<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
FIRST AMENDMENT TO
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 31, 1995
CITY NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-10521 95-2568550
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Roxbury Drive
Beverly Hills, California 90210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 888-6000
<PAGE>
Item 7. Financial Statements and Exhibits.
On January 12, 1996, the registrant filed a Current Report on
Form 8-K to report the acquisition of First Los Angeles Bank ("First LA") on
December 31, 1995. Pursuant to Item 7(a)(4)(iv) of Form 8-K, financial
statements of First LA and pro forma combined financial statements of the
registrant and First LA required by Item 7(a) and (b) are being filed with this
First Amendment.
(a) Financial statements of businesses acquired.
Audited consolidated financial statements of First LA, including
consolidated balance sheets as of December 31, 1993 and 1994, and consolidated
statements of operations, changes in stockholder's equity and cash flows for the
twelve months ended December 31, 1993 and 1994, respectively, appear on pages
A-1 through A-25 of this First Amendment. In addition, unaudited consolidated
balance sheets of First LA as of October 31, 1994 and 1995, and consolidated
statements of operations and cash flows for the ten months ended October 31,
1994 and 1995, respectively, appear on pages A-26 through A-29 of this First
Amendment.
(b) Pro forma financial information.
An unaudited pro forma combined statement of operations of the
registrant and First LA for the year ended December 31, 1995, appears
on pages A-30 through A-32 of this First Amendment. Because the acquisition was
accounted for as a purchase, the December 31, 1995 Consolidated Balance Sheet of
the registrant reflects the assets and liabilities of First LA, and no pro forma
balance sheet is included.
(c) Exhibits
Exhibit No. Exhibit
----------- -------
27. Financial Data Schedules (EDGAR only)
City National Corporation,
a Delaware corporation
Dated: March 15, 1996 /s/ Frank P. Pekny
------------------
Frank P. Pekny, Executive Vice President,
Chief Financial Officer and Treasurer
<PAGE>
INDEX TO FINANCIAL DATA
Page
----
1994 AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF FIRST LOS
ANGELES BANK
Consolidated Balance Sheet.................................. A-1
Consolidated Statement of Operations........................ A-2
Consolidated Statement of Changes in Stockholder's Equity... A-3
Consolidated Statement of Cash Flows........................ A-4
Notes to Consolidated Financial Statements.................. A-5
Report of Independent Public Accountants.................... A-14
1993 AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF FIRST LOS
ANGELES BANK
Independent Auditors' Report................................ A-15
Consolidated Statement of Financial Condition............... A-16
Consolidated Statement of Changes in Stockholder's
Equity................................................. A-16
Consolidated Statement of Operations........................ A-17
Consolidated Statement of Cash Flows........................ A-18
Notes to Consolidated Financial Statements.................. A-19
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF
FIRST LOS ANGELES BANK
Consolidated Balance Sheets................................. A-26
Consolidated Statements of Operations....................... A-27
Consolidated Statements of Cash Flows....................... A-28
Notes to Unaudited Consolidated Financial Statements........ A-29
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT OF
CITY NATIONAL CORPORATION AND FIRST LOS ANGELES
BANK
Combined Statement of Operations............................ A-30
Notes to Unaudited Pro Forma Financial Statements........... A-31
<PAGE>
CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------
FIRST LOS ANGELES BANK
<TABLE>
<CAPTION>
December 31, 1994
- ----------------------------------------------------------------------
<S> <C>
ASSETS
Cash and due from banks $ 76,160,000
Federal funds sold --
-------------
Total cash and cash equivalents 76,160,000
Trading account securities --
Securities available for sale, at market value 56,632,000
Investment securities at amortized cost
(market value of $189,191,000) 197,710,000
Loans (net of allowance for loan losses of
$27,591,000) 594,857,000
Other real estate owned, net 2,043,000
Bank premises and equipment, net 6,139,000
Accrued interest receivable and other assets 13,630,000
-------------
Total assets $ 947,171,000
=============
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Demand $ 319,173,000
Savings 341,232,000
Time 152,677,000
--------------
Total deposits 813,082,000
Term federal funds purchased from a related party 50,000,000
Securities sold under agreement to repurchase 3,385,000
Other liabilites 8,217,000
--------------
Total liabilities 874,684,000
--------------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value,
Authorized--2,000,000 shares
Outstanding--1,667,488 shares 99,875,000
Retained earnings (deficit) (22,934,000)
Unrealized loss on securities available for sale (4,454,000)
--------------
Total stockholder's equity 72,487,000
--------------
Total liabilities and stockholder's equity $ 947,171,000
==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-1
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
FIRST LOS ANGELES BANK
<TABLE>
<CAPTION>
For the Year Ended December 31, 1994
- ------------------------------------------------------------------------------------
<S> <C>
Interest income:
Loans, including fees $ 51,295,000
Securities:
U.S. treasury securities 4,577,000
U.S. government agency securities 8,186,000
Obligations of states and political subdivisions 238,000
Other securities 3,000
Federal funds sold 285,000
------------
Total interest income 64,584,000
------------
Interest expense:
Deposits 17,449,000
Interest on federal funds purchased and
securities sold under agreements to repurchase 1,660,000
------------
Total interest expense 19,109,000
------------
Net interest income 45,475,000
Provision for loan losses 21,200,000
------------
Net interest income after provision for loan losses 24,275,000
------------
Noninterest income:
Service charges and other charges and fees 5,216,000
Trading account (losses) gains (256,000)
Investment securities gains 35,000
------------
Total noninterest income 4,995,000
------------
Noninterest expense:
Salaries and employee benefits 15,070,000
Occupancy 5,379,000
Furniture and equipment 1,462,000
Other real estate owned expense 4,470,000
Other operating expense 22,263,000
------------
Total noninterest expense 48,644,000
------------
Loss before benefit (provision) for income taxes
and cumulative effect of a change in
accounting principle (19,374,000)
Benefit (provision) for income taxes (15,361,000)
------------
Loss before cumulative effect of a change in
accounting principle (34,735,000)
Cumulative effect of a change in accounting for
income taxes --
------------
Net loss $(34,735,000)
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-2
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------
FIRST LOS ANGELES BANK
<TABLE>
<CAPTION>
Unrealized
Loss on
Retained Securities
Common Earnings Available
For the Year Ended December 31, 1994 Stock (Deficit) for Sale Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE,
December 31, 1993 $84,875,000 $ 11,801,000 $ -- $96,676,000
Capital contribution 15,000,000 -- -- 15,000,000
Unrealized loss on securities available for
sale at January 1, 1994 -- -- (334,000) (334,000)
Change in unrealized loss on securities
available for sale -- -- (4,120,000) (4,120,000)
Net loss for the year ended December 31, 1994 -- (34,735,000) -- (34,735,000)
----------- ------------ ------------ -----------
BALANCE,
December 31, 1994 $99,875,000 $(22,934,000) $(4,454,000) $72,487,000
=========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-3
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
FIRST LOS ANGELES BANK
<TABLE>
<CAPTION>
For the Year Ended December 31, 1994
- -------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Interest received $ 68,178,000
Service charges and other charges and fees received 5,216,000
Proceeds from sales and maturities of trading securities 5,712,000
Purchases of trading securities __
Interest paid (19,051,000)
Operating expenses paid (42,480,000)
Income tax refunds received 2,164,000
------------
Net cash provided by operating activities 19,739,000
------------
Cash flows from investing activities:
Proceeds from maturities and sales of securities available for sale 44,433,000
