for the aggregate of "unsecured loans" (as defined for regulatory purposes). As of December 31, 1997 these consolidated lending limits for the Banks were approximately $31.0 million for secured loans, and approximately $18.6 million for unsecured loans. The Company sells participations in loans between its subsidiaries and to outside parties where necessary to stay within lending limits or otherwise to limit the Company's exposure in particular credits. Where deemed appropriate to better utilize available funds, the Company may purchase participations in loans. At December 31, 1997, there are no loans outstanding to a single borrower which exceed these limits. 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. 32 Because the Company is unable to estimate the extent to which its borrowers will renew their loans, the table below is based on contractual maturities at December 31, 1997:
ONE YEAR ONE YEAR OR THROUGH 5 OVER 5 LESS YEARS YEARS TOTAL ----------- ---------- ---------- ---------- (IN THOUSANDS) Real estate construction.................... $ 50,774 $ 13,247 $ 1,961 $ 65,982 Real estate mortgage........................ 67,890 171,052 138,351 377,293 Commercial.................................. 191,780 119,114 51,189 362,083 Installment, leases, and other.............. 31,347 28,082 18,557 77,986 ----------- ---------- ---------- ---------- Total................................... $ 341,791 $ 331,495 $ 210,058 $ 883,344 ----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- Loan maturing after one year with: Fixed interest rates...................... $ 145,539 $ 116,598 Variable interest rates................... 185,956 93,461 ---------- ---------- Total................................... $ 331,495 $ 210,058 ---------- ---------- ---------- ----------
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES. The following table shows the Company's nonaccrual, past due and restructured loans and leases.
AT DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Nonaccrual loans and leases: Real estate construction.................................. $ -- $ 1,031 $ 4,545 $ 7,021 $ 6,505 Real estate mortgage...................................... 6,331 11,471 10,983 1,479 10,308 Commercial................................................ 844 2,454 1,572 7,862 10,838 Leases.................................................... -- -- 27 -- 26 Installment and other..................................... 313 1,201 176 452 319 --------- --------- --------- --------- --------- Total................................................... $ 7,488 $ 16,157 $ 17,303 $ 16,814 $ 27,996 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total nonaccrual loans and leases as a percentage of gross loans and leases.......................................... .85% 1.97% 3.18% 3.81% 6.05% Allowance for loan and lease losses to nonaccrual loans and leases.................................................... 212.26% 97.52% 75.88% 72.05% 68.14% Loans past due 90 days or more on accrual status: Real estate mortgage...................................... $ -- $ -- $ -- $ 199 $ 124 Commercial................................................ 23 193 -- 1,014 375 Installment and other..................................... 8 -- -- -- 6 --------- --------- --------- --------- --------- Total................................................... $ 31 $ 193 $ -- $ 1,213 $ 505 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Restructured loans: On accrual status......................................... $ 3,107 $ 1,887 $ 4,528 $ 3,262 $ -- On nonaccrual status(1)................................... 6,346 5,170 168 8,024 1,399 --------- --------- --------- --------- --------- Total................................................... $ 9,453 $ 7,057 $ 4,696 $ 11,286 $ 1,399 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Included in nonaccrual loans above. Nonaccrual loans decreased $8.7 million from $16.2 million at December 31, 1996 to $7.5 million at December 31, 1997. The decrease represents an improvement of $6.6 million in Western's nonaccrual loans and leases due to two real estate loans which were foreclosed upon, converted to OREO and 33 subsequently sold during 1997. Nonaccrual loans and leases at SCB decreased by approximately $2.1 million during the same period of time due in part to the addition of a $2.8 million real estate loan, payments on nonaccrual loans by borrowers, and the transfer of one real estate loan for $867 thousand to OREO. Total nonaccrual loans and leases as a percentage of gross loans and leases decreased from 1.97 percent at December 31, 1996 to .85 percent at December 31, 1997. 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 non-performing 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 non-performing loan or lease may be returned to accrual status if the loan or lease performs for a period of six months. The Company has not been active in areas that involve hazardous waste. Based on portfolio reviews by the Company and credit reviews during regulatory examinations, one loan with a principal balance of $2.8 million has been identified being impacted by hazardous material. At this time the resolution of this hazardous material issue is not expected to have a material impact on the Company. POTENTIAL PROBLEM LOANS AND IMPAIRED LOANS. "Impaired loans" are commercial, commercial real estate, and individually significant mortgage and consumer loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The category of "impaired loans" is not coextensive with the category of "nonaccrual loans," although the two categories overlap. "Nonaccrual loans" include impaired loans and are those on which the accrual of interest is discontinued when collectibility of principal or interest is uncertain or payments of principal or interest have become contractually past due 90 days. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral. Mortgage and consumer loans which are not individually significant are measured for impairment collectively. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. 34 At December 31, 1997 and 1996, impaired loans and leases and the related specific loan and lease loss allowances were as follows:
1997 ------------------------------------- ALLOWANCE FOR LOAN RECORDED AND LEASE NET INVESTMENT LOSSES INVESTMENT ----------- ----------- ----------- (IN THOUSANDS) With specific allowances...................................................... $ 2,118 $ 679 $ 1,439 Without specific allowances................................................... 11,364 -- 11,364 ----------- ----------- ----------- Total impaired loans and leases............................................. $ 13,482 $ 679 $ 12,803 ----------- ----------- ----------- ----------- ----------- -----------
1996 ------------------------------------- ALLOWANCE FOR LOAN RECORDED AND LEASE NET INVESTMENT LOSSES INVESTMENT ----------- ----------- ----------- (IN THOUSANDS) With specific allowances...................................................... $ 9,938 $ 2,172 $ 7,766 Without specific allowances................................................... 11,096 -- 11,096 ----------- ----------- ----------- Total impaired loans and leases............................................. $ 21,034 $ 2,172 $ 18,862 ----------- ----------- ----------- ----------- ----------- -----------
Except as reflected above, management is not aware of any borrowers who are experiencing severe financial difficulties, or who, in the normal course of business, represent any identified loss potential. The Company monitors all loans and completes a monthly internal watch list report, which is inclusive of both loans past due and borrowers that have been identified for closer monitoring. LOAN CONCENTRATIONS. The Company's lending activities are predominantly in Southern California. Other than this geographical concentration, the Company considers the loan portfolios to be diverse, and there are no specific concentrations to any one borrower or group of borrowers that are engaged in similar activities which would cause them to be similarly impacted by economic or other considerations. 35 SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR LOAN AND LEASE LOSSES The following table summarizes loan balances, loans charged off, the provision for loan and lease losses charged to expense, the allowance, and loan recoveries.
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Balance at the beginning of the year................. $ 15,757 $ 13,130 $ 12,115 $ 19,077 $ 13,687 Loans and leases charged off: Real estate mortgage............................. 1,600 1,632 5,335 5,318 4,503 Real estate construction......................... -- 1,017 739 3,695 1,394 Commercial....................................... 2,007 1,481 2,567 3,321 7,066 Leases........................................... -- 27 11 48 120 Installment and other............................ 558 518 925 511 969 ---------- ---------- ---------- ---------- ---------- Total loans and leases charged off............. 4,165 4,675 9,577 12,893 14,052 ---------- ---------- ---------- ---------- ---------- Recoveries on loans and leases charged off: Real estate mortgage............................. 93 138 542 488 10 Real estate construction......................... 41 9 -- 228 2 Commercial....................................... 1,198 873 625 1,541 1,281 Leases........................................... -- -- 34 52 12 Installment and other............................ 170 103 210 112 218 ---------- ---------- ---------- ---------- ---------- Total recoveries on loans and leases charged off.......................................... 1,502 1,123 1,411 2,421 1,523 ---------- ---------- ---------- ---------- ---------- Net loans and leases charged off............... 2,663 3,552 8,166 10,472 12,529 ---------- ---------- ---------- ---------- ---------- Provision charged to operating expense............. 2,800 1,018 8,564 3,510 17,919 Addition to allowance due to: Acquisition of Western........................... -- 5,041 -- -- -- Loan portfolio purchases......................... -- 120 617 -- -- ---------- ---------- ---------- ---------- ---------- Balance at the end of the year....................... $ 15,894 $ 15,757 $ 13,130 $ 12,115 $ 19,077 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Loans: Average loans and leases outstanding during year... $ 868,466 $ 601,115 $ 485,983 $ 431,429 $ 501,166 Gross loans and leases at end of year.............. $ 883,344 $ 819,792 $ 544,804 $ 440,917 $ 462,685 Ratios: Net loans and leases charged off to average loans and leases....................................... 0.31% 0.59% 1.68% 2.43% 2.50% Allowance as a percent of end of year loans and leases........................................... 1.80% 1.92% 2.41% 2.75% 4.12%
The allowance for loan and lease losses increased from $15.8 million at December 31, 1996 to $15.9 million at December 31, 1997. Net loans and leases charged-off decreased $889 thousand from $3.6 million at December 31, 1996 to $2.7 million at December 31, 1997, and the provision charged to operating expense increased $1.8 million from $1.0 million at December 31, 1996 to $2.8 million at December 31, 1997, respectively. The Company's local markets were severely affected by the recession in 1993 through 1995, and in several instances borrowers who had never reported financial difficulties as well as borrowers whose loans were past due declared bankruptcy. During 1996 the economy started a slow recovery which was evidenced by the decrease in net charge-offs for 1996 and 1997. 36 The allowance for loan and lease losses as a percentage of end of year loans and leases has declined from 4.12 percent at December 31, 1993 to 1.80 percent at December 31, 1997 along with a decline in the percentage of net loans and leases charged off to average loans and leases from 2.50 percent at December 31, 1993 to 0.31 percent at December 31, 1997. While the allowance as a percentage of end of year loans and leases has declined from 1.92 percent to 1.80 percent from December 31, 1996 to 1997, respectively, the allowance for loan and lease losses as a percentage of nonaccrual loans has increased from 98 percent to 212 percent from December 31, 1996 to December 31, 1997, respectively. The following table reflects management's allocation of the allowance for loan and lease losses by loan category and the ratio of loans and leases in each category to total loans and leases at December 31 for each of the last five years:
ALLOWANCE AS OF DECEMBER 31, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Real estate construction............................. $ 891 $ 726 $ 864 $ 2,576 $ 3,297 Real estate mortgage................................. 4,730 6,891 4,439 3,978 5,193 Commercial........................................... 6,580 4,118 4,246 3,192 5,311 Leases............................................... 47 47 47 88 85 Installment and other................................ 1,243 1,109 1,243 978 714 Not allocated........................................ 2,403 2,866 2,291 1,303 4,477 ---------- ---------- ---------- ---------- ---------- Total............................................ $ 15,894 $ 15,757 $ 13,130 $ 12,115 $ 19,077 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
LOANS AND LEASES AT DECEMBER 31, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Real estate construction............................. $ 65,982 $ 59,952 $ 31,403 $ 33,854 $ 45,615 Real estate mortgage................................. 377,293 313,620 188,842 170,731 184,965 Commercial........................................... 362,083 342,737 248,259 174,058 174,143 Leases............................................... 1,934 3,027 3,463 4,159 4,532 Installment and other................................ 76,052 100,456 72,837 58,115 53,430 ---------- ---------- ---------- ---------- ---------- Total............................................ $ 883,344 $ 819,792 $ 544,804 $ 440,917 $ 462,685 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
PERCENT OF LOANS AND LEASES TO TOTAL LOANS AND LEASES AT DECEMBER 31, -------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Real estate construction.................................... 7% 8% 6% 8% 10% Real estate mortgage........................................ 43% 38% 35% 39% 40% Commercial.................................................. 41% 42% 45% 39% 38% Leases...................................................... 0% 0% 1% 1% 1% Installment and other....................................... 9% 12% 13% 13% 11% ---- ---- ---- ---- ---- Total................................................... 100% 100% 100% 100% 100% ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
The allowance for loan and lease losses allocated to the loan and lease categories shown above is based on previous loan and lease loss experience, the level of nonaccrual loans, management's review of classified loans, evaluation of the current loan portfolio, and anticipated economic conditions. While the allowance for loan and lease losses is allocated to specific loans and to portfolio segments, the allowance is general in nature and is available for the portfolio in its entirety. 37 At December 31, 1997, the Company had identified impaired loans with a recorded investment of approximately $13.5 million. An allowance of $679 thousand, representing the difference between the value of collateral supporting these loans and their outstanding balance, is included in the allowance for loan and lease losses. For further information on loans and leases, see Note 5 of Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." The Company has an established monitoring system for its loans and leases in order to identify impaired loans and potential problem loans and to permit periodic evaluation of impairment and the adequacy of allowance for loan and lease losses in a timely manner. All problem loans and leases are monitored on a monthly basis making appropriate adjustments to grade classifications where necessary. This monitoring system and allowance methodology includes a loan-by-loan and lease-by-lease analysis for all classified loans and leases as well as loss factors for the balance of the portfolio that are based on migration analysis relative to both the classified and the unclassified portion of the portfolio. This analysis includes such factors as historical loss experience, current portfolio delinquencies, and risk levels of classified loans and leases and particular loan and lease pool categories. The Company is required under applicable law and regulations to review its assets on a regular basis and to classify them as "pass," "special mention," "substandard," "doubtful," or "loss." An asset which possesses no apparent weakness or deficiency is designated "pass." An asset which possesses weaknesses or deficiencies deserving close attention is designated as "special mention." An asset, or a portion thereof, is generally classified as "substandard" if it possesses a well-defined weakness which could jeopardize the timely liquidation of the asset or realization of the collateral at the asset's book value. Substandard assets are characterized by the possibility that the institution will sustain some loss if the deficiencies are not corrected. An asset, or portion thereof, is classified as "doubtful" if a probable loss of principal and/or interest exists but the amount of the loss, if any, is subject to the outcome of future events, which are undeterminable at the time of classification. If an asset, or portion thereof, is classified as "loss," the Company charges off such amount. On a quarterly basis, senior management and the board of directors of the Company review the adequacy of the allowance for loan and lease losses. Special Asset Credit Reports ("SAC Reports") are prepared and reviewed by senior management for each loan and lease on the Company's classified asset listing. SAC Reports include all pertinent details about the loan or lease, a write-up of the current status, steps being taken to correct any problems, a detailed workout plan and recommendations as to a classification of the loans and leases as "pass," "special mention," "substandard," "doubtful," or "loss." Loans and leases classified as "loss" are immediately charged against the allowance for loan and lease losses. Based on the foregoing discussion and all of the factors analyzed by management in determining the adequacy of the allowance for loan and lease losses, management believes that the allowance is adequate at December 31, 1997. Management utilizes its best judgement in providing for possible loan and lease losses and establishing the allowance for loan and lease losses. However, the allowance is an estimate which is inherently uncertain and depends on the outcome of future events. Although the Company believes that its allowance for loan and lease losses is adequate, there can be no assurance that the allowance will be adequate to cover future loan and lease losses. OTHER REAL ESTATE OWNED Other real estate owned ("OREO") is comprised of real estate acquired through foreclosure or through the receipt of a deed in lieu of foreclosure. These assets are recorded at the lower of the carrying value of the loan or the fair value less selling costs of the related real estate. The excess carrying value, if any, over the fair market value of the asset received is charged to the allowance for loan and lease losses at the time of acquisition. Any subsequent decline in the fair market value of the OREO is recognized as a 38 charge to operations and a corresponding decrease to the OREO asset. Gains from sales and operating expenses associated with OREO assets are included in operations when realized. The following table summarizes the Company's net OREO portfolio:
DECEMBER 31, -------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Other Real Estate Owned....... $6,261 $7,082 $4,388 $9,130 $9,715 Percent of Total Assets....... 0.45% 0.53% 0.51% 1.20% 1.22%
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 1997, the Banks along with banks in Southern California, have generally become much more aggressive in pricing time deposits, but have yet to make a significant increase in the rate paid on interest-bearing transactional accounts. The Company provides a range of deposit types to meet the needs of the local communities. Time deposits, which are normally sensitive to competitive rate changes, are generally used to expand or contract the overall liability position needed to meet the various management ratios established for liquidity, capital, loans to deposits, and other funding measurements. As a policy, the Company does not accept or solicit brokered deposits. The following table shows the average amount of interest bearing and non-interest bearing deposits and rates as of December 31, 1997, 1996 and 1995:
1997 AVERAGE 1996 AVERAGE 1995 AVERAGE ------------------ ------------------ ------------------ BALANCE RATE BALANCE RATE BALANCE RATE ---------- ------ ---------- ------ ---------- ------ (DOLLARS IN THOUSANDS) Non-interest bearing deposits.................... $ 408,518 0.00% $ 300,665 0.00% $ 239,886 0.00% Interest bearing demand deposits.................... 394,340 2.67 167,018 2.71 106,921 1.86 Savings deposits.............. 118,565 3.15 179,805 2.65 181,626 2.57 Time deposits................. 273,157 5.12 231,361 5.23 219,462 5.70 ---------- ---------- ---------- Total(1).................. $1,194,580 2.37% $ 878,849 2.43% $ 747,895 2.56% ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
- ------------------------ (1) Includes non-interest bearing deposits for both amounts and rates. Rates represent weighted averages. The following table shows the contractual maturity schedule of time certificates of deposit of $100,000 or more as of December 31, 1997 (dollars in thousands): 3 months or less.................................................. $ 94,603 Over 3 months through 6 months.................................... 22,908 Over 6 months through 12 months................................... 16,407 Over 1 year....................................................... 4,647 --------- Total........................................................... $ 138,565 --------- ---------
Deposits increased approximately $50 million, or 4.2 percent, from $1.18 billion at December 31, 1996 to $1.23 billion at December 31, 1997. This growth was primarily attributable to the increase in economic activity in Los Angeles, Orange and San Diego counties. The increase in average deposits from 1995 to 1996 was due mainly to the acquisition of Western in the fourth quarter of 1996. The increase in average 39 deposits from 1996 to 1997 is due to both the increased economic activity discussed above as well as Western's deposits included in the average balance for the entire year. BORROWINGS On September 30, 1996, the Company borrowed $26.5 million from The Northern Trust Company under a three year revolving credit agreement. Concurrent with the acquisition of Western, the Company reduced the loan by $15.5 million as a result of a dividend in the same amount from Western 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, 1997 and 1996 was $7.1 million and $11.0 million, respectively, and the interest rate was 7.02 percent and 6.75 percent, respectively. The highest amount outstanding during 1997 and 1996 was $12.2 million and $26.5 million, respectively; the average balance outstanding during 1997 and 1996 was $9.6 million and $2.75 million, respectively; and the average rate paid in 1997 and 1996 was 7.07 percent and 6.95 percent, respectively. On January 26, 1998, the Company executed a third amendment to the revolving credit agreement that, among other things, increased the line of credit from $13.0 million to $17.5 million and adjusted certain of the financial covenants in the revolving credit agreement to reflect the Company's larger size. The revolving loan agreement expires on September 25, 1999. CCB entered into a note with a shareholder in March 1996 bearing an interest rate of 3 percent over the prime rate with interest only payable monthly for the first year; thereafter, quarterly principal payments of $125,000 plus interest payable monthly. The note would have matured on April 1, 1999. On March 17, 1997, the Company paid down $2.0 million on this note and paid the remaining unpaid principal balance of $350,000 on April 1, 1997. 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, and loan repayments. Deposits are a volatile source of funds because of changing conditions in the interest rate markets and competition. The ability to sell securities without significant loss is subject to changing market conditions. Loan repayments are dependent on the financial wherewithal of the Company's borrowers. The Parent Company's sources of liquidity include dividends from the Banks 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 1. Business--Supervision and Regulation--BANK HOLDING COMPANY REGULATION" and "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 the Company's and the Banks' commitments. Management utilizes its best judgement 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 and the Banks' requirements. For further information on 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 reprice to higher interest rates faster than liabilities reprice, resulting in a net interest margin that tends to rise. When RSL exceed RSA, net interest margin will tend to fall in the same interest rate environment. The opposite effect on the net interest margin occurs in a decreasing interest rate environment. As a rule, the Company works to keep the cumulative difference between RSA and RSL 40 as low as possible over a one year cycle. The following table for the Company breaks down RSA and RSL at December 31, 1997 based on the earliest possible repricing dates for variable rate instruments, or for fixed rate assets and liabilities, on scheduled maturities. In the past few years, various models and rate sensitive studies have focused on the interest rate risk characteristics of interest-bearing transactional accounts. Based on historical reviews and documentation, it appears that these accounts do not have the same degree of short-term interest rate sensitivity associated with loans that are tied to any immediate change in prime rate or to short-term investments such as Federal funds sold. The following table makes certain assumptions as to the interest rate sensitivity of savings accounts that have limited rate fluctuation during the past three years, as to money market accounts which are based on a tiered rate structure depending on the account deposit level, and as to NOW accounts that have had very little price fluctuation in the past three years:
90 DAYS OR LESS 90-365 DAYS 1-5 YEARS 5+ YEARS TOTAL -------------- ----------- ----------- ---------- ------------ (DOLLARS IN THOUSANDS) Federal funds sold........................... $ 138,702 $ -- $ -- $ -- $ 138,702 Securities................................... 40,373 87,538 72,770 1,223 201,904 FRB and FHLB stocks.......................... -- -- -- 5,610 5,610 Loans and leases............................. 563,269 77,039 167,208 75,828 883,344 -------------- ----------- ----------- ---------- ------------ Total RSA................................ 742,344 164,577 239,978 82,661 1,229,560 Savings...................................... -- -- 94,233 23,558 117,791 Interest-bearing demand deposits............. -- 141,359 141,360 -- 282,719 NOW accounts................................. -- -- 80,305 20,076 100,381 Time certificates of deposit of $100,000 or more....................................... 94,603 39,315 4,396 251 138,565 Time certificates of deposit less than $100,000................................... 64,955 53,881 10,928 70 129,834 Borrowings................................... 12,751 -- -- -- 12,751 -------------- ----------- ----------- ---------- ------------ Total RSL................................ 172,309 234,555 331,222 43,955 782,041 -------------- ----------- ----------- ---------- ------------ Net RSA-RSL............................ $ 570,035 $ (69,978) $ (91,244) $ 38,706 $ 447,519 -------------- ----------- ----------- ---------- ------------ -------------- ----------- ----------- ---------- ------------ Cumulative RSA-RSL........................... $ 500,057 $ 408,813 $ 447,519 ----------- ----------- ---------- ----------- ----------- ---------- Cumulative as a percentage of total assets... 41.20% 36.14% 29.55% 32.35% 32.35% -------------- ----------- ----------- ---------- ------------ -------------- ----------- ----------- ---------- ------------
The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values at December 31, 1997. Market risk sensitive instruments are generally defined as on and off balance sheet derivatives and other financial instruments. For discussion of the fair value of financal instruments as of December 31, 1997, see Note 15 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." 41 EXPECTED MATURITY DATA AT DECEMBER 31, 1997 (1)
EXPECTED MATURITY DATE AT DECEMBER 31, 1997 -------------------------------------------------------------------------------------- THERE- TOTAL FAIR 1998 1999 2000 2001 2002 AFTER BALANCE VALUE --------- --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) INTEREST-SENSITIVE ASSETS: Loans Receivable FIXED RATE: Construction............... $ 5,784 $ 525 $ 85 $ 79 $ 73 $ 873 $ 7,419 7,269 Average interest rate.... 9.59% 9.66% 9.24% 9.24% 9.24% 9.24% 9.61% Real Estate--Residential... 5,923 5,503 3,648 2,594 1,238 3,815 22,721 22,744 Average interest rate.... 7.51% 8.52% 8.22% 8.42% 7.97% 7.62% 8.28% Real Estate--Commercial.... 29,930 19,420 17,497 29,371 13,987 44,113 154,318 147,567 Average interest rate.... 7.56% 9.19% 9.26% 9.18% 8.75% 8.90% 8.81% Commercial................. 37,355 29,164 6,264 4,162 5,590 7,805 90,340 91,377 Average interest rate.... 7.19% 8.41% 9.38% 9.06% 8.82% 8.71% 8.33% Installment and other...... 19,873 13,316 7,928 5,042 3,035 8,231 57,425 55,287 Average interest rate.... 8.72% 9.53% 9.41% 9.40% 9.50% 9.54% 9.49% VARIABLE RATE: Construction............... 46,478 11,542 54 49 44 396 58,563 57,294 Averages interest rate... 9.69% 9.38% 8.50% 8.50% 8.50% 8.50% 9.82% Real Estate--Residential... 11,636 7,845 5,880 4,539 2,319 7,001 39,220 39,108 Average interest rate.... 8.90% 8.86% 8.99% 8.95% 8.58% 8.30% 8.96% Real Estate--Commercial.... 64,454 36,199 23,965 12,638 10,603 13,175 161,034 157,864 Average interest rate.... 8.99% 9.40% 9.16% 9.27% 9.15% 9.23% 9.45% Commercial................. 179,814 39,251 20,755 10,538 6,874 14,511 271,743 265,525 Average interest rate.... 9.40% 9.31% 9.43% 9.09% 9.04% 8.83% 9.54% Installment and other...... 18,470 1,129 425 323 136 78 20,561 19,145 Average interest rate.... 8.84% 9.05% 9.60% 8.74% 9.60% 9.00% 8.95% Federal Funds Sold........... 138,702 -- -- -- -- -- 138,702 138,702 Average interest rate.... 5.87% -- -- -- -- -- 5.87% FRB and FHLB Stock........... -- -- -- -- -- 5,610 5,610 5,610 Average interest rate.... -- -- -- -- -- 6.33% 6.33% Investment Securities........ 100,293 57,749 23,083 15,498 655 4,786 202,064 201,904 Average interest rate.... 5.70% 5.85% 6.19% 6.12% 7.05% 6.05% 5.84% --------- --------- --------- --------- --------- --------- --------- --------- Total interest-sensitive assets..................... $ 658,712 $ 221,643 $ 109,584 $ 84,833 $ 44,554 $ 110,394 $1,229,720 $1,209,396 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- INTEREST-SENSITIVE LIABILITIES: Deposits: NOW........................ $ -- $ 30,115 $ 30,114 $ 10,038 $ 10,038 $ 20,076 $ 100,381 $ 100,381 Average interest rate.... -- 1.26% 1.26% 1.26% 1.26% 1.26% 1.26% Savings.................... -- 35,337 35,337 11,779 11,780 23,558 117,791 117,791 Average interest rate.... -- 3.14% 3.14% 3.14% 3.14% 3.14% 3.14% Money-market............... 141,359 70,680 70,680 -- -- -- 282,719 282,719 Average interest rate.... 3.13% 3.13% 3.13% -- -- -- 3.13% Certificates--Fixed........ 239,505 9,251 4,337 702 723 434 254,952 256,228 Average interest rate.... 5.17% 5.38% 5.90% 5.18% 5.52% 5.78% 5.19% Certificates--Variable..... 13,249 114 84 -- -- -- 13,447 13,492 Average interest rate.... 5.13% 5.49% 5.31% -- -- -- 5.13% Borrowings: Other...................... 5,671 7,080 -- -- -- -- 12,751 12,751 Average interest rate.... 5.30% 7.02% -- -- -- -- 6.26% --------- --------- --------- --------- --------- --------- --------- --------- Total interest-sensitive liabilities................ $ 399,784 $ 152,577 $ 140,552 $ 22,519 $ 22,541 $ 44,068 $ 782,041 $ 783,362 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------------ (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. 42 RESULTS OF OPERATIONS Banking is a business that depends largely on rate differentials. In general, the difference between the interest rate paid by the Banks on their deposits and their other borrowings and the interest rate received by the Banks on loans extended to their customers and securities held in the Banks' portfolios comprise the major portion of the Banks' earnings. These rates are highly sensitive to many factors that are beyond the control of the Banks. Accordingly, the earnings and growth of the Banks are subject to, among others, the influence of local, domestic and foreign economic conditions, including recession, unemployment and inflation. NET INCOME Consolidated net income for the year ended December 31, 1997 was $3,162,000, or $0.29 per diluted share. This compares with consolidated net income of $8,989,000, or $1.09 per diluted share, for the year ended December 31, 1996 and a net loss for the year ended December 31, 1995 of $1,789,000 or $0.28 per diluted share. The decline in earnings from 1996 to 1997 is primarily the result of the costs incurred in connection with the CCB Merger and the SCB Merger. The net loss for the year ended December 31, 1995 was due primarily to the credit problems associated with the downturn in the California economy. As the table below indicates, the provision for loan and lease losses, the lower of cost or market adjustment on loans and OREO expense was substantially higher in 1995 than the subsequent years:
1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Provision for loan and lease losses.............................. $ 2,800 $ 1,018 $ 8,564 Lower of cost or market adjustment on loans...................... -- -- 756 OREO expense (income)............................................ $ 242 $ (134) $ 3,080
Credit quality at the Company has improved substantially since December 31, 1995 due largely to an improved economy in Southern California and management's focus on credit quality. Due to the acquisition activity of the Company during 1997, there was a significant amount of merger costs which are one-time in nature and are not part of ongoing operating results. See "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 was consummated using the purchase method of accounting, expenses include goodwill amortization which is also a non-operating expense. As the following table indicates, on an operating basis, the financial results 43 of the Company have improved significantly for the year ended December 31, 1997 over the year ended December 31, 1996:
YEAR ENDED DECEMBER 31, --------------------- 1997 1996 ---------- --------- (DOLLARS IN THOUSANDS) INCOME: Net income.......................................................... $ 3,162 $ 8,989 ADJUSTMENTS TO NET INCOME TO DERIVE OPERATING INCOME: Merger costs...................................................... 14,201 -- Merger costs tax benefit.......................................... (2,382) -- ---------- --------- After tax merger costs............................................ 11,819 -- Goodwill amortization............................................. 2,538 1,004 Gain on sale of loans, net of tax................................. (46) (389) ---------- --------- OPERATING INCOME................................................ $ 17,473 $ 9,604 ---------- --------- ---------- --------- PER SHARE INFORMATION: Number of shares (weighted average)................................. 10,523.9 8,095.7 Diluted shares...................................................... 10,731.6 8,248.4 Basic net income per share.......................................... $ 0.30 $ 1.11 Diluted net income per share........................................ $ 0.29 $ 1.09 OPERATING PER SHARE EARNINGS: Basic net income per share........................................ $ 1.66 $ 1.19 Diluted net income per share...................................... $ 1.63 $ 1.16 PROFITABLILITY MEASURES: Return on average assets............................................ 0.23% 0.90% Return on average equity............................................ 2.37% 9.78% OPERATING PROFITABILITY MEASURES: Return on average tangible assets................................. 1.32% 0.98% Return on average equity.......................................... 13.1% 10.5% Efficiency ratio.................................................. 60.2% 77.0%
The improvement in operating earnings is a result of the Company's focus on making its operations more efficient and leveraging management and back room operations. As the consolidation of operations of the entities acquired in 1997 and the SMB Acquisition are completed in 1998, it is expected that the operating results will continue to improve. However, there can be no assurance that the Company will be able to successfully consolidate the operations of the entities acquired or that any reductions in operating costs will result therefrom. The Company continues to pursue acquisition opportunities and, if successful, will continue to have merger costs which will affect reported net income. NET INTEREST INCOME The Company's consolidated earnings depend primarily upon the difference between the income the Banks receive from their loan portfolios and investment securities, and their cost of funds, including principally interest paid on savings and time deposits. Interest rates charged on the Banks' loans are influenced principally by the demand for such loans, the supply of money for lending purposes, and competitive factors. These factors are, in turn, affected by general economic conditions and other factors beyond the Banks' control, such as federal economic and tax policies, the general supply of money in the economy, governmental budgetary actions, and the actions of the Federal Reserve Board. See "Item 1. Business--Competition" and "Item 1. Business--Supervision and Regulation." 44 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:
INTEREST RATES AND INTEREST RATE DIFFERENTIAL (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 1997 1996 ----------------------------------- ---------------------------------- AVERAGE AVERAGE AVERAGE BALANCE INCOME/ AVERAGE BALANCE INCOME/ YIELD/ (1) EXPENSE YIELD/ COST (1) EXPENSE COST ---------- ---------- ----------- ---------- ---------- ---------- INTEREST-EARNING ASSETS: Interest-bearing deposits with banks.. $ -- $ -- -- % $ 53 $ 3 5.66% Securities held to maturity........... 5,830 355 6.09% 8,011 516 6.44% Securities available for sale......... 264,242 15,359 5.81% 218,504 12,346 5.65% Federal funds sold.................... 84,106 4,681 5.57% 54,852 2,998 5.47% Loans and leases (net)(2)............. 841,880 80,639 9.58% 601,115 58,374 9.71% ---------- ---------- --- ---------- ---------- --- Interest earning assets............. 1,196,058 $ 101,034 8.45% 882,535 $ 74,237 8.41% ---------- ---------- NON INTEREST-EARNING ASSETS: Cash and due from banks............... 93,432 69,198 Premises and equipment (net).......... 14,164 11,916 Other real estate owned............... 8,373 5,580 Goodwill.............................. 31,657 7,419 Other assets.......................... 12,272 17,442 ---------- ---------- Total assets........................ $1,355,956 $ 994,090 ---------- ---------- ---------- ---------- INTEREST-BEARING LIABILITIES: Interest-bearing demand deposits...... $ 394,340 $ 10,547 2.67% $ 167,018 $ 4,525 2.71% Savings deposits...................... 118,565 3,730 3.15% 179,805 4,759 2.65% Time deposits......................... 273,157 13,999 5.12% 231,361 12,098 5.23% Federal funds purchased............... 2,964 168 5.67% 462 26 5.63% Notes payable......................... 9,947 728 7.32% 5,207 469 9.01% Other borrowings...................... 3,836 186 4.85% 8,145 434 5.33% ---------- ---------- --- ---------- ---------- --- Interest bearing liabilities.......... 802,809 $ 29,358 3.66% 591,998 $ 22,311 3.77% ---------- ---------- NON INTEREST-BEARING LIABILITIES AND EQUITY: Non-interest bearing demand........... $ 408,518 $ 300,665 Non-interest bearing liabilities...... 11,474 9,516 Shareholders' equity.................... 133,155 91,911 ---------- ---------- Total liabilities & shareholders' equity................................ $1,355,956 $ 994,090 ---------- ---------- ---------- ---------- Net interest income..................... $ 71,676 $ 51,926 ---------- ---------- ---------- ---------- Net interest margin on interest-earning assets(3)............................. 5.99% 5.88% --- --- --- --- Net interest spread..................... 4.79% 4.64% --- --- --- --- 1995 ---------------------------------- AVERAGE AVERAGE BALANCE INCOME/ YIELD/ (1) EXPENSE COST ---------- ---------- ---------- INTEREST-EARNING ASSETS: Interest-bearing deposits with banks.. $ 1,016 $ 43 4.23% Securities held to maturity........... 62,092 3,564 5.74% Securities available for sale......... 142,898 7,162 5.01% Federal funds sold.................... 48,995 2,846 5.81% Loans and leases (net)(2)............. 485,983 49,014 10.09% ---------- ---------- ----- Interest earning assets............. 740,984 $ 62,629 8.45% ---------- NON INTEREST-EARNING ASSETS: Cash and due from banks............... 57,584 Premises and equipment (net).......... 11,879 Other real estate owned............... 9,818 Goodwill.............................. -- Other assets.......................... 11,878 ---------- Total assets........................ $ 832,143 ---------- ---------- INTEREST-BEARING LIABILITIES: Interest-bearing demand deposits...... $ 106,921 $ 1,984 1.86% Savings deposits...................... 181,626 4,672 2.57% Time deposits......................... 219,462 12,511 5.70% Federal funds purchased............... 303 18 5.94% Notes payable......................... 2,483 268 10.79% Other borrowings...................... 6,281 351 5.59% ---------- ---------- ----- Interest bearing liabilities.......... 517,076 $ 19,804 3.83% ---------- NON INTEREST-BEARING LIABILITIES AND EQUITY: Non-interest bearing demand........... $ 239,886 Non-interest bearing liabilities...... 6,022 Shareholders' equity.................... 69,159 ---------- Total liabilities & shareholders' equity................................ $ 832,143 ---------- ---------- Net interest income..................... $ 42,825 ---------- ---------- Net interest margin on interest-earning assets(3)............................. 5.78% ----- ----- Net interest spread..................... 4.62% ----- -----
- ------------------------------ (1) Average balances are primarily computed on daily balances during the period. When such balances are not available, averages are computed on a monthly basis. Average balances include the effect of discounts and premiums on loans, investment securities, deposits and borrowings acquired in acquisitions, as well as deferred loan fees. (2) Nonaccrual loans are included in the average balances for the periods; however, interest on such loans has been excluded in computing the average yields for the periods. (3) The net interest margin on interest-earning assets for a period is net interest income divided by average interest-earning assets. 45 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.