Purchases of securities available for sale (9,897,000)
Proceeds from maturities of investment securities 88,784,000
Purchases of investment securities (59,968,000)
Proceeds from sales of other real estate owned 46,509,000
Net decrease (increase) in loans 51,836,000
Net increase in premises and equipment (976,000)
Cash paid to improve other real estate owned (1,444,000)
------------
Net cash provided by (used in) investing activities 159,277,000
------------
Cash flows from financing activities:
Net (decrease) increase in demand deposits (155,775,000)
Net (decrease) increase in savings deposits (53,068,000)
Net decrease in time deposits (58,281,000)
Net increase in federal funds purchased 50,000,000
Net (decrease) increase in securities sold under
agreements to repurchase (6,567,000)
Capital contribution received 15,000,000
------------
Net cash used in financing activities (208,691,000)
------------
Net decrease in cash and cash equivalents (29,675,000)
Cash and cash equivalents, beginning of year 105,835,000
------------
Cash and cash equivalents, end of year $ 76,160,000
============
Reconciliation of net loss to net cash provided by operating activities
Net loss $(34,735,000)
Add (subtract) adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of premiums on securities 2,429,000
Accretion of discounts on securities (213,000)
Gain on sale of securities available for sale (35,000)
Gain on sale of investments securities __
Loss (gain) on trading securities 256,000
Provision for loan losses 21,200,000
Write-downs and charge-offs of other real estate owned 3,151,000
Depreciation 1,625,000
Net principal received upon maturity or sale of trading securities 5,712,000
Change in accrued interest receivable and other assets 3,214,000
Deferred tax provision (benefit) 15,000,000
Change in other liabilities 2,135,000
------------
Net cash provided by operating activities $ 19,739,000
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------
FIRST LOS ANGELES BANK
December 31, 1994
[1] Accounting Policies and
Practices
The accounting and reporting policies and practices of First Los Angeles Bank
(the "Bank") conform to generally accepted accounting principles and practices
within the banking industry. The more significant accounting policies and
practices are presented below.
The Bank is a wholly-owned subsidiary of San Paolo U.S. Holding Company (SPUSH),
which is itself a wholly-owned subsidiary of Sanpaolo Bank Holding S.p.A.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Bank and its
wholly-owned subsidiary, FLAB Asset Management Corporation (FLAMCO). All
material intercompany transactions have been eliminated in consolidation.
SECURITIES
The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 115
effective January 1, 1994. The Statement addresses the accounting and reporting
for certain investments in debt and equity securities. Under SFAS 115,
securities are classified as either trading, available for sale, or held to
maturity, and are accounted for as follows.
TRADING SECURITIES
Trading securities are valued at their estimated market value. Gains and
losses resulting from the change in fair market value of trading
securities are included in noninterest income.
INVESTMENT SECURITIES
Investment securities are so classified because the Bank has the ability
and management has the positive intent to hold them to maturity. Such
investment securities are stated at cost, adjusted for amortization of
premiums and accretion of discounts, which are recognized as adjustments
to income using a method that approximates the effective interest
method.
AVAILABLE-FOR-SALE SECURITIES
Securities that are not specifically designated as trading or
investment are classified as available-for-sale. Securities available-
for-sale are carried at market value. Net aggregate unrealized gains or
losses on securities available-for-sale are included as a separate item
in stockholder's equity until realized. Premiums and discounts are
recognized as adjustments to income using a method that approximates the
effective interest method.
In 1993, prior to the adoption of SFAS 115, it was generally the Bank's
intent to hold investments to maturity. Accordingly, investment securities were
stated at cost, adjusted for the amortization of premium and accretion of
discount which were recognized on the effective interest method as adjustments
to interest income. Gains and losses on dispositions were based on the net
preceeds and the adjusted carrying amount of the securities sold, using the
specific identification method.
LOANS
Loans are carried at amounts advanced less payments collected. Interest income
on commercial and real estate loans is accrued daily based on the principal
amounts outstanding. Interest on consumer loans is recorded on the level yield
method. The accrual of income on loans is discontinued and previously accrued
interest is reversed when the full collection of principal or interest is in
doubt or when the payment of principal or interest has become contractually 90
days past due. Subsequent cash payments received are applied to the principal
balance or recorded as interest income, depending on management's assessment of
the ultimate collectibility of the loan. If cash payments received relate to a
loan previously charged off in whole or in part, payments not applied to the
remaining principal balance are recorded as recoveries.
ALLOWANCE FOR LOAN LOSSES
The Allowance for loan losses (the Allowance) is established by a charge to
income as a provision for loan losses. Actual loan losses or recoveries are
charged or credited directly to this Allowance. The Allowance is based on
management's estimate of the amounts required to maintain an allowance adequate
to reflect losses inherent in the loan portfolio; however ultimate losses may
vary from current estimates. The estimates are reviewed periodically and
adjustments are reported in earnings in the period in which they become known.
Management determines the adequacy of the Allowance based on a continuing review
of individual loans, recent loss experience, current
A-5
<PAGE>
economic conditions, the risk characteristics of the various categories of
loans, and other pertinent factors.
RECOGNITION OF LOAN ORIGINATION
FEES AND COSTS
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount amortized as an adjustment of the related loan's
yield over the contractual life of the related loan. If a commitment expires
unexercised, the commitment fee is recognized as income.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is composed both of formally foreclosed
property and in-substance foreclosed property to which the Bank does not have,
but anticipates that it will eventually foreclose on and receive, legal title.
These assets are transferred from the loan portfolio to OREO at fair value.
Subsequent to foreclosure the assets are carried at the lower of the new cost
basis established at foreclosure or fair market value less estimated selling
costs. The excess carrying value, if any, of the loan over the estimated fair
value less estimated selling costs at the time of foreclosure is charged to the
Allowance. Subsequent writedowns due to further declines in fair market value
are charged to Other real estate owned expense, Gains and losses from sales of
OREO and net operating expenses are recorded in operations and included in Other
real estate owned expense. Depreciation expense is not recorded on OREO.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment, which consist of furniture, fixtures, equipment and
leasehold improvements, are stated at cost less accumulated depreciation of
$12,829,000 at December 31, 1994, computed on the straight-line method over the
lesser of estimated useful lives ranging primarily from three to ten years or
the remaining lease term. The cost of repairs and maintenance is charged to
expense as incurred, and expenditures that improve or extend the service lives
of assets are capitalized.
INCOME TAXES
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. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. Valuation allowances are
established against deferred tax assets to the extent that assets are not
considered more likely than not realizable through future taxable income.
The Bank and SPUSH file consolidated federal and combined state income tax
returns. Pursuant to the Bank's tax-sharing agreement with SPUSH, the net cost
or benefit resulting from determining the Bank's tax liability on a separate tax
return basis is recorded as income tax expense or benefit by the Bank.
COMMON STOCK
Based on the provisions of the General Corporation Law, the Bank changed its
stock to no par value, except for purposes of recording stock dividends and
reporting to the Federal Deposit Insurance Corporation ("FDIC"), where, pursuant
to the Financial Code, the par value of the Bank's common stock is $2.00 per
share at December 31, 1994.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods, except for term federal funds.
INTEREST RATE DERIVATIVES
Amounts receivable or payable under derivative financial instruments used to
manage interest rate risks arising from the Bank's financial assets and
financial liabilities are recognized as interest income or expense unless the
instrument qualifies for hedge accounting. Gains and losses on qualifying hedges
of existing assets or liabilities are included in the carrying amount of those
assets or liabilities and are ultimately recognized in income as part of those
carrying amounts. Derivative financial instruments that do not qualify for hedge
accounting are recorded at fair market value. Gains and losses on early
terminations of derivatives are included in the carrying amount of the related
loans or debt and amortized as yield adjustments over the remaining terms of the
loans or debt.
OFF-BALANCE-SHEET
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, and standby letters of credit. Such financial
A-6
<PAGE>
instuments are recorded in the consolidated financial statments when they
utilized and become actual assets and liabilities.
[2] Securities
As discussed in Note 1, the Bank adopted SFAS 115 on January 1, 1994. On that
date, securities with an amortized cost of $90,199,000 and fair market value of
$89,865,000 were reclassified as available-for-sale.
At December 31, 1994, available-for-sale securities consisted entirely of
securities issued by United States Government agencies and corporations. There
are no unrealized gains in the available-for-sale securities portfolio. The
unrealized losses of $4,454,000 has been included as a reduction of
stockholder's equity. The bank has not recorded any income tax benefit
relating to the unrealized losses on available-for-sale securities. See Note 7
for a discussion of deferred tax benefits.
The following table presents the estimated unrealized gains and losses on
held-to-maturity securities by major classes of securities.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. Treasury
and agency
securities $ 99,411,000 $ -- $(3,688,000) $ 95,723,000
Pass-through
securities 90,243,000 -- (4,612,000) 85,631,000
Federal Home
Loan Bank
stock 4,058,000 -- -- 4,058,000
State, county
and municipal
securities 3,978,000 4,000 (223,000) 3,759,000
Other 20,000 -- -- 20,000
------------ --------- ----------- ------------
$197,710,000 $ 4,000 $(8,523,000) $189,191,000
============ ========= =========== ============
</TABLE>
The following table presents the amortized cost, estimated fair value and
average yields of debt securities available for sale at December 31, 1994 based
on scheduled maturities.
<TABLE>
<CAPTION>
Amortized Estimated Average
Cost Fair Value Yields
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government agencies
and corporations
Within one year $ 5,965,000 $ 5,853,000 3.94%
After one year but
before five years 25,611,000 24,142,000 5.23%
After five years but
before ten years 29,510,000 26,637,000 5.30%
------------ ------------ -------
Total available-for-sale $ 61,086,000 $ 56,632,000 5.14%
============ ============ =======
</TABLE>
The following table presents the book value, estimated fair value and average
yields of investment securities at December 31, 1994 based on scheduled
maturities.
<TABLE>
<CAPTION>
Estimated Average
Book Value Fair Value Yields
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities
After one year but before
five years $ 99,411,000 $ 95,723,000 4.58%
------------ ------------ -------
Total U.S. Treasury
securities 99,411,000 95,723,000 4.58%
------------ ------------ -------
Obligations of states and
political subdivisions
Within one year 440,000 444,000 8.00%
After one year but
before five years 3,538,000 3,315,000 5.68%
------------ ------------ -------
Total obligations of
states and political
subdivisions 3,978,000 3,759,000 5.20%
------------ ------------ -------
Pass-through securities
Mortgage-backed
securities 26,452,000 24,868,000 5.80%
Collateralized mortgage
obligations 33,544,000 30,516,000 4.72%
U.S. government
guaranteed SBA pool
certificates 30,247,000 30,247,000 6.44%
------------ ------------ -------
Total pass-through
securities 90,243,000 85,631,000 5.61%
------------ ------------ -------
Federal Home Loan Bank
stock and other securities 4,078,000 4,078,000 5.50%
------------ ------------ -------
Total held-to-maturity $197,710,000 $189,191,000 5.10%
============ ============ =======
</TABLE>
A-7
<PAGE>
At December 31, 1994, the Bank's mortgage-backed securities, collaterized
mortgage obligations and SBA Pool portfolios had weighted average maturities of
3.5,9.5, and 12.7 years, respectively. Actual maturities can be expected to
differ from scheduled and weighted average maturities due to prepayments of
underlying debt instruments or early call privileges of the issuer.
Proceeds from sales of securities were $70,545,000 for the year ending December
31, 1994. A gain of $35,000 was realized from those sales in 1994. All sales
were from securities classified available-for-sale. The Bank calculates the book
value of its securities using the specific identification method when
determining the gain or loss from sales of securities.
Securities carried at approximately $93,670,000 at December 31, 1994 were
pledged to secure trust funds and public deposits as required by law.
[3] Loans
Loans at December 31 are summarized by major category as follows:
<TABLE>
<CAPTION>
1994
- -----------------------------------------------------------
<S> <C>
Commercial $285,130,000
Real estate construction
and land development 54,528,000
Other real estate loans 272,969,000
Consumer loans 11,706,000
Other 134,000
------------
624,467,000
Unearned discounts on
consumer loans (379,000)
Net deferred loan origination
fees and costs (1,640,000)
Allowance for loan losses (27,591,000)
------------
$594,857,000
============
</TABLE>
Many of the loans in the commercial loan category above are secured by real
estate collateral. The ability of borrowers to repay these loans is tied to the
value of the underlying real estate collateral.
Most of the Bank's lending activity has been limited to its immediate service
area, resulting in a natural concentration of loans secured by real estate in
western Los Angeles County. Weaknesses in the Southern California economy in
general and, more specifically, in western Los Angeles County have negatively
impacted the ability of the Bank's customers to honor their loan agreements.
These trends have negatively impacted the Bank's recent results of operations
through increases in nonaccrual loans and significant provisions for loan
losses. Management believes the Allowance is adequate at December 31, 1994, to
cover inherent losses in the loan portfolio. Ultimate losses may be different
from those provided for. Additional losses, if any, will be recognized in the
periods in which they occur.
Loans where the accrual of interest income has been discontinued and placed on
nonaccrual status at December 31 are as follows:
<TABLE>
<CAPTION>
1994
- ------------------------------------------------------
<S> <C>
Nonaccrual loans $38,103,000
===========
As a percent of total loans, net 6.4%
===========
Interest income that would have
been recorded had the nonaccrual
loans performed in accordance
with original terms $ 2,344,000
===========
</TABLE>
The nonaccrual loans are net of partial charge-offs of $4,695,000
at December 31, 1994.