INTEREST RATES AND INTEREST RATE DIFFERENTIALS (IN THOUSANDS) ---------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996 1996 COMPARED TO 1995 ---------------------------------------------- ---------------------------------------------- CHANGE DUE TO CHANGE DUE TO TOTAL --------------------------------- TOTAL --------------------------------- INCREASE VOLUME & INCREASE VOLUME & (DECREASE) VOLUME RATE RATE (DECREASE) VOLUME RATE RATE ----------- --------- --------- ----------- ----------- --------- --------- ----------- INTEREST INCOME: Interest and fees on loans..................... $ 22,265 $ 23,381 $ (797) $ (319) $ 9,360 $ 11,612 $ (1,820) $ (432) Interest-bearing deposits with banks................ (3) (3) -- -- (40) (41) 15 (14) Securities held to maturity.................. (161) (140) (28) 7 (3,048) (3,104) 435 (379) Securities available for sale...................... 3,013 2,584 354 75 5,184 3,789 912 483 Federal funds sold.......... 1,683 1,599 55 29 152 340 (168) (20) ----------- --------- --------- ----- ----------- --------- --------- ----- Total interest income... 26,797 27,421 (416) (208) 11,608 12,596 (626) (362) ----------- --------- --------- ----- ----------- --------- --------- ----- INTEREST EXPENSE: Interest-bearing demand deposits.................. 6,022 6,159 (58) (79) 2,541 1,115 913 513 Savings deposits............ (1,029) (1,621) 898 (306) 87 (47) 135 (1) Time deposits............... 1,901 2,186 (241) (44) (413) 678 (1,035) (56) Federal funds purchased..... 142 141 -- 1 8 9 (1) -- Notes payable............... 259 427 (88) (80) 201 294 (44) (49) Other borrowings............ (248) (230) (39) 21 83 104 (16) (5) ----------- --------- --------- ----- ----------- --------- --------- ----- Total interest expense.... 7,047 7,062 472 (487) 2,507 2,153 (48) 402 ----------- --------- --------- ----- ----------- --------- --------- ----- Net interest income..... $ 19,750 $ 20,359 $ (888) $ 279 $ 9,101 $ 10,443 $ (578) $ (764) ----------- --------- --------- ----- ----------- --------- --------- ----- ----------- --------- --------- ----- ----------- --------- --------- -----
INTEREST INCOME Interest income increased by $26.8 million for the year ended December 31, 1997 compared to 1996 and $11.6 million for the year ended December 31, 1996 compared to 1995. The increase for 1997 compared to 1996 is due largely to the increase in average earning assets resulting from the acquisition of Western. Average earning assets for Western are only included in the 1996 average totals for three months. Interest income also improved as a result of a significant decline in non-performing assets from $23.2 million at December 31, 1996 to $13.7 million at December 31, 1997. The increase in interest income from the year ended December 31, 1995 to the year ended December 31, 1996 is also a result of the increase in average earning assets as a result of the Western Acquisition. Due to the use of purchase accounting for the Western Acquisition, Western's average balances are not included with the Company until October 1, 1996. INTEREST EXPENSE Interest expense increased by $7.0 million for the year ended December 31, 1997 compared with the year ended December 31, 1996 and increased by $2.5 million for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase in interest expense in both 1997 and 1996 compared to the respective prior years is due mostly to the increase in average interest-bearing deposits as a result of the Western Acquisition. Due to the use of purchase accounting for the Western Acquisition, Western's average balances are not included with the Company until October 1, 1996. 46 NON-INTEREST INCOME The following table sets forth the details of non-interest income for the years ended December 31, 1997 and December 31, 1996. Western was acquired on October 1, 1996. Therefore, 1996 only includes three months of non-interest income from Western, while 1997 includes a full year of non-interest income for Western. The amount for the Parent Company and SCB includes the same entities for both years.
1997 1996 --------------------------------------- --------------------------------------- INCREASE PARENT PARENT (DECREASE) COMPANY AND COMPANY AND BEFORE CONSOLIDATED WESTERN SCB CONSOLIDATED WESTERN SCB WESTERN ------------- ----------- ----------- ------------- ----------- ----------- ----------- (IN THOUSANDS) Service charges on deposit accounts......................... $ 3,240 $ 409 $ 2,831 $ 3,218 $ 189 $ 3,029 $ (198) Escrow fees........................ 827 -- 827 781 -- 781 46 Other fee income................... 3,466 256 3,210 3,486 126 3,360 (150) Other income....................... 1,733 386 1,347 1,444 23 1,421 (74) ------ ----------- ----------- ------ ----- ----------- ----- Operating non-interest income.... 9,266 1,051 8,215 8,929 338 8,591 (376) Gain on sale of loans.............. 78 -- 78 665 -- 665 (587) Gain on sale of securities available for sale............... 342 107 235 281 267 14 221 ------ ----------- ----------- ------ ----- ----------- ----- Total non-interest income........ $ 9,686 $ 1,158 $ 8,528 $ 9,875 $ 605 $ 9,270 $ (742) ------ ----------- ----------- ------ ----- ----------- ----- ------ ----------- ----------- ------ ----- ----------- -----
Annualized 1996 operating non-interest income for Western would be approximately $1.4 million, as compared with approximately $1.1 million in 1997. This reduction at Western is due mostly to more customers paying for service charges with balances and Western no longer servicing a portfolio of loans in 1997. Without Western, operating non-interest income declined approximately $376 thousand from $8.6 million to $8.2 million. Most of this difference can be attributed to rental income and related income on other real estate owned of approximately $387 thousand in 1996 which did not reoccur in 1997. The following table shows the details of non-interest income for the years ended December 31, 1996 and December 31, 1995. Western was acquired on October 1, 1996. Therefore, 1996 includes three months of non-interest income from Western, while 1995 does not include any non-interest income for Western. The amount for the Parent Company and SCB includes the same entities for both years.
1996 --------------------------------------- INCREASE PARENT (DECREASE) COMPANY AND 1995 BEFORE CONSOLIDATED WESTERN SCB CONSOLIDATED WESTERN ------------- ----------- ----------- ------------- ----------- (IN THOUSANDS) Service charges on deposit accounts................. $ 3,218 $ 189 $ 3,029 $ 2,923 $ 106 Escrow fees......................................... 781 -- 781 308 473 Other fee income.................................... 3,486 126 3,360 3,320 40 Other income........................................ 1,444 23 1,421 1,822 (401) ------ ----- ----------- ------ ----------- Operating non-interest income..................... 8,929 338 8,591 8,373 218 Gain on sale of loans............................... 665 -- 665 145 520 Gain (loss) on sale of securities available for sale.............................................. 281 267 14 (692) 706 ------ ----- ----------- ------ ----------- Total non-interest income......................... $ 9,875 $ 605 $ 9,270 $ 7,826 $ 1,444 ------ ----- ----------- ------ ----------- ------ ----- ----------- ------ -----------
47 Without Western, operating non-interest income increased by approximately $218 thousand. Escrow fees increased by $473 thousand as the Company emphasized this business. In 1995, other income included a legal settlement of approximately $252 thousand which did not reoccur in 1996. The remainder of the $401 thousand reduction in other income is a result of several smaller amounts. NON-INTEREST EXPENSE The following table shows the details of non-interest expense for the years ended December 31, 1997 and December 31, 1996. Western was acquired on October 1, 1996. Therefore, 1996 only includes three months of non-interest expense for Western, while 1997 includes a full year of non-interest expense for Western. The amount for the Parent Company and SCB includes the same entities for both years.
1997 1996 --------------------------------------- --------------------------------------- INCREASE PARENT PARENT (DECREASE) COMPANY AND COMPANY AND BEFORE CONSOLIDATED WESTERN SCB CONSOLIDATED WESTERN SCB WESTERN ------------- ----------- ----------- ------------- ----------- ----------- ----------- (IN THOUSANDS) Salaries and benefits.......... $ 25,023 $ 5,520 $ 19,503 $ 23,016 $ 2,025 $ 20,991 ($ 1,488) Occupancy...................... 7,843 1,254 6,589 7,649 373 7,276 (687) Advertising and business development.................. 1,225 228 997 1,342 27 1,315 (318) Other real estate owned........ 242 (24) 266 (134) (158) 24 242 Insurance...................... 742 154 588 514 41 473 115 Legal expense.................. 2,379 227 2,152 3,396 48 3,348 (1,196) Other professional services.... 1,327 215 1,112 2,658 253 2,405 (1,293) Telephone, stationery and supplies..................... 2,735 392 2,343 2,201 143 2,058 285 Data processing................ 1,667 667 1,000 1,064 186 878 122 Customer services costs........ 1,263 651 612 510 210 300 312 Loan related expenses.......... 612 149 463 614 12 602 (139) Regulatory assessments......... 533 82 451 791 39 752 (301) Other.......................... 3,427 903 2,524 3,513 109 3,404 (880) ------------- ----------- ----------- ------------- ----------- ----------- ----------- Operating non-interest expense.................... 49,018 10,418 38,600 47,134 3,308 43,826 (5,226) Goodwill amortization.......... 2,538 1,997 541 1,004 499 505 36 Merger related costs........... 14,201 -- 14,201 -- -- -- 14,201 ------------- ----------- ----------- ------------- ----------- ----------- ----------- Non-interest expense........... $ 65,757 $ 12,415 $ 53,342 $ 48,138 $ 3,807 $ 44,331 $ 9,011 ------------- ----------- ----------- ------------- ----------- ----------- ----------- ------------- ----------- ----------- ------------- ----------- ----------- -----------
Annualized 1996 operating non-interest expense for Western would be approximately $13.2 million, as compared with approximately $10.4 million in 1997. This reduction at Western is due mostly to the implementation of various efficiency efforts at Western. Without Western, operating non-interest expense declined approximately $5.2 million from $43.8 million to $38.6 million. Expenses declined in most categories as management of the Company focused on more efficient operations and cost reductions from the acquisitions completed in 1997. The following table shows the details of non-interest expense for the years ended December 31, 1996 and December 31, 1995. Western was acquired on October 1, 1996. Therefore, 1996 includes three months 48 of non-interest expense for Western, while 1996 does not include any non-interest income for Western. The amount for the Parent Company and SCB includes the same entities for both years.
1996 -------------------------------------- INCREASE PARENT (DECREASE) COMPANY AND 1995 BEFORE CONSOLIDATED WESTERN SCB CONSOLIDATED WESTERN ------------ ----------- ----------- ------------ ----------- (IN THOUSANDS) Salaries and benefits............................... $ 23,016 $ 2,025 $ 20,991 $ 19,575 $ 1,416 Occupancy........................................... 7,649 373 7,276 7,878 (602) Advertising and business development................ 1,342 27 1,315 1,199 116 Other real estate owned............................. (134) (158) 24 3,080 (3,056) Insurance........................................... 514 41 473 670 (197) Legal expense....................................... 3,396 48 3,348 2,217 1,131 Other professional services......................... 2,658 253 2,405 959 1,446 Telephone, stationery and supplies.................. 2,201 143 2,058 2,337 (279) Data processing..................................... 1,064 186 878 822 56 Customer services costs............................. 510 210 300 184 116 Loan related expenses............................... 614 12 602 649 (47) Regulatory assessments.............................. 791 39 752 1,434 (682) Other............................................... 3,513 109 3,404 3,784 (380) ------------ ----------- ----------- ------------ ----------- Operating non-interest expense.................... 47,134 3,308 43,826 44,788 (962) Goodwill amortization............................... 1,004 499 505 821 (316) Merger related costs................................ -- -- -- -- -- ------------ ----------- ----------- ------------ ----------- Non-interest expense.............................. $ 48,138 $ 3,807 $ 44,331 $ 45,609 ($ 1,278) ------------ ----------- ----------- ------------ ----------- ------------ ----------- ----------- ------------ -----------
Operating non-interest expense without Western declined by approximately $962 thousand in 1996 versus 1995. Other real estate expense declined by approximately $3.1 million, as certain credit problems that occurred in 1995 did not recur in 1996. Legal expenses in 1996 include approximately $950 thousand, which was charged to expense to provide for potential losses related to on-going litigation matters. Salary and benefits increased by approximately $1.4 million in 1996 over 1996 mostly due increased activity in the escrow division, the business development group and opening of two new branches in Fountain Valley and Laguna Beach. As a result of the CCB Merger and the SCB Merger, the Company incurred certain merger related costs. These costs are described below:
PAID IN ACCRUED AT CCB MERGER SCB MERGER TOTAL 1997 DECEMBER 31, 1997 ------------- ----------- --------- ---------- ----------------- (IN THOUSANDS) Investment banking fees..................... $ 1,400 $ 3,520 $ 4,920 $ (4,920) $ -- Other professional services................. 697 1,960 2,657 (2,483) 174 Compensation related expense................ 1,055 2,769 3,824 (2,303) 1,521 Conversion costs............................ 252 753 1,005 (225) 780 Branch closure expense...................... -- 790 790 -- 790 Termination of interest rate swap........... -- 446 446 (446) -- Other....................................... -- 559 559 (359) 200 ------ ----------- --------- ---------- ------ Total merger related costs.............. $ 3,404 $ 10,797 $ 14,201 $ (10,736) $ 3,465 ------ ----------- --------- ---------- ------ ------ ----------- --------- ---------- ------
49 INCOME TAXES The Company's effective income tax (tax benefit) rates were 75.3 percent, 28.9 percent, and (49.2) percent for the years ending December 31, 1997, 1996 and 1995, respectively. The difference from the expected rate of 35 percent in 1997 is largely the result of non-deductible merger costs. The difference from the expected rate of 35 percent in 1996 relates to state income taxes and the non-deductibility of goodwill for tax purposes, offset by a reduction in the deferred tax valuation allowance. The difference from the expected rate of 34 percent in 1995 results from state income taxes and the reduction in the deferred tax asset valuation allowance. At December 31, 1997, the Company had a net deferred tax asset of approximately $7.8 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 RISKS AND PREPAREDNESS Many existing computer programs use only two digits to identify a year in a data field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects the Parent Company and the Banks in that the financial services business is highly dependent on computer applications in a variety of ways, including the following: (i) the Company and the Banks rely on computer systems in almost all aspects of their business, including the processing of deposits, loans and other services and products offered to customers of the Banks, the failure of which in connection with the Year 2000 could cause systemic disruptions and failures in the products and services offered by the Banks; (ii) other banks, clearing houses, and vendors whose products and services the Banks use 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 Banks might be diminished by significant disruptions of their business as result of their own or others' failure adequately to address the Year 2000 issue prior to the Year 2000; and (iv) Federal Banking Agencies have issued interagency guidance on the business-wide risk posed to financial institutions by the Year 2000 problem pursuant to which the Federal Banking Agencies may take supervisory action against financial institutions that fail appropriately to address Year 2000 issues prior to the Year 2000, including formal and informal enforcement actions, the denial of applications to the Federal Banking Agencies, civil money penalties, and a reduction in the management component rating or the institution's composite rating. In order to address the Year 2000 issues facing the Company, management of the Company has initiated a program to prepare the Parent Company's and the Banks' computer systems and applications for the Year 2000 (the "Year 2000 Plan"). The primary focus of the Year 2000 Plan is to convert the Parent Company and each of the Banks to the target systems identified and believed to be Year 2000 compliant. The Company expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare for conversion and Year 2000 system preparations. Testing and conversion of primary system applications and hardware is expected to cost approximately $1,100,000, to be expended during fiscal years 1998 and 1999. This cost estimate does not include costs associated with infrastructure and facilities enhancements required in connection with operational consolidations due to the CCB Merger, the SCB Merger and the SMB Acquisition. A significant portion of the cost to the Company in connection with becoming Year 2000 compliant is 50 expected to be the redeployment of existing technology and operations resources rather than incremental costs to the Company. As a part of the Year 2000 Plan, the Company is not only undertaking the infrastructure and facilities enhancement and testing necessary to ensure that the Company is adequately prepared for the Year 2000, but also the Company is communicating with its vendors upon whose services the Banks rely to ensure Year 2000 compliance. Pursuant to the Year 2000 Plan, the Company expects to complete substantially testing its own systems and the computer-related interactive vendor systems by December 31, 1998 and to complete all testing by June 1999. In addition, as part of the credit review process, the Banks are communicating with their major borrowers in an effort to ensure that such borrowers have taken appropriate steps to address their Year 2000 issues and will not be materially affected by any Year 2000 problems. The Company also is preparing contingency plans to protect the Company in the event that the Company is unable to attain Year 2000 compliance in certain applications according to the Year 2000 Plan. Although the Company believes that its Year 2000 Plan and other steps being taken are adequate to ensure that the Parent Company and the Banks will not be materially affected by the Year 2000 problem, there can be no assurance that the Year 2000 Plan and the Company's other Year 2000 remedial and contingency plans will protect fully the Company or the Banks from the risks associated with the Year 2000. The analysis of, and preparation for, the Year 2000 and related problems necessarily rely on a variety of assumptions about future events, and there can be no assurance that management of the Company has accurately predicted such future events or that the remedial and contingency plans of the Company will adequately address such future events. In the event that the business of any of the Parent Company, the Banks, vendors of the Banks or customers of the Banks is disrupted as a result of the Year 2000 problem, such disruption could have a material adverse effect on the Parent Company and the Banks. 51 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONTENTS
Independent Auditors' Reports................................................................................ 53 Consolidated Balance Sheets.................................................................................. 58 Consolidated Statements of Operations........................................................................ 59 Consolidated Statements of Changes in Shareholders' Equity................................................... 60 Consolidated Statements of Cash Flows........................................................................ 61 Notes to Consolidated Financial Statements................................................................... 63
52 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") (formerly Monarch Bancorp) as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 1996 consolidated financial statements of California Commercial Bankshares, acquired by the Company on June 4, 1997 in a pooling-of-interests, which statements reflect total assets constituting 26.3% and net interest income and net income constituting 38.4% and 42.2%, 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 35.6% and net interest income and net income constituting 45.1% and 49.6%, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for SC Bancorp, is based solely on the report of the other auditors. The Western Bancorp consolidated statements of operations, changes in shareholders' equity and cash flows for the year ended December 31, 1995, prior to their restatement for the 1997 pooling-of-interests transactions described in Notes 1 and 2 of the Notes to the consolidated financial statements, were audited by other auditors whose report dated February 29, 1996, expressed an unqualified opinion on those statements. The separate consolidated financial statements of California Commercial Bankshares also included in the 1995 consolidated financial statements were audited by other auditors whose report dated January 24, 1997, and March 17, 1997, as to Notes 7 and 13, expressed an unqualified opinion on those statements. The separate consolidated financial statements of SC Bancorp also included in the 1995 consolidated financial statements were audited by other auditors whose report dated January 24, 1997, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 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, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. We also audited the combination of the accompanying consolidated statements of operations, changes in shareholders' equity and cash flows for the year ended December 31, 1995, after restatement for the 1997 pooling-of-interests transactions; in our opinion, such consolidated financial statements have been 53 properly combined on the basis described in Notes 1 and 2 of the Notes to the accompanying consolidated financial statements. KPMG PEAT MARWICK LLP Los Angeles, California January 30, 1998 54 INDEPENDENT AUDITORS' REPORT To the Shareholders and Directors of SC Bancorp: We have audited the consolidated balance sheets of SC Bancorp and its subsidiary as of December 31, 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 1996 (such consolidated financial statements are not included herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of SC Bancorp and its subsidiary at December 31, 1996, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Los Angeles, California January 24, 1997 55 INDEPENDENT AUDITORS' REPORT To the Board of Directors and shareholders of California Commercial Bankshares: We have audited the consolidated balance sheets of California Commercial Bankshares and subsidiaries (the "Company") as of December 31, 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 1996 (such consolidated financial statements are not included herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of California Commercial Bankshares and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Los Angeles, California January 24, 1997 (March 17, 1997 as to Notes 7 and 13) 56 INDEPENDENT AUDITORS' REPORT To the Shareholders and Directors of Monarch Bancorp We have audited the consolidated statements of operations, changes in shareholders' equity, and cash flows of Monarch Bancorp and Subsidiaries for the year ended December 31, 1995. These financial statements, which are not presented separately herein, are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Monarch Bancorp and Subsidiaries for the year ended December 31, 1995, in conformity with generally accepted accounting principles. DAYTON & ASSOCIATES February 29, 1996 Laguna Hills, California 57 WESTERN BANCORP CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ ASSETS Cash and due from banks (Note 3).................. $ 97,456 $ 96,202 Federal funds sold................................ 138,702 22,517 ------------ ------------ Total cash and cash equivalents............. 236,158 118,719 Federal Reserve Bank and Federal Home Loan Bank stock, at cost.................................. 5,610 5,504 Securities held to maturity (fair value of $7,032) (Note 4)........................................ -- 7,057 Securities available for sale (amortized cost of $202,064 and $321,767) (Note 4)................. 201,904 320,257 ------------ ------------ Total securities............................ 207,514 332,818 Loans and leases held for investment, net (Notes 5, 8 and 12).................................... 864,481 800,367 Loans and leases available for sale, net.......... 359 1,234 Premises and equipment (Note 6)................... 13,685 14,955 Other real estate owned........................... 6,261 7,082 Deferred tax asset, net (Note 10)................. 7,849 8,735 Taxes receivable (Note 10)........................ 2,809 3,769 Goodwill (Note 2)................................. 30,430 32,968 Accrued interest receivable....................... 8,204 9,664 Other assets...................................... 5,760 8,602 ------------ ------------ Total assets................................ $ 1,383,510 $ 1,338,913 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (Note 7): Noninterest bearing............................. $ 457,503 $ 422,854 Interest-bearing demand......................... 383,100 379,615 Savings......................................... 117,791 105,391 Time certificates of deposit of $100,000 or more.......................................... 138,565 135,314 Time certificates of deposit less than $100,000...................................... 129,834 133,840 ------------ ------------ Total deposits.............................. 1,226,793 1,177,014 Borrowings (Note 8)............................... 12,751 20,290 Accrued interest payable.......................... 2,427 2,258 Other liabilities................................. 11,884 10,304 ------------ ------------ Total liabilities........................... 1,253,855 1,209,866 Commitments and contingencies (Notes 11 and 14) Shareholders' equity (Notes 8, 9, 13, 16, 18 and 20): Preferred stock no par value, 5 million shares authorized, none issued....................... -- -- Common stock no par value, 100,000,000 shares authorized 10,648,317 and 10,438,677 issued and outstanding in 1997 and 1996.............. 112,947 111,326 Retained earnings............................... 16,802 18,583 Unrealized loss on investment securities available for sale, net of taxes.............. (94 ) (862 ) ------------ ------------ Total shareholders' equity.................. 129,655 129,047 ------------ ------------ Total liabilities and shareholders' equity.................................... $ 1,383,510 $ 1,338,913 ------------ ------------ ------------ ------------
See accompanying Notes to Consolidated Financial Statements. 58 WESTERN BANCORP CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 ---------- --------- --------- Interest income: Interest and fees on loans..................................................... $ 80,639 $ 58,374 $ 49,014 Interest on interest bearing deposits in other banks........................... -- 3 43 Interest on investment securities.............................................. 15,714 12,862 10,726 Interest on Federal funds sold................................................. 4,681 2,998 2,846 ---------- --------- --------- Total interest income...................................................... 101,034 74,237 62,629 ---------- --------- --------- Interest expense: Deposits....................................................................... 28,276 21,382 19,167 Notes payable.................................................................. 728 469 268 Other interest-bearing liabilities............................................. 354 460 369 ---------- --------- --------- Total interest expense..................................................... 29,358 22,311 19,804 ---------- --------- --------- Net interest income.............................................................. 71,676 51,926 42,825 Provision for loan and lease losses (Note 5)..................................... 2,800 1,018 8,564 ---------- --------- --------- Net interest income after provision for loan and lease losses.................... 68,876 50,908 34,261 ---------- --------- --------- Non-interest income: Service charges, commissions and fees.......................................... 7,533 7,485 6,551 Gain (loss) on sale of securities available for sale (Note 4).................. 342 281 (692) Gain on sale of loans.......................................................... 78 665 145 Other.......................................................................... 1,733 1,444 1,822 ---------- --------- --------- Total non-interest income.................................................. 9,686 9,875 7,826 ---------- --------- --------- Non-interest expense: Salaries and benefits.......................................................... 25,023 23,016 19,575 Occupancy...................................................................... 7,843 7,649 7,878 Advertising and business development........................................... 1,225 1,342 1,199 Other real estate owned........................................................ 242 (134) 3,080 Professional services.......................................................... 3,706 6,054 3,176 Telephone, stationery and supplies............................................. 2,735 2,201 2,337 Lower of cost or market adjustment on loans available for sale................. -- -- 756 Goodwill amortization (Note 2)................................................. 2,538 1,004 821 Data processing for company.................................................... 1,667 1,064 822 Customer services cost......................................................... 1,263 510 184 Regulatory assessments......................................................... 533 791 1,434 Merger related costs (Note 2).................................................. 14,201 -- -- Other.......................................................................... 4,781 4,641 4,347 ---------- --------- --------- Total non-interest expense................................................. 65,757 48,138 45,609 ---------- --------- --------- Income (loss) before income taxes................................................ 12,805 12,645 (3,522) Income taxes (benefit) (Note 10)................................................. 9,643 3,656 (1,733) ---------- --------- --------- Net income (loss).......................................................... $ 3,162 $ 8,989 $ (1,789) ---------- --------- --------- ---------- --------- --------- Per share information (Notes 1 and 21): Weighted-average number of common shares outstanding........................... 10,524 8,096 6,487 Basic net income (loss) per share.............................................. $ 0.30 $ 1.11 $ (0.28) Diluted common shares outstanding.............................................. 10,732 8,248 6,599 Diluted net income (loss) per share............................................ $ 0.29 $ 1.09 $ (0.28)
See accompanying Notes to Consolidated Financial Statements. 59 WESTERN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
UNREALIZED GAIN (LOSS) ON COMMON STOCK RETAINED SECURITIES -------------------- EARNINGS AVAILABLE FOR DEFERRED CHARGE TOTAL SHARES AMOUNT (DEFICIT) SALE, NET RELATED TO KSOP EQUITY --------- --------- ----------- --------------- ----------------- --------- Balance at December 31, 1994 as previously reported.................................... 93 $ 7,368 $ (6,137) $ (356) $ (173) $ 702 Adjustment for the CCB pooling-of-interests... 2,423 11,257 9,789 (1,318) -- 19,728 Adjustment for the SCB pooling-of-interests... 3,403 37,643 7,731 (3,530) -- 41,844 --------- --------- ----------- ------- ----- --------- Balance at December 31, 1994, as restated..... 5,919 $ 56,268 $ 11,383 $ (5,204) $ (173) $ 62,274 Repayment on KSOP debt...................... -- -- -- -- 41 41 Unrealized appreciation on investment securities available for sale, net........ -- -- -- 4,665 -- 4,665 Stock options exercised..................... 26 27 -- -- -- 27 Tax benefit of stock options exercised (Note 18)....................................... -- 78 -- -- -- 78 Issuance of common stock (Note 9)........... 1,349 12,332 -- -- -- 12,332 Net loss.................................... -- -- (1,789) -- -- (1,789) --------- --------- ----------- ------- ----- --------- Balance at December 31, 1995.................. 7,294 $ 68,705 $ 9,594 $ (539) $ (132) $ 77,628 Repayment on KSOP debt...................... -- -- -- -- 132 132 Unrealized depreciation on investment securities available for sale, net........ -- -- -- (323) -- (323) Stock options exercised (Note 18)........... 69 361 -- -- -- 361 Tax benefit of stock options exercised (Note 18)....................................... -- 51 -- -- -- 51 Issuance of common stock (Note 9)........... 3,076 42,213 -- -- -- 42,213 Repurchase of shares........................ -- (4) -- -- -- (4) Net income.................................. -- -- 8,989 -- -- 8,989 --------- --------- ----------- ------- ----- --------- Balance at December 31, 1996.................. 10,439 $ 111,326 $ 18,583 $ (862) $ -- $ 129,047 Unrealized appreciation on investment securities available for sale, net........ -- -- -- 768 -- 768 Stock options exercised (Note 18)........... 70 522 -- -- -- 522 Warrants exercised (Note 18)................ 29 193 -- -- -- 193 Shares issued for SCB Options related to the SCB Merger................................ 138 -- -- -- -- -- Tax benefit of stock options exercised (Note 18)....................................... -- 1,755 -- -- -- 1,755 Repurchase of shares........................ (28) (849) -- -- -- (849) Net income.................................. -- -- 3,162 -- -- 3,162 Dividends declared at $0.30 per share....... -- -- (4,943) -- -- (4,943) --------- --------- ----------- ------- ----- --------- Balance at December 31, 1997.................. 10,648 $ 112,947 $ 16,802 $ (94) $ -- $ 129,655 --------- --------- ----------- ------- ----- --------- --------- --------- ----------- ------- ----- ---------
See accompanying Notes to Consolidated Financial Statements. 60 WESTERN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---------- ----------- ----------- (IN THOUSANDS) Cash flow from operating activities: Net income (loss)........................................................ $ 3,162 $ 8,989 $ (1,789) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan and lease losses...................................... 2,800 1,018 8,564 Benefit (provision) for deferred income taxes............................ 304 992 (3,385) Provision for losses on other real estate owned.......................... 129 767 335 Depreciation and amortization............................................ 2,484 2,519 2,693 Amortization of discounts and premiums on investment securities, net............................................. 111 1,094 2,962 Goodwill amortization.................................................... 2,538 1,004 821 Loans originated for sale................................................ -- -- (9,620) Lower of cost or market adjustment on loans available for sale........... -- -- 756 Proceeds from sale of loans originated for sale.......................... 875 3,466 -- (Gain) loss on sale of other real estate owned........................... (551) (1,260) 1,545 Gain on sale of loans originated for sale................................ -- (665) (145) (Gain) loss on sale of securities available for sale..................... (342) (281) 692 Net increase (decrease) in other liabilities............................. (472) 1,197 357 Net (increase) decrease in other assets.................................. 5,262 (195) 557 ---------- ----------- ----------- Net cash provided by operating activities............................ 16,300 18,645 4,343 ---------- ----------- ----------- Cash flows from investing activities: Net decrease in interest-bearing deposits at other banks................. -- 198 1,184 Securities held to maturity: Proceeds from maturities of mortgage backed securities................. -- -- 6,481 Proceeds from maturities of other securities........................... 4,127 5,267 4,443 Purchases of other securities.......................................... -- (4,880) (5,704) Securities available for sale: Proceeds from maturities of mortgage backed securities................. 10,543 8,734 927 Purchases of mortgage backed securities................................ -- -- (1,390) Proceeds from maturities of other securities........................... 181,088 72,825 23,656 Proceeds from sales of other securities................................ 8,546 33,315 48,020 Purchases of other securities.......................................... (77,313) (127,100) (36,151) Purchases of FRB and FHLB stocks......................................... (106) (2,468) (2,823) Net increase in loans and leases......................................... (78,361) (82,615) (112,008) Recoveries of loans and investment in leases............................. 1,502 1,123 1,411 Additions to other real estate owned..................................... (86) (284) -- Proceeds from sales of other real estate owned........................... 11,274 8,524 11,989 Additions to premises and equipment, net of proceeds from sales............................................................. $ (1,214) $ (1,173) $ (2,296)
See accompanying Notes to Consolidated Financial Statements. 61 WESTERN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---------- ----------- ----------- (IN THOUSANDS) Increase in assets and liabilities due to the acquisition of Western Bank: Securities available for sale.......................................... $ -- $ (134,394) $ -- Securities held to maturity............................................ -- (988) -- Loans and leases....................................................... -- (198,418) -- Deferred taxes......................................................... -- (3,663) -- Other assets........................................................... -- (11,729) -- Premises and equipment................................................. -- (5,099) -- Deposits............................................................... -- 353,111 -- Other liabilities...................................................... -- 3,932 -- Goodwill............................................................... -- (29,841) -- ---------- ----------- ----------- Net cash provided by (used in) investing activities.................. 60,000 (115,623) (62,261) ---------- ----------- ----------- Cash flow from financing activities: Net increase in deposits................................................. 49,779 49,846 98,086 Increase (decrease) in borrowings........................................ (7,539) 12,908 (7,369) Purchase of treasury shares.............................................. (849) (4) -- Dividends paid........................................................... (2,722) -- -- Proceeds from issuance of common stock and exercise of options and warrants, net of issuance costs........................................ 2,470 42,625 12,437 ---------- ----------- ----------- Net cash provided by financing activities.............................. 41,139 105,375 103,154 Net increase in cash and cash equivalents.................................. 117,439 8,397 45,236 Cash and cash equivalents at the beginning of the year..................... 118,719 110,322 65,086 ---------- ----------- ----------- Cash and cash equivalents at the end of the year........................... $ 236,158 $ 118,719 $ 110,322 ---------- ----------- ----------- ---------- ----------- ----------- Supplemental disclosure of cash flow information: Property acquired through foreclosure.................................... $ 10,031 $ 4,758 $ 9,117 Loans to facilitate the sale of other real estate owned.................. $ 6,422 $ 2,936 $ 3,386 Transfer of securities held-to-maturity to available-for-sale............ $ 2,933 -- $ 51,991 Tax benefits for exercise of non-qualified stock options................. $ 1,755 $ 51 $ 78 Cash paid for Interest............................................................... $ 29,189 $ 22,151 $ 19,235 Taxes.................................................................. $ 5,597 $ 4,789 $ 1,492
See accompanying Notes to Consolidated Financial Statements. 62 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--ACCOUNTING POLICIES WESTERN BANCORP--ACQUISITIONS Western Bank ("Western") was acquired by Western Bancorp (the "Company") on September 30, 1996. The acquisition was accounted for as a purchase. Accordingly, results of operations presented herein include Western only from the date of acquisition. On June 4, 1997, California Commercial Bankshares ("CCB") merged with and into the Company (the "CCB Merger"), and in connection therewith, National Bank of Southern California ("NBSC"), a wholly-owned subsidiary of CCB prior to the CCB Merger, merged with Monarch Bank, a wholly-owned subsidiary of the Company prior to such merger ("Monarch"). On October 10, 1997, SC Bancorp merged (the "SCB Merger") with and into the Company. Southern California Bank ("SCB") was a wholly-owned subsidiary of SC Bancorp prior to the SCB Merger. 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 and SC Bancorp as if the CCB Merger and the SCB Merger had been in effect for all periods presented. On December 15, 1997, NBSC merged into SCB, leaving the Company with two banking subsidiaries: Western and SCB. Further details pertaining to the CCB Merger and the SCB 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, Western (together, the "Banks"), Venture Partners, Inc. and M. B. Mortgage Company, Inc. (inactive) are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. All significant inter-company balances and transactions have been eliminated. On June 3, 1997, the Company completed an 8.5-to-1 reverse stock split (the "Reverse Stock Split"). All share amounts herein have been restated to give effect to the Reverse Stock Split. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the 1997 presentation. NATURE OF OPERATION The Company conducts business through the Banks. SCB is a full service bank with twenty-one banking offices, and Western is a full service bank with five banking offices, in each case, as of December 31, 1997. (SCB is in the process of closing and merging five banking offices, and with the merger of Santa Monica Bank into Western (see Note 20), the surving corporation, Western renamed "Santa Monica Bank" ("SMB") will have thirteen banking 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 registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to regulation and supervision by the Federal Reserve Board. The areas served by the Banks are San Diego, Orange and Los Angeles counties. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the 63 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--ACCOUNTING POLICIES (CONTINUED) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates subject to change include the allowance for loan and lease losses, the carrying value of other real estate owned, and the carrying value of the deferred tax asset. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include the balance sheet captions "Cash and due from banks" and "Federal funds sold." SECURITIES Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and carried at amortized cost. Securities that are purchased and held principally for the purpose of selling them in the near term are classified as "trading" and carried at fair value, with unrealized gains and losses included in earnings. Securities not classified as either "held to maturity" or "trading" are classified as "available for sale" and carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. When a debt security is transferred into the "held to maturity" category from the "available for sale" category, the unrealized gain or loss at the transfer date continues to be reported as a separate component of shareholders' equity and is amortized over the remaining life of the related security as a yield adjustment. If a decline in the fair market value of a security below the amortized cost basis is judged by management to be other than temporary, the cost basis of the security is written down to fair value and the amount of the writedown is included in earnings. The Company's investments in Federal Reserve Bank and Federal Home Loan Bank Stock are carried at cost as these equity securities are not readily marketable. Premiums and discounts on securities are recognized in the statements of income using a method that approximates the level-yield method over the lives of the securities. Gains and losses on securities are recognized when realized with the cost basis of securities sold determined on a specific identification basis. INTEREST ON LOANS Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest income is ordinarily discontinued when a loan becomes 90 days past due as to principal or interest; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. When the loan is determined to be uncollectible, the unpaid principal is charged to the allowance for loan losses. LOAN ORIGINATION FEES AND COSTS Loan origination fees and certain direct loan origination costs are capitalized at origination and the net amount deferred is taken into interest income over the contractual lives of the loans using the interest method. 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 64 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--ACCOUNTING POLICIES (CONTINUED) may affect the borrower's ability to pay, specific problem loans and trends in loan delinquencies and charge-offs. Losses on loans and leases are provided for under the allowance method of accounting. The allowance is increased by provisions charged to income and reduced by loan and lease charge-offs, net of recoveries. Loans and leases, including impaired loans, are charged off in whole or in part when, in management's opinion, collectibility is not probable. While management uses available information to establish the allowance for loan and lease losses, future additions to the allowance may be necessary if economic developments differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowances for loan and lease losses. Such agencies may require the Banks to recognize additions to the allowance based on judgments different from those of management. The Company's policy concerning non-performing 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 non-performing loan or lease may be returned to accrual status if the loan or lease performs for a period of at least six months. Impaired loans are commercial, commercial real estate, and individually significant mortgage and consumer loans for which it is probable that the Company will not be able to collect all amounts due according to contractual terms of the loan agreement. The category of "impaired loans" is not coextensive with the category of "nonaccrual loans," although the two categories overlap. Nonaccrual loans include impaired loans and are those on which the accrual of interest is discontinued when collectibility of principal or interest is uncertain or payments of principal or interest have become contractually past due 90 days. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility while not classifying the loan as impaired if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. Mortgage and consumer loans which are not individually significant are measured for impairment collectively. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, 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. 65 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--ACCOUNTING POLICIES (CONTINUED) LOANS HELD FOR SALE Loans held for sale are recorded at the lower of cost or estimated fair market value, determined on an aggregate basis, and include loan origination costs and related fees. Any transfers of loans held for sale to the investment portfolio are recorded at the lower of cost or estimated fair market value on the transfer date. Gains or losses resulting from sales of loans are recorded at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold. OTHER REAL ESTATE OWNED Other real estate owned ("OREO") is comprised of real estate acquired through foreclosure. These assets are recorded initially at the lower of the carrying value of the receivable or the fair value less selling costs of the related real estate. The excess carrying value, if any, over the fair market value of the asset received is charged to the allowance for loan losses at the time of acquisition. Any subsequent decline in the fair market value of the OREO is recognized as a charge to operations and a corresponding decrease in the OREO asset. Gains from sales and operating expenses associated with OREO assets are included in operations when realized. PREMISES AND EQUIPMENT Premises and equipment 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. INTEREST RATE SWAP AGREEMENTS SCB entered into two interest rate swap agreements in the management of its interest rate exposure with notional principal amounts of $50 million and $25 million, respectively. Revenue or expense associated with these agreements, which 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 asset or liability to be hedged and linking the swap to the specified asset or liability. The notional amount of interest rate swaps are not reflected in the Consolidated Financial Statements, but are disclosed in Note 14 of the Notes to Consolidated Financial Statements. In January 1997, the swap with the notional principal amount of $25 million matured, and as part of the SCB Merger, and to be consistent with the asset/liability management philosophy of the Company, the remaining swap was terminated in the fourth quarter of 1997. 66 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. NET INCOME (LOSS) PER SHARE Basic net income per share of common stock is based on the weighted-average number of common shares outstanding during the year. Diluted net income per share is based on the weighted-average number of common shares outstanding during the year plus common stock equivalents (stock options and warrants) using the treasury stock method. On December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Such statement requires disclosure of basic and diluted earnings per share rather than primary net income per share and fully diluted income per share. All periods presented have been restated to reflect the new disclosure standard. EFFECT OF NEW ACCOUNTING STANDARDS On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock-based employee compensation plans. This statement encourages all entities to adopt a new method of accounting to measure compensation cost of all employee stock compensation plans based on the estimated fair value of the award at the date it is granted. Companies are, however, allowed to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting, which generally does not result in compensation expense recognition for most plans. Companies that elect to remain with the existing accounting are required to disclose in a footnote to the financial statements pro forma net income and earnings per share as if this statement had been adopted. The Company elected to continue accounting for stock options under the intrinsic value method and has provided the pro forma disclosure. The Company adopted Statement of Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," on January 1, 1997. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Adoption did not have a material impact on the Company's financial condition and results of operations. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 129, "Disclosure of Financial Information About Capital Structure" ("SFAS 129"). SFAS 129 supersedes capital structure disclosure requirements found in previous accounting 67 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--ACCOUNTING POLICIES (CONTINUED) pronouncements and consolidates them into one statement for ease of retrieval and greater visibility for non-public entities. These disclosures are required for financial statements for periods ending after December 15, 1997. As SFAS 129 makes no changes to previous accounting pronouncements as those pronouncements applied to the Company, adoption of SFAS 129 had no impact on the Company's results of operations and financial condition. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the inclusion of comprehensive income, either in a separate statement for comprehensive income, or as part of a combined statement of income and comprehensive income in a full-set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. SFAS 130 requires that comprehensive income is to be presented beginning with net income, adding the elements of comprehensive income not included in the determination of net income, to arrive at comprehensive income. SFAS 130 also requires that an enterprise display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for the Company on January 1, 1998. SFAS 130 requires the presentation of information already contained in the Company's financial statements and therefore is not expected to have an impact on the Company's financial position or results of operation. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the reporting of information about operating segments by public business enterprises in their annual and interim financial reports issued to shareholders. SFAS 131 requires that a public business enterprise report financial and descriptive information, including profit or loss, certain specific revenue and expense items, and segment assets, about its reportable operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for the Company's financial statements beginning January 1, 1998. Management has concluded that the Company operates in one segment--banking. Accordingly, adoption is not expected to have an effect on the Company's financial position, results of operations, or existing disclosures. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and other Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes disclosure requirements for pensions and other postretirement benefits and requires additional disclosure on changes in benefit obligations and fair values of plan assets in order to facilitate financial analysis. SFAS 132 is effective for fiscal years beginning after December 15, 1997 with earlier application encouraged. The adoption of SFAS 132 will have no impact on the Company's results of operations and financial condition as this statement relates to disclosure requirements. The Company adopted SFAS 132 on January 1, 1998. 68 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--ACQUISITIONS WESTERN BANK On September 30, 1996, the Company completed the acquisition of Western in which Western 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 and an additional $5.5 million related to the outstanding stock options of Western. The net consideration for the acquisition of Western was thus approximately $66.6 million. The acquisition was accounted for under the purchase method of accounting which resulted in approximately $30 million of goodwill being recorded. The Company funded the purchase price with the issuance of 3,076,045 shares of common stock of the Company ("Company Common Stock") in a private placement pursuant to which the Company raised approximately $42.2 million, net of approximately $1 million in issuance costs, and from the proceeds of a three year loan of $26.5 million from The Northern Trust Company. A $15.5 million dividend was declared by Western concurrently with the completion of the acquisition and paid to the Company; the proceeds of such dividend were used to reduce the $26.5 million note to $11 million. The following table presents unaudited pro forma results of operations of the Company for the years ended December 31, 1996 and 1995 as if the acquisition of Western had been effective at the beginning of each year presented. The unaudited pro forma combined summary of operations is intended for informational purposes only and is not necessarily indicative of the future operating results of the Company or of the operating results of the Company that would have occurred had the Western acquisition been in effect for the years presented. UNAUDITED PRO FORMA COMBINED SUMMARY OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 --------- --------- Interest income........................................................ $ 95,587 $ 89,487 Interest expense....................................................... 29,577 27,737 --------- --------- Net interest income.................................................. 66,010 61,750 Provision for loan and lease losses.................................... 1,821 9,274 --------- --------- Net interest income after provision for loan and lease losses........ 64,189 52,476 Non-interest income.................................................... 10,999 11,331 Non-interest expense................................................... 60,576 62,336 --------- --------- Income before taxes.................................................. 14,612 1,471 Income tax expense..................................................... 5,095 1,209 --------- --------- Net income........................................................... $ 9,517 $ 262 --------- --------- --------- --------- Net income per share: Basic................................................................ $ 0.92 $ 0.03 Diluted.............................................................. $ 0.90 $ 0.03 Weighted average shares outstanding: Basic................................................................ 10,398.5 9,563.0 Diluted.............................................................. 10,551.2 9,674.5
69 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--ACQUISITIONS (CONTINUED) WESTERN BANCORP--CCB MERGER On June 4, 1997, CCB merged with and into the Company in a transaction accounted for using the pooling-of-interests method of accounting. In the CCB Merger, 3,043,226 shares of Company Common Stock were issued to holders of common stock of CCB based on a 1-for-1 exchange ratio (after the Reverse Stock Split) and all of the outstanding shares of common stock of CCB were canceled. The financial information for all periods presented has been restated to present the combined consolidated financial condition and results of operations of the Company and CCB as if the CCB Merger had been in effect for all periods presented. At the date of the CCB Merger, the Company charged to expense merger costs of $3.0 million (after tax), representing investment banking, filing and professional fees; employee compensation and severance; and costs of computer conversions. Separately reported net interest income and net income for CCB and the Company for the quarter ended March 31, 1997, were $5,089,000 and $939,000, and $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. WESTERN BANCORP--SCB MERGER SC Bancorp merged with and into the Company in a transaction accounted for using the pooling-of-interests method of accounting on October 10, 1997. In the SCB Merger approximately 3,555,500 shares of Company Common Stock (prior to adjustment for fractional shares) were issued based on a 0.4556-for-1 exchange ratio and all of the outstanding shares of common stock of SC Bancorp were cancelled. The financial information for all periods presented herein has been restated to present the combined consolidated financial condition and results of operations of the Company and SC Bancorp as if the SCB Merger had been in effect for all periods presented. Management charged to expense merger costs of $8.8 million (after tax), representing investment banking, filing and professional fees; compensation and severance costs; termination of an interest rate swap; branch closure expense; and costs of computer conversions. Separately reported net interest income and net income for SC Bancorp and the Company for the nine months ended September 30, 1997, were $18,842,000 and $4,014,000, and $34,066,000 and $3,514,000, respectively. On a combined basis, giving effect to both the CCB Merger and the SCB Merger as pooling-of-interests, the Company's restated net interest income and net income were $52,908,000 and $7,528,000, respectively, for the nine months ended September 30, 1997. These amounts are unaudited. 70 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--ACQUISITIONS (CONTINUED) MERGER RELATED COSTS As a result of the CCB Merger and the SCB Merger, the Company incurred certain merger related costs. These costs are described below:
ACCRUED AT PAID IN DECEMBER 31, CCB MERGER SCB MERGER TOTAL 1997 1997 ------------- ----------- --------- ---------- ------------- (IN THOUSANDS) Investment banking fees......................... $ 1,400 $ 3,520 $ 4,920 $ (4,920) $ -- Other professional services..................... 697 1,960 2,657 (2,483) 174 Compensation related expense.................... 1,055 2,769 3,824 (2,303) 1,521 Conversion costs................................ 252 753 1,005 (225) 780 Branch closure expense.......................... -- 790 790 -- 790 Termination of interest rate swap............... -- 446 446 (446) -- Other........................................... -- 559 559 (359) 200 ------ ----------- --------- ---------- ------ Total merger related costs.................... $ 3,404 $ 10,797 $ 14,201 $ (10,736) $ 3,465 ------ ----------- --------- ---------- ------ ------ ----------- --------- ---------- ------
The following table presents certain financial data reported separately by each company and on a combined basis for the years ended December 31:
1996 1995 --------- --------- (IN THOUSANDS) Net interest income: The Company (before mergers with CCB and SC Bancorp)................... $ 8,545 $ 3,343 CCB.................................................................... 19,964 17,453 SC Bancorp............................................................. 23,417 22,029 Combined............................................................... 51,926 42,825 Net income (loss): The Company (before mergers with CCB and SC Bancorp)................... $ 738 $ 683 CCB.................................................................... 3,796 (3,341) SC Bancorp............................................................. 4,455 869 Combined............................................................... 8,989 (1,789) Issuances of common stock: The Company (before mergers with CCB and SC Bancorp)................... $ 42,213 $ 9,132 CCB.................................................................... 332 3,290 SC Bancorp............................................................. 80 15 Combined............................................................... 42,625 12,437
NOTE 3--RESTRICTIONS ON CASH AND DUE FROM BANKS The Company is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. The total average amount of those reserve balances for the year ended December 31, 1997 was approximately $32 million. 71 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--SECURITIES Investment securities at December 31, 1997 and 1996 were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ------------- ----------- ---------- (IN THOUSANDS) 1997 Securities available for sale: US government securities................... $ 107,248 $ 288 $ -- $ 107,536 US agency securities or insured obligations.............................. 53,599 61 (145) 53,515 Mortgage-backed securities................. 40,048 97 (512) 39,633 State and political subdivisions........... 1,169 51 -- 1,220 ---------- ----- ----------- ---------- Total debt securities.................... $ 202,064 $ 497 $ (657) $ 201,904 ---------- ----- ----------- ---------- ---------- ----- ----------- ---------- 1996 Securities held to maturity: US government securities................... $ 1,147 $ 13 $ -- $ 1,160 US agency securities....................... 3,989 2 (1) 3,990 Mortgage-backed securities................. 1,921 -- (39) 1,882 ---------- ----- ----------- ---------- Total debt securities.................... $ 7,057 $ 15 $ (40) $ 7,032 ---------- ----- ----------- ---------- ---------- ----- ----------- ---------- Securities available for sale: US government securities................... $ 168,411 $ 53 $ (111) $ 168,353 US agency securities or insured obligations.............................. 92,914 17 (538) 92,393 Mortgage-backed securities................. 49,474 34 (1,218) 48,290 State and political subdivisions........... 413 -- (2) 411 Other debt securities...................... 1,390 68 (9) 1,449 ---------- ----- ----------- ---------- Total debt securities.................... 312,602 172 (1,878) 310,896 Mutual funds............................... 9,042 36 -- 9,078 Other equity securities.................... 123 160 -- 283 ---------- ----- ----------- ---------- Total.................................... $ 321,767 $ 368 $ (1,878) $ 320,257 ---------- ----- ----------- ---------- ---------- ----- ----------- ----------
The amortized cost and estimated fair value of debt securities at December 31, 1997, 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 72 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--SECURITIES (CONTINUED) 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.
AMORTIZED ESTIMATED COST FAIR VALUE ---------- ---------- (IN THOUSANDS) AVAILABLE FOR SALE: Due in one year or less............................................. $ 94,837 $ 94,753 Due after one year through five years............................... 94,496 94,370 Due after five years through ten years.............................. 6,615 6,550 Due after ten years................................................. 6,116 6,231 ---------- ---------- $ 202,064 $ 201,904 ---------- ---------- ---------- ----------
Gross gains and losses on sale of available for sale securities were $342,000 and $0, respectively, for 1997, and $281,000 and $0, respectively, for 1996. Gross gains and losses were $0 and $692,000, respectively, for 1995. Investment securities available for sale with a carrying amount of approximately $19.2 million and $49.5 million, were pledged as collateral to secure public deposits at December 31, 1997 and 1996, respectively. In December 1997, in conjunction with the merger between NBSC and SCB, SCB and Western reclassified their entire held-to-maturity investment portfolio to the available-for-sale category. The held-to-maturity investment securities were transferred to available for sale at their fair market values. The amortized cost of the securities transferred was $2.9 million and the related unrealized net gain recorded was $35,000. The Banks may hold derivative securities as part of their investment portfolios. At December 31, 1997, the Bank's held three collateralized mortgage obligations ("CMOs") with an amortized cost of approximately $1.042 million and a current market value of approximately $1.052 million. The weighted average yield of these investments was 7.19% and the weighted average life was 1.88 years as of December 31, 1997. All three CMOs have been tested no less than annually using the Federal Financial Institutions Examination Council ("FFIEC") "High Risk Security Test" and each of the securities has passed the annual tests. This stress test is used by bank regulators to assess the relative risks of investments in CMOs. A security that passes this test is not considered to be "high-risk;" a security that fails the test may be subject to additional regulatory scrutiny, and under the most severe case, the bank could be asked to sell the security. 73 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--LOANS AND LEASES LOANS AND LEASES Most of the loans and leases made by the Company are to customers located in San Diego, Orange and Los Angeles counties. Mortgage and construction loans are collateralized by real estate trust deeds. The Company generally requires security in the form of assets, including real estate, for commercial and installment loans. The ability of the Company's customers to honor their loan agreements is dependent upon the general economy of the Company's market areas and the financial strength of the customer. The distribution of the Company's held for investment loan and lease portfolio is as follows:
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- (IN THOUSANDS) Real estate construction.............................................. $ 65,982 $ 59,952 Real estate mortgage.................................................. 376,934 312,386 Commercial............................................................ 362,083 342,737 Leases................................................................ 1,934 3,027 Installment and other................................................. 76,052 100,456 ---------- ---------- Gross loans and leases............................................ 882,985 818,558 Less:................................................................. Unearned lease income............................................... (226) (364) Deferred loan fees, net............................................. (2,384) (2,070) Allowance for loan and lease losses................................. (15,894) (15,757) ---------- ---------- Net loans and leases held for investment.......................... $ 864,481 $ 800,367 ---------- ---------- ---------- ----------
74 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--LOANS AND LEASES (CONTINUED) ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses for the three years ended December 31, were as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Allowance for loan and lease losses: Balance at the beginning of the period..................... $ 15,757 $ 13,130 $ 12,115 Loans and leases charged off: Real estate mortgage and construction...................... 1,600 2,649 6,074 Commercial................................................. 2,007 1,481 2,567 Installment and other...................................... 558 518 925 Leases..................................................... -- 27 11 --------- --------- --------- Total loans and leases charged off....................... 4,165 4,675 9,577 Recoveries on loans and leases charged off: Real estate mortgage and construction...................... 134 147 542 Commercial................................................. 1,198 873 625 Installment and other...................................... 170 103 210 Leases..................................................... -- -- 34 --------- --------- --------- Total recoveries on loans and leases charged off......... 1,502 1,123 1,411 --------- --------- --------- Net loans and leases charged off......................... 2,663 3,552 8,166 Provision charged to operating expense....................... 2,800 1,018 8,564 Other additions due to: Acquisition of Western..................................... -- 5,041 -- Loan portfolio purchases................................... -- 120 617 --------- --------- --------- Balance at the end of the period............................. $ 15,894 $ 15,757 $ 13,130 --------- --------- --------- --------- --------- ---------
CREDIT QUALITY A summary of loans on which the accrual of interest has been discontinued as of December 31 follows:
AT DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Nonaccrual loans and leases: Real estate construction.................................... $ -- $ 1,031 $ 4,545 Real estate mortgage........................................ 6,331 11,471 10,983 Commercial.................................................. 844 2,454 1,572 Leases...................................................... -- -- 27 Installment and other....................................... 313 1,201 176 --------- --------- --------- Total..................................................... $ 7,488 $ 16,157 $ 17,303 --------- --------- --------- --------- --------- ---------
75 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--LOANS AND LEASES (CONTINUED) If interest on nonaccrual loans and leases had been recognized at the original interest rates, interest income would have increased approximately $570,000, $859,000 and $849,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company has no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual. At December 31, 1997 and 1996, impaired loans and the related specific loan loss allowances were as follows:
1997 ------------------------------------------------ RECORDED ALLOWANCE FOR LOAN INVESTMENT AND LEASE LOSSES NET INVESTMENT ----------- ------------------- -------------- (IN THOUSANDS) With specific allowances..................... $ 2,118 $ 679 $ 1,439 Without specific allowances.................. 11,364 -- 11,364 ----------- ----- ------- Total impaired loans and leases............ $ 13,482 $ 679 $ 12,803 ----------- ----- ------- ----------- ----- -------
1996 ---------------------------------------------- ALLOWANCE FOR RECORDED LOAN AND LEASE INVESTMENT LOSSES NET INVESTMENT ----------- ----------------- -------------- (IN THOUSANDS) With specific allowances..................... $ 9,938 $ 2,172 $ 7,766 Without specific allowances.................. 11,096 -- 11,096 ----------- ------ ------- Total impaired loans and leases............ $ 21,034 $ 2,172 $ 18,862 ----------- ------ ------- ----------- ------ -------
The average recorded investment in impaired loans and leases for the years ended December 31, 1997, 1996 and 1995 was approximately $17,459,000, $13,098,000 and $17,583,000, respectively. Interest income on impaired loans and leases of approximately $654,000, $589,000 and $593,000 was recognized for cash payments in 1997, 1996 and 1995, respectively. NOTE 6--PROPERTY AND EQUIPMENT The components of premises and equipment at December 31, were as follows:
1997 1996 --------- --------- (IN THOUSANDS) Land and building..................................................... $ 11,195 $ 11,106 Furniture, fixtures and equipment..................................... 14,273 13,628 Leasehold improvements................................................ 5,135 5,013 --------- --------- Total property and equipment........................................ 30,603 29,747 Less accumulated depreciation and amortization........................ (16,918) (14,792) --------- --------- Total property and equipment, net................................... $ 13,685 $ 14,955 --------- --------- --------- ---------
76 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--DEPOSITS At December 31, 1997, the scheduled contractual maturities of certificates of deposit are as follows (In thousands): 1998.............................................................. $ 252,754 1999.............................................................. 9,365 2000.............................................................. 4,421 2001.............................................................. 702 2002 and thereafter............................................... 1,157 --------- $ 268,399 --------- ---------
NOTE 8--BORROWINGS At December 31, 1997 and 1996, borrowings were as follows:
1997 1996 --------- --------- (IN THOUSANDS) Notes payable......................................................... $ 7,080 $ 13,350 Federal funds purchased............................................... -- 1,852 Treasury, tax and loan note........................................... 5,671 5,088 --------- --------- $ 12,751 $ 20,290 --------- --------- --------- ---------
On September 30, 1996, the Company borrowed $26.5 million from The Northern Trust Company under a three year revolving credit agreement. Concurrently with the acquisition of Western, the Company reduced the loan by $15.5 million as a result of a dividend in the same amount from Western and retained a credit line of $11 million. In 1997 the credit line was increased to $13 million. The balance at December 31, 1997 and 1996 was $7.1 million and $11.0 million, respectively, and the interest rate was 7.02% and 6.75%, respectively. The highest amount outstanding during 1997 and 1996 was $12.2 million and $26.5 million, respectively; the average balance outstanding during 1997 and 1996 was $9.6 million and $2.75 million, respectively; and the average rate paid in 1997 and 1996 was 7.07% and 6.95%, respectively. The revolving credit agreement expires on September 25, 1999. 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, 1997 and 1996, the Company, and where applicable, its subsidiaries, were in compliance with each of such covenants or the Company has obtained the appropriate waivers from The Northern Trust Company. Shares of common stock of Western, with a carrying value of approximately $58 million, have been pledged as collateral against the note payable to The Northern Trust Company. In December 1988 CCB obtained a $3 million term loan from another financial institution for the purpose of providing additional capital to NBSC. The credit agreement for this loan was amended pursuant to a Second Amendment to the Credit Agreement, dated August 25, 1994 (the "Second Amendment"). Interest was payable monthly on the unpaid principal balance of the loan and required prepayment of 40% of the proceeds of any stock offering or placement of debt or equity. The Second 77 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--BORROWINGS (CONTINUED) Amendment was supported by a Support Agreement (the "Support Agreement") between a shareholder and director of CCB (the "Shareholder") and CCB whereby the Shareholder guaranteed the payment of the loan. To compensate the Shareholder for signing the Support Agreement and subsequently paying off the lending institution, CCB signed a Holding Company Support Agreement (the "Holding Company Support Agreement") whereby CCB agreed to: (1) pay to the Shareholder a fee equal to 1% of the unpaid principal amount of the note on each anniversary date and (2) issue to the Shareholder on or prior to March 31, 1997, and thereafter on each anniversary date, warrants to purchase 25,000 shares of Company Common Stock at an exercise price per share equal to 80% of the book value per share of the Company on December 31, 1996 and subsequent year end periods. The Shareholder paid off the outstanding balance of $2,350,000 to the lending institution in March of 1996, and CCB entered into a new note with the shareholder (the "New Note"). The New Note bore an interest rate of 3% over prime rate with interest only payable monthly for the first year; and thereafter, quarterly principal payable of $125,000 plus interest payable monthly. Any remaining principal and interest would have been due on April 1, 1999. On March 17, 1997, CCB paid down $2,000,000 on this note, and based on the $350,000 remaining balance of the note, CCB issued to the Shareholder pursuant to the Holding Company Support Agreement, a number of warrants to purchase 3,723 shares of the CCB's common stock at an exercise price of $6.60 per share, which number of warrants was proportional to the outstanding balance on the New Note at that time. CCB also paid the Shareholder a fee equal to 1% of the unpaid principal balance on March 17, 1997. The remaining unpaid principal balance of $350,000 was subject to the original terms of the note and was paid on April 1, 1997. Under an agreement with the Federal Home Loan Bank of San Francisco, SCB may obtain an extension of credit of up to 55% of total assets collateralized by real estate loans. At December 31, 1997, SCB had pledged loans amounting to $11,150,000 and had available credit of $6,629,000. No amounts were outstanding on this line of credit at December 31, 1997 and 1996. Under separate agreements with three commercial banks, SCB may borrow an aggregate of up to $48 million through federal funds lines of credit. Western also may borrow an aggregate of up to $22.0 million through federal funds lines of credit. Federal funds arrangements are subject to the terms of the individual arrangements and may be terminated at the discretion of the correspondent bank. $0 and $1,852,000 were outstanding on these lines of credit at December 31, 1997 and 1996, respectively. SCB participates in the Treasury, Tax and Loan Note program. SCB has a limit of $6.0 million at the Federal Reserve Bank. Treasury, Tax and Loan balances fluctuate based on the amounts deposited by customers and the amounts called for payment by the Federal Reserve Bank. At December 31, 1997 the interest rate on the Treasury, Tax and Loan Note was 5.28 percent. NOTE 9--SHAREHOLDERS' EQUITY EQUITY TRANSACTIONS The Company declared a cash dividend of $0.15 per share payable on December 10, 1997 to shareholders of record on November 10, 1997 and $0.15 per share payable on March 27, 1998 to shareholders of record on February 27, 1998. 78 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--SHAREHOLDERS' EQUITY (CONTINUED) As part of the September 30, 1996 acquisition of Western, the Company sold approximately 3,076,000 shares of Company Common Stock in a private placement for net proceeds of approximately $42,213,000. Pursuant to this equity transaction, the Company issued to parties related to Belle Plaine Financial, L.L.C., 92,275 warrants to acquire Company Common Stock at $16.83 per share. The warrants expire on September 30, 2006. During 1995, the Company completed two capital raising transactions. Under a private placement which closed in March 1995, the Company issued approximately 535,000 shares of Company Common Stock for net proceeds of approximately $5,669,000. In September 1995, pursuant to a shareholders' rights and public offering, the Company issued approximately 340,000 shares of Company Common Stock for net proceeds of approximately $3,464,000. Pursuant to the September 1995 equity transaction, the Company issued to parties related to Belle Plaine Financial, L.L.C., 48,400 warrants to acquire Company Common Stock at $13.77 per share. The warrants expire on September 30, 2005. In November 1995, CCB sold 474,000 shares of its common stock through private placement at $6.75 per share for the purpose of contributing most of the proceeds into NBSC as additional capital. Of the total proceeds of $3,200,000, CCB contributed $2,900,000 into NBSC's capital in December 1995. SCB declared three cash dividends during 1997. On each of January 23, March 27, and July 24, 1997, SCB declared a $0.05 per share cash dividend, payable to its shareholders of record at the close of business on February 6, May 2, and August 4, 1997, respectively. The dividends were paid on February 20, May 20, and August 20, 1997, respectively, totaling $374,000, $375,000, and $375,000, respectively. RESTRICTIONS ON PAYMENTS OF DIVIDENDS Holders of Company Common Stock are entitled to receive dividends declared by the Board of Directors out of funds legally available therefor under the laws of the State of California and certain federal laws and regulations governing the banking and financial services business. The Company's ability to pay dividends is also limited by the Third Amendment to Revolving Credit Agreement, dated as of January 26, 1998, between the Company and The Northern Trust Company, which provides that the Company may not declare or pay any dividend other than dividends payable in Company Common Stock or in the ordinary course of business not to exceed 50 percent of net income per fiscal quarter 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 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. 79 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, 1997, 1996, and 1995 are as follows:
1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Current expense: Federal....................................................... $ 6,296 $ 2,002 $ 704 State......................................................... 3,043 488 228 --------- --------- --------- Total....................................................... 9,339 2,490 932 --------- --------- --------- Deferred expense (benefit): Federal....................................................... 471 725 (1,461) State......................................................... (167) 441 (1,204) --------- --------- --------- Total....................................................... 304 1,166 (2,665) --------- --------- --------- Total income taxes........................................ $ 9,643 $ 3,656 $ (1,733) --------- --------- --------- --------- --------- ---------
Tax benefits associated with the exercise of nonqualified stock options of $1,755,000, $51,000 and $78,000 for 1997, 1996 and 1995, respectively, are reflected in the Consolidated Statements of Changes in Shareholders' Equity. The provision for income taxes differs from that which would result from applying the U.S. statutory rate of 35% in 1997 and 1996 and 34% in 1995 as follows:
1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Federal income tax expense (benefit) at statutory rate.......... $ 4,482 $ 4,425 $ (1,198) Increase (reduction) in taxes resulting from: State income taxes, net of federal benefits................... 1,870 613 (219) Amortization of goodwill...................................... 739 210 196 Non-deductible merger expenses................................ 2,750 -- -- Change in valuation allowance................................. -- (1,576) (413) Other, net.................................................... (198) (16) (99) --------- --------- --------- Total income tax expense (benefit).............................. $ 9,643 $ 3,656 $ (1,733) --------- --------- --------- --------- --------- ---------
80 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, 1997 and 1996 are presented below.