As of December 31, 1994, $3,019,000 of loans were classified as restructured
loans in accordance with SFAS No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings."
There were no related party loans outstanding during 1994.
A-8
<PAGE>
[4] Allowance For Loan Losses
Activity in the allowance for loan losses for the year ended December 31 is as
follows:
<TABLE>
<CAPTION>
1994
- ----------------------------------------------------
<S> <C>
Balance--beginning of year $30,798,000
Recoveries of charged--off loans 1,381,000
Provision for loan losses 21,200,000
Loans charged off (25,788,000)
-----------
Balance-end of year $27,591,000
===========
</TABLE>
Loans charged off are summarized by major category as follows:
<TABLE>
<CAPTION>
1994
- ----------------------------------------------------
<S> <C>
Commercial and real estate $25,335,000
Consumer loans 418,000
Other 35,000
-----------
$25,788,000
===========
</TABLE>
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." In addition, in
October, 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures," which amended certain
sections of SFAS No. 114. Statements 114 and 118, which are effective for
periods beginning after December 15, 1994, require that impaired loans that are
within the scope of the Statement be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Management does not
believe that the implementation of these Statements will have a material impact
on the Bank's financial condition and results of operations.
[5] Other Real Estate Owned
Other real estate owned at December 31 consists of the following:
<TABLE>
<CAPTION>
1994
- ----------------------------------------------------
<S> <C>
Foreclosed assets $ 2,043,000
In-substance foreclosures --
-----------
2,043,000
Less valuation allowance --
-----------
$ 2,043,000
===========
</TABLE>
The composition of OREO by type of collateral at December 31 is as follows:
<TABLE>
<CAPTION>
1994
- ----------------------------------------------------
<S> <C>
Residential 1--4 units $ 1,309,000
Residential land 734,000
Commercial land --
Office building --
-----------
$ 2,043,000
===========
</TABLE>
During 1994, the Bank sold certain OREO and loans totaling $30,251,000 at fair
value to San Paolo Asset Management Company, an affiliate of SPUSH. During
1993, the Bank sold loans classified as in-substance foreclosures totaling
$18,031,000 at fair value to SPUSH. No gain or loss was recognized from either
of these transactions, as the sold assets had been written down to fair values
on the books of the Bank prior to the sale.
OREO expense for the year ended December 31 consists of the following:
<TABLE>
<CAPTION>
1994
- ----------------------------------------------------
<S> <C>
Net (gain) loss on sale of OREO $ (357,000)
Valuation adjustments charged
to operations 3,151,000
Direct holding costs, net 1,676,000
-----------
$ 4,470,000
===========
</TABLE>
[6] Deposits
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $123,122,000 at December 31, 1994. Interest on such time
certificates amounted to $7,045,000 for 1994. Also included in noninterest
expense is $4,707,000 of expense paid to third parties on behalf of customers in
1994.
A-9
<PAGE>
[7] Income Taxes
Income tax provision (benefit) consists of the following components:
<TABLE>
<CAPTION>
Current Deferred Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended
December 31, 1994:
Federal $ 361,000 $ 11,250,000 $ 11,611,000
State -- 3,750,000 3,750,000
----------- ------------ -------------
$ 361,000 $ 15,000,000 $ 15,361,000
=========== ============ =============
</TABLE>
The provision (benefit) for income taxes differs from the amounts computed by
applying the assumed federal income tax rate of 34% to loss before income taxes
for the year ended December 31, 1994, because of state income taxes, the
increase in the valuation allowance on deferred tax assets, and the impact of
tax-exempt income and non-deductible expenses.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1994
are as follows:
<TABLE>
<CAPTION>
1994
- ------------------------------------------------------------
<S> <C>
Deferred tax assets:
Loan loss deductions $12,546,000
Unrealized holding losses--
available-for-sale securities 2,026,000
Write down of other
real estate owned 1,796,000
Deferred loan fees and costs 746,000
Other accrued expenses 1,170,000
Accrued interest receivable 1,532,000
Net operating loss carryforwards 11,271,000
Other 132,000
-----------
Total deferred tax assets 31,219,000
-----------
Deferred tax liabilities:
Premises and equipment--
primarily due to differences
in depreciation (807,000)
State franchise taxes (2,252,000)
Other --
-----------
Total deferred tax liabilities (3,059,000)
-----------
Net deferred tax asset 28,160,000
Less valuation allowance (24,289,000)
-----------
Total net deferred tax account $ 3,871,000
===========
</TABLE>
The total net deferred tax account of $3,871,000 in 1994 is included in
Accrued Interest Receivable and Other Assets in the Consolidated Balance Sheets.
The valuation allowance for deferred tax assets as of December 31, 1994 was
$24,289,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which the temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections of future taxable
income over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Bank will realize the benefits of these
deductible differences, net of the existing valuation allowance at December 31,
1994.
At December 31, 1994, the Bank had net operating loss carryforwards for federal
income tax purposes of $26,548,000 that are available to offset future federal
taxable income. $5,556,000 of these federal net operating losses expire in full
in 1998, and $20,981,000, of these federal net operating losses expire in full
in 2009. The Bank has net operating loss carryforwards for California franchise
tax purposes of $19,571,000. $7,858,000 of this amount expires in 1997,
$6,916,000 expires in 1998, and $4,797,000 expires in 1999.
The State of California follows the unitary method of taxation. Under this
method, the income of all unitary entities which have greater than 50% common
ownership is combined and apportioned to California taxpayers based on
certain formulas. Since its inception, the Bank has provided California state
taxes on a separate company basis. The California Franchise Tax Board (FTB) is
currently auditing the California tax returns of the Bank for the years 1983
through 1985. If the FTB were to deem that the Bank is unitary with Sanpaolo
Bank Holding S.p.A., the Bank could be assessed additional state taxes. The
Bank, however, will be reimbursed for any additional state taxes ultimately paid
by SPUSH under their tax-sharing agreement and as a result no additional state
taxes are recorded in these financial statements.
A-10
<PAGE>
[8] Profit Sharing and Employee Incentive Investment Plan
The Bank established a profit-sharing and employee incentive/investment plan for
employees who meet certain age and service requirements specified in the plan.
The Bank's contribution to the plan, as determined by the Board of Directors, is
discretionary. No discretionary contributions were made to the plan in 1994 or
1993.
[9] Related Party Transactions
The Bank is involved in various transactions with its stockholder and companies
affiliated with its stockholder. During 1994, the Bank borrowed funds from
related parties in the form of term federal funds purchased, repurchase
agreements, and certificates of deposit. At December 31, 1994, such borrowings
consisted entirely of term federal funds purchased totaling $50,000,000. During
1994, the Bank incurred $763,000 of interest expense on these related party
borrowings. The terms of these related party borrowings do not differ
significantly from the terms of borrowings from unrelated third parties.
As discussed in Note 5, in 1994, the Bank sold certain nonperforming loans and
OREO to related parties at their book value.
The Bank had issued irrevocable letters of credit to related parties totaling
$744,500 at December 31, 1994.