1997 1996 --------- --------- (IN THOUSANDS) Deferred tax assets: Unrealized loss on investment securities................................ $ 66 $ 648 Unrealized loss on loans................................................ -- 265 Loans, principally due to allowance for losses.......................... 2,355 2,613 Other real estate owned................................................. 226 788 Interest on nonaccrual loans............................................ 354 239 Net operating loss carryovers........................................... 378 392 Purchase accounting adjustments......................................... 1,109 1,022 Deferred compensation................................................... 1,267 1,190 Depreciation............................................................ 767 987 Contingencies........................................................... 895 382 Other................................................................... 1,007 1,145 --------- --------- Total deferred tax assets................................................. 8,424 9,671 Valuation allowance..................................................... -- -- --------- --------- Net deferred tax assets................................................... 8,424 9,671 --------- --------- Deferred tax liabilities: FHLB stock dividends.................................................... (289) (215) Leases.................................................................. (179) (183) Other................................................................... (107) (538) --------- --------- Total deferred tax liabilities.......................................... (575) (936) --------- --------- Net deferred tax asset................................................ $ 7,849 $ 8,735 --------- --------- --------- ---------
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, 1996 and 1997. On December 31, 1997 the Company had $2,621,000 and $873,000 of Federal and California net operating loss carryovers, respectively, and $333,000 in tax credit carryforwards. During 1995, the Company entered into a recapitalization plan which resulted in a change in ownership for purposes of Section 382 of the Internal Revenue Code of 1986, as amended ("IRC"). IRC Section 382 imposes restrictions on the utilizations of certain tax loss and credit carryforwards which resulted in $1,741,000 of the Federal net operating loss carryovers and $333,000 of tax credit carryovers no longer being available for utilization. Management believes that the remaining $880,000 and $873,000 of the Federal and California net operating losses, respectively, will be realized. The net operating loss carryovers have various expiration dates through the year 2010. 81 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 1997 are as follows:
AMOUNT (IN THOUSANDS) ----------- Year ended December 31: 1998............................................................................ $ 2,262 1999............................................................................ 2,348 2000............................................................................ 2,334 2001............................................................................ 2,163 2002............................................................................ 1,623 Thereafter...................................................................... 5,699 ----------- Total......................................................................... $ 16,429 ----------- -----------
Rental expense was $2,938,000 in 1997, $2,617,000 in 1996 and $2,603,000 in 1995. Rental expense for 1996 includes that for Western since the date of its acquisition. Sublease rental income for the years ended December 31, 1997, 1996 and 1995 totaled approximately $194,000, $155,000 and $187,000, respectively. 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 incurrence of the loss is probable. Set forth below is a brief summary of the status of certain pending legal proceedings to which the Company and/or the Banks are subject. Management believes that the reserves which it has established for these matters are adequate at this time. However, litigation is inherently uncertain and no assurance can be given that this or any other litigation will not result in any loss which might be material to the Company and/or the Banks. PDI LITIGATION. NBSC v. Vincent E. Galewick, Performance Development, Inc. et al. (the "PDI Litigation"), is an interpleader action filed by NBSC on August 22, 1995 in the Orange County Superior Court. The dispute arose from a demand by the California Department of Corporations under California Government Code Section 7480 on August 17, 1995 for the identification of account names and account number 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 82 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) 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 $25 million (the original claim alleged $45 million and was reduced during discovery) in damages due to lost opportunities, breach of contract, loss of goodwill and damage to their reputation due to the inability to use the $12,301,113. Additional claims for an unspecified amount of punitive damages, consequential damages and incidental damages have been alleged. Discovery has not yet been completed. Trial is anticipated to take place in the fourth quarter of 1998. FIP LITIGATION. Financial Institution Partners, L.P. v. California Commercial Bankshares et al., is an action filed by Financial Institution Partners, L.P. (collectively with its purported assignee, Hovde Capital, Inc., "FIP") on December 19, 1996 in the United States District Court for the Central District of California. The dispute arose from the purchase by FIP in December 1995 of 288,888 shares of common stock of CCB (the "Initial Shares") in a private placement at $6.75 per share ($1,949,994 in the aggregate), and FIP's agreement to purchase an additional 266,659 shares of common stock of CCB on or prior to May 5, 1996, subject to satisfaction of certain closing conditions, including the receipt of required regulatory approval, if any. 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 common stock of CCB 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 of 1934 and Rule 10b-5 thereunder, intentional misrepresentation, negligent misrepresentation, suppression of fact and breach of contract (rescission, restitution and damages). On August 20, 1997, FIP filed a Third Amended Complaint adding the Company as a defendant and alleging additional claims for breach of contact (right of first refusal) and civil violation of Penal Code Section 496. The complaint 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 common stock of CCB in an amount necessary to maintain FIP's agreed beneficial ownership interest in CCB. FIP's complaint does not specify 83 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) 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. On September 19, 1997, the Company filed an answer to the complaint. The Company believes that FIP's claims are without merit, that FIP has not been damaged but in fact has earned a substantial profit from its purchase of the Initial Shares, that FIP breached its agreement with CCB, and that FIP has no contractual right or right of first refusal to purchase any shares of Company Common Stock. 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 have not alleged a specific damage claim against NBSC or Monarch. ZWICK ACTION. Beverly Zwick v. Monarch Bank et al., is a class action brought in the San Diego Superior Court (the "Zwick Action"). The plaintiffs are a class of investors whose funds were deposited by First Pension in custodial accounts held at Monarch. The plaintiffs stated claims for negligence, fraud and aiding and abetting constructive fraud against Monarch and the Company. Plaintiffs claim that Monarch knew or should have known that the now incarcerated principals of First Pension were periodically stealing funds from the custodial accounts through transferring authorized withdrawals to bogus accounts from which the funds were eventually stolen. The damages alleged by the plaintiffs exceed $2,000,000. SETTLEMENT. On February 13, 1998, the Company entered into a Settlement Agreement and Mutual Release, pursuant to which the Company and SCB, as successors to Monarch and NBSC, were released from all claims raised in the Rousseau Action, the Evans Action and the Zwick Action and the Company will pay $1.1 million to be allocated among the various plaintiffs. Before this settlement becomes final, the settlement agreement must be approved by the courts in the various actions. The impact of the settlement has been included in the 1997 consolidated financial statements. 84 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:
1997 1996 --------- --------- (IN THOUSANDS) Balance, January 1....................................................... $ 4,514 $ 4,141 Additions due to acquisitions............................................ -- 184 New loans................................................................ 1,073 2,303 Repayments............................................................... (4,458) (2,114) --------- --------- Balance, December 31................................................... $ 1,129 $ 4,514 --------- --------- --------- ---------
In addition to the $1,129,000 of related party loans outstanding at December 31, 1997, there were $382,000 in undisbursed commitments. Included in the repayments of $4,458,000 during 1997 is a decrease of $3,405,000 due to a reduction in the number of related parties due to the CCB Merger and the SCB Merger. In addition, principal officers and directors in the aggregate had $3.1 million in deposits with the Banks at December 31, 1997. Certain of the Company's life insurance policies have been contracted based on competitive bids through Rice Brown Financial. The principal of Rice Brown Financial is a director of the Company. On January 1, 1996, the Company engaged one of its directors as a financial advisor. The engagement agreement provides for a monthly fee of $3,000 plus expenses beginning January 1, 1996. The agreement may be terminated by either the Company or the director upon 30 days written notice. Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. are entities related to a director of the Company. Belle Plaine Partners, Inc. serves as financial advisor to the Company under an engagement letter dated May 17, 1995. The agreement may be terminated by either party upon 30 days written notice. In that capacity, Belle Plaine Partners, Inc. was paid fees of approximately $1.4 million for evaluating and identifying potential acquisitions including the acquisition of Western 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, by the Company, and expects to pay approximately $2.7 million in connection with the acquisition of Santa Monica Bank by the Company. 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 acquisition of Santa Monica Bank by the Company for which it did not receive a fee. As part of the cost of raising equity in September of 1995, 48,400 warrants were issued to parties related to Belle Plaine Partners, Inc., including 40,425 to directors of the Company. The exercise price of $13.77 was 20% higher than the price at which the equity was raised. As part of the cost of the equity raised in 1996 for the Western acquisition, 92,275 warrants were issued to parties related to Belle Plaine Partners, 85 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--RELATED PARTY TRANSACTIONS (CONTINUED) 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. NOTE 13--BENEFITS PLANS On May 16, 1995, the Board of Directors of the Company approved the 1995 Directors Deferred Compensation Plan which was approved by shareholders on July 17, 1995. The plan is effective for fees earned on and after July 1, 1995. No compensation has been awarded under the plan. During 1992 the Company adopted an employee stock ownership and salary deferral plan ("KSOP"). The Company's contributions to the KSOP totaled approximately $20,000 in 1995. No contributions were made in 1997 and 1996. In September of 1996 the Company froze the KSOP plan and recorded a related expense of approximately $189,000 for repayment of a loan and other expenses. The loan was classified in other liabilities as of December 31, 1996 and was paid off in January of 1997. The Banks have 401(k) plans covering substantially all employees. Amounts contributed by the Banks and charged to expense were approximately $271,000, $250,000, and $247,000 in 1997, 1996 and 1995, respectively. The Company intends to merge the Banks' 401(k) plans into a single plan in the first quarter of 1998. In 1987, CCB purchased cost recovery life insurance with aggregate death benefits in the amount of $2,473,000 on the lives of the senior management participants. The Company, as successor to CCB is the sole owner and beneficiary of such policies, which were purchased to fund CCB's obligation under separate deferred compensation arrangements. The cash surrender values and obligation under deferred compensation agreements at December 31, 1997 and 1996 of $1,415,000 and $1,296,000, respectively, and $568,000 and $529,000, respectively, have been included in other assets and in other liabilities, respectively, in the accompanying consolidated balance sheets. The Company, as successor to SC Bancorp, has established deferred compensation plans which permit certain directors and management employees to defer portions of their compensation and earn interest at a predetermined amount above a specified interest rate index on the deferred amounts. Expense incurred on deferred balances was approximately $220,000, $177,000 and $648,000 in 1997, 1996 and 1995, respectively. The deferred compensation liability at December 31, 1997 and 1996 was approximately $1.9 million and $2.1 million, respectively, of which $938,000 and $1.2 million, respectively, represented principal, and was classified with other liabilities in the accompanying consolidated balance sheets. Approximately $932,000 and $948,000 represented accrued interest payable at December 31, 1997 and 1996, respectively, and was also classified as other liabilities in the accompanying consolidated balance sheets. In conjunction with the plans, the Company purchased life insurance policies on the participants with the Company as beneficiary. The cash surrender values of the life insurance policies were included in other assets in the accompanying consolidated balance sheets and totaled approximately $3.9 million and $3.5 million at December 31, 1997 and 1996, respectively. NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK LENDING COMMITMENTS The Banks are parties to financial instruments with off-balance sheet risk in the normal course of business in meeting the financial needs of their customers. These financial instruments consist primarily of 86 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) 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:
1997 1996 ---------- ---------- (IN THOUSANDS) Loan commitments...................................................... $ 304,081 $ 240,563 Standby letters of credit............................................. 13,893 13,145 ---------- ---------- $ 317,974 $ 253,708 ---------- ---------- ---------- ----------
In addition to the amounts above, approximately $7,450,000 and $5,089,000 in consumer credit card and overdraft commitments were outstanding as of December 31, 1997 and 1996. Loan commitment arrangements represent commercial lines of credit with variable interest rates determined at the time funds are drawn by adding an interest spread to an agreed upon index. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract; 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. INTEREST RATE SWAPS SCB entered into two interest rate swap agreements with notional principal amounts of $50 million and $25 million, respectively. These agreements were intended to mitigate interest rate fluctuations on SCB's floating rate loan portfolio. In January 1997 the swap with the notional principal amount of $25 million matured. Due to the merger of SCB with the Company in the fourth quarter of 1997 and to apply the Company's asset liability management philosophy, the Company terminated the $50 million swap. For the years ended December 31, 1997, 1996, and 1995, net interest expense of $410,000, $563,000, and $929,000 from the swap agreements is included in interest income on loans in the consolidated statements of operations. The costs associated with the termination of the $50 million notional principal swap is $446,000 and is included in other merger costs for the year ended December 31, 1997. 87 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no readily discernible market value exists for a large portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business, and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments: FINANCIAL ASSETS The carrying amounts of cash and due from banks, and federal funds sold, are considered to approximate fair value. The fair value of investment securities is generally based on quoted market prices. The fair value of loans is estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments, where available, taking into consideration the varying degrees of credit risk. The carrying amounts of accrued interest receivable are considered to approximate fair value. FINANCIAL LIABILITIES The carrying amounts of deposit liabilities payable on demand is considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of notes payable is based on rates currently available to the Company for debt with similar terms and remaining maturities. As notes payable reprice daily, the carrying value approximates fair value. The carrying amounts of other short-term borrowings and accrued interest payable are considered to approximate fair value. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material. 88 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, 1997 and 1996 is summarized as follows:
CARRYING VALUE FAIR VALUE ------------ ------------ (IN THOUSANDS) DECEMBER 31, 1997 Financial Assets: Cash and due from banks....................................... $ 97,456 $ 97,456 Federal funds sold............................................ 138,702 138,702 Securities.................................................... 207,514 207,514 Loans and leases, net......................................... 864,840 863,180 Accrued interest receivable................................... 8,204 8,204 Financial Liabilities: Deposits...................................................... $ 1,226,793 $ 1,228,114 Notes payable................................................. 12,751 12,751 Accrued interest payable...................................... 2,427 2,427 DECEMBER 31, 1996 Financial Assets: Cash and due from banks....................................... $ 96,202 $ 96,202 Federal funds sold............................................ 22,517 22,517 Securities.................................................... 332,818 332,793 Loans and leases, net......................................... 801,601 803,312 Accrued interest receivable................................... 9,664 9,664 Financial Liabilities: Deposits...................................................... $ 1,177,014 $ 1,177,345 Notes payable................................................. 20,290 20,290 Accrued interest payable...................................... 2,258 2,258 Off-Balance Sheet Financial Instrument: Interest rate swap agreements in a net payable position....... $ -- $ (900)
NOTE 16--REGULATORY MATTERS The Company and the Banks are subject to various regulatory capital requirements administered by Federal and State of California banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices, must be met. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Company and the Banks are considered well-capitalized at December 31, 1997. 89 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16--REGULATORY MATTERS (CONTINUED) Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum ratios based on average and risk weighted assets as set forth below. Actual capital ratios for the Company and the Banks as of December 31, 1997 are also shown in the table:
REQUIREMENT ACTUAL ------------------------ ---------------------------------- ADEQUATELY WELL COMPANY CAPITALIZED CAPITALIZED WESTERN SCB CONSOLIDATED ----------- ----------- --------- --------- ------------ (GREATER THAN OR EQUAL TO) Tier 1 risk-based capital ratio......................... 4.00% 6.00% 10.85% 10.41% 9.66% Total risk-based capital........ 8.00% 10.00% 12.10% 11.66% 10.91% Tier 1 leverage capital ratio... 4.00% 5.00% 7.43% 8.22% 7.33%
90 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- (IN THOUSANDS) CONDENSED BALANCE SHEETS Assets: Cash and due from banks................................................................. $ 458 $ 7,401 Other real estate owned................................................................. 83 83 Investments in subsidiaries (Note 8).................................................... 138,615 134,389 Securities available for sale........................................................... -- 262 Other assets............................................................................ 1,954 1,253 ---------- ---------- Total assets.......................................................................... $ 141,110 $ 143,388 ---------- ---------- ---------- ---------- Liabilities: Notes payable........................................................................... $ 7,080 $ 13,350 Other liabilities....................................................................... 4,375 991 ---------- ---------- Total liabilities..................................................................... 11,455 14,341 Shareholders' equity...................................................................... 129,655 129,047 ---------- ---------- Total liabilities and shareholders' equity............................................ $ 141,110 $ 143,388 ---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) CONDENSED STATEMENTS OF OPERATIONS Interest income.................................................................... $ 79 $ 301 $ 236 Management fees.................................................................... 291 58 -- Gain on sale of securities available for sale...................................... 229 -- -- Dividend income from subsidiaries.................................................. 10,500 -- -- --------- --------- --------- Total income..................................................................... 11,099 359 236 --------- --------- --------- Interest expense................................................................... 730 465 260 Merger costs....................................................................... 9,537 -- -- Other expense...................................................................... 2,624 1,757 461 --------- --------- --------- Total expense.................................................................... 12,891 2,222 721 --------- --------- --------- Loss before taxes and equity in undistributed subsidiary earnings................ (1,792) (1,863) (485) Income tax benefit................................................................. (1,857) (846) (47) --------- --------- --------- Income (loss) before equity in undistributed earnings of subsidiaries.............. 65 (1,017) (438) Equity in undistributed income (loss) of subsidiaries.............................. 3,097 10,006 (1,351) --------- --------- --------- Net income (loss).................................................................. $ 3,162 $ 8,989 $ (1,789) --------- --------- --------- --------- --------- ---------
91 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--CONDENSED (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (IN THOUSANDS) CONDENSED STATEMENTS OF CASH FLOWS Net income (loss)........................................................... $ 3,162 $ 8,989 $ (1,789) Gain on sale of investments................................................. (229) -- -- Change in other assets...................................................... (701) (1,034) 78 Change in other liabilities................................................. 1,163 982 (91) Equity in undistributed subsidiary (earnings) losses........................ (3,097) (10,006) 1,351 ---------- ---------- ---------- Cash flows provided (used) by operating activities........................ 298 (1,069) (451) ---------- ---------- ---------- Acquisition of Western, including acquisition costs......................... -- (53,154) -- Proceeds from sale of securities available for sale......................... 332 4,924 -- Increase in investment in subsidiaries...................................... -- -- (7,900) Other investing activities.................................................. (202) 126 (8,939) ---------- ---------- ---------- Cash flows provided (used) by investing activities........................ 130 (48,104) (16,839) ---------- ---------- ---------- Net proceeds from issuance of common stock, net of issuance costs, and from exercise of common stock options and warrants............................. 2,470 42,625 12,973 Repurchases of common stock................................................. (849) -- -- Dividends paid.............................................................. (2,722) -- -- Issuance (repayments) of debt............................................... (6,270) 11,000 -- Other financing activities.................................................. -- (137) (589) ---------- ---------- ---------- Cash flows provided (used) by financing activities........................ (7,371) 53,488 12,384 ---------- ---------- ---------- Net increase (decrease) in cash............................................. (6,943) 4,315 (4,906) Cash beginning of year...................................................... 7,401 3,086 7,992 ---------- ---------- ---------- Cash end of year............................................................ $ 458 $ 7,401 $ 3,086 ---------- ---------- ---------- ---------- ---------- ---------- Cash paid for interest...................................................... $ 730 $ 465 $ 260 Cash paid for income taxes.................................................. $ 2,750 $ -- $ --
92 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18--STOCK OPTION PLAN AND WARRANTS At the time of the CCB Merger, all outstanding stock options of CCB were converted into stock options of the Company at an exchange rate of one-to-one. At the time of the SCB Merger, all outstanding stock options of SC Bancorp were converted into shares of Company Common Stock based upon the difference between $14.25 and the exercise price of each SC Bancorp option divided by $31.28. 246,401 options were converted into shares as a result of the SCB Merger. The following disclosures reflect the combination of the Company, CCB and SC Bancorp stock option data. The Company has a stock option plan (the "Plan") pursuant to which the Company's Board of Directors may grant stock options to officers, directors and key employees. The Plan authorizes grants of options to purchase shares of authorized but unissued Company Common Stock. Stock options are granted with an exercise price greater than or equal to the stock's fair market value at the date of grant. Qualified stock options have 5-year terms and vest over a three year period from the date of grant. The Company's non-qualified stock options ("NQSO") have 5-year and 10-year terms and vest over a three year period from the date of grant. As of December 31, 1997, of the 404,410 options then authorized for grant, there were 76,201 options available for grant under the Plan. 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 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.
1997 1996 1995 -------------------------- -------------------------- -------------------------- NO. OF WEIGHTED-AVG. NO. OF WEIGHTED-AVG. NO. OF WEIGHTED-AVG. SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------- --------------- --------- --------------- --------- --------------- Options outstanding, January 1..... 581,699 $ 11.25 491,036 $ 9.59 415,240 $ 10.00 Options granted.................... 186,444 30.99 214,052 14.38 221,616 7.42 Options exercised.................. (74,492) 8.25 (80,042) 5.74 (45,616) 5.64 Options forfeited.................. (10,486) 12.78 (1,699) 13.77 -- -- Options converted to shares related to the SCB Merger................ (246,401) 13.70 -- -- -- -- Options expired.................... (117) 13.77 (16,648) 13.50 (36,129) 14.18 Options cancelled.................. -- -- (25,000) 5.83 (64,075) 11.12 --------- ------ --------- ------ --------- ------ Options outstanding, December 31............................. 436,647 $ 18.79 581,699 $ 11.25 491,036 $ 9.59 --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ Options exercisable, December 31............................. 122,152 245,705 232,551 --------- --------- --------- --------- --------- --------- Weighted-average grant date fair value of options granted during the year......................... $ 9.56 $ 9.28 $ 5.94 ------ ------ ------ ------ ------ ------
The fair market value of options granted during 1997, 1996 and 1995 was estimated using the Black-Scholes option-pricing model. The following assumptions were incorporated into the valuation calculation: (i) an option contract life of 2 1/2 to 10 years, (ii) a stock price volatility of 40% based on daily market 93 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18--STOCK OPTION PLAN AND WARRANTS (CONTINUED) prices for the preceding five year period, (iii) dividends of $0.60 per share per annum, and (iv) a risk-free interest rate of 5.2% to 7.9%. The table below provides the range of exercise prices, weighted-average exercise prices and weighted-average remaining contractual lives for options outstanding at December 31, 1997.
WEIGHTED-AVG. NUMBER REMAINING WEIGHTED-AVG. NUMBER WEIGHTED-AVG. OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE - --------------------------------------- ----------- --------------- ------------- ----------- ------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE $5.25 to $6.50......................... 128,584 6.5 years $ 5.62 83,916 $ 5.66 $13.77 to $14.02....................... 121,619 7.9 years 14.01 33,777 13.99 $19.64 to $25.50....................... 19,803 8.9 years 19.77 2,156 20.86 $29.88 to $33.00....................... 166,641 5.0 years 32.32 2,303 32.60 ----------- ----------- $5.25 to $33.00........................ 436,647 6.4 years $ 18.79 122,152 $ 8.74 ----------- ----------- ----------- -----------
The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its Plan. Accordingly, no compensation cost has been recognized for its stock option plans in the consolidated financial statements. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, the Company's net income and earnings per share for 1997 and 1996 would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
1997 1996 1995 --------- --------- --------- Net income: As reported................................................... $ 3,162 $ 8,989 $ (1,789) Pro forma..................................................... 2,411 8,663 (1,988) Basic net income per share As reported................................................... 0.30 1.11 (0.28) Pro forma..................................................... 0.23 1.07 (0.31) Diluted net income per share As reported................................................... 0.29 1.09 (0.28) Pro forma..................................................... 0.22 1.05 (0.31)
The pro forma amounts shown above may not be representative of the effects on reported net income for future periods. At December 31, 1997, 1996 and 1995, there were also exercisable warrants outstanding of 140,675, 140,675 and 48,400, respectively, and the weighted average exercise price of those warrants exercisable was $15.81, $15.81 and $13.77, respectively. Of the warrants outstanding on December 31, 1997, 48,400 expire on September 30, 2000 and 92,275 expire on September 30, 2001. 94 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED -------------------------------------------------- MAR 31, JUN 30, SEP 30, DEC 31, 1997 1997 1997 1997 ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income............................................ $ 23,965 $ 24,793 $ 26,081 $ 26,195 Interest expense........................................... 7,015 7,315 7,439 7,589 ----------- ----------- ----------- ----------- Net interest income........................................ 16,950 17,478 18,642 18,606 Provision for loan and lease losses........................ 725 675 725 675 ----------- ----------- ----------- ----------- Net interest income after provision for loan and lease losses................................................... 16,225 16,803 17,917 17,931 Other income............................................... 2,600 2,614 2,157 2,315 Merger costs............................................... (66) (3,404) -- (10,731) Goodwill amortization...................................... (636) (634) (635) (633) Other expenses............................................. (12,716) (12,530) (12,145) (11,627) ----------- ----------- ----------- ----------- Income (loss) before income taxes.......................... 5,407 2,849 7,294 (2,745) Income taxes............................................... 2,431 2,380 3,211 1,621 ----------- ----------- ----------- ----------- Net income (loss).......................................... $ 2,976 $ 469 $ 4,083 $ (4,366) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Shares outstanding: Basic.................................................... 10,487.0 10,497.9 10,488.7 10,621.0 Diluted.................................................. 10,757.7 10,798.7 10,791.1 10,835.0 Net income (loss) per share: Basic.................................................... $ 0.28 $ 0.04 $ 0.39 $ (0.41) Diluted.................................................. $ 0.28 $ 0.04 $ 0.38 $ (0.41) 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
95 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
QUARTERS ENDED -------------------------------------------------- MAR 31, JUN 30, SEP 30, DEC 31, 1996 1996 1996 1996 ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income............................................ $ 16,134 $ 16,961 $ 17,094 $ 24,048 Interest expense........................................... 4,948 4,865 5,132 7,366 ----------- ----------- ----------- ----------- Net interest income........................................ 11,186 12,096 11,962 16,682 Provision for loan and lease losses........................ 630 (295) 60 623 ----------- ----------- ----------- ----------- Net interest income after provision for loan and lease losses................................................... 10,556 12,391 11,902 16,059 Other income............................................... 2,172 3,188 1,648 2,867 Merger costs............................................... -- -- -- -- Goodwill amortization...................................... (114) (121) (135) (634) Other expenses............................................. (10,371) (11,394) (10,240) (15,129) ----------- ----------- ----------- ----------- Income before income taxes................................. 2,243 4,064 3,175 3,163 Income taxes (benefit)..................................... 926 1,639 1,319 (228) ----------- ----------- ----------- ----------- Net income................................................. $ 1,317 $ 2,425 $ 1,856 $ 3,391 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Shares outstanding: Basic.................................................... 7,309.9 7,317.4 7,322.7 10,415.6 Diluted.................................................. 7,401.0 7,433.4 7,424.2 10,647.9 Net income per share: Basic.................................................... $ 0.18 $ 0.33 $ 0.25 $ 0.33 Diluted.................................................. $ 0.18 $ 0.33 $ 0.25 $ 0.32 Dividends per common share declared and paid............... $ -- $ -- $ -- $ -- Common stock price range: High..................................................... $ 11.05 $ 17.00 $ 14.88 $ 29.75 Low...................................................... $ 8.93 $ 8.50 $ 8.50 $ 13.86
NOTE 20--ACQUISITION OF SANTA MONICA BANK On July 30, 1997, the Company and Santa Monica Bank entered into a definitive agreement for the merger of Santa Monica Bank with a subsidiary of the Company, subject to approval by the banking regulators and shareholders of both companies. On January 27, 1998, the Company consummated the SMB Acquisition through the merger of Santa Monica Bank with and into Western. The name of Western was changed to "Santa Monica Bank." As a result of the SMB Acquisition, approximately 4,973,550 shares of Company Common Stock were issued to certain holders of common stock of Santa Monica Bank and to certain private investors. Upon the SMB Acquisition becoming effective, each share of SMB Common Stock issued and outstanding at the time was converted into the right to receive either (i) $28.00 in cash or (ii) 0.875 shares of Company Common Stock. Of the 7,084,244 shares of SMB Common Stock outstanding at the time of 96 WESTERN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20--ACQUISITION OF SANTA MONICA BANK (CONTINUED) the SMB Acquisition, approximately 57.3% elected to receive cash and approximately 42.7% elected to receive Company Common Stock. The SMB Acquisition will be accounted for using the purchase method of accounting. At December 31, 1997, Santa Monica Bank had total assets, deposits, shareholders' equity and number of shares of SMB Common Stock outstanding of $678 million, $593 million, $81 million and 7.1 million, respectively. For the year ended December 31, 1997, Santa Monica Bank reported net income and net income per share of approximately $10.9 million and $1.54, respectively; these amounts were not audited in connection with the preparation of these financial statements. NOTE 21--NET INCOME PER SHARE The following is a summary of the calculation of basic and diluted net income per share for the three years ended December 31, 1997:
YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 --------- --------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss)............................................................... $ 3,162 $ 8,989 $ (1,789) --------- --------- ------------- --------- --------- ------------- Weighted average shares outstanding............................................. 10,524 8,096 6,487 Basic net income (loss) per share............................................... $ 0.30 $ 1.11 $ (0.28 ) Weighted average shares outstanding............................................. 10,524 8,096 6,487 Effect of dilutive stock options and warrants................................... 208 152 --(1) --------- --------- ------------- Diluted shares outstanding...................................................... 10,732 8,248 6,487 --------- --------- ------------- --------- --------- ------------- Diluted net income (loss) per share............................................. $ 0.29 $ 1.09 $ (0.28 ) --------- --------- ------------- --------- --------- -------------
- ------------------------ (1) Stock options and warrants would be antidilutive in 1995 and therefore are not used for diluted net income per share. Diluted shares outstanding would have been 6,599. 97 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Board of Directors of the Company appointed KPMG Peat Marwick LLP as its auditors and replaced Dayton & Associates, which is now Vavrinek, Trine, Day & Co. Dayton & Associates' report dated February 29, 1996 on the Company's consolidated financial statements for the year ended December 31, 1995 did not include an adverse opinion or disclaimer opinion nor was it qualified as to audit scope or accounting principles. During the Company's fiscal years ended December 31, 1994 and December 31, 1995, and subsequent interim period, there were no disagreements with Dayton & Associates on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which if not resolved to Dayton & Associates' satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their Report. During the Company's fiscal years ended December 31, 1994 and December 31, 1995, and subsequent interim period: (a) Dayton & Associates has not advised the Company that there do not exist the internal controls necessary for the Company to develop reliable financial statements; (b) Dayton & Associates has not advised the Company that information had come to their attention that has led them to no longer be able to rely on management's representations, or that has made Dayton & Associates unwilling to be associated with the financial statements prepared by management; (c) Dayton & Associates has not advised the Company that they needed to expand significantly the scope of their audit, or that information has come to their attention during such time period that if further investigated may (i) materially impact the fairness or reliability of either the previously issued audit report or the underlying financial statements, or the financial statements to be issued covering the fiscal period subsequent to the date of the most recent financial statements covered by an audit report or (ii) cause Dayton & Associates to be unwilling to rely on management's representations or be associated with the Company's financial statements; and (d) Dayton & Associates has not advised the Company that information has come to their attention of the type described in subparagraph (c) above, the issue not being resolved to their satisfaction prior to its dismissal. The Company has not, during its fiscal years ended December 31, 1994 and December 31, 1995, and the subsequent interim periods, consulted with KPMG Peat Marwick LLP regarding the application of accounting principles to a specifc transaction or the type of audit opinion that might be rendered on the Company's financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS At the Company's 1997 Annual Meeting held June 2, 1997, the following individuals were elected to the Company's Board of Directors: Rice E. Brown, Joseph J. Digange, John M. Eggemeyer, John W. Rose, Hugh S. Smith, Jr., Matthew P. Wagner, and Dale E. Walter. Upon consummation of the CCB Merger, William H. Jacoby, Robert L. McKay and Mark H. Stuenkel were appointed to the Board of Directors of the Company. Upon consummation of the SCB Merger, Harold A. Beisswenger, Larry D. Hartwig, William C. Greenbeck and Donald E. Wood were appointed to the Board of Directors of the Company. Upon consummation of the SMB Acquisition, Aubrey L. Austin was appointed to the Board of Directors of the Company. 98 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 1998 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.