[10] Commitments and Contingencies
The Bank is a defendant in various lawsuits arising from the normal course of
business. Management believes that the ultimate resolution of the pending
litigation will not have a material effect on the Bank's financial position or
results of operations.
The Bank occupies land and premises under lease agreements with initial lease
terms expiring at various dates through 2006. Certain of these leases are
subject to renewal at the then-prevailing rental rate for periods of up to 15
years. The aggregate minimum commitments under these noncancelable operating
leases are as follows:
<TABLE>
<S> <C>
1995 $ 4,111,000
1996 4,129,000
1997 4,033,000
1998 3,704,000
1999 3,551,000
Thereafter 4,833,000
-----------
Total minimum payments required 24,361,000
Less-sublease rentals (4,364,000)
-----------
$19,997,000
===========
</TABLE>
[11] Off Balance Sheet Risks and Derivative Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet risk in the
form of unfunded loan commitments, standby letters of credit and an interest
rate swap. These financial instruments, while not recorded as assets and
liabilities in the Consolidated Balance Sheets, expose the Bank to a risk of
loss. This risk takes two forms: credit risk, the risk that the Bank is
committed to advance funds to borrowers who will not be able to repay those
amounts; and interest rate risk, the risk that interest rates will fluctuate
between the time that the Bank has contracted and fixed the terms for these
agreements and the time the Bank actually transacts them.
The Bank uses the same underwriting criteria when entering into
off-balance-sheet financial instruments with credit risk as when it makes other
lending decisions, including obtaining collateral when deemed appropriate.
Financial instruments with off-balance-sheet credit risk at December 31 are as
follows:
<TABLE>
<CAPTION>
1994
- ----------------------------------------------------------
<S> <C>
Unfunded loan commitments $107,684,000
Standby letters of credit 10,188,000
------------
$117,872,000
============
</TABLE>
A-11
<PAGE>
The majority of loan commitments have terms up to one year and have variable
rates of interest. Standby letters of credit generally have terms up to one
year. Most standby letters of credit expire unused.
Additionally, the Bank has entered into one transaction that involves only
off-balance-sheet interest rate risk. This transaction involves an interest rate
swap agreement with a notional principal amount of $10,000,000 whereby the Bank
has exchanged its obligation on floating rate deposits for a fixed-rate
obligation. This transaction resulted in the Bank making net cash payments
totaling $645,000 in 1994. Starting in 1994, the Bank is accounting for this
transaction on a mark-to-market basis. An accrued liability of $217,000 has been
recorded in the Bank's financial statements as of December 31, 1994,
representing the estimated fair market value of the Bank's remaining obligation
under this contract. This agreement will expire in 1996.
[12] Fair Value of Financial
Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires
disclosure of the fair value of financial instruments. The majority of the
Bank's assets and liabilities are considered financial instruments. The fair
values estimated are dependent on subjective assumptions and involve significant
uncertainties resulting in estimates that vary with changes in assumptions. Any
change in assumptions or estimation methodologies may have a material effect on
the estimated fair values disclosed. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in these estimates.
The fair values have been estimated as of December 31, 1994, and the amounts
that will be realized or paid at settlement or maturity of the instruments
could be significantly different from these estimates. Additionally, due to the
wide range of permitted valuation techniques, the results may not be comparable
between financial institutions. In addition, these fair values do not represent
the fair value of the Bank as an entity. Furthermore, management does not
presently intend to sell these assets.
The following methods and assumptions were used to estimate the fair value of
each class of the Bank's financial instruments for which it is practicable to
estimate value:
CASH AND DUE FROM BANKS AND
FEDERAL FUNDS SOLD
The fair value for Cash and Due From Banks and Federal Funds Sold is estimated
to be book value, due to the short maturity of, and negligible credit concerns
within, those instruments.
TRADING ACCOUNT SECURITIES AND
INVESTMENT SECURITIES
The fair value of marketable securities is based on quoted market prices,
dealers quotes, and prices obtained from independent pricing services.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real estate,
and consumer, and are further segmented for fixed and adjustable rate interest
terms.
Loans that are subject to repricing in the short term are valued for fair value
purposes by using the carrying amount for such loans. For other loans, fair
value is estimated by discounting scheduled cash flows through estimated
maturity using a discount rate equal to the rate that the Bank was offering to
make such loans at the reporting date. The balances determined using this
methodology have been reduced by the allowance for loan losses as an estimate of
the reduction from fair value attributable to credit risk.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as noninterest-bearing
demand deposits, savings and NOW accounts, and money market and checking
accounts, is estimated to equal the amount payable on demand as of December 31,
1994. The fair value of certificates of deposit is based on the estimated
discounted value of contractual cash flows. The discount rate is estimated using
the rates offered for such deposits on the reporting date.
SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Book value is reflective of fair value due to the short maturity of, and
negligible credit concerns with those instruments.
A-12
<PAGE>
OFF-BALANCE-SHEET
FINANCIAL INSTRUMENTS
The fair value of the Bank's interest rate swap reflects the estimated amount
that the Bank would pay to terminate the contract at December 31, 1994. The fair
value of the Bank's commitments to extend credit and standby letters of credit
is estimated based on terms currently offered for similar agreements and
approximates their carrying value.
At December 31, 1994, the Bank's estimated fair values of financial instruments
based on disclosed assumptions are as follows:
<TABLE>
<CAPTION>
1994
(in thousands)
- -------------------------------------------------
Carrying,
Contractual Estimated
or Notional Fair
Amount Value
- -------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and due
from banks $ 76,160 $ 76,160
Federal funds sold -- --
Trading account
securities -- --
Securities available
for sale 56,632 56,632
Investment
securities 197,710 189,191
Loans, net 594,857 591,865
Financial liabilities:
Deposits 813,082 814,189
Securities sold
under agreement
to repurchase 3,385 3,385
Off-balance-sheet
financial instruments
Commitments to
extend credit 107,684 283
Standby letters
of credit 10,188 153
Interest rate swap 10,000 (217)
</TABLE>
[13] Regulatory Matters
The Board of Directors of the Bank has agreed to take certain actions as a
result of a 1994 regulatory examination by the FDIC and the California State
Banking Department, as documented by written Consent Agreements (the Consent
Agreements). The most significant provisions of the Consent Agreements require
the Bank to do the following:
. Have and retain qualified management
. Maintain Tier 1 capital equal to or greater than 7.0%
. Reduce classified assets to specified levels by certain deadlines
. Maintain an adequate Allowance for Loan Losses
. Develop a plan to control overhead expenses and return the Bank to
profitable operations, and develop a comprehensive liquidity and funds
management policy
. Periodically report these compliance matters to the FDIC and the State
Banking Department
The Board of Directors and management of the Bank have taken various actions,
which included among other things, the reduction of problem assets through sales
of foreclosed real estate to both third parties and related parties,
restructuring operations to reduce personnel expense and strengthening key areas
of senior management, to improve the condition of the Bank and to comply with
the terms outlined in the Consent Agreements. Additionally, the Bank's parent
has made significant capital infusions. While many of the deadlines for meeting
the various requirements have not yet occurred, the Bank has already complied
with numerous provisions in the Consent Agreements and management believes that
the Bank is currently in substantial compliance with the terms of the Consent
Agreements. At December 31, 1994, the Bank's Tier 1 Capital ratio was 7.53%. The
Bank plans to continue to work closely with its federal and state regulators in
order to meet the terms of the Consent Agreements and to maintain compliance
with such terms. The continued ability of the Bank to meet and maintain
compliance with these requirements will be dependent in part upon the impact of
current and future economic conditions on its customers, its ability to operate
on a profitable basis in the future, and, if necessary the continued capital
support of its parent.
A-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
---------------------------------------------------
FIRST LOS ANGELES BANK
TO THE STOCKHOLDER AND BOARD OF DIRECTORS OF FIRST LOS ANGELES BANK:
We have audited the accompanying consolidated balance sheet of First Los Angeles
Bank (a wholly owned subsidiary of San Paolo U.S. Holding Company) and
subsidiary as of December 31, 1994, and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether 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 audit provides a reasonable basis for our opinion.
As described in Note 13, the Bank is subject to an agreement with its regulatory
authorities which requires it to, among other things, maintain specified levels
of capital in ratio to its assets. Due to operating losses during the last two
years, the Bank's parent has contributed additional capital to the Bank to
enable it to meet its capital requirements. The continued ability of the Bank to
meet and maintain compliance with these requirements will be dependent in part
upon the impact of current and future economic conditions upon its customers,
its ability to operate on a profitable basis and, if necessary, the continued
capital support of its parent.
In addition, as more fully discussed in Note 7, the Bank may be assessed
additional state tax under the worldwide unitary method of calculation. If such
taxes are assessed, the Bank, under its tax-sharing arrangement with its parent,
will be reimbursed for all additional taxes due.
In our opinion, the consolidated financial statement referred to above present
fairly, in all material respects, the financial position of First Los Angeles
Bank and subsidiary as of December 31, 1994, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the Bank changed its method
of accounting for income taxes in 1993 and its method of accounting for
investment securities in 1994.
/s/ Arthur Andersen LLP
Los Angeles, California
January 27, 1995
A-14
<PAGE>
--------------------------------------------------
TO THE STOCKHOLDER AND BOARD OF DIRECTORS
FIRST LOS ANGELES BANK
INDEPENDENT WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION OF FIRST LOS
AUDITORS' ANGELES BANK, AND SUBSIDIARY AS OF DECEMBER 31,
1993, AND RELATED CONSOLIDATED STATEMENTS OF
REPORT OPERATIONS, CHANGES IN STOCKHOLDER'S EQUITY AND CASH
FLOWS FOR THE YEAR THEN ENDED. THESE CONSOLIDATED
FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF
FIRST LOS ANGELES BANK'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE
CONSOLIDATED 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 CONSOLIDATED FINANCIAL
STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY, IN ALL
MATERIAL RESPECTS, THE FINANCIAL POSITION OF FIRST
LOS ANGELES BANK AND SUBSIDIARY AS OF DECEMBER 31,
1993 AND THE RESULTS OF THEIR OPERATIONS AND THEIR
CASH FLOWS FOR THE YEAR THEN ENDED IN CONFORMITY
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
AS DISCUSSED IN NOTE 1 TO THE FINANCIAL
STATEMENTS, THE BANK HAS CHANGED ITS METHOD OF
ACCOUNTING FOR INCOME TAXES IN 1993.
/s/ Ernst & Young LLP
JANUARY 31, 1994
A-15
<PAGE>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
First Los Angeles Bank
December 31,
1993
--------------
Assets
Cash and Due From Banks $ 93,835,000
Federal Funds Sold 12,000,000
Trading Account Securities--Note 2 5,968,000
Investment Securities (Market Value--$324,016,000)--
Note 2 324,329,000
Loans (Net of Allowance for Loan Losses of
$30,798,000)--Notes 3 and 4 685,313,000
Other Real Estate Owned--Note 5 32,839,000
Bank Premises and Equipment, Net--Note 1 6,788,000
Accrued Interest Receivable and Other Assets--Note 7 31,845,000
--------------
$1,192,917,000
==============
Liabilities and Stockholder's Equity
Deposits
Demand $ 474,948,000
Savings 394,300,000
Time--Notes 2 and 6 210,958,000
--------------
Total Deposits 1,080,206,000
Securities Sold Under Agreement to Repurchase 9,952,000
Other Liabilities 6,083,000
--------------
1,096,241,000
Commitments and Contingencies--Notes 9 and 10
Stockholder's Equity
Common Stock, No Par Value, 2,000,000 Shares
Authorized, 1,667,488 Issued and Outstanding in 1993 84,875,000
Retained Earnings 11,801,000
--------------
96,676,000
--------------
$1,192,917,000
==============
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
First Los Angeles Bank
Common Undivided
For the Year Ended December 31, 1993 Stock Profits Total
----------- ------------ ------------
Balance--December 31, 1992 $35,875,000 $ 30,389,000 $ 66,264,000
Capital Contribution Received 49,000,000 -- 49,000,000
Net Loss for the Year Ended
December 31, 1993 -- (18,588,000) (18,588,000)
----------- ------------ ------------
Balance--December 31, 1993 $84,875,000 $ 11,801,000 $ 96,676,000
=========== ============ ============
See accompanying notes to consolidated financial statements.
A-16
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
First Los Angeles Bank
For The Year Ended December 31, 1993
Interest Income $ 52,261,000
Interest and Fees on Loans
Interest on Investment Securities
United States Treasury 6,043,000
Federal Agency Securities 5,257,000
State, County and Municipal Securities 163,000
Other 12,000
Interest on Federal Funds Sold 1,206,000
-----------
Total Interest Income 64,942,000
Interest Expense -----------
Interest on Deposits
Savings 9,736,000
Time 9,322,000
-----------
19,058,000
Interest of Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 816,000
-----------
Total Interest Expense 19,874,000
-----------
Net Interest Income 45,068,000
Provision For Loan Losses 30,200,000
-----------
Net Interest Income After Provision For Loan Losses 14,868,000
Other Income
Service Charges and Other Operating Income 5,233,000
Trading Account Gains 92,000
Investment Securities Gains 1,819,000
-----------
22,012,000
-----------
Others Expenses
Salaries and Employee Benefits 12,221,000
Occupancy Expenses 5,057,000
Furniture, Fixtures and Equipment Expenses 1,399,000
Other Real Estate Owned Expense--Note 5 9,903,000
Other Operating Expenses 25,597,000
-----------
Total Other Expenses 54,177,000
-----------
Loss Before Benefit For Income Taxes and Cumulative
Effect of a Change in Accounting Principle (32,165,000)
Benefit For Income Taxes--Notes 1 And 7 13,506,000
-----------
Loss Before Cumulative Effect of a Change in Accounting
Principle (18,659,000)
Cumulative Effect of a Change in Accounting For Income
Taxes--Notes 1 and 7 71,000
------------
Net Loss $(18,588,000)
============
See accompanying notes to consolidated financial statements.