DIRECTOR OF COMPANY NAME AGE POSITION WITH COMPANY SINCE - --------------------------------- --- ----------------------------------------------------------------- ------- Aubrey L. Austin................. 51 Director; Chairman, President and Chief Executive Officer of SMB 1998 Rice E. Brown.................... 60 Director 1988 John M. Eggemeyer................ 52 Director 1997 William C. Greenbeck............. 50 Director 1997 Robert L. McKay.................. 67 Director 1997 Hugh S. Smith, Jr................ 67 Chairman and Director 1996 Mark H. Stuenkel................. 45 Director; President and Chief Executive Officer of SCB 1997 Matthew P. Wagner................ 41 Director, President and Chief Executive Officer 1996 Dale E. Walter................... 63 Director 1996
AUBREY L. AUSTIN currently serves as Chairman, President and Chief Executive Officer of SMB. Mr. Austin joined Santa Monica Bank in 1977. In January 1990 Mr. Austin was named President of Santa Monica Bank and in August 1993 was appointed to the additional position of Chief Executive Officer. Mr. Austin also served on the Board of Directors of Santa Monica Bank since 1985. RICE E. BROWN, MSFS is a registered investment advisor, registered principal and President of the firm Rice Brown Financial Services Inc. which has been in business for over 35 years. His primary 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 Enterprise Fund, Rancho Santa Fe National Bank, TCF National Bank-Illinois, 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 served as its Secretary. 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 1992 to 1997, Mr. McKay served as a Director of CCB. HUGH S. SMITH, JR. currently serves as the Chairman of the Board of the Company and on the Board of Directors of each of the Banks. 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, a position he held for 23 years. MARK H. STUENKEL currently serves as 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 99 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. 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, positions he held until January 1998. 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. 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 1997, the Board of Directors of the Company held sixteen (16) meetings. All Directors attended at least 75% of the Board meetings of the Company during the time they were directors of the Company. The Audit Committee of the Board of Directors currently consists Rice E. Brown, John M. Eggemeyer, Robert L. McKay, John W. Rose, 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 three (3) meetings in 1997. The Executive Committee of the Board of Directors currently consists of John M. Eggemeyer, William C. Greenbeck, Hugh S. Smith, Jr., Matthew P. Wagner and Dale E. Walter. There were no formal meetings of the Executive Committee in 1997. 100 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:
YEAR HIRED BY NAME AGE POSITION WITH COMPANY COMPANY - --------------------------------- --- ----------------------------------------------------------------- ------- Robert M. Borgman................ 50 Executive Vice President 1997 And Chief Credit Officer Suzanne R. Brennan............... 47 Executive Vice President-- 1997 Operations Julius G. Christensen............ 32 Executive Vice President, 1997 General Counsel and Secretary Arnold C. Hahn................... 46 Executive Vice President and 1996 Chief Financial Officer Matthew P. Wagner................ 41 President and Chief Executive Officer 1996
ROBERT M. BORGMAN is currently 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 and 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. Prior to joining the Company, Ms. Brennan was the Senior Vice President of Corporate Trust Operations at U.S. Bancorp in Minneapolis, Minnesota from 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 spent 2 years in practice with the law firm of Sullivan & Cromwell engaged in merger and acquisitions and securities law practice. From 1992 to 1995, Mr. Christensen was a candidate for a Juris Doctorate degree from Harvard Law School. ARNOLD C. HAHN has served as Executive Vice President and Chief Financial Officer of the Company since November 1996. 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. MATTHEW P. WAGNER is the President and 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, positions he held until January 1998. 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. Prior to joining the Company in 1996, Mr. Wagner was Executive Vice President with U.S. Bancorp in Minneapolis, Minnesota since 1991 and Senior Vice President since 1985. 101 ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table reflects all compensation paid to Mr.Hugh S. Smith, Jr., the Company's former Chief Executive Officer, Mr. Matthew P. Wagner, the Company's current Chief Executive Officer, and other four (4) other most highly compensated executive officers receiving a total annual salary and bonus of $100,000 or more.
LONG-TERM COMPENSATION ---------------------------------- AWARDS ANNUAL COMPENSATION ---------------------------------- --------------------------------------------- (G) (E) (F) SECURITIES OTHER RESTRICTED UNDERLYING (A) (B) (C) (D) ANNUAL STOCK OPTIONS/ NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMP ($)(1) AWARD(S) SARS - -------------------------------- --------- ----------- ----------- ------------------- --------------------- ----------- Hugh S. Smith, Jr.(2) .......... 1997 187,000 40,000 23,529 Chairman and Former Chief 1996 188,260 50,000 Executive Officer 1995 186,292 100,000 Matthew P. Wagner .............. 1997 175,000 175,000 21,000 President and Chief Executive 1996 43,750 100,000 58,823 Officer Aubrey L. Austin(4) ............ 1997 237,756 119,597 President and Chief Executive 1996 237,748 96,162 Officer of SMB 1995 224,200 17,840 Mark H. Stuenkel(5) ............ 1997 163,414 83,738 32,647 President and Chief Executive 1996 161,027 76,125 Officer of SCB 1995 144,333 -- Arnold C. Hahn ................. 1997 150,000 120,000 15,000 Executive Vice President and 1996 25,029 100,000 15,882 Chief Financial Officer Suzanne R. Brennan ............. 1997 63,179 40,000 9,188 Executive Vice President--Operations PAYOUTS ------- (I) (H) ALL (A) LTIP OTHER NAME AND PRINCIPAL POSITION PAYOUTS COMP ($) - -------------------------------- ------- ----------- Hugh S. Smith, Jr.(2) .......... Chairman and Former Chief Executive Officer Matthew P. Wagner .............. 200,000(3) President and Chief Executive Officer Aubrey L. Austin(4) ............ 4,500 President and Chief Executive 3,517 Officer of SMB Mark H. Stuenkel(5) ............ 1,318 President and Chief Executive 1,062 Officer of SCB Arnold C. Hahn ................. Executive Vice President and Chief Financial Officer Suzanne R. Brennan ............. Executive Vice President--Operations
- ------------------------ (1) None of the named 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. Smith's compensation for 1996 and 1995 includes amounts received from Western prior to the Western Acquisition on September 30, 1996. (3) The amount reflects reimbursement of costs incurred in connection with Mr. Wagner's relocation to California. (4) Mr. Austin joined the Company on January 27, 1998 as Chairman, President and Chief Executive Officer of SMB. Mr. Austin's compensation reflects amounts paid to him by Santa Monica Bank prior to the SMB Acquisition. Other Annual Compensation includes Santa Monica Bank's matching 401(k) contribution. All Other Compensation represents amounts contributed by Santa Monica Bank to the Profit Sharing Plan and allocated to Mr. Austin's vested or unvested account under such plan. (5) Mr. Stuenkel joined the Company as President and Chief Executive Officer of NBSC on June 4, 1997 as part of the CCB Merger. His compensation includes amounts received from CCB prior to the CCB Merger. Other Annual Compensation includes the CCB's matching 401(k) contribution. All Other Compensation for Mr. Stuenkel represents the executives' portion of amount contributed to CCB's Stock Bonus Plan, which was 100 percent funded by the CCB. The contributions were made at the discretion of the Board of Directors of CCB. The distributions are made at the earlier of 2 years after termination, retirement, death or disability. Mr. Stuenkel's 1996 compensation included $16,000 of vacation pay. 102 OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------------------------------------ POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED NUMBER OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS/SARS EXERCISE OR PRICE APPRECIATION UNDERLYING GRANTED TO BASE FOR TERM OF OPTION OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION --------------------- NAME GRANTED (#) FISCAL YEAR ($/SHARES) DATE 5% ($) 10% ($) - -------------------------------------- ------------- --------------- --------------- ------------ --------- ---------- Matthew P. Wagner..................... 21,000 11.3% $ 32.375 12/23/2002 187,837 415,070 Mark H. Stuenkel(1)................... 17,647 17.5% $ 19.64 6/4/2007 501,393 1,003,680 15,000 $ 32.375 12/23/2002 134,169 296,479 Arnold C. Hahn........................ 15,000 8.0% $ 32.375 12/23/2002 134,169 296,479 Robert M. Borgman..................... 5,000 6.4% $ 32.00 8/19/2002- 65,362 156,676 7,000 $ 32.375 8/19/2007 62,612 138,357 12/23/2002 Suzanne R. Brennan.................... 2,188 4.9% $ 32.00 8/19/2002 19,344 42,745 7,000 $ 32.375 12/23/2002 62,612 138,357 Julius G. Christensen................. 3,000 4.3% $ 29.875 10/10/2002 24,762 54,717 5,000 $ 32.375 12/23/2002 44,723 98,826
No stock options were granted to Hugh S. Smith, Jr. or Aubrey L. Austin in 1997. - ------------------------ (1) On June 4, 1997, the effective date of the CCB Merger, Mr. Stuenkel was granted 17,647 options at an exercise price of $19.64, the market price of Company Common Stock on December 19, 1996, the day the Company executed the definitive agreement pursuant to which the CCB Merger was effected. On June 4, 1997, the market price of Company Common Stock was $29.50, resulting in a value to Mr. Stuenkel of $173,999 at 0% market appreciation. 103 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS/SARS AT IN- THE-MONEY VALUE FY-END OPTIONS/SARS AT FY-END SHARES ACQUIRED REALIZED EXERCISABLE/ ($) EXERCISABLE/ NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE - -------------------------------------- ----------------- ----------- ------------------ ----------------------- Hugh S. Smith, Jr..................... 7,130 129,231 713/15,686 13,533/297,720 Aubrey L. Austin...................... N/A N/A 0/0 0/0 Mark H. Stuenkel...................... 7,500 138,600 32,916/35,981 882,324/333,490 Arnold C. Hahn........................ 0 5,294/25,588 100,480/210,335 Matthew P. Wagner..................... 0 19,608/60,215 372,160/757,426 Robert M. Borgman..................... 0 0/12,000 0/9,375 Suzanne R. Brennan.................... 0 0/9,188 0/6,563 Julius G. Christensen................. 0 0/8,000 0/12,500
COMPENSATION OF DIRECTORS The Board of Directors of the Company approved the following fees to be paid to outside directors of the Company: 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
During 1997, directors fees were paid and options granted 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 104 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 Mr. Stuenkel will continue to be entitled to receive his retirement, death and disability benefits as provided in the Salary Continuation Agreement. AUBREY L. AUSTIN In connnection with the SMB Acquisition, the Company, SMB and Mr. Austin entered into an Employment Agreement, dated as of December 31, 1997, pursuant to which SMB agreed to employ Mr. Austin as Chairman, President and Chief Executive Officer of SMB for a period of three years. SMB agreed to pay Mr. Austin a base salary equal to the base annual salary paid to Mr. Austin as of July 30, 1997, subject to increase annually at the discretion of SMB. Mr. Austin will also be considered annually by SMB for a discretionary bonus in accordance with the compensation policies and practices of SMB. Mr. Austin's employment agreement also provides that if SMB should terminate the Period of Employment (as defined therein) for other than Breach or Just Cause (each as defined therein), or if Mr. Austin should terminate the Period of Employment for Good Cause (as defined therein), SMB shall pay to Mr. Austin an amount equal to the sum of (a) the result of multiplying (i) the base annualy salary payable to Mr. Austin under the Employment Agreement as of the date of termination of the Period of Employment by (ii) the number of years (and fractions thereof) then remaining in the Period of Employment and (b) the result of multiplying (i) the average of the bonuses payable to Mr. Austin pursuant to his employment agreement during the three fiscal years immediately preceeding the date of termination of the Period of Employment by (ii) the number of years (and fractions thereof) then remaining in the Period of Employment. If Mr. Austin is terminated for Breach or Just Cause, Mr. Austin agreed that from January 27, 1998 until the second anniversary of the date of the termination of the Period of Employment (the "Non-Competition Period") Mr. Austin will not (i) engage in the banking business other than on behalf of SMB within the Designated Area (as defined therein), (ii) directly or indirectly own, manage, operate, control, be employed by, or provide management or consulting services in any capacity to any firm, corporation or other entity (other than SMB) engaged in the banking business in the Designated Area (as defined therein) or (iii) directly or indirectly solicit or otherwise intentionally cause any employee, officer, or member of the respective boards of directors of SMB or the Company to engage in any action prohibited under (i) or (ii); provided that the ownership by Mr. Austin as an investor of not more than 1 percent of the outstanding shares of stock of any corporation whose stock is listed for trading on any securities 105 exchange or is quoted on the automated quotation system of the National Association of Securities Dealers, Inc., or the shares of any investment company as defined in Section 3 of the Investment Act of 1940, as amended, shall not in itself constitute a violation of Mr. Austin's obligations under his employment 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 of the Subsidiary 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). BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION It is the duty of the Board of Directors of the Company to administer the Company's compensation program and various incentive plans, including its stock option plan and annual bonus plan. In addition, the Board of Directors reviews compensation levels of members of management, evaluates the performance of management, considers management succession and related matters. As discussed under "Business--Strategic Evolution" and "--Management Changes," the Company has grown from approximately $60 million in assets at June 30, 1996 to close to $1.4 billion in assets at December 31, 1997, with much of the growth taking place in fiscal 1997. In connection with this growth, most of the senior management of the Company was hired (in connection with strategic transactions or otherwise) during 1997, and the compensation package for each such member of senior management was individually negotiated based in large part on market conditions. In particular, the compensation of Mr. Stuenkel and Mr. Austin was negotiated and approved by the Board of Directors in connection with the CCB Merger and SMB Acquisition, respectively. Because the composition of the Board of Directors changed substantially during fiscal 1997, a substantial number of the compensation decisions were made before the current Board of Directors was fully constituted. See "Item 10. Directors and Executive Officers of the Company--Directors" for a discussion of the Directors of the Company in office throughout the year. The Board of Directors has reviewed the compensation for each of the five highest paid officers for the period during 1997 for which such officers were employed by the Company, and in the Board of Directors', 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 Board of Directors took into account, among other things, 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. With its senior management now in place, the current Board of Directors, many of whom became directors during fiscal 1997, intends to 106 establish a compensation committee which will administer the Company's compensation policies commencing with the 1998 fiscal year. The compensation committee will develop specific policies that will apply to the determination of compensation for all executives, including the chief executive officer. 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 1993 and 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 reflects trades of Company Common Stock on the Nasdaq National Market-Registered Trademark-. The following graph shows the cumulative total return on Com pany 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, 1992. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
NASDAQ BANKS NASDAQ INDEX WEBC 1992 100 100 100 1993 114 115 100 1994 114 112 100 1995 169 159 113 1996 223 195 138 1997 377 240 324
107 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 (a) file a Form 3 for Larry D. Hartwig, a director of the Company as of October 10, 1997 and (b) file a Form 4 for each director and executive officer who exercised stock options in the fourth quarter of 1997. 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 13, 1998, there were 15,678,960 shares of Company Common Stock outstanding and entitled to vote and approximately 2,190 shareholders of record. 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 13, 1998. All shares are Company Common Stock, the only class of security outstanding.
AMOUNT AND NATURE OF NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS - ----------------------------------------------------------------- ------------------------------ ----------------- Castle Creek Capital Partners Fund I--L.P.(2) ................... 2,289,889 14.6% 4370 LaJolla Village, Suite 400 San Diego, California Franklin Mutual Advisors, Inc.(3) ............................... 1,297,183 8.3% 51 John F. Kennedy Parkway Short Hills, New Jersey Wellington Management Company, LLP(4) ........................... 928,654 5.9% 75 State Street Boston, Massachusetts Hugh S. Smith, Jr.(5)(8) ........................................ 23,357 0.1% 1251 Westwood Boulevard Los Angeles, California Matthew P. Wagner(5)(9) ......................................... 48,886 0.3% 1251 Westwood Boulevard Los Angeles, California Mark H. Stuenkel(5)(10) ......................................... 58,415 0.4% 4100 Newport Place, Suite 900 Newport Beach, California Aubrey L. Austin(5) ............................................. 21,640 0.1% 1251 4th Street Santa Monica, California
108
AMOUNT AND NATURE OF NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS - ----------------------------------------------------------------- ------------------------------ ----------------- John M. Eggemeyer(6)(11) ........................................ 2,388,232 15.1% 4370 LaJolla Village, Suite 400 San Diego, California Rice E. Brown(6)(12) ............................................ 2,347 * 27127 Calle Arroyo, Suite 1907 Laguna Niguel, California Robert L. McKay(6)(13) .......................................... 766,337 4.9% 11551 Plantero Drive, Santa Ana, California William C. Greenbeck(6)(14) ..................................... 64,307 0.4% 9530 East Imperial Highway, Downey, California Dale E. Walter(6)(15) ........................................... 12,142 0.1% 50096 Calle Rosarita La Quinta, California Arnold C. Hahn(7)(16) ........................................... 12,272 0.1% 4100 Newport Place, Suite 900 Newport Beach, California Directors and Executive Officers as a group...................... 3,446,722 21.8% All nine (9) directors as a group(4)............................. 3,434,450 21.7%
* less than 0.1% - ------------------------ (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 of the record date for the 1998 Annual Meeting. 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, is a principal of the Fund. (3) Shares of Company Common Stock beneficially owned by Franklin Mutual Advisors, Inc. are held in various investment funds. (4) Shares of Company Common Stock beneficially owned by Wellington Management Company, LLP are held in various investment funds. (5) Director and Executive Officer. (6) Director. (7) Executive Officer. (8) Includes 713 shares of Company Common Stock which may be purchased on the exercise of stock options. (9) Includes 19,608 shares of Company Common Stock which may be purchased on the exercise of stock options. 109 (10) Includes 21,666 shares of Company Common Stock which may be purchased on the exercise of stock options. (11) Includes 588 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 of which Mr. Eggemeyer is a principal. Mr. Eggemeyer disclaims any beneficial ownership of the shares of Company Common Stock held by the Fund except to the extent of his interest in the Fund. (12) Includes 784 shares of Company Common Stock which may be purchased on the exercise of stock options. (13) Includes 455 shares of Company Common Stock which may be purchased on the exercise of stock options. (14) Includes 462 shares of Company Common Stock which may be purchased on the exercise of stock options. (15) Includes 784 shares of Company Common Stock which may be purchased on the exercise of stock options. (16) Includes 5,294 shares of Company Common Stock which may be purchased on the exercise of stock options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS BANKING TRANSACTIONS Some of the directors and executive officers of the Company and its subsidiaries, 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 $1.1 million on December 31, 1997, constituting approximately 0.9 percent of the Company's equity capital accounts on that date. INSURANCE CONTRACTS Certain of the Company's life insurance policies have been contracted, based on a competitive bid, through Rice Brown Financial; Mr. Brown is an insurance broker and a director of the Company. INVESTMENT BANKING SERVICES Belle Plaine Partners, Inc. and Belle Plaine Financial, L.L.C. are entities related to the Fund which held 14.6% percent of the outstanding Company Common Stock. John M. Eggemeyer, a director of the Company, is a principal of the Fund, 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 $3.2 million and $1.4 in 1997 and 1996, respectively, for evaluating and identifying potential acquisitions, including the Western Acquisition which closed on September 30, 1996, the CCB Merger which closed on June 4, 1997, and the SCB Merger which closed on October 10, 1997. 110 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." 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 1,982,000 shares of Company Common Stock and to standby to purchase up to approximately 2,311,500 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 agreed to file under the Securities Act a "shelf" Registration Statement providing for the registration of the Private Placement Shares no later than 120 days after the effective date of the SMB Acquisition. See "Item 1. Business--Strategic Evolution." Certain directors, executive officers and shareholders holding more than 5 percent of the outstanding Company Common Stock 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:
1998 PRIVATE PLACEMENT INVESTOR SHARES DOLLARS - ------------------------------------------------------------------ ---------- ------------- 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 ---------- ------------- ---------- -------------
111 ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS
EXHIBITS PAGE - ------ ----- 2.1 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) 2.2 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) 2.3 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) 2.4 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 reference) 3.1 Restated Articles of Incorporation of Western Bancorp. 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 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) 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)
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EXHIBITS PAGE - ------ ----- 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. 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 Form of Amendment to the 1993 Stock Option Plan (Exhibit 10.1 of the Company's Proxy Materials for the 1998 Annual Meeting of Shareholders filed on schedule 14A and incorporated herein by reference) 10.5 Employment Agreement, dated as of July 9, 1997, by and between William H. Jacoby and Western Bancorp. 10.6 Executive Salary Continuation Agreement, dated as of January 1, 1988, between National Bank of Southern California and Mark H. Stuenkel. 10.7 Employment Agreement, dated as of December 31, 1997, by and among Western Bank and Aubrey L. Austin. 10.8 Western Bancorp Executive Severance Policy.