A-17
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
First Los Angeles Bank
For the Year Ended December 31, 1993
Cash Flows from Operating Activities
Interest Received $ 67,509,000
Service Charges and Other Operating Income Received 5,233,000
Proceeds From Sales and Maturities of Trading Securities 246,221,000
Purchases of Trading Securities (177,277,000)
Interest Paid (20,493,000)
Operating Expenses Paid (39,782,000)
Income Taxes Paid 6,566,000
-------------
Net Cash Provided by Operating Activities 87,977,000
-------------
Cash Flows From Investing Activities
Proceeds From Sales and Maturities of Investment
Securities 608,559,000
Purchases of Investment Securities (746,504,000)
Proceeds From Sales of Other Real Estate Owned 26,513,000
Net Increase in Loans (75,187,000)
Net Increase in Premises and Equipment (271,000)
Cash Paid to Improve Other Real Estate Owned (2,641,000)
-------------
Net Cash (Used In) Provided by Investing Activities (189,531,000)
-------------
Cash Flows From Financing Activities
Net Change in Demand Deposits 3,158,000
Net Change in Savings Deposits 26,187,000
Net Change in Time Deposits (107,366,000)
Net Change in Securities Sold Under an Agreement to
Repurchase 5,501,000
Capital Contribution Received 49,000,000
-------------
Net Cash (Used in) Provided by Financing Activities (23,520,000)
-------------
Net Change in Cash and Cash Equivalents (125,074,000)
Cash and Cash Equivalents at the Beginning of the Year 230,909,000
-------------
Cash and Cash Equivalents at the End of the Year $ 105,835,000
=============
Reconciliation of Net Loss to Net Cash Provided by
Operating Activities
Net Loss $ (18,588,000)
Add (Subtract) Adjustments to Reconcile Net Loss
to Net Cash Provided by Operating Activities
Amortization of Premiums on Investment Securities 4,885,000
Accretion of Discounts on Investment Securities (1,040,000)
Gain on Investment Securities (1,819,000)
Gain on Trading Securities (92,000)
Provision For Loan Losses 30,200,000
Write-Down and Charge-Off of Other Real Estate Owned 11,945,000
Depreciation 1,500,000
Net Decrease (Increase) in Trading Securities 68,944,000
Change in Accrued Interest Receivable and Other Assets 5,536,000
Deferred Tax Benefit (12,430,000)
Cumulative Effect of a Change in Accounting Principle (71,000)
Change in Other Liabilities (993,000)
------------
Net Cash Provided by Operating Activities $ 87,977,000
============
See accompanying notes to consolidated financial statements.
A-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Los Angeles Bank
Decmber 31, 1993
Note 1-Accounting Policies and Practices
The accounting and reporting policies and practices of First Los Angeles Bank
(the "Bank") conform to generally accepted accounting principles and practices
within the banking industry. The more significant accounting policies and
practices are presented below.
The Bank is a wholly owned subsidiary of San Paolo U.S. Holding Company, which
is itself a wholly owned subsidiary of SAN PAOLO BANK HOLDING S.p.A.
Consolidation
The consolidated financial statements include the accounts of the Bank and its
wholly owned subsidiary, FLAB--Asset Management Corporation. All material
intercompany transactions have been eliminated in consolidation.
Trading Account Securities
Trading Account Securities are valued at their estimated market value. Trading
account gains and losses are included in Other Income.
Investment Securities
Investment Securities are so classified because the Bank has the ability and
management has the intent to hold them to maturity. Investment securities are
stated at cost and adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to income using a method that
approximates the interest method.
Loans
Loans are carried at amounts advanced less payments collected. Interest income
on loans is accrued daily as earned. Generally, the accrual of income on real
estate and commercial loans is discontinued when the full collection of
principal or interest is in doubt or when the payment of principal or interest
has become contractually 90 days past due, unless the obligation is both well
secured and in the process of collection. Nonrefundable loan fees received and
costs incurred during the process of originating loans are deferred and
recognized as income over the loan term as an adjustment to the loan's yield
using a method that approximates the interest method.
Allowance For Loan Losses
Loan losses are charged to the Allowance For Loan Losses (the "Allowance") and
recoveries are credited to it. The Allowance at December 31, 1993 represents
management's estimate of the allowance considered necessary to provide for loan
losses. Management determines the adequacy of the Allowance based on a
continuing review of individual loans, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans, and
other pertinent factors. Additional provisions are made to the Allowance for
such factors from time to time.
Other Real Estate Owned
Other Real Estate Owned ("OREO") is composed both of formally foreclosed
property and in-substance foreclosed property to which the Bank does not have
legal title. These assets are transferred from the loan portfolio at fair value.
The excess carrying value, if any, of the loan over the estimated fair value is
charged to the Allowance For Loan Losses. Estimated selling costs and any
subsequent declines in value are charged to Other Real Estate Owned Expense and
a valuation allowance is established. Subsequent increases in fair value are
credited to income and reduce the valuation allowance only to the extent that
decreases in fair value were recorded through the valuation allowance. Gains and
losses from sales of OREO and net operating expenses are recorded in operations
and included in Other Real Estate Owned Expense. Depreciation expense is not
recorded on OREO.
Bank Premises and Equipment
Bank Premises and Equipment, which consist of furniture, fixtures, equipment and
leasehold improvements, are stated at cost less accumulated depreciation of
$11,419,000 at December 31, 1993 computed on the straight-line method over the
lesser of estimated useful lives ranging primarily from three to ten years and
the remaining lease term. The cost of repairs and maintenance is charged to
expense as incurred, and expenditures that improve or extend the service lives
of assets are capitalized.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement
109 requires a change from the deferred method of accounting for income taxes of
APB Opinion 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, 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. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled. Under Statement 109, 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.
Effective January 1, 1993, the Bank adopted Statement 109 and has reported the
cumulative effect of that change in the method of accounting for income taxes in
the 1993 consolidated statement of operations.
Pursuant to the deferred method under APB Opinion 11, which was applied in 1992
and prior years, deferred income taxes are recognized for income and expense
items that are reported in
A-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Los Angeles Bank
December 31, 1993
different years for financial reporting purposes and income tax purposes using
the tax rate applicable for the year of the calculation. Under the deferred
method, deferred taxes are not adjusted for subsequent changes in tax rates.
The Bank and its parent file consolidated federal and combined state income tax
returns. Pursuant to the Bank's tax-sharing agreement, the net cost (benefit)
resulting from determining the liability on a separate return basis is recorded
as income tax expense (benefit) by the Bank.
Common Stock
Based on the provisions of the General Corporation Law, the Bank changed its
stock to no par value, except for purposes of recording stock dividends and
reporting to the Federal Deposit Insurance Corporation ("FDIC"), where,
pursuant to the Financial Code, the par value of the Bank's common stock is
$2.00 per share at December 31, 1993.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
Interest Rate Swaps and Floors
The differential to be paid or received on interest rate swaps and floors
reduces the impact of changes in net interest rates and is included in net
interest income over the terms of the agreements.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, and standby letters of credit. Such financial
instruments are recorded in the consolidated financial statements when they
become payable.