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EXHIBITS PAGE - ------ ----- 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.) 16.0 Letter of Dayton & Associates on change of Certifying Accountant. (Exhibit 16.0 of the Company's Annual Report of Form 10-KSB for the fiscal year ended December 31, 1996 and incorporated herein by reference) 21.0 Subsidiaries of Western Bancorp. 23.1 Consent of Dayton & Associates (Western Bancorp) 23.2 Consent of KPMG Peat Marwick LLP (Western Bancorp) 23.3 Consent of Deloitte & Touche LLP (California Commercial Bankshares) 23.4 Consent of Deloitte & Touche LLP (SC Bancorp) 27.1 Financial Data Schedule (Fiscal year end 1997) 27.2 Financial Data Schedule (Fiscal Year ends 1995 and 1996) 27.3 Financial Data Schedule (first, second and third quarters of 1997)
REPORTS ON FORM 8-K On October 3, 1997, the Company filed a Current Report on Form 8-K enclosing (i) Santa Monica Bank's Annual Report for the fiscal year ended December 31, 1996; (ii) Santa Monica Bank's Current Reports on Form F-3, dated April 17, 1997 and August 8, 1997; (iii) Santa Monica Bank's Quarterly Reports on Form F-4, dated April 19, 1997 and August 6, 1997; and (iv) Santa Monica Bank's Proxy Statement to Security holders for fiscal year ended December 31, 1996. On October 24, 1997, the Company filed a Current Report on Form 8-K announcing (i) that the SCB Merger had been consummated on October 10, 1997; (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 SCB Merger. On October 31, 1997, the Company filed a Current Report on Form 8-K enclosing Santa Monica Bank's Quarterly Report on Form F-4 for the quarter ended September 30, 1997. On November 13, 1997, the Company filed a Current Report on Form 8-K disclosing the Company's Supplemental Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for the third quarter of 1997 reflecting the SCB Merger. On December 29, 1997, the Company filed a Current Report on Form 8-K announcing that on December 23, 1997 the shareholders of Santa Monica Bank and the Company approved the SMB Acquisition. 114 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. WESTERN BANCORP Date: March 19, 1998 By: /s/ ----------------------------------------- Matthew P. Wagner PRESIDENT AND CHIEF EXECUTIVE OFFICER
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.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ - ------------------------------ President and Chief March 19, 1998 Matthew P. Wagner Executive Officer /s/ - ------------------------------ Executive Vice President March 19, 1998 Arnold C. Hahn Chief Financial Officer /s/ - ------------------------------ Chairman and Director March 19, 1998 Hugh S. Smith, Jr. /s/ - ------------------------------ Director March 19, 1998 Aubrey L. Austin /s/ - ------------------------------ Director March 19, 1998 Harold A. Beisswenger /s/ - ------------------------------ Director March 19, 1998 Rice E. Brown /s/ - ------------------------------ Director March 19, 1998 Joseph J. Digange
115
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ - ------------------------------ Director March 19, 1998 Johm M. Eggemeyer /s/ - ------------------------------ Director March 19, 1998 William C. Greenbeck /s/ - ------------------------------ Director March 19, 1998 Larry D. Hartwig /s/ - ------------------------------ Director March 19, 1998 William H. Jacoby /s/ - ------------------------------ Director March 19, 1998 Robert L. McKay /s/ - ------------------------------ Director March 19, 1998 John W. Rose /s/ - ------------------------------ Director March 19, 1998 Mark H. Stuenkel /s/ - ------------------------------ Director March 19, 1998 Dale E. Walter /s/ - ------------------------------ Director March 19, 1998 Donald E. Wood
116 EX-3.1 2 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF MONARCH BANCORP Matthew P. Wagner and Arnold C. Hahn hereby certify that: 1. They are the President and Secretary, respectively, of Monarch Bancorp, a California Corporation. 2. The articles of incorporation of Monarch Bancorp, as amended to the date of the filing of this certificate, including amendments set forth herein but not separately filed (and with the omissions required by Section 910 of the California Corporations Code) are restated as follows: ARTICLE ONE. The name of the Corporation shall be: WESTERN BANCORP ARTICLE TWO. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE THREE. (a) The Corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is Five Million (5,000,000) and the number of shares of Common Stock authorized to be issued is One Hundred Million (100,000,000). Upon the restatement of this article to read as set forth herein, each 8.5 outstanding shares of Common Stock are converted into 1.0 share of Common Stock. (b) The Preferred Stock may be divided into such number of series as the Board of Directors may determine. The Board of Directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. ARTICLE FIVE. DIRECTOR LIABILITY The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. ARTICLE SIX. INDEMNIFICATION The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the corporation and its stockholders through bylaw provisions or through agreements with agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. 3. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The total number of outstanding shares of the Corporation entitled to vote is 4,043,885, after giving effect to the reverse stock split provided for herein. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. -2- We further declare under penalty of perjury under the law of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: June 2, 1997 /s/ Matthew P. Wagner ------------------------------- Matthew P. Wagner President /s/ Arnold C. Hahn ------------------------------- Arnold C. Hahn Secretary -3- EX-10.2 3 EXHIBIT 10.2 THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE AGREEMENT AND WAIVER THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE AGREEMENT AND WAIVER ("AMENDMENT") dated as of January 26, 1998 between WESTERN BANCORP (formerly known as Monarch Bancorp), a California corporation (the "BORROWER"), and THE NORTHERN TRUST COMPANY, an Illinois banking corporation (the "LENDER"). WHEREAS, the Borrower and the Lender have entered into a Revolving Credit Agreement dated as of September 25, 1996, an Amendment thereto dated as of November 27, 1996 and a Second Amendment thereto dated as of June 11, 1997 (collectively, the "EXISTING AGREEMENT") pursuant to which the Lender has agreed to make revolving credit loans to Borrower; WHEREAS, Borrower and Lender have entered into a Pledge Agreement dated as of September 25, 1996 (the "PLEDGE AGREEMENT") pursuant to which Borrower pledged to Lender the stock of Western Bank, a California banking corporation and a wholly owned subsidiary of the Borrower, as security for Borrower's obligations to Lender under the Existing Agreement; WHEREAS, the parties wish to amend the Existing Agreement to increase the Commitment of the Lender thereunder and otherwise amend the Existing Agreement and Pledge Agreement; and WHEREAS, the Borrower was not in compliance with certain financial covenants under the Existing Agreement and has requested Lender to waive such non-compliance; NOW, THEREFORE, the parties agree as follows: Section 1. DEFINITIONS. Terms defined in the introductory paragraphs hereof shall have their respective defined meanings when used in this Amendment, and except as otherwise expressly provided herein, terms defined in the Existing Agreement or Pledge Agreement shall have their respective defined meanings when used in this Amendment. In addition, the following terms shall have the following meanings (terms defined in the introductory paragraphs or this SECTION 1 in the singular to have correlative meanings when used in the plural and VICE VERSA): "EFFECTIVE DATE" means the first date, if any, which occurs before the termination of this Amendment and on which the conditions precedent set forth in SECTION 5 hereof shall have been satisfied. "RESTATED NOTE" shall mean a Second Amended and Restated Revolving Credit Note in the form of EXHIBIT A attached hereto. Section 2. AMENDMENTS TO EXISTING AGREEMENT. The following amendments are hereby made to the Existing Agreement with effect only from and after the Effective Date: (a) SECTION 1.2. SECTION 1.2 of the Existing Agreement is amended by deleting the dollar amount "$13,000,000" in the first sentence thereof and inserting in place thereof "$35,000,000". (b) SECTION 2.1(b). SECTION 2.1(b) of the Existing Agreement is amended by adding the phrase "Subject to SECTION 9," at the beginning of the sentence. (c) SECTION 2.7. SECTION 2.7 of the Existing Agreement is amended by deleting the percentage "1/4 of 1%" appearing therein and substituting the percentage "1/8 of 1%" therefor. (d) SECTION 3.1(a). SECTION 3.1(a) of the Existing Agreement is amended by deleting it in its entirety and substituting the following therefor: "(a) Borrower shall repay in full (i) on the Reduction Date the outstanding principal amount of the Loans, if any, in excess of $17,500,000 and (ii) on the Termination Date, the entire outstanding principal amount of the Loans." (e) SECTION 4.2. SECTION 4.2 of the Existing Agreement is amended by adding the phrase ", except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and subject to general principles of equity" to the end of the last sentence thereof. (f) SECTION 4.3. SECTION 4.3 of the Existing Agreement is hereby amended by (i) deleting the dates "June 30, 1996", "December 31, 1995" and "June 30, 1996" appearing therein and substituting the dates "September 30, 1997", "December 31, 1996" and "September 30, 1997" respectively, therefor and (ii) deleting the dollar amount "$500,000" in the last sentence thereof and inserting in place thereof "$3,000,000". (g) SECTION 5.4(a). SECTION 5.4(a) of the Existing Agreement is amended by deleting the dollar amount "$23,000,000" appearing therein and substituting the dollar amount "$90,000,000" therefor. (h) SECTION 5.4(b). SECTION 5.4(b) of the Existing Agreement is hereby amended by deleting everything appearing after the phrase "Tangible Net Worth" and before the period appearing therein. (i) SECTION 5.4(e). SECTION 5.4(e) of the Existing Agreement is amended by deleting the phrase "for the Borrower's 1996 fiscal year," and substituting the phrase "for the Borrower's 1998 fiscal year" therefor and deleting the phrase "the Merger (as hereinafter defined) in an aggregate amount not to exceed $2,500,000" and inserting in place of the second deletion, the phrase "any merger, consolidation or other restructuring contemplated by the Merger Agreement or similar transactions only in an aggregate amount not to exceed $25,000,000". 2 (j) SECTION 5.7(ii). SECTION 5.7(ii) of the Existing Agreement is amended by adding the phrase "or ordinary course dividends not to exceed 50% of net income per fiscal quarter of the Borrower before goodwill amortization and any restructuring charges incurred in connection with any merger, consolidation or other restructuring contemplated by the Merger Agreement or similar transactions only" to the end of the parenthetical thereof. (k) SECTION 5.10(b). SECTION 5.10(b) of the Existing Agreement is hereby amended by deleting the first sentence thereof and substituting the following therefor: "Borrower shall use the proceeds of the Revolving Credit Loans for working capital purposes; provided, however, upon the occurrence of the No Restructuring Date (hereinafter defined), the Borrower shall use Revolving Credit Loan proceeds up to the maximum amount of $35,000,000 for working capital purposes (which for avoidance of doubt, shall not include acquisitions of any kind) or to consummate the merger as contemplated by the Merger Agreement (hereinafter defined); provided, further, however, that the outstanding principal balance of the Revolving Credit Loans shall be reduced to $17,500,000 on or before the Reduction Date." (l) SECTION 5.10(b). SECTION 5.10(b) of the Existing Agreement is amended by adding the phrase "Except as contemplated by the Merger Agreement," at the beginning of the second sentence thereof. (m) SECTION 5.11. SECTION 5.11 of the Existing Agreement is amended to add to the end thereof the phrase "; provided, however, in the event the No Reorganization Date shall occur, the Borrower will at all times be at least "adequately capitalized" as defined in the Act referred to above and within sixty (60) days after the Merger Effective Date be and at all times thereafter, be "well capitalized" as defined in such Act". (n) SECTIONS 5.13 and 5.14. New SECTIONS 5.13 and 5.14 are hereby added to the Existing Agreement as follows: "5.13. COLLATERAL. The Borrower shall deliver to the Lender, within one (1) calendar day of the Merger Effective Date, any new, additional, substitute or replacement shares of Western Bank after giving effect to the transactions contemplated by the Merger Agreement, together with stock powers, duly executed in blank and such shares shall constitute Pledged Shares (as defined in the Pledge Agreement) under the Pledge Agreement. 3 5.14. MERGER EFFECTIVE DATE. Within three (3) Banking Days of the Merger Effective Date, the Borrower shall deliver to the Lender the certificate contemplated by the definition of Merger Effective Date. Notwithstanding anything in SECTION 7.1 to the contrary, Borrower's failure to comply with this requirement shall constitute an immediate Event of Default with no further action on the part of the Lender required." (o) SECTION 7.1(c). SECTION 7.1(c) of the Existing Agreement is amended by (i) inserting the phrase "(after giving effect to any applicable cure period)" after the phrase "event of default" appearing therein and (ii) inserting the phrase "in an aggregate principal amount in excess of $1,000,000" after the phrase "or other agreement" after the first time only that such phrase appears therein. (p) SECTION 7.1(h) of the Existing Agreement is amended by (i) adding the phrase "and the Lender shall not have waived in writing any Event of Default arising from such proceeding within five (5) Banking Days of the commencement of such proceeding" immediately before the first semicolon appearing therein, and (ii) deleting the dollar amount "$500,000" appearing therein and inserting in place thereof the dollar amount "$3,000,000". (q) SECTION 7.1(j). SECTION 7.1(j) of the Existing Agreement is amended by deleting the phrase ", or Lender shall otherwise reasonably deem itself insecure" therefrom and substituting the phrase "and Borrower shall not have prepaid the Loans in an amount satisfactory to Lender or delivered additional or substitute collateral acceptable to the Lender within five (5) Banking Days after notice to the Borrower by Lender" therefor. (r) SECTION 7.2(a). SECTION 7.2(a) of the Existing Agreement is amended by deleting the phrase "Section 7.1(l)-(n)" appearing therein and inserting in place thereof "Section 7.1(l)-(m)". (s) DEFINITIONS. The definition of "Commitment" in SECTION 8.1(b) of the Existing Agreement is amended and restated in full to read as provided below and the following additional definitions are hereby added in alphabetical order: "(b) The term Commitment" shall mean (i) $13,000,000 in the aggregate until the Banking Day immediately preceding the Merger Effective Date; (ii) $17,500,000 in the aggregate from the Banking Day immediately preceding the Merger Effective Date until the Termination Date, except as further contemplated in CLAUSE (iii) hereof; and (iii) $35,000,000 in the aggregate from the No Reorganization Date until the Reduction Date only. "Merger Agreement" means the Agreement and Plan of Merger dated as of the 30th day of July 1997 as Amended and Restated as of November 20, 1997 by and among Borrower, Western Bank and Santa Monica Bank, as further amended, modified or supplemented. 4 "Merger Effective Date" means the date specified in a certificate of the Secretary of the Borrower addressed to the Lender certifying that the Merger Agreement or related document has been filed and accepted by the California Secretary of State, but in no event shall such date be earlier than the filing date or later effective date stamped on such document by the California Secretary of State, a copy of which shall accompany such certificate to the Lender. "No Reorganization Date" means the date specified in a certificate of the Secretary of the Borrower delivered to the Lender, which date shall not be more than one day prior to the Merger Effective Date, certifying that the merger described in the Merger Agreement will be an all-cash merger. "Reduction Date" means September 30, 1998." (t) SECTION 11. SECTION 11 of the Existing Agreement is amended by adding the phrase "after an Event of Default or Unmatured Event of Default shall have occurred and be continuing" after the phrase "At any time" appearing therein. (u) SECTION 13. The seventh sentence of SECTION 13 of the Existing Agreement is amended by adding the phrase ", to the extent permitted by applicable law" at the end thereof. Section 3. WAIVER. The Borrower has advised the Lender that it is not or has not been in compliance with SECTIONS 5.2(c) and (e) (FDIC Call Reports and Reports to SEC and Shareholders), 5.4(e) (Return on Average Assets) and 5.7 (Dividends) of the Existing Agreement for fiscal periods ending on and before December 31, 1997. As of and through December 31, 1997, the Lender waives on the Effective Date pursuant to SECTION 7.2(b) of the Existing Agreement compliance by the Borrower with SECTIONS 5.2(c) and (e), 5.4(e) and 5.7 of the Existing Agreement The Lender's waiver of non-compliance with SECTIONS 5.2(c) and (e), 5.4(e) and 5.7 of the Existing Agreement is limited to the specific instance of failure to comply which is described above and shall not be deemed a waiver of or consent to any other failure to comply with the terms of SECTIONS 5.2(c) and (e), 5.4(e) or 5.7 of the Existing Agreement or any other provisions of the Existing Agreement. Such waiver shall not prejudice any right or remedies which the Lender may have or be entitled to with respect to any such other breach of SECTION 5.2(c) and (e), 5.4(e) or 5.7 or any other provision of the Existing Agreement. Section 4. AMENDMENTS TO PLEDGE AGREEMENT. The following amendments are hereby made to the Pledge Agreement with effect only from and after the Effective Date: (a) DEFINITIONS. The definition of "Purchase Agreement" in SECTION 1 of the Pledge Agreement is deleted and the following substituted therefor: "Merger Agreement" shall have the same meaning herein as in the Loan Agreement." (b) SECTION 3(c) OF THE PLEDGE AGREEMENT. SECTION 3(c) of the Pledge Agreement is hereby amended by deleting the phrase "7 calendar days following the date of the 5 Merger" appearing therein and substituting the phrase "one (1) calendar day following the Merger Effective Date" therefor. Section 5. CONDITIONS TO EFFECTIVE DATE. The occurrence of the Effective Date shall be subject to the satisfaction, on and as of the Effective Date, of the following conditions precedent: (a) The Borrower and the Lender shall have executed and delivered this Amendment. (b) No Event of Default or Unmatured Event of Default shall have occurred and be continuing under the Existing Agreement and the representations and warranties of the Borrower in SECTION 4 of the Existing Agreement and in SECTION 9 hereof shall be true and correct on and as of the Effective Date assuming for purposes hereof that the representations and warranties were made as of the Effective Date except for representations and warranties which relate to a specific date and the Borrower shall have provided to the Lender a certificate of a senior officer of the Borrower to that effect. (c) The Borrower shall have provided to the Lender, in form and substance satisfactory to the Lender, a certificate attaching a true and correct copy of its articles of incorporation or bylaws as in effect on the date hereof. (d) The Borrower shall have executed and delivered to the Lender the Restated Note. Lender agrees to return to the Borrower the Amended and Restated Revolving Credit Note dated June 11, 1997 marked "replaced". (e) The Borrower shall have delivered to Lender a copy of a resolution of the Board of Directors of Borrower, authorizing or ratifying, the execution, delivery and performance, respectively, of this Amendment, the Restated Note and the other documents provided for in this Amendment, certified by the secretary or an assistant secretary of Borrower, and further certifying the names of the officer(s) of the Borrower authorized to sign this Amendment, the Restated Note and the other documents provided for in this Amendment, together with a sample of the true signature of each such person (Lender may conclusively rely on such certificate until formally advised by a like certificate of any changes therein). (f) The Borrower shall have delivered to Lender a certificate signed by the secretary or a senior officer of Borrower acceptable to Lender to the effect that attached thereto are true and complete copies of (i) the Merger Agreement, (ii) all governmental approvals, licenses, consents, registrations and filings required for the execution, delivery and performance by Borrower of this Amendment and the agreements, documents and instruments provided for herein and for the consummation of the transaction contemplated by the Merger Agreement. (g) The Borrower shall have delivered to Lender an opinion of counsel to Borrower in the form of EXHIBIT B attached hereto. 6 (h) Borrower shall have paid a $10,000 fee to the Lender in connection with Lender's issuance of a commitment letter specifying the terms contained in this Amendment. (i) The Borrower shall have delivered to Lender such other documents and certificates as Lender may reasonably request. Section 6. EFFECTIVE DATE NOTICE. Promptly following the occurrence of the Effective Date, the Lender shall give notice to the Borrower of the occurrence of the Effective Date, which notice shall be conclusive, and the parties may rely thereon; provided, that such notice shall not waive or otherwise limit any right or remedy of the Lender arising out of any failure of any condition precedent set forth in SECTION 5 to be satisfied. Section 7. TERMINATION. If the Effective Date shall not have occurred on or before January 30, 1998, the Lender may terminate this Amendment by notice in writing to the Borrower at any time before the occurrence of the Effective Date; provided, that the Borrower's obligations under SECTION 14 shall survive any such termination. Section 8. RATIFICATION. The parties agree that neither the Existing Agreement nor the Revolving Credit Note nor the Pledge Agreement has lapsed or terminated; each is in full force and effect, and is and from and after the Effective Date shall remain binding in accordance with its respective terms, as amended hereby. Section 9. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Lender that: (a) NO BREACH. The execution, delivery and performance of this Amendment, the Existing Agreement and Pledge Agreement, each as amended hereby, and the Restated Note will not conflict with or result in a breach of, or cause the creation of a lien or require any consent (which consent has not already been obtained) under the articles of incorporation or bylaws of the Borrower, or any applicable law or regulation, or any order, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Borrower is a party or by which it or its property is bound. (b) POWER AND ACTION: BINDING EFFECT. The Borrower has been duly organized and is validly existing in good standing as a corporation under the laws of the State of California and has all necessary power and authority to execute, deliver and perform its obligations under this Amendment, the Existing Agreement and Pledge Agreement, each as amended hereby, and the Restated Note; the execution, delivery and performance by the Borrower of this Amendment, the Existing Agreement and Pledge Agreement, each as amended hereby, and the Restated Note have been duly authorized by all necessary action on its part; and this Amendment, the Existing Agreement and Pledge Agreement, each as amended hereby, and the Restated Note have been duly and validly executed and delivered by the Borrower and constitute legal, valid and binding obligations, enforceable in accordance with their respective terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws effecting creditors' rights generally and subject to general principles of equity. 7 (c) APPROVALS. Except as set forth on SCHEDULE 9(c) attached hereto, no authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency or any other person are necessary for the execution, delivery or performance by the Borrower of this Amendment, the Existing Agreement or Pledge Agreement, each as amended hereby, or the Restated Note, or for the validity or enforceability thereof. Section 10. CERTAIN USAGES. From and after the Effective Date, each reference to the Existing Agreement, Pledge Agreement or the Revolving Credit Note in the Existing Agreement, the Pledge Agreement and the other agreements, documents or instruments referred to or provided for in or delivered under the Existing Agreement shall be deemed to refer to the Existing Agreement and Pledge Agreement, each as amended hereby, and the Revolving Credit Note as amended by the Restated Note, respectively. Section 11. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of the Borrower, the Lender and their respective successors and assigns, except that the Borrower may not transfer or assign any of its rights or interest hereunder without the prior written consent of Lender. Section 12. GOVERNING LAW. This Amendment shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of Illinois. Section 13. COUNTERPARTS. This Amendment and the Restated Note may be executed in any number of counterparts and either party hereto may execute any one or more of such counterparts, all of which shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment or the Restated Note by telecopier shall be as effective as delivery of a manually executed counterpart of this Amendment or Restated Note, as applicable. Section 14. EXPENSES. Whether or not the Effective Date shall occur, without limiting the obligations of the Borrower under the Existing Agreement or Pledge Agreement, the Borrower agrees to pay, or to reimburse on demand, all reasonable costs and expenses incurred by the Lender in connection with the negotiation, preparation, execution, delivery, modification, amendment or enforcement of this Amendment, the Existing Agreement and the Pledge Agreement, as amended hereby, the Restated Note and the other agreements, documents and instruments referred to herein, including the reasonable fees and expenses of Gardner, Carton & Douglas, special counsel to the Lender. 8 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers as of the day and year first above written. WESTERN BANCORP (formerly known Monarch Bancorp) By: /s/ Arnold C. Hahn ------------------------------- Name: Arnold C. Hahn Title: Executive Vice President and Chief Financial Officer THE NORTHERN TRUST COMPANY By: /s/ Thomas E. Bernhardt ------------------------------- Name: Thomas E. Bernhardt Title: Vice President 9 EXHIBIT A SECOND AMENDED AND RESTATED REVOLVING CREDIT NOTE (Bank Holding Company) $35,000,000 Chicago, Illinois January 26, 1998 FOR VALUE RECEIVED, on or before September 25, 1999, the scheduled maturity date hereof, WESTERN BANCORP (formerly known as Monarch Bancorp), a California corporation ("BORROWER"), promises to pay to the order of THE NORTHERN TRUST COMPANY, an Illinois banking corporation (hereafter, together with any subsequent holder hereof, called "LENDER"), at its main banking office at 50 South LaSalle Street, Chicago, Illinois 60675, or at such other place as Lender may direct, the aggregate unpaid principal balance of each advance (a "LOAN" and collectively the "LOANS") made by Lender to Borrower under the Revolving Credit Agreement (hereinafter defined); provided, however, the Borrower agrees to pay in full on or before the Reduction Date the outstanding principal balance of all Loans in excess of $17,500,000, together with all accrued and unpaid interest thereon. The total principal amount of Loans outstanding at any one time hereunder shall not exceed THIRTY FIVE MILLION UNITED STATES DOLLARS ($35,000,000). Lender is hereby authorized by Borrower at any time and from time to time at Lender's sole option to attach a schedule (grid) to this Note and to endorse thereon notations with respect to each Loan specifying the date and principal amount thereof, and the date and amount of each payment of principal and interest made by Borrower with respect to each such Loan. Lender's endorsements as well as its records relating to Loans shall be rebuttably presumptive evidence of the outstanding principal and interest on the Loans, and, in the event of inconsistency, shall prevail over any records of Borrower and any written confirmations of Loans given to Borrower. Borrower agrees to pay interest on the unpaid principal amount from time to time outstanding hereunder at on the dates and at the rate or rates as set forth in the Revolving Credit Agreement (as hereinafter defined). Payments of both principal and interest are to be made in immediately available funds in lawful money of the United States of America. This Note evidences indebtedness incurred under a Revolving Credit Agreement dated as of September 25, 1996 executed by and between the Borrower and Lender (together with all amendments, restatements and replacements thereto or therefor, the "REVOLVING CREDIT AGREEMENT"), to which Revolving Credit Agreement reference is hereby made for a statement of its terms and provisions, including without limitation those under which this Note may be paid prior to its due date or have its due date accelerated. Capitalized terms used but not otherwise defined in this Note shall have the same meaning herein as in the Revolving Credit Agreement. This Note amends and restates in full the Amended and Restated Revolving Credit Note dated June 11, 1997 in the principal amount of $13,000,000 issued by the Borrower under the Revolving Credit Agreement and evidences the indebtedness previously evidenced thereby. This Note is secured by the collateral provided for in the Pledge Agreement referred to in the Revolving Credit Agreement. This Note and any document or instrument executed in connection herewith shall be governed by and construed in accordance with the internal law of the State of Illinois, and shall be deemed to have been executed in the State of Illinois. Unless the context requires otherwise, wherever used herein the singular shall include the plural and vice versa, and the use of one gender shall also denote the other. This Note shall bind Borrower, its successors and assigns, and shall inure to the benefit of Lender, its successors and assigns, except that Borrower may not transfer or assign any of its rights or interest hereunder without the prior written consent of Lender. Borrower agrees to pay upon demand all expenses (including without limitation attorneys' fees, legal costs and expenses, and time charges of attorneys who may be employees of Lender, in each case whether in or out of court, in original or appellate proceedings or in bankruptcy) incurred or paid by Lender or any holder hereof in connection with the enforcement or preservation of its rights hereunder or under any document or instrument executed in connection herewith. Borrower expressly and irrevocably waives presentment, protest, demand and notice of any kind in connection herewith, to the extent such waiver is permitted by applicable law. WESTERN BANCORP (formerly known as Monarch Bancorp) By: ------------------------------- Name: Arnold C. Hahn Title: Executive Vice President and Chief Financial Officer -2- EXHIBIT C LIST OF SUBSIDIARIES 1. Western Bank, a California corporation. Bank chartered by the State of California. 2. Southern California Bank, a California corporation. Bank chartered by the State of California. 3. M.B. Mortgage Company, Inc., a California corporation. 4. Venture Partners, Inc., a California corporation. SCHEDULE 9(c) APPROVALS 1. Federal Reserve Bank of San Francisco, dated December 16, 1997. 2. Department of Financial Institutions, dated December 17, 1997. 3. Department of Financial Institutions, dated December 19, 1997. 4. Federal Reserve Bank of San Francisco, dated November 25, 1997. 5. Federal Deposit Insurance Corporation, dated December 16, 1997. 6. Federal Deposit Insurance Corporation, dated December 16, 1997. 7. Department of Financial Institutions, dated December 19, 1997. 8. Department of Financial Institutions, dated December 17, 1997. EX-10.5 4 EXHIBIT 10.5 EMPLOYMENT AGREEMENT This employment agreement (the "Agreement"), dated as of July 9, 1997, by and between William H. Jacoby ("Jacoby"), Chairman of National Bank of Southern California ("NBSC"), and Western Bancorp, a California corporation ("Western," formerly named Monarch Bancorp), is made with reference to the Amended and Restated Agreement and Plan of Merger dated as of December 19, 1996 (the "Merger Agreement") by and between California Commercial Bankshares, the parent of NBSC ("CCB"), and Western. Capitalized terms used herein but not otherwise defined shall have the meanings assigned thereto in the Merger Agreement. Subject to the terms and conditions of this Agreement, Western wishes to provide for Jacoby's continued services to NBSC during the period following the Effective Time and Jacoby is willing to continue to serve as chairman of NBSC and thereafter as consultant to Western. As of the Effective Time, this Agreement replaces the executive salary continuation agreement, dated as of January 2, 1988 (the "Prior Agreement"), between Jacoby and NBSC. Now, therefore, for good and valuable consideration, the receipt, sufficiency and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. DUTIES. From the Effective Time through June 30, 1998 (such date being the "Employment Termination Date" and such period being the "Employment Period"), Jacoby shall serve as Chairman of the Board of NBSC. In addition, Jacoby shall serve as a director of Western until the annual meeting of shareholders of Western in the second quarter of 1998. In his position as Chairman of the Board of NBSC, Jacoby shall promote the welfare of NBSC, with an emphasis on business development and customer retention. His specific duties shall be performed in accordance with a plan to be mutually agreed by Jacoby, Mark H. Stuenkel (President of NBSC) and Hugh S. Smith, Jr. (Chairman of Western). Thereafter, Jacoby shall act as consultant to Western as set forth in Section 7 hereof. 2. TERM. This Agreement, which shall supersede the Prior Agreement, shall not terminate until all payments hereunder have been made in full. 3. COMPENSATION. During the Employment Period, Jacoby will be entitled to receive (i) a salary of (a) $190,000 per annum from the Effective Time through December 31, 1997 and (b) $209,000 per annum from January 1, 1998 through the Employment Termination Date, payable in accordance with NBSC's customary practices, and (ii) the perquisites currently provided to him as chairman of NBSC. Provided that prior to December 31, 1997 Jacoby has NOT voluntarily terminated his employment hereunder or been terminated by NBSC for "Cause" as defined in Section 4(c) hereof, then Jacoby will also be entitled to a bonus for 1997 based on job performance, the earnings of NBSC in relation to its budget and otherwise comparable to the bonus paid for the 1997 plan year to other executives of Western and its affiliates with similar duties, responsibilities and job performance (expected to be approximately $109,725). In addition, on July 1, 1998, Western shall pay to Jacoby, subject to the terms and conditions set forth herein, the sum of $611,639 which may, by mutual agreement, be deferred and -2- paid at a future time and future value. Jacoby shall be entitled to supplemental retirement payments of $80,000 per year from and after the date of Jacoby's 65th birthday, payable monthly on the first day of each month following such birthday for a period of 15 years (the aggregate of such payments not to exceed $1,200,000). 4. TERMINATION OF SERVICE PRIOR TO RETIREMENT (a) DEATH. In the event Jacoby should die before receiving the full amount of the payments provided in Section 3, then subject to clause (c) hereof, Western shall nevertheless pay such sums to Jacoby's representative or the person entitled to receive such payments under Jacoby's will or the laws of descent and distribution at the times due in accordance with Section 3. (b) DISABILITY. In the event Jacoby suffers a disability prior to the Employment Termination Date, Western may terminate Jacoby's employment but, subject to clause (c) hereof, Jacoby shall nevertheless be entitled to receive the payments provided in Section 3 hereof. For purposes of this Agreement, the term "disability" shall mean Jacoby's inability to perform his duties whether by injury (physical or mental), illness, or otherwise, incapacitating Jacoby for a continuous period exceeding 120 days and which at any time after such 120-day period NBSC's Board of Directors shall determine permanently renders Jacoby incapable of performing his services. Any determination made in good faith by NBSC's Board of Directors shall be conclusive and binding upon Jacoby. (c) VOLUNTARY TERMINATION BY JACOBY; TERMINATION BY NBSC FOR "CAUSE." In the event Jacoby's employment with NBSC is terminated prior to the -3- Employment Termination Date either (i) voluntarily by Jacoby (including, without limitation, by not accepting employment pursuant to this Agreement) or (ii) by NBSC for "Cause" (as defined herein), then this Agreement (except for the provisions of Section 6) and all of Western's and NBSC's obligations hereunder shall terminate on the date of such termination and no benefits or payments of any kind shall thereafter be made to Jacoby pursuant to this Agreement. For purposes of this Agreement, "Cause" means: (x) the willful and continued failure by Jacoby substantially to perform Jacoby's duties with the NBSC (other than such failure resulting from Jacoby's disability) after demand for substantial performance has been delivered by NBSC's Board of Directors to Jacoby which specifically identifies the manner in which Jacoby has not substantially preformed his duties; (y) the willful engaging by Jacoby in gross misconduct materially and demonstrably injurious to the Bank; or (z) upon Jacoby's dishonesty, conviction of a serious crime or habitual intemperance. (d) TERMINATION FOR "GOOD REASON." Notwithstanding anything to the contrary contained herein, Jacoby will not be treated as having voluntarily terminated his employment hereunder, if such termination was for "Good Reason" (as defined below). For purposes hereof, the term "Good Reason" shall mean: (i) a change in assignment to a geographical location which is more than 50 miles from the location of the principal executive office of NBSC at the time of entering into this Agreement; or (ii) material breach by NBSC of the terms and conditions of this Agreement. Accordingly, any such termination of employment by Jacoby -4- for Good Reason shall not relieve NBSC of its obligations to make the payments required by Section 3 hereof. 5. STOCK OPTION. Subject to Section 4 hereof, Western and NBSC confirm that certain options held by Jacoby to acquire an additional 5,000 shares at $5.25 per share will vest on January 26, 1998 and that certain options held by Jacoby to acquire an additional 3,333 shares at $6.50 per share will vest on June 27, 1998 (in each case in accordance with the stock option agreements under which such options were issued). 6. COMPETITION. Neither Jacoby nor any corporation, partnership, trust or other entity controlled by Jacoby shall: (a) except for shares of publicly held companies not in excess of 1% of the total outstanding in any one investee, on or before January 1, 1999 (and notwithstanding any early termination of Jacoby's employment under Section 4), engage in, be employed by, acquire an equity interest in or start, or otherwise provide any assistance to, directly or indirectly, any insured depositary institution ("Insured Depositary Institution") in Orange County in the State of California so long as NBSC or its successors or assigns remain an Insured Depositary Institution; (b) at any time following the Effective Time, disclose confidential information regarding Western or its affiliates to any third party, except as required by law, regulation or court order or pursuant to the request of NBSC's (or Western's) Board of Directors; and -5- (c) solicit, directly or indirectly, on its own behalf or on behalf of any other person or entity, management personnel employed by Western or any Western affiliate for employment with any other Insured Depositary Institution; PROVIDED, HOWEVER, that with respect to any of the matters covered in this Section 6, to the extent that any restriction set forth in this Section 6 is adjudicated to be invalid or unenforceable in any jurisdiction, the court making such determination shall have the power to limit, construe or reduce the duration, scope, activity or area of such provision to the extent necessary to render such provision enforceable to the maximum extent permitted by applicable law, such limited form to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. 7. CONSULTING. Western and Jacoby hereby agree that, effective as of July 1, 1998, Jacoby may be requested to provide consulting services to Western through December 31, 1998 including advice on, among other things, pending litigation. Jacoby shall be paid during the term of his engagement as consultant $1,000 for each day actually spent by Jacoby (if any) in consulting hereunder, plus reasonable out-of-pocket expenses, payable quarterly in arrears. 8. EFFECT OF TERMINATION. Except as otherwise agreed by the parties, effective upon the Employment Termination Date Jacoby shall cease to be a director of NBSC. 9. AMENDMENT OF SHAREHOLDER AGREEMENT. The parties hereto agree that Section 5 of the Shareholder Agreement, dated as of December 19, 1996, by and between Jacoby and Western shall be deleted and the following substituted in place thereof: "Omitted." -6- 10. NOTICES. All notices, requests, claims, demands or other communications hereunder shall be in writing and shall be deemed given when delivered personally, upon receipt of a transmission confirmation if sent by telecopy or like transmission and on the next business day when sent by a reputable overnight courier service to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Western: 30000 Town Center Drive Laguna Niguel, California 92677 Telecopier: 714/495-3135 Attention: Arnold C. Hahn If to Jacoby: 11. MISCELLANEOUS. (a) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto without the prior written consent of the other party; PROVIDED, HOWEVER, that the consent of Jacoby shall not be required in the event of a merger or consolidation of Western (in which Western is not the surviving entity) or a sale of all or substantially all of the assets of Western if, in any such transactions, the surviving entity shall assume all of the obligations of Western hereunder. -7- (b) AMENDMENTS. This Agreement may not be changed orally, but only by an agreement in writing signed by the party or parties against whom enforcement of any waiver, change, modification or consent is sought or from whom discharge is sought. (c) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument. (d) HEADINGS. All section headings herein are for convenience of reference only; they are not part of this Agreement, and no construction or reference shall be derived therefrom. (e) CHOICE OF LAW. This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of California, without reference to its conflicts of law principles. (f) PAYMENTS. All payments hereunder shall be net of applicable withholding taxes and other related amounts, if any. (g) EXPENSES. Each party shall be responsible for its own fees and expenses in connection with the preparation and execution of this Agreement. In any dispute arising out of or relating to this Agreement, the prevailing party shall be entitled to reasonable attorney's fees in addition to other costs. -8- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. WILLIAM H. JACOBY ---------------------------------------- WESTERN BANCORP By: /s/ Hugh S. Smith, Jr. ------------------------------------- Name: Hugh S. Smith, Jr. Title: CHAIRMAN Confirmed as to (i) replacement of the Prior Agreement and (ii) Section 5 NATIONAL BANK OF SOUTHERN CALIFORNIA By /s/ Mark H. Stuenkel ------------------------------- Name: Mark H. Stuenkel Title: Pres -9- EX-10.6 5 EXHIBIT 10.6 EXECUTIVE SALARY CONTINUATION AGREEMENT This Executive Salary Continuation Agreement (the "Agreement") is dated as of January 1, 1988, by and between National Bank of Southern California, a national banking association (the "Bank") and Mark H. Stuenkel ("Executive"). R E C I T A L S A. Executive is employed by the Bank as its Executive Vice President; B. The Bank and California Commercial Bankshares, a California corporation ("CCB") and the Bank's parent corporation, have determined that it is in the Bank's best interests to grant the benefits described herein to Executive as an inducement for Executive to remain in the employ of the Bank and for increasing Executive's efforts during such employment; and C. Executive desires to accept the benefits contained herein and to continue in the employ of the Bank. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I BENEFITS UPON RETIREMENT 1.1 PAYMENT OF BENEFITS. Subject to the terms and conditions set forth herein, the Bank agrees that upon Executive's "Retirement" (as defined below) from the Bank, that the Bank shall pay to Executive the sum of Fifty-Five Thousand Dollars ($55,000) per year for a period of fifteen (15) years (the "Retirement Payments"). The Retirement Payments shall be paid by the Bank monthly on the first day of each month following Executive's Retirement until the total is paid in full. 1.2 RETIREMENT. The term "Retirement" shall mean Executive's cessation from active continuous daily employment from the Bank as of the first day of the month following Executive's attainment of age sixty (60) or upon such later date as mutually agreed upon by Executive and the Bank. 1.3 DEATH AFTER RETIREMENT. If Executive shall so retire but die before receiving the full amount of the Retirement Payments which Executive is entitled to hereunder, the Bank shall pay all remaining and unpaid Retirement Payments until such payments are paid in full to Executive's representative, or the person entitled to receive such payments under Executive's will or the laws of descent and distribution. -2- ARTICLE II TERMINATION OF SERVICE PRIOR TO RETIREMENT 2.1 TERMINATION BY DEATH. In the event Executive should die (with the exception of death by suicide within two (2) years of the date of this Agreement in which case all benefits hereunder shall be forfeited) while actively employed by the Bank but prior to Retirement, the Bank shall pay the sum of Fifty-Five Thousand Dollars ($55,000) per year for a period of fifteen (15) years (the "Death Benefits"). The Death Benefits shall be payable in equal monthly installments on the first day of each month following Executive's death to Executive's representative or the person entitled to receive such payments under Executive's will or the laws of descent and distribution. 2.2 TERMINATION BY DISABILITY. In the event Executive's employment with the Bank is terminated because of Executive's disability prior to Retirement, Executive shall be entitled to receive, and shall be 100% vested in (i) the Retirement Payments referred to in Section 1.1 and, if applicable, Section 1.3 hereof, commencing on Executive's retirement age referred to in Section 1.2 hereof, or (ii) if Executive should die before reaching such retirement age, the -3- Death Benefits referred to in Section 2.1 hereof. In lieu of the benefits referred to in (i) and (ii) of the preceding sentence, Executive may elect to receive a disability benefit (the "Disability Benefit") in an amount equal to the then present value of the Retirement Payments referred to in Sections 1.1 and 1.3 hereof. In arriving at the present value of such payments there shall be applied a discount factor equal to two points over the Federal Reserve Discount Rate in effect on the date of termination of employment. Executive's election to receive the Disability Benefit shall be made by written notice to the Bank within one-hundred twenty (120) days after termination of Executive's employment, and the monthly payments shall commence not later than ninety (90) days after receipt of such notice by the Bank. For purposes of this Agreement, the term "disability" shall mean Executive's inability to perform his duties whether by injury (physical or mental), illness, or otherwise, incapacitating Executive for a continuous period exceeding 120 days and which at any time after such 120 day period the Bank's Board of Directors shall determine permanently renders Executive incapable of performing his services. Any determination made in good faith by its Board of Directors shall be conclusive and binding upon Executive. -4- 2.3 VOLUNTARY TERMINATION BY EXECUTIVE; TERMINATION BY BANK FOR "CAUSE". In the event Executive's employment with the Bank is terminated prior to Retirement either (i) voluntarily by Executive other than for "Good Reason" (as defined below) or (ii) by the Bank for "Cause" (as defined herein), then this Agreement and all of Bank's obligations hereunder shall terminate on the date of such termination and no benefits or payments of any kind shall be made to Executive pursuant to this Agreement. For purposes of this Agreement, "Cause" means: (a) The willful and continued failure by Executive substantially to perform Executive's duties with the Bank (other than such failure resulting from Executive's disability) after demand for substantial performance has been delivered by the Bank's Board of Directors to Executive which specifically identifies the manner in which Executive has not substantially performed his duties; (b) The willful engaging by Executive in gross misconduct materially and demonstrably injurious to the Bank; or (c) Upon Executive's dishonesty, conviction of a serious crime or habitual intemperance. The term "Good Reason" shall mean: (i) The assignment to Executive without Executive's express consent of duties which constitute a material reduction in the importance of Executive's current position, authority or responsibilities or any other material adverse change in Executive's current position, authority and responsibilities or any other material adverse -5- change in Executive's current position, authority and responsibilities; or (ii) a change in assignment to a geographical location which is more than fifty (50) miles from the location of the principal executive office of the Bank at the time of entering into this Agreement; or (iii) material breach by the Bank of the terms and conditions of this Agreement. 2.4 OTHER TERMINATION OF SERVICE BY BANK. In the event Executive's employment with the Bank is terminated by the Bank prior to Executive's Retirement for any reason other than for Executive's death, disability, or for Cause, or is terminated by Executive for "Good Reason," then Executive shall be entitled to (i) the Retirement Payments referred to in Section 1.1 and, if applicable, Section 1.3 hereof, commencing on Executive's retirement age referred to in Section 1.2 hereof, or (ii) if Executive should die before reaching such retirement age, the Death Benefits referred to in Section 2.1, but in the case of either (i) or (ii), only to the extent that Executive's interest in such benefits is vested at the time of the termination of Executive's employment. Executive's interest shall vest up to a maximum of one hundred percent (100%) at the rate of ten percent (10%) per year for each year of employment that Executive has been employed by the Bank commencing as of January 1, 1988. A year of employment shall equal twelve (12) full months of continu- -6- ous service by Executive to the Bank from and after January 1, 1988. ARTICLE III CHANGES IN LAW; CHANGE IN CONTROL; ALIENABILITY 3.1 TERMINATION OF AGREEMENT BY REASON OF CHANGES IN LAW. The Bank is entering into this Agreement upon the assumption that certain existing tax laws will continue in substantially their current form for the term of this Agreement. In the event any changes in Federal Law relating to the tax free accumulation of earnings within a life insurance policy, the income tax free payment of proceeds from life insurance policies or the deduction from income of interest payments on certificates of deposit issued by banking institutions shall be adopted and such change or changes shall have the effect of substantially and adversely impacting the economic assumptions upon which this Agreement and the funding mechanism utilized by the Bank were based, the Bank shall have the option unilaterally to terminate this Agreement. Upon such termination by the Bank of this Agreement, Executive shall be 100% vested in the amount set forth in Schedule "A" for the particular year in which such termination occurs. Such amount shall be paid to Executive in a lump sum within three (3) months of such termination of this Agreement. -7- 3.2 CHANGE IN CONTROL. The following provisions will become effective immediately upon the occurrence of a "Change in Control" (as hereinafter defined): (a) If, at the time of a Change in Control, Executive is employed by the Bank pursuant to an employment agreement, the term remaining under such employment agreement shall, if less than three years in duration, be extended for a period of three (3) years from and after the date on which the Change in Control occurs. If Executive is not employed pursuant to the terms of a current employment agreement at the time of a Change in Control, this Agreement shall then become an employment agreement having a term of three (3) years from and after the date on which the Change of Control occurs. (b) Executive will receive cash compensation at an annual rate equal to (i) Executive's annualized base salary in effect immediately prior to the Change in Control, plus (ii) an amount equal to any cash bonus award or awards received by Executive for the year immediately prior to the Change in Control. Such compensation shall be increased annually on Executive's normal salary review date (i.e., January 1 of each year) by whichever of the following amounts results in the greater compensation: (i) an increase of 10% of the compensation in effect for the immediately preceding year or (ii) an -8- increase based upon 80% of the percentage increase in the Consumer Price Index of Urban Wage Earners and Clerical Workers (Revised Series), Los Angeles-Long Beach-Anaheim Average from the month of December last preceding the Change in Control over the December immediately preceding the effective date of adjustment being calculated. In addition, Executive shall continue to receive all non-cash forms of compensation, perquisites and benefits which Executive was receiving prior to the Change in Control. (c) In the case of any termination of Executive's employment by Executive for Good Reason or by the Bank for any reason other than Cause, the Bank shall: (i) pay Executive cash compensation, determined as provided in subparagraph (b) above, during Executive's remaining employment term (including any extension thereof pursuant to subparagraph (a) above), without any reduction for the amount of compensation Executive may receive from any other source (whether or not from another bank or financial institution), PROVIDED, however, the aggregate amount of such payments shall in no event be less than two times the annual cash compensation being paid to Executive at the time of such termination; -9- (ii) maintain in full force and effect, for Executive's continued benefit during the remainder of such term all employee benefit plans and programs in which Executive was entitled to participate immediately prior to such termination, provided that Executive's continued participation is possible under the general terms and provisions of such plans and programs. If Executive's participation in any such plan or program is barred, the Bank shall arrange to provide Executive with benefits substantially similar to those which Executive would otherwise have been entitled to receive under such plans and programs; and (iii) Executive shall continue to be entitled to the benefits provided under Section 2.4 hereof. (d) The other provisions of this Agreement which are not inconsistent with the provisions of this Section 3.2 shall continue in full force and effect. (e) As used herein, a "Change in Control" shall be deemed to have occurred if: (i) Excluding CCB's directors as of the date of this Agreement, any person, or any two or more persons acting as a group, and all affiliates of such person or -10- persons, shall own beneficially more than 40% of CCB's outstanding common stock (exclusive of shares held in the Company's treasury or by the Company's subsidiaries) which shall have been acquired after the date of this Agreement pursuant to a tender offer, exchange offer or series of purchases or other acquisitions, or any combination of those transactions; (ii) There shall be a change in the composition of CCB's or the Bank's Board of Directors at any time within two years after any tender offer, exchange offer, merger, consolidation, sale of assets or contested election or any combination of those transactions (a "Transaction"), so that the persons who are directors of CCB or the Bank immediately before the first Transaction cease to constitute a majority of the Board of Directors of CCB or the Bank or any corporation which may be the successor to CCB or the Bank in any such transaction; or (iii) CCB shall sell, transfer or otherwise dispose of substantially all of its assets and properties including the stock of the Bank or CCB shall cause the Bank to sell, transfer or otherwise dispose of substantially all of its assets and properties. -11- A Change in Control shall be deemed to take place upon the first to occur of those events specified in the foregoing clauses (i), (ii) or (iii). (f) Notwithstanding anything in this Agreement to the contrary, if and to the extent (but only to the extent) that any payment made under this Agreement shall constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code as in effect on January 1, 1987 (or, if at the time of any such "excess parachute payment" said Section 280G shall have been amended to provide more favorable treatment to Executive without materially adversely affecting the Bank or CCB under said amended Section 280G), such payment shall be reduced or extended over a longer period of time to the extent necessary to reduce such "excess parachute payment" to zero. 3.3 ALIENABILITY. Neither Executive nor any other beneficiary under this Agreement shall have the power or right to transfer, assign, anticipate, hypothecate, mortgage, commute or subject any of the benefits hereunder to seizure for the payment of any debts, judgments or obligations of Executive or his beneficiaries. In the event of any attempted assignment or transfer by Executive or any beneficiary of any benefit hereunder, all of Bank's liabilities under this Agreement shall terminate. -12- ARTICLE IV BARK'S OBLIGATIONS HEREUNDER 4.1 FUNDING. The Bank reserves the right, at its sole and exclusive discretion, either to fund the obligations of the Bank undertaken by this Agreement or to refrain from funding the same, and to determine the extent, nature and method of such funding. Should the Bank elect to fund this Agreement, in whole or in part, through the medium of life insurance, or annuity or both, the Bank shall be the owner and beneficiary of such policies. The Bank reserves the absolute right, at its sole discretion, to terminate such life insurance or annuities, as well as any other funding program at any time, in whole or in part. At no time shall Executive be deemed to have any right, title or interest in or to any specified asset or assets of the Bank, including but not limited to any insurance or annuity contract or contracts or the proceeds therefrom. 4.2 UNSECURED. This Agreement shall not be construed to give Executive or his beneficiaries any greater rights than those of any other unsecured creditor of the Bank. Any insurance policy or annuity purchased by the Bank shall not be considered to be a security for the performance of the obligations of this Agreement. -13- ARTICLE V EMPLOYMENT; PARTICIPATION IN OTHER PLANS 5.1 NOT AN EMPLOYMENT CONTRACT. Except as provided in Section 3.2(a) hereof, this Agreement is not an employment contract. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Bank, CCB or any other parent corporation of the Bank, to terminate Executive's employment for any reason or no reason, with or without cause. 5.2 FULL EFFORTS. During the time in which this Agreement is in effect, Executive agrees to devote his full time and attention exclusively to the business and affairs of the Bank, except during vacation, and to use his best efforts to furnish faithful and satisfactory services to the Bank. 5.3 FRINGE BENEFITS. The benefits provided by this Agreement are granted by the Bank as a fringe benefit to Executive and are not part of any salary reduction plan or arrangement deferring any bonus or salary increase. Executive has no option to take any current payment or bonus in lieu of the benefits provided hereunder. -14- 5.4 PARTICIPATION IN OTHER PLANS. Nothing contained in this Agreement shall be construed to alter, abridge or in any manner affect the rights and privileges of Executive to participate in and be covered by any pension, profit sharing, group insurance, bonus, or other similar employee plans which the Bank may now or hereafter have. ARTICLE VI MISCELLANEOUS 6.1 EARLY TERMINATION OF BENEFITS. Notwithstanding any other provisions of this Agreement, Bank may at any time terminate its obligation to pay any Retirement Payments, Death Benefits, or Disability Benefits under Articles I and II hereof, or the unpaid portion of any such benefit, by paying to Executive or Executive's representative the present value of the unpaid portion of such benefit calculated in the manner provided under Section 2.2 hereof. Any benefit which is prepaid pursuant to this provision shall be deemed to be 100% vested for purposes of calculating the amount of such prepayment. 6.2 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, but -15- neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto without the prior written consent of the other party; PROVIDED, HOWEVER, the consent of Executive shall not be required in the event of a merger or consolidation of Bank (in which the Bank is not the surviving entity) or a sale of all or substantially all of the assets of Bank if, in any such transactions, the surviving entity shall (i) have a net worth immediately following the transaction at least equal to the net worth of Bank immediately prior to the transaction and (ii) shall assume all of the obligations of Bank hereunder. 6.3 AMENDMENTS. This Agreement may not be changed orally, but only by an agreement in writing signed by the party or parties against whom enforcement of any waiver, change, modification or consent is sought or from whom discharge is sought. 6.4 WAIVER. No action taken pursuant to this Agreement, including any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant or agreement contained in this Agreement or any exhibit hereto. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. -16- 6.5 NOTICES. All notices or other communications required or permitted hereunder must be in writing and shall be deemed to have been duly given if delivered personally, by telegram or telex, or mailed, postage prepaid, by registered or certified first class (return receipt requested) addressed to the party to be notified. Such notice shall be deemed to have been given as of the date so delivered if delivered in person, at the time confirmed for delivery if by telegram or telex, or ninety-six (96) hours after deposit in the mails as provided above. For purposes of notice, the addresses of the parties hereto, until changed, as hereinafter provided, shall be as set forth directly below. Each party shall have the right to change its address to which notice to such party is to be given by giving written notice thereof to all other parties to this Agreement. If to the Bank to: National Bank of Southern California 3951 South Plaza Drive P. 0. Box 26170 Santa Ana, CA 92799-6170 Attn: Chief Executive Officer If to Executive, to: Mark H. Stuenkel 6.6 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement and supersedes all prior oral and written agreements and understandings between the parties hereto with respect to the subject matter hereof. -17- 6.7 GOVERNING LAW. This Agreement shall be construed as to both validity and performance and enforced in accordance with and governed by the laws of the state of California, without giving effect to the principles of conflict of laws thereof. 6.8 SEVERABILITY. In the event that any provision of this Agreement shall be unenforceable or inoperative as a matter of law, the remaining portions or provisions shall remain in full force and effect. 6.9 COUNTERPARTS. This Agreement shall be executed in two or more identical counterparts, each of which shall be deemed an original but all of which shall constitute one in the same instrument. 6.10 CAPTIONS. Captions of the paragraphs of this Agreement are for reference only and are not to be construed in any way as part of this Agreement. 6.11 ATTORNEYS' FEES. In the event that any party herein commences any legal or equitable action or other proceeding, including without limitation, an action for declaratory relief or any other form of relief, or to enforce, interpret, reform, rescind or in any other manner affect the -18- provisions of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees which may be set by the court in the same action, including any appellate action which may be brought in connection with such action, or in a separate action brought for that purpose, in addition to any other relief to which the party may be entitled. 6.12 AGREEMENT TO PERFORM NECESSARY ACTS. Each of the parties hereto agrees to execute and deliver such other and further documents and to perform such other acts as may be necessary to effectuate the purposes of this Agreement including, but not limited to, Executive agrees to sign any documents and undergo any medical examination or tests which may be necessary for Bank to acquire a life insurance or annuity policy on Executive's life. [Signature Page Follows] -19- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "Bank" NATIONAL BANK OF SOUTHERN CALIFORNIA By: /s/ William H. Jacoby -------------------------------- William H. Jacoby, President and Chief Executive Officer "Executive" /s/ Mark H. Stuenkel -------------------------------- Mark H. Stuenkel -20- MARK STUENKEL ------------ Accrued Salary Plan Continuation Year Liability -------- ------------ 1988 = 1 3,625 2 7,630 3 12,054 4 16,942 5 22,341 6 28,306 7 34,895 8 42,175 9 50,216 10 59,100 11 68,913 12 79,755 13 91,731 14 104,962 15 119,578 16 135,725 17 153,563 18 173,268 19 195,037 20 219,065 21 245,651 22 274,999 23 307,421 24 343,237 25 382,803 26 426,513
EXHIBIT A EX-10.7 6 EXHIBIT 10.7 EMPLOYMENT AGREEMENT AGREEMENT, dated as of December 31, 1997, by and among Western Bancorp ("Western"), Western Bank and Aubrey L. Austin (the "Employee"). WHEREAS, Western Bank has entered into an Agreement and Plan of Merger, dated as of July 30, 1997, and amended and restated as of November 20, 1997, by and among Western, Western Bank and Santa Monica Bank (the "Merger Agreement"), as a result of which Western Bank will merge with Santa Monica Bank, with Western Bank as the surviving corporation (hereinafter referred to as "Employer"), which then will change its name to Santa Monica Bank, and Western will own 100% of the shares of Employer's common stock; and WHEREAS, in connection with the transactions contemplated by the Merger Agreement, Employer and Employee consider it desirable to enter into this employment agreement (the "Agreement") to provide for ongoing employment. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. (a) Employer hereby agrees to employ Employee, and Employee agrees to serve as an employee of Employer during the Period of Employment, as defined in Section 2, in such capacity as is set forth herein and initially as Chairman of the Board ("Chairman"), President and Chief Executive Officer of Employer with the duties and responsibilities as shall be specified in the By-Laws of Employer. Employer acknowledges that Employee also shall be appointed as a director of Western. (b) If at any time during the Period of Employment, Employer fails, without Employee's consent, to cause Employee to be elected or re-elected as Chairman, President and Chief Executive Officer of Employer, or removes Employee from such offices, or if at any time during the Period of Employment, Employee shall fail to be vested by the Board of Directors of Employer with the power and authority of Chairman, President and Chief Executive Officer of Employer or Employee shall lose any significant duties or responsibilities attending such offices, Employee shall have the right by written notice to Employer (a "Termination Notice") to terminate his services hereunder, effective as of the thirtieth day following receipt by Employer of the Termination Notice (or such earlier day as shall be individually agreed) (the "Termination Effective Date"), in which event the Period of Employment, as hereinafter defined, shall so terminate on the Termination Effective Date; termination under these circumstances shall be deemed pursuant to paragraph (a) of Section 6 hereof as a termination by Employee for "Good Reason" with all the consequences that flow from such termination. If Employee exercises Employee's right of termination under this paragraph (b), Employee shall resign voluntarily as an employee of Employer and as a Director of Employer and any affiliate on the Termination Effective Date. 2. PERIOD OF EMPLOYMENT. The "Period of Employment" shall be the period commencing on the Effective Date (as such term is defined in the Merger Agreement) and ending on the third anniversary of the Effective Date. 3. DEVOTION TO EMPLOYER'S BUSINESS. Employee shall devote Employee's full business time, attention and best efforts to the affairs of Employer during the Period of Employment, PROVIDED, HOWEVER, that Employee may engage in other activities, such as activities involving professional, charitable, educational, religious and similar types of organizations, speaking engagements, membership on the boards of directors of other organizations (as Employer may from time to time agree to), and similar types of activities to the extent that such other activities do not inhibit or prohibit the performance of Employee's duties under this Agreement, or conflict in any material way with the business of Employer. 4. CURRENT CASH COMPENSATION. (a) BASE ANNUAL SALARY. Employer will pay (or cause to be paid) to Employee during the Period of Employment a base annual salary equal to the base annual salary paid to Employee as -2- of July 30, 1997, payable in accordance with Employer's standard payroll procedures. It is agreed between the parties that Employer shall review the base annual salary as of the Effective Date and annually thereafter and in light of such review may, in the discretion of the Board of Directors of Employer (but shall not be obligated to), increase such base annual salary in accordance with standard policies and practices of Employer with respect to other executive officers of Employer, and Employer may not decrease Employee's base annual salary during the Period of Employment. (b) DISCRETIONARY BONUS. During the Period of Employment, Employee shall be considered annually by the Human Resources Committee of the Board of Directors of Employer for a discretionary bonus payment by Employer made in accordance with the compensation policies and practices of Employer as presently in effect or as they may be modified by Employer from time to time, taking into account the performance of Employer and bonuses awarded to similar positions in Employer. 5. OTHER EMPLOYEE BENEFITS. (a) VACATION AND SICK LEAVE. Employee shall be entitled to paid annual vacation periods and to sick leave in accordance with the policies of Employer as in effect as of the date hereof or as may be modified by Employer from time to time as may be applicable to officers of Employee's rank employed by Employer, but in no event less than that provided to Employee at July 30, 1997. (b) INCENTIVE STOCK PLAN. Employee shall be eligible to participate in the Incentive Stock Option Plan of Employer, as in effect as of the date hereof or as may be modified by Employer from time to time, in such amounts and upon such terms as may be prescribed by the Human Resources Committee of the Board of Directors of Employer in its sole discretion consistent with established practices and procedures for officers holding similar positions with Employer. -3- (c) EMPLOYEE BENEFIT PLANS OR ARRANGEMENTS. Subject to Section 6(a) hereof, Employee shall be entitled to participate in all employee benefit plans of Employer, as presently in effect or as they may be modified by Employer from time to time, under such terms as may be applicable to officers of Employee's rank employed by Employer, including, without limitation, plans providing retirement benefits, medical insurance, life insurance, disability insurance, and accidental death or dismemberment insurance. Immediately upon termination of the Period of Employment, Employer shall provide all requested assistance to allow Employee to elect continuation coverage under all medical, dental, prescription medicines and other plans through which coverage was provided to Employee by Employer under the requirements of 29 U.S.C. Section 1161 ("COBRA") (Consolidated Omnibus Budget Reconciliation Act) [Pub. L. 99-272]. The cost of all premiums assessed with regard to continuation health care coverage under COBRA shall be paid by Employer. (d) EXPENSES. Employee shall be reimbursed for reasonable travel and other expenses incurred or paid by Employee in connection with the performance of his services under this Agreement, upon presentation of expense statements or vouchers or such other supporting information as may from time to time be requested, in accordance with such policies of Employer as are in effect as of the date hereof and as may be modified by Employer from time to time, under such terms as may be applicable to officers of Employee's rank employed by Employer. Reasonable other expenses shall include, but not be limited to, the costs of (or dues and incidental expenses associated with) maintaining membership at the Riviera Country Club and the Santa Monica Rotary Club. (e) USE OF AUTOMOBILE. Employer shall provide Employee with the use of an automobile appropriate for a President and Chief Executive Officer with optional equipment of Employee's selection for the Period of Employment and six months thereafter. Employer shall pay all operating expenses of the automobile. -4- Employer shall procure and maintain an automobile liability insurance policy on the automobile in accordance with Employer's policy with reference to automobile insurance for employees. 6. TERMINATION. (a) TERMINATION BY EMPLOYER OTHER THAN FOR BREACH OR JUST CAUSE. If Employer should terminate the Period of Employment for other than Breach or Just Cause, as herein defined, or if Employee should terminate the Period of Employment for Good Reason, as herein defined, then after the date of termination the provisions of Section 8 hereof no longer shall apply to Employee, and, in addition to all other benefits, if any, payable as provided for hereunder, Employer shall forthwith cause to be paid to Employee, at the option of Employee, in a lump sum or in equal monthly payments for the balance of the Period of Employment, an amount equal to the sum of (a) the result of multiplying (i) the base annual salary payable to Employee pursuant to paragraph (a) of Section 4 as of the date of termination of the Period of Employment by (ii) the number of years (and fractions thereof) then remaining in the Period of Employment and (b) the result of multiplying (i) the average of the bonuses payable to Employee pursuant to paragraph (b) of Section 4 or otherwise during the three fiscal years immediately preceding the date of the termination of the Period of Employment by (ii) the number of years (and fractions thereof) then remaining in the Period of Employment. "Breach" and "Just Cause" shall mean the continuing failure by Employee to perform substantially his duties with Employer (other than such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance has been delivered to Employee by the Board of Directors of Western; conviction of a felony involving an act of moral turpitude; absenteeism not related to illness, sick leave or vacations, but only after notice from the Board of Directors followed by repetition of such absenteeism; material act of dishonesty; conflicts of interest after notice in writing from the Board of Directors and a reasonable opportunity to remove the conflicts; or such other behavior that has a direct, substantial and adverse effect on Employer so as to be injurious to Employer or to Western. Notwithstanding the foregoing, Employee -5- shall not be deemed to have been terminated for Breach or Just Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire incumbent membership of the Board of Directors of Employer at a meeting of the Board of Directors called and held (after reasonable notice to Employee and an opportunity for Employee, together with Employee's counsel, to be heard before the Board of Directors) for the purpose of determining whether in the good faith opinion of the Board of Directors Employer has Just Cause to terminate Employee's employment. Termination by Employee for "Good Reason" shall mean termination by Employee under the following circumstances: (i) Employee exercises his right to terminate this agreement pursuant to Section 1(b) hereof; (ii) Employer requires Employee to be based anywhere other than the principal offices of Employer in Santa Monica, California (except for travel as reasonably required in the performance of his duties hereunder); (iii) Employer fails to pay Employee the compensation provided for in this Agreement for more than ten business days after receipt of written notice of such nonpayment from Employee; (iv) Employer materially breaches this agreement after Employee has given written notice to Employer of such breach and has given Employer thirty days to rectify the matter complained of; or (v) Employee fails to be elected or reelected as a director of Western. (b) TERMINATION BY EMPLOYER FOR BREACH OR JUST CAUSE. If Employer should terminate the Period of Employment for Breach or Just Cause, Employee will be entitled to be paid the base annual salary otherwise payable to Employee under paragraph (a) of Section 4 through the date the resolution of the Board of Directors is delivered to Employee pursuant to Section 6(a) above. 7. NON-DISCLOSURE. Employee shall not, at any time during or following the Period of Employment, disclose, use, transfer or sell, except in the course of employment with Employer, any confidential information or proprietary data of Employer so long as such information or proprietary data remains confidential and has not been disclosed or is not otherwise in the public domain, except as required by law or pursuant to legal process. -6- 8. NONCOMPETITION AGREEMENT. (a) Subject to Section 6(a) hereof, if Employee is terminated for Breach or Just Cause, Employee hereby agrees that from the Effective Date until the second anniversary of the date of the termination of the Period of Employment (the "Non-Competition Period"), Employee will not (i) engage in the banking business other than on behalf of Employer within the Designated Area (as hereinafter defined), (ii) directly or indirectly own, manage, operate, control, be employed by, or provide management or consulting services in any capacity to any firm, corporation, or other entity (other than Employer) engaged in the banking business in the Designated Area, or (iii) directly or indirectly solicit or otherwise intentionally cause any employee, officer, or member of the respective Boards of Directors of Employer or Western to engage in any action prohibited under (i) or (ii) of this Section 8(a); provided that the ownership by Employee as an investor of not more than one percent of the outstanding shares of stock of any corporation whose stock is listed for trading on any securities exchange or is quoted on the automated quotation system of the National Association of Securities Dealers, Inc., or the shares of any investment company as defined in section 3 of the Investment Company Act of 1940, as amended, shall not in itself constitute a violation of Employee's obligations under this Section 8(a). (b) Employee acknowledges and agrees that irreparable injury will result to Employer and Western in the event of a breach of any of the provisions of this Section 8 (the "Designated Provisions") and that Employer and Western will have no adequate remedy at law with respect thereto. Accordingly, in the event of a material breach of any Designated Provision, and in addition to any other legal or equitable remedy Employer or Western may have, Employer and Western shall be entitled to the entry of a preliminary injunction and a permanent injunction (including, without limitation, specific performance) by a court of competent jurisdiction in Los Angeles, California, to restrain the violation or breach thereof by Employee or any affiliates, agents, or any other persons acting for or with Employee in any capacity whatsoever, and Employee submits to the jurisdiction of such court in any such action. (c) It is the desire and intent of the parties that the provisions of this Section 8 shall be enforced to the fullest extent permissible under the laws and public -7- policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Section 8 shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. In addition, should any court determine that the provisions of this Section 8 shall be unenforceable with respect to scope, duration, or geographic area, such court shall be empowered to substitute, to the extent enforceable, provisions similar hereto or other provisions so as to provide to Employer and Western, to the fullest extent permitted by applicable law, the benefits intended by this Section 8. (d) As used herein, "Designated Area" shall mean the California counties of Orange and Los Angeles. (e) This Section 8 shall be of no force or effect and shall not survive the end of the Period of Employment, provided that the Period of Employment has not been terminated earlier than the third anniversary of the Effective Date for Breach or Just Cause as defined in Section 6(a). 9. REPRESENTATIONS AND WARRANTIES. (a) Employee represents and warrants to Employer that his execution, delivery, and performance of this Agreement will not result in or constitute a breach of, or conflict with, any term, covenant, condition, or provision of any commitment, contract, or other agreement or instrument, including, without limitation, any other employment agreement to which Employee is or has been a party. (b) Employee shall indemnify, defend, and hold harmless Employer and Western for, from and against any and all losses, claims, suits, damages, expenses, or liabilities, including court costs and counsel fees, that Employer or Western has incurred or to which Employer or Western may become subject, insofar as such losses, claims, suites, damages, expenses, liabilities, costs, or fees arise out of or are based upon any failure of any representation or warranty of Employee in Section 9(a) hereof to be true and correct when made. -8- 10. INDEMNIFICATION OF EMPLOYEE. Employer shall, to the maximum extent permitted by law, indemnify and hold Employee harmless for any acts or decisions made in good faith while performing services for Employer. To the same extent, Employer will pay, and subject to any legal limitations, advance all expenses, including reasonable attorney's fees and costs, of court-approved settlements actually and necessarily incurred by Employee in connection with the defense of any action, suit or proceeding and in connection with any appeal that has been brought against Employee by reason of his service as an officer or agent of Employer. Employer shall use its best efforts to obtain coverage for Employee (provided it may be obtained at a reasonable cost) under any liability insurance policy or policies now in force of hereafter obtained during the term of this Agreement that cover other officers of Employer having comparable or lesser status and responsibility. 11. GOVERNING LAW. This Agreement is governed by and is to be construed and enforced in accordance with the laws of the State of California. If under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement; the invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 12. NOTICES. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person, or forty-eight (48) hours after deposit thereof in the U.S. mails, postage prepaid, for delivery as registered or certified mail, addressed, in the case of: -9- (a) Employee, to: Aubrey L. Austin c/o Santa Monica Bank 1251 Fourth Street Santa Monica, California 90401 (b) Employer, to: Western Bancorp 1251 Westwood Blvd. Los Angeles, California 90024 Attention: Matthew P. Wagner In lieu of personal notice or notice by deposit in the U.S. mail, a party may give notice by confirmed telegram, telex or fax. 13. MISCELLANEOUS. (a) ENTIRE AGREEMENT. This Agreement constitutes the entire understanding between Employer and Employee relating to employment of Employee by Employer and supersedes and cancels all prior written and oral agreements and understandings with respect to the subject matter of this Agreement. This Agreement may be amended but only by a subsequent written agreement of the parties. This Agreement shall be binding upon and shall inure to the benefit of Employee, Employee's heirs, executors, administrators and beneficiaries, and Employer and its successors. (b) WITHHOLDING TAXES. All amounts payable to Employee under this Agreement shall be subject to applicable withholding of income, wage and other taxes. 14. DEATH OF EMPLOYEE. If Employee dies prior to the expiration of the Period of Employment, any sums that may be due him from Employer under this Agreement as of the date of death shall be paid to Employee's executors, administrators, heirs, personal representatives, successors and assigns. -10- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the year and day first above written. WESTERN BANCORP By: /s/ Julius G. Christensen ------------------------------ Name: Julius G. Christensen Title: EVP, General Counsel and Secretary WESTERN BANK By: /s/ Julius G. Christensen ------------------------------ Name: Julius G. Christensen Title: EVP /s/ Aubrey L. Austin ------------------------------ Aubrey L. Austin -11- EX-10.8 7 EXHIBIT 10.8 WESTERN BANCORP 4100 NEWPORT PLACE, SUITE 900 NEWPORT BEACH, CALIFORNIA 92660 March 19, 1998 To: Executives of Western Bancorp and Subsidiaries From: Matthew P. Wagner Subject: Western Bancorp Executive Severance Plan Western Bancorp has adopted the Western Bancorp Executive Severance Plan (the "Plan"), as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS Whenever used in this Plan, the following capitalized terms shall have the meanings set forth in this Section 1.1, certain other capitalized terms being defined elsewhere in this Plan: (a) "Board" means the Board of Directors of the Company. (b) "Change in Control" shall mean the occurrence of any of the following: (i) Any "Person" or "Group" (as such terms are defined in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations promulgated thereunder) is or becomes the "Beneficial Owner" (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company, or of any entity resulting from a merger or consolidation involving the Company, representing more than fifty percent (50%) of the combined voting power of the then outstanding securities of the Company or such entity. (ii) The individuals who, as of the date hereof, are members of the Board (the "Existing Directors"), cease, for any reason, to constitute more than fifty percent (50%) of the number of authorized directors of the Company as determined in the manner prescribed in the Company's Articles of Incorporation and Bylaws; PROVIDED, HOWEVER, that if the election, or nomination for election, by the Company's stockholders of any new director was approved by a vote of at least fifty percent (50%) of the Existing Directors, such new director shall be considered an Existing Director; PROVIDED FURTHER, HOWEVER, that no individual shall be considered an Existing Director if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies by or on behalf of anyone other than the Board (a "Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest. (iii) The consummation of (x) a merger, consolidation or reorganization to which the Company is a party, whether or not the Company is the Person surviving or resulting therefrom, or (y) a sale, assignment, lease, conveyance or other disposition of all or substantially all of the assets of the Company, in one transaction or a series of related transactions, to any Person other than the Company, where any such transaction or series of related transactions as is referred to in clause (x) or clause (y) above in this subparagraph (iii) (a "Transaction") does not otherwise result in a "Change in Control" pursuant to subparagraph (i) of this definition of "Change in Control"; PROVIDED, HOWEVER, that no such Transaction shall constitute a "Change in Control" under this subparagraph (iii) if the Persons who were the shareholders of the Company immediately before the consummation of such Transaction are the Beneficial Owners, immediately following the consummation of such Transaction, of fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Person surviving or resulting from any merger, consolidation or reorganization referred to in clause (x) above in this subparagraph (iii) or the Person to whom the assets of the Company are sold, assigned, leased, conveyed or disposed of in any transaction or series of related transactions referred in clause (y) above in this subparagraph (iii). -2- (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Company" means Western Bancorp, a California corporation, and any successor or assignee as provided in Article V. (e) "Compensation" means your highest annual compensation for any calendar year in the three calendar years ending with the calendar year which includes the date of your termination of employment with the Company and its Subsidiaries, with your compensation for any such calendar year in which you do not complete twelve (12) months of service being annualized on the basis of a twelve (12) month year. For purposes of determining your "Compensation," your annual compensation for any calendar year or portion thereof shall be limited to your base salary, your nonaccountable automobile and other expense allowances, and your bonus attributable to such calendar year regardless of when paid (or, if you did not receive a bonus for a calendar year, your target bonus), before reductions for any amounts excludable from your gross income for federal income tax purposes pursuant to Section 125 or Section 401(k) of the Code or under any nonqualified deferred compensation plan. "Compensation" shall NOT include your income from the grant or vesting of restricted stock, or from the grant, vesting, or exercise of stock options. (f) "Disability" means a physical or mental infirmity which substantially impairs your ability to perform your material duties for a period of at least one hundred eighty (180) consecutive calendar days, and, as a result of such Disability, you have not returned to your full-time regular employment prior to termination. (g) "Employee Grade" means the grade within the compensation system to which you are assigned by the Company. (h) "Executive" means a regular full-time salaried or hourly employee of the Company or its Subsidiaries in Employee Grades 1, 2, 3, A or B who does not have an individual agreement with the Company or its Subsidiaries regarding severance payments. (i) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (j) "Good Reason" means any of the following events, provided that you give the Company or its Subsidiary -3- at least thirty (30) days prior written notice of your termination with the Company or its Subsidiary: (i) a reduction by the Employer in the your base salary as in effect immediately before such reduction; or (ii) a diminution in your duties and responsibilities, as in effect immediately before the Change in Control, or an adverse change, after the occurrence of a Change in Control, in your place in the Company's organization chart or in the seniority of the individual to whom you report; or (iii) a material reduction in the your annual target bonus opportunity (if any) (for this purpose, a reduction for any year of over ten percent (10%) of your annual target bonus opportunity (if any) measured by the preceding year shall be considered "material"); or (iv) a material reduction in your Welfare Benefits (for this purpose, a reduction for any one year of over ten percent (10%) of aggregate Welfare Benefits shall be considered "material"); or (v) the failure by the Company or its Subsidiaries to provide and credit you with the number of accrued annual leave days to which you are then entitled in accordance with the Company's normal annual leave policy as in effect immediately before the Change in Control; or (vi) the Employer's requiring you to be based more than twenty five (25) miles from the location of your place of employment immediately before the Change in Control, except for normal business travel in connection with your duties with the Company or its Subsidiaries. (k) "Just Cause" means: (i) the willful and continued failure by you to perform substantially your duties with the Company and its Subsidiaries, and such willful and continued failure continues after a demand for substantial performance is delivered to you by the Company or its Subsidiaries which specifically identifies the manner in which you have not substantially performed your duties; or (ii) the willful engaging by you in conduct which is materially and demonstrably injurious to the -4- business or reputation of the Company or its Subsidiaries. For purposes of determining whether "Just Cause" exists, no act or failure to act on your part shall be considered "willful" unless done, or omitted to be done, by you in bad faith and without reasonable belief that the action or omission was in, or not opposed to, the best interests of the Company and its Subsidiaries. (l) "Multiplier" for each Employee Grade shall be the number set forth opposite such Employee Grade below:
Employee Grade Multiplier -------------- ---------- Grade One 3 Grade Two 2 Grade Three 2 Grade A 2 Grade B 1
(m) "Person" shall have the meaning set forth in the definition of "Change in Control." (n) "Release" means the Separation and General Release Agreement in the form attached hereto as Exhibit "A". (o) "Severance Payment" means the payment of severance compensation as provided in Article III. (p) "Severance Period" means the number of whole months equal to the product of 12 multiplied by the Multiplier for your Employee Grade, beginning on the date of your termination of employment with the Company and its Subsidiaries. (q) "Subsidiary" means any corporation or other Person, a majority of the voting power, equity securities or equity interest of which is owned directly or indirectly by the Company. (r) "WARN" means the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Section 2101 ET SEQ. (s) "Welfare Benefits" means the medical, dental, disability and life insurance coverages (including coverage under self-insured arrangements or plans) which the Company or its Subsidiaries provide to you or your dependents immediately before a Change in Control. -5- ARTICLE II INDEMNIFICATION AND GROSS-UP FOR EXCISE TAXES 2.1 INDEMNIFICATION AND GROSS-UP The Company hereby indemnifies you and holds you harmless from and against any and all liabilities, costs and expenses (including, without limitation, attorney's fees and costs) you may incur as a result of the excise tax imposed by Section 4999 of the Code or any similar provision of state or local income tax law (the "Excise Tax"), to the end that you shall be placed in the same tax position with respect to the Severance Payment under this Plan and all other payments from the Company to you in the nature of compensation as you would have been in if the Excise Tax had never been enacted. In furtherance of such indemnification, the Company shall pay to you a payment (the "Gross-Up Payment") in an amount such that, after payment by you of all taxes, including income taxes and the Excise Tax imposed on the Gross-Up Payment and any interest or penalties (other than interest and penalties imposed by reason of your failure to file timely tax returns or to pay taxes shown due on such returns and any tax liability, including interest and penalties, unrelated to the Excise Tax or the Gross-Up Amount), you shall be placed in the same tax position with respect to the Severance Payment under this Plan and all other payments from the Company to you in the nature of compensation as you would have been in if the Excise Tax had never been enacted. At such time or times necessary to carry out the purposes of this Article II in view of the withholding requirement of Section 4999(c)(1) of the Code, the Company shall pay to you one or more Gross-Up Payments for the Severance Payment and any other payments in the nature of compensation which the Company determines are "excess parachute payments" under Section 280G(b)(1) of the Code ("Excess Parachute Payments"). If, through a determination of the Internal Revenue Service or any state or local taxing authority (a "Taxing Authority"), or a judgement of any court, you become liable for an amount of Excise Tax not covered by the Gross-Up Payment payable pursuant to the preceding sentence, the Company shall pay you an additional Gross-Up Payment to make you whole for such additional Excise Tax; PROVIDED, HOWEVER, that, pursuant to Section 2.3, the Company shall have the right to require you to protest, contest, or appeal any such determination or judgement. For purposes of this Article II, any amount which the Company is required to withhold under Sections 3402 or 4999 of the Code or under any other provision of law shall be deemed to have been paid to you. -6- 2.2 REPORTING Upon payment to you of a Gross-Up Payment, the Company shall provide you with a written statement showing the Company's computation of such Gross-Up Payment and the Excess Parachute Payments and Excise Tax to which it relates, and setting forth the Company's determination of the amount of gross income you are required to recognize as a result of such payments and your liability for the Excise Tax. You shall cause your federal, state, and local income tax returns for the period in which you receive such Gross-Up Payment to be prepared and filed in accordance with such statement, and, upon such filing, you shall certify in writing to the Company that such returns have been so prepared and filed. At your request, the Company shall furnish to you, at no cost to you, assistance in preparing your federal, state, and local income tax returns for the period in which you receive such Gross-Up Payment in accordance with such statement. Notwithstanding the provisions of Section 2.1, the Company shall not be obligated to indemnify you from and against any tax liability, cost or expense (including, without limitation, any liability for the Excise Tax or attorney's fees or costs) to the extent such tax liability, cost or expense is attributable to your failure to comply with the provisions of this Section 2.2. 2.3 CONTROVERSIES If any controversy arises between you and a Taxing Authority with respect to the treatment on any return of the Gross-Up Amount, or of any payment you receive from the Company as an Excess Parachute Payment, or with respect to any return which a Taxing Authority asserts should show an Excess Parachute Payment, including, without limitation, any audit, protest to an appeals authority of a Taxing Authority or litigation (a "Controversy"), the Company shall have the right to participate with you in the handling of such Controversy. The Company shall have the right, solely with respect to a Controversy, to direct you to protest or contest any proposed adjustment or deficiency, initiate an appeals procedure within any Taxing Authority, commence any judicial proceeding, make any settlement agreement, or file a claim for refund of tax, and you shall not take any of such steps without the prior written approval of the Company, which the Company shall not unreasonably withhold. If the Company elects, you shall be represented in any Controversy by attorneys, accountants, and other advisors selected by the Company, and the Company shall pay the fees, costs and expenses of such attorneys, accountants, or advisors, and any tax liability you may incur as a result of such payment. You shall promptly notify the Company of any communication with a -7- Taxing Authority, and you shall promptly furnish to the Company copies of any written correspondence, notices, or documents received from a Taxing Authority relating to a Controversy. You shall cooperate fully with the Company in the handling of any Controversy by furnishing to the Company any information or documentation relating to or bearing upon the Controversy; PROVIDED, HOWEVER, that you shall not be obligated to furnish to the Company copies of any portion of your tax returns which do not bear upon, and are not affected by, the Controversy. 2.4 REFUNDS You shall pay over to the Company, within ten (10) days after your receipt thereof, any refund you receive from any Taxing Authority of all or any portion of the Gross-Up Payment or the Excise Tax, together with any interest you receive from such Taxing Authority on such refund. For purposes of this Section 2.4, a reduction in your tax liability attributable to the previous payment of the Gross-Up Amount or the Excise Tax shall be deemed to be a refund. If you would have received a refund of all or any portion of the Gross-Up Payment or the Excise Tax, except that a Taxing Authority offset the amount of such refund against other tax liabilities, interest, or penalties, you shall pay the amount of such offset over to the Company, together with the amount of interest you would have received from the Taxing Authority if such offset had been an actual refund, within ten (10) days after receipt of notice from the Taxing Authority of such offset. ARTICLE III SEVERANCE PAYMENTS 3.1 RIGHT TO SEVERANCE PAYMENT; RELEASE Conditioned on the execution and delivery by you (or your beneficiary or personal representative, if applicable) of the Release, you shall be entitled to receive a Severance Payment from the Company in the amount provided in Section 3.2 if (a) you are an Executive, and (b) within twenty four (24) months after the occurrence of a Change in Control, your employment with the Company and its Subsidiaries terminates for any reason other than: (a) Death, (b) Disability, (c) Termination by the Company or its Subsidiaries for Just Cause, -8- (d) Retirement in accordance with the normal retirement policy of the Company, (e) Voluntary termination by you for other than Good Reason, or (f) The sale by the Company of the Subsidiary which employed you before such sale, if you have been offered employment with the purchaser of such Subsidiary on substantially the same terms and conditions under which such you worked for the Subsidiary before the sale. If your employment with the Company or its Subsidiaries terminates before the occurrence of a Change in Control for any reason other than one of those enumerated immediately above, your employment will be deemed to have terminated on the day after the occurrence of the Change in Control if (i) your employment terminates within ninety (90) days before a Change in Control actually occurs, or (ii) you reasonably demonstrate that the Company or its Subsidiaries involuntarily terminated your employment, or gave you Good Reason, at the request of a Person (other than the Company or its Subsidiaries) who has indicated an intention or taken steps reasonably calculated to effect a Change in Control, or otherwise in connection with, or in anticipation of, a Change in Control which actually occurs. 3.2 AMOUNT OF SEVERANCE PAYMENT If you become entitled to a Severance Payment under this Plan, the amount of your Severance Payment, when added to any payments which the Company or its Subsidiaries are required to make to you under WARN, shall equal the product of your Compensation multiplied by the Multiplier for your Employee Grade. 3.3 NO MITIGATION The Company acknowledges and agrees that you shall be entitled to receive your entire Severance Payment regardless of any income which you may receive from other sources following your termination on or after the Effective Time. -9- 3.4 PAYMENT OF SEVERANCE PAYMENT The Severance Payment to which you are entitled shall be paid to you, in cash and in full, not later than eight (8) calendar days after execution and delivery by you (or your beneficiary or personal representative, if applicable) of the Release Agreement, but in no event before the date on which such Release becomes effective. If you should die before all amounts payable to you have been paid, such unpaid amounts shall be paid to your beneficiary under this Plan or, if you have not designated such a beneficiary in writing to the Company, to the personal representative(s) of your estate. 3.5 WELFARE BENEFITS If you are entitled to receive a Severance Payment under Section 3.1, you will also be entitled to receive continued Welfare Benefits on the same basis, including required employee contributions, if any, as in effect for similarly-situated Executives in the employ of the Company or its Subsidiaries, for your Severance Period. Notwithstanding the foregoing, your right to any particular type of Welfare Benefit shall be subject to cancellation by the Company if you or your dependents obtain alternative coverage of a similar type during the Severance Period; provided, however, that if any such alternative group health coverage excludes any pre-existing condition that you or your dependents may have when coverage under such group health plan would otherwise begin, coverage under this Section 3.5 shall continue (but not beyond the Severance Period) with respect to such pre-existing condition until such exclusion under such other group health plan lapses or expires. You shall be obligated to notify the Company's Human Resources Department of any such alternative coverage within thirty (30) days of its first becoming applicable to you or your dependents. In the event you are required to make an election under Sections 601 through 607 of ERISA (commonly known as COBRA) to qualify for continuing health benefits coverage described in this Section 3.5, the obligations of the Company and its Subsidiaries under this Section 3.5 to continue your health benefits coverage shall be conditioned upon your timely making such an election. 3.6 AUTOMOBILE If you become entitled to receive a Severance Payment under Section 3.1, and you then have the use of an automobile that is provided to you at the expense of the Company or any Subsidiary, you shall have the right, for ninety (90) days following your termination of employment, (a) to continue your use of the automobile on the same basis on which you used it immediately before your termination of employment, or (b) to purchase the automobile from the Company or Subsidiary -10- for its low wholesale bluebook value, or, if the Company or Subsidiary has leased the automobile, to assume the lease, or (c) to take the actions described in clauses (a) and (b) of this sentence. 3.7 OUTPLACEMENT SERVICES If you become entitled to receive a Severance Payment under Section 3.1, you will also become entitled to receive outplacement services in accordance with the Company's usual practice. 3.8 WITHHOLDING OF TAXES The Company may withhold from any amounts payable under this Plan all federal, state, city or other taxes required by applicable law to be withheld by the Company. ARTICLE IV OTHER RIGHTS AND BENEFITS NOT AFFECTED 4.1 OTHER BENEFITS This Plan does not provide a pension for you, nor shall any payment hereunder be characterized as deferred compensation. Except as set forth in Section 4.2, neither the provisions of this Plan nor the Severance Payment provided for hereunder shall reduce any amounts otherwise payable, or in any way diminish your rights as an employee, whether existing now or hereafter, under any written benefit, incentive, retirement, stock option, stock bonus or stock purchase plan or any written employment agreement or other written plan or arrangement not related to severance. 4.2 OTHER SEVERANCE PLANS SUPERSEDED As of the Effective Time, this Plan will supersede any and all other severance plans of the Company or its Subsidiaries to the extent they apply to Executives (except for any individual severance agreement between you and the Company and its Subsidiaries), and your participation in any other severance plan of the Company and its Subsidiaries will be hereby terminated. 4.3 EMPLOYMENT STATUS This Plan does not constitute a contract of employment or impose on you any obligation to remain in the employ of the Company, nor does it impose on the Company or any of its Subsidiaries any obligation to retain you in your present or any other position, nor does it change the status of your -11- employment as an employee at will. Nothing in this Plan shall in any way affect the right of the Company or any of its Subsidiaries in its absolute discretion to change or reduce your compensation at any time, or to change at any time one or more benefit plans, including but not limited to pension plans, dental plans, health care plans, savings plans, bonus plans, vacation pay plans, disability plans, and the like. ARTICLE V SUCCESSOR TO COMPANY The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in this Plan, shall mean (from and after, but not before, the occurrence of such event) the Company as herein before defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Plan. ARTICLE VI CONFIDENTIALITY 6.1 NONDISCLOSURE OF CONFIDENTIAL MATERIAL In the performance of your duties, you have previously had, and may in the future have, access to confidential records and information, including, but not limited to, development, marketing, purchasing, organizational, strategic, financial, managerial, administrative, manufacturing, production, distribution and sales information, data, specifications and processes presently owned or at any time hereafter developed by the Company or its agents or consultants or used presently or at any time hereafter in the course of its business, that are not otherwise part of the public domain (collectively, the "Confidential Material"). All such Confidential Material is considered secret and has been and/or will be disclosed to you in confidence. By your acceptance of your Severance Payment under this Plan, you shall be deemed to have acknowledged that the Confidential Material constitutes proprietary information of the Company which draws independent economic value, actual or potential, from not being generally known to the public or to other persons who could obtain economic value from its disclosure or use, and that the Company has taken efforts reasonable under the circumstances, of which this Section 6.1 is an -12- example, to maintain its secrecy. Except in the performance of your duties to the Company, you shall not, directly or indirectly for any reason whatsoever, disclose or use any such Confidential Material, except that the foregoing disclosure prohibition shall not apply as to Confidential Material that (i) has been publicly disclosed or was within your possession prior to its being furnished to you by the Company or becomes available to you on a nonconfidential basis from a third party (in any of such cases, not due to a breach by you of your obligations to the Company or by breach of any other person of a confidential, fiduciary or confidential obligation, the breach of which you know or reasonably should know), (ii) is required to be disclosed by you pursuant to applicable law, and you provide notice to the Company of such requirement as promptly as possible, or (iii) was independently acquired or developed by you without violating any of the obligations under this Plan and without relying on Confidential Material of the Company. All records, files, drawings, documents, equipment and other tangible items, wherever located, relating in any way to the Confidential Material or otherwise to the Company's business, which you have prepared, used or encountered or shall in the future prepare, use or encounter, shall be and remain the Company's sole and exclusive property and shall be included in the Confidential Material. Upon your termination of employment with the Company, or whenever requested by the Company, you shall promptly deliver to the Company any and all of the Confidential Material and copies thereof, not previously delivered to the Company, that may be, or at any previous time has been, in your possession or under your control. 6.2 NONSOLICITATION OF EMPLOYEES By your acceptance of your Severance Payment under this Plan, you agree that, for a period of two (2) years following your termination of employment with the Company or its Subsidiaries, neither you nor any Person or entity in which you have an interest shall solicit any person who was employed on the date of your termination of employment by the Company or any of its Subsidiaries to leave the employ of the Company or any of its Subsidiaries. Nothing in this Section 6.2, however, shall prohibit you or any Person or entity in which you have an interest from placing advertisements in periodicals of general circulation soliciting applications for employment, or from employing any person who answers any such advertisement. For purposes of this Section 6.2, you shall not be deemed to have an interest in any corporation whose stock is publicly traded merely because you are the owner of not more than two percent (2%) of the outstanding shares of any class of stock of such corporation, provided you have no active participation in the business of such corporation (other than voting your stock) and you do not -13- provide services to such corporation in any capacity (whether as an employee, an independent contractor or consultant, a board member, or otherwise). 6.3 EQUITABLE RELIEF By your acceptance of your Severance Payment under this Plan, you shall be deemed to have acknowledged that violation of Sections 6.1 or 6.2 would cause the Company irreparable damage for which the Company cannot be reasonably compensated in damages in an action at law, and that therefore in the event of any breach by you of Sections 6.1 or 6.2, the Company shall be entitled to make application to a court of competent jurisdiction for equitable relief by way of injunction or otherwise (without being required to post a bond). This provision shall not, however, be construed as a waiver of any of the rights which the Company may have for damages under this Plan or otherwise, and, except as limited in Article VII, all of the Company's rights and remedies shall be unrestricted. ARTICLE VII ARBITRATION Except for equitable relief as provided in Section 6.3, arbitration in accordance with the then most applicable rules of the American Arbitration Association shall be the exclusive remedy for resolving any dispute or controversy between you and the Company or any of its Subsidiaries, including, but not limited to, any dispute regarding your employment or the termination of your employment or any dispute regarding the application, interpretation or validity of this Plan not otherwise resolved through the claims procedure set forth in Section 8.10. The arbitrator shall be empowered to grant only such relief as would be available in a court of law. In the event of any conflict between this Plan and the rules of the American Arbitration Association, the provisions of this Plan shall be determinative. If the parties are unable to agree upon an arbitrator, they shall select a single arbitrator from a list designated by the office of the American Arbitration Association having responsibility for the city in which you primarily performed services for the Company or its Subsidiaries immediately before your termination of employment of seven arbitrators, all of whom shall be retired judges who are actively involved in hearing private cases or members of the National Academy of Arbitrators, and who, in either event, are residents of the area in which you primarily performed services for the Company or its Subsidiaries immediately before your termination of employment. If the parties are unable to agree upon an arbitrator from such list, they shall each -14- strike names alternatively from the list, with the first to strike being determined by lot. After each party has used three strikes, the remaining name on the list shall be the arbitrator. The fees and expenses of the arbitrator shall initially be borne equally by the parties; PROVIDED, HOWEVER, that each party shall initially be responsible for the fees and expenses of its own representatives and witnesses. Unless mutually agreed otherwise by the parties, any arbitration shall be conducted at a location within fifty (50) miles from the location in which you primarily performed services for the Company or any of its Subsidiaries immediately before your termination of employment. If the parties cannot agree upon a location for the arbitration, the arbitrator shall determine the location within such fifty (50) mile radius. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. The prevailing party in the arbitration proceeding, as determined by the arbitrator, and in any enforcement or other court proceedings, shall be entitled to the extent provided by law to reimbursement from the other party for all of the prevailing party's costs (including but not limited to the arbitrator's compensation), expenses and reasonable attorney's fees. ARTICLE VIII MISCELLANEOUS 8.1 APPLICABLE LAW To the extent not preempted by the laws of the United States, the laws of the State of California shall be the controlling law in all matters relating to this Plan, regardless of the choice-of-law rules of the State of California or any other jurisdiction. 8.2 CONSTRUCTION No term or provision of this Plan shall be construed so as to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Plan and any present or future statute, law, ordinance, or regulation, the latter shall prevail, but in such event the affected provision of this Plan shall be curtailed and limited only to the extent necessary to bring such provision within the requirements of the law. 8.3 SEVERABILITY If a provision of this Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of this Plan and this Plan shall be construed -15- and enforced as if the illegal or invalid provision had not been included. 8.4 HEADINGS The Section headings in this Plan are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Plan or of any particular Section. 8.5 ASSIGNABILITY Your rights or interests under this Plan shall not be assignable or transferrable (whether by pledge, grant of a security interest, or otherwise) by you, your beneficiaries or legal representatives, except by will or by the laws of descent and distribution. 8.6 TERM This Plan shall continue in full force and effect until its terms and provisions are completely carried out, unless terminated by the Board with at least a two-thirds majority before the occurrence of a Change in Control; provided, however, that no termination of this Plan shall be effective if made while the Company (or any Person acting on the Company's behalf) is conducting negotiations to effect a Change in Control, or within ninety (90) days before the Company (or any Person acting on its behalf) executes a letter of intent (whether or not binding) or a definitive agreement to effect a Change in Control. 8.7 AMENDMENT This Plan may be amended in any respect by resolution adopted by the Board with at least a two-thirds majority until Change in Control occurs; provided, however, that this Section 8.7 shall not be amended, and no amendment shall be effective if made while the Company (or any Person acting on the Company's behalf) is conducting negotiations to effect a Change in Control, or within ninety (90) days before the Company (or any Person acting on its behalf) executes a letter of intent (whether or not binding) or a definitive agreement to effect a Change in Control. After a Change in Control occurs, this Plan shall no longer be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever. No agreement or representations, written or oral, express or implied, with respect to the subject matter hereof, have been made by the Company which are not expressly set forth in this Plan. -16- 8.8 NOTICES For purposes of this Plan, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered, telecopied, or sent by certified or overnight mail, return receipt requested, postage prepaid, addressed to the respective addresses, or sent to the respective telecopier numbers, last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board of Directors with a copy to the General Counsel. All notices and communications shall be deemed to have been received on the date of delivery thereof if personally delivered, upon return confirmation if telecopied, on the third business day after the mailing thereof, or on the date after sending by overnight mail, except that notice of change of address shall be effective only upon actual receipt. No objection to the method of delivery may be made if the written notice or other communication is actually received. 8.9 ADMINISTRATION This Plan constitutes a welfare benefit plan within the meaning of Section 3(1) of ERISA. This letter constitutes the governing document of the Plan and the Summary Plan Description under ERISA. The Administrator of the Plan, within the meaning of Section 3(16) of ERISA, and the Named Fiduciary thereof, within the meaning of Section 402 of ERISA, is the Company. Attached hereto as Exhibit "B" is a statement of your rights under ERISA. 8.10 CLAIMS If you believe you are entitled to a benefit under this Plan, you may make a claim for such benefit by filing with the Company a written statement setting forth the amount and type of payment so claimed. The statement shall also set forth the facts supporting the claim. The claim may be filed by mailing or delivering it to the Secretary of the Company. Within sixty (60) calendar days after receipt of such a claim, the Company shall notify you in writing of its action on such claim and if such claim is not allowed in full, shall state the following in a manner calculated to be understood by you: (a) The specific reason or reasons for the denial; (b) Specific reference to pertinent provisions of this Plan on which the denial is based; -17- (c) A description of any additional material or information necessary for you to be entitled to the benefits that have been denied and an explanation of why such material or information is necessary; and (d) An explanation of this Plan's claim review procedure. If you disagree with the action taken by the Company, you or your duly authorized representative may apply to the Company for a review of such action. Such application shall be made within one hundred twenty (120) calendar days after receipt by you of the notice of the Company's action on your claim. The application for review shall be filed in the same manner as the claim for benefits. In connection with such review, you may inspect any documents or records pertinent to the matter and may submit issues and comments in writing to the Company. A decision by the Company shall be communicated to you within sixty (60) calendar days after receipt of the application. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by you, and specific references to the pertinent provisions of this Plan on which the decision is based. Sincerely, WESTERN BANCORP By: --------------------- Matthew P. Wagner President and Chief Executive Officer -18- EX-21.0 8 EXHIBIT 21.0 Exhibit 21.0 Subsidiaries of Western Bancorp 1. M.B. Mortgage Company, Inc., a California corporation 2. Santa Monica Bank, a California corporation 3. Southern California Bank, a California corporation 4. WBC Management Company, Inc., a California corporation 5. Venture Partners, Inc., a California corporation 6. SMB Development Company, a California Company EX-23.1 9 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent, as successor accountants of Dayton & Associates (said firm being merged with and into Vavrinek, Trine, Day & Co. on September 1, 1996) to the incorporation by reference of their Independent Auditors Report dated February 29, 1996 regarding the consolidated balance sheets of Monarch Bancorp and Subsidiaries as of December 31, 1995 and December 31, 1994, and the related statements of operations, changes in capital, and cash flows for each of the two years in the period ended December 31, 1995, in the Form 10-K of Western Bancorp filed with the Securities and Exchange Commission, which is to be incorporated by reference in the Form S-8 of Western Bancorp related to its 401(k) Plan. /s/ VAVRINEK, TRINE, DAY & Co., LLP March 23, 1998 Laguna Hills, California EX-23.2 10 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Western Bancorp: We consent to the incorporation by reference in the registration statement (No. 333-44609) on Form S-8 of Western Bancorp related to its 401(K) Plan of our report dated January 30, 1998, relating to the consolidated balance sheets of Western Bancorp as of December 31, 1997 and 1996 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the two-year period ended December 31, 1997 which report appears in the December 31, 1997, annual report on Form 10-K of Western Bancorp. Our report, dated January 30, 1998, contains explanatory paragraphs indicating that: (i) We did not audit the 1996 consolidated financial statements of California Commercial Bankshares. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for California Commercial Bankshares in the 1996 consolidated financial statements of Western Bancorp, is based on the report of the other auditors; (ii) We did not audit the 1996 consolidated financial statements of SC Bancorp. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for SC Bancorp in the 1996 consolidated financial statements of Western Bancorp, is based on the report of the other auditors; (iii) The consolidated statements of operations, changes in shareholders' equity and cash flows of Western Bancorp (formerly Monarch Bancorp) for the year ended December 31, 1995, prior to their restatement for the 1997 pooling-of-interests transactions described in Notes 1 and 2 of notes to the consolidated financial statements, were audited by other auditors; (iv) Separate consolidated financial statements of California Commercial Bankshares also included in the 1995 consolidated financial statements were audited by other auditors; (v) Separate consolidated financial statements of SC Bancorp also included in the 1995 consolidated financial statements were audited by other auditors; and (iv) We also audited the combination of the consolidated statements of operations, changes in shareholders' equity and cash flows for the year ended December 31, 1995, after restatement for the 1997 pooling-of-interests transactions. KPMG PEAT MARWICK LLP Los Angeles, California March 23, 1998 EX-23.3 11 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-44609 of Western Bancorp (formerly Monarch Bancorp) on Form S-8 of our report dated January 24, 1997 (March 17, 1997 as to Notes 8 and 16) on the consolidated statements of financial condition of California Commercial Bankshares and subsidiaries as of December 31, 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1996 (such consolidated financial statements are not included herein), appearing in this Annual Report on Form 10-K of Western Bancorp, for the year ended December 31, 1997. Deloitte & Touche LLP Los Angeles, California March 23, 1998 EX-23.4 12 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-44609 of Western Bancorp (formerly Monarch Bancorp) on Form S-8 of our report dated January 24, 1997 on the consolidated balance sheet of SC Bancorp and subsidiary as of December 31, 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1996 (such consolidated financial statements are not included herein), appearing in this Annual Report on Form 10-K of Western Bancorp, for the year ended December 31, 1997. Deloitte & Touche LLP Los Angeles, California March 23, 1998 EX-27.1 13 EXHIBIT 27.1
9 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 97,456 0 138,702 0 201,904 0 0 880,734 15,894 1,383,510 1,226,793 12,751 14,311 0 0 0 112,947 16,708 1,383,510 80,639 15,714 4,681 101,034 28,276 29,358 71,676 2,800 342 65,757 12,805 3,162 0 0 3,162 0.30 0.29 5.99 7,488 31 9,453 13,482 15,757 4,165 1,502 15,894 15,894 0 0
EX-27.2 14 EXHIBIT 27.2
9 1,000 YEAR YEAR DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 DEC-31-1996 62,384 96,202 47,938 0 0 22,517 0 0 175,494 320,257 6,661 7,057 6,693 7,032 543,042 817,358 13,130 15,757 866,385 1,338,913 774,057 1,177,014 7,366 20,290 7,334 12,562 0 0 0 0 0 0 68,705 111,326 8,923 17,721 866,385 1,338,913 49,014 58,374 10,726 12,862 2,889 3,001 62,629 74,237 19,167 21,382 19,804 22,311 42,825 51,926 8,564 1,018 (692) 281 45,609 48,138 (3,522) 12,645 (1,789) 8,989 0 0 0 0 (1,789) 8,989 (0.28) 1.11 (0.28) 1.09 5.78 5.88 17,303 16,157 0 193 4,696 7,057 19,058 21,034 12,115 13,130 9,577 4,675 1,411 1,123 13,130 15,757 13,130 15,757 0 0 0 0
EX-27.3 15 EXHIBIT 27.3
9 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 95,968 95,295 105,962 0 0 9 88,426 73,304 84,000 0 0 0 277,526 271,848 233,379 6,928 6,902 5,365 6,909 6,902 5,404 816,370 851,147 875,020 15,714 15,345 15,160 1,357,268 1,367,665 1,369,815 1,201,300 1,207,714 1,199,408 13,830 18,194 23,733 11,106 10,115 12,147 0 0 0 0 0 0 0 0 0 111,152 111,186 111,311 19,880 20,456 23,216 1,357,268 1,367,665 1,369,815 19,045 38,605 59,700 4,308 8,500 12,343 612 1,653 2,796 23,965 48,758 74,839 6,676 13,735 20,915 7,015 14,330 21,769 16,950 34,428 53,070 725 1,400 2,125 107 337 342 13,418 29,986 42,766 5,407 8,256 15,550 2,976 3,445 7,528 0 0 0 0 0 0 2,976 3,445 7,528 0.28 0.33 0.72 0.28 0.32 0.70 5.95 5.88 5.97 17,134 14,665 9,468 472 422 1,267 0 0 0 19,259 18,530 14,960 15,757 15,757 15,757 888 2,282 3,743 121 470 1,021 15,715 15,345 15,160 15,715 15,345 15,160 0 0 0 0 0 0
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