Note 2-Securities
Trading Account Securities
The trading account was established in 1992, when $71,498,000 of investment
securities were transferred to the trading portfolio. No gain or loss was
recognized as a result of this transfer. The difference between the carrying
amount and the estimated market value of securities transferred from the
investment portfolio to the trading account was deferred at the time of transfer
and was recognized as Investment Securities Gains when those securities were
ultimately sold. At December 31, 1993, the trading securities portfolio contains
U.S. Treasury and Agency Securities.
Investment Securities
Investment securities with an amortized cost of $41,376,000 at December 31, 1993
were pledged as security for public deposits in the amounts of $23,365,000 and
for other purposes as required or permitted by law.
The amortized cost and estimated market values of investment securities at
December 31 are as follows:
<TABLE>
<CAPTION>
1993
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
U.S. Treasury and Agency Securities $239,787,000 $319,000 $(505,000) $239,601,000
State, County and Municipal Securities 4,057,000 38,000 - 4,095,000
Federal Home Loan Bank Stock 3,876,000 - - 3,876,000
Mortgage-Backed Securities 76,589,000 296,000 (461,000) 76,424,000
Other 20,000 - - 20,000
------------ -------- --------- -----------
$324,329,000 $653,000 $(966,000) $324,016,000
============ ======== ========= ============
</TABLE>
A-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Los Angeles Bank
December 31, 1993
The amortized cost and estimated market value of investment securities at
December 31, 1993, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
------------ ------------
U.S. Treasury and Agency Securities
Due in one year or less $ 70,689,000 $ 70,750,000
Due after one year through five years 61,743,000 61,971,000
Due five years through ten years 107,355,000 106,880,000
------------ ------------
239,787,000 239,601,000
State, County and Municipal Securities
Due after one year through five years 4,057,000 4,095,000
Federal Home Loan Bank Stock and
Other Securities 3,896,000 3,896,000
Mortgaged-Backed Securities
Due after ten years 76,589,000 76,424,000
------------ ------------
$324,329,000 $324,016,000
============ ============
Proceeds from sales of investment securities were $223,990,000 for the year
ending December 31, 1993. Gains of $1,819,000 were realized from those sales in
1993.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Statement 115, which is effective for fiscal years
beginning after December 15, 1993, requires that investments in equity
securities that have readily determinable fair values and all debt securities be
classified in three categories and accounted for as follows:
. Debt securities that the Bank has a positive intent and ability to hold are
classified as held-to-maturity securities and reported at amortized cost.
. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in
earnings.
. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholder's
equity.
Management anticipates that when Statement 115 is implemented, substantially all
of the Bank's securities currently classified as investment securities will be
classified as available-for-sale.
Note 3--Loans
Loans at December 31 are summarized by major category as follows:
1993
------------
Commercial $348,618,000
Real Estate Construction and Land Development 49,811,000
Other Real Estate Loans 292,036,000
Consumer Loans 27,146,000
Other 50,000
------------
717,661,000
Unearned Discount on Consumer Loans (1,550,000)
Allowance For Loan Losses (30,798,000)
------------
$685,313,000
============
Most of the Bank's lending activity has been limited to its immediate service
area resulting in a natural concentration of loans secured by real estate in
western Los Angeles County. Weaknesses in the Southern California economy in
general and, more specifically, in western Los Angeles County have negatively
impacted the ability of the Bank's customers to honor their loan agreements.
These trends have negatively impacted the Bank's recent results of operations
through increases in nonaccrual loans and the Allowance For Loan Losses.
Loans where the accrual of interest income has been discontinued and placed on
nonaccrual status at December 31 are as follows:
1993
------------
Nonaccrual Loans $ 25,738,000
============
As a Percent of Total Loans, Net 3.6%
============
Interest Income That Would Have Been
Recorded Had the Nonaccrual Loans
Performed in Accord With Original Terms $ 1,769,000
============
The nonaccrual loans are net of aggregate charge-offs of $5,144,000 at
December 31, 1993.
There was no interest receivable on nonaccrual loans at December 31, 1993.
The aggregate dollar amount of related party loans outstanding, which are made
at market rates of interest, was $0 at December 31, 1993. Loans to related
parties include loans made to directors and their associates.
A-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST LOS ANGELES BANK
DECEMBER 31, 1993
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the Allowance For Loan Losses for the year ended December 31 is as
follows:
1993
------------
Balance -- Beginning of Year $ 15,800,000
Recoveries of Charged-Off Loans 1,702,000
Provision For Loan Losses 30,200,000
Loans Charged Off (16,904,000)
------------
Balance -- End of Year $ 30,798,000
============
Loans charged off are summarized by major category as follows:
1993
------------
Commercial and Real Estate $ 16,351,000
Consumer Loans 439,000
Other Loans 114,000
------------
$ 16,904,000
============
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan." Statement 114, which is effective for periods beginning after
December 15, 1994, requires that impaired loans that are within the scope of the
Statement be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of the collateral if the
loan is collateral-dependent. Management does not believe that the
implementation of this Statement will have a material impact on the Bank's
financial statements.
NOTE 5 - OTHER REAL ESTATE OWNED
Other Real Estate Owned at December 31 consists of the following:
1993
------------
Foreclosed Assets $ 14,484,000
In-Substances Foreclosures 21,041,000
------------
35,525,000
Less Valuation Allowance (2,686,000)
------------
$ 32,839,000
============
The composition of OREO by type of collateral at December 31 is as follows:
1993
------------
Residential 1-4 Units $ 24,798,000
Residential Land 6,556,000
Commercial Land 934,000
Office Building 551,000
------------
$ 32,839,000
============
During 1993, the Bank sold loans classified as in-substance foreclosures
totaling $18,031,000 to its shareholder, San Paolo U.S. Holding Company. No gain
or loss was recognized from the sale.
OREO expense for the years ended December 31 consists of the following:
1993
------------
Net Loss (Gain) on Sale of OREO $ 1,534,000
Valuation Adjustments Charged to
Operations 6,420,000
Direct Holding Costs 1,949,000
------------
$ 9,903,000
============
NOTE 6 - TIME DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $165,500,000 at December 31, 1993. Interest on such time
certificates amounted to $7,907,000 for 1993.
NOTE 7 - INCOME TAXES
As discussed in Note 1, the Bank adopted Statement 109 as of January 1, 1993.
The cumulative effect of this change in accounting for income taxes of $71,000
is determined as of January 1, 1993, and is reported separately in the
consolidated statement of operations for the year ended December 31, 1993. Prior
years' financial statements have not been restated to apply the provisions of
Statement 109.
Income tax benefit consists of the following components:
Current Deferred Total
----------- ----------- -----------
Year Ended
December 31, 1993:
Federal $ 1,076,000 $10,612,000 $11,688,000
State -- 1,818,000 1,818,000
----------- ----------- -----------
$ 1,076,000 $12,430,000 $13,506,000
=========== =========== ===========
A-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Los Angeles Bank
December 31, 1993
The benefit for income taxes differs from the amounts computed by applying the
assumed federal income tax rate of 34% to loss before income taxes for the year
ended December 31, 1993 for the following reasons:
1993
-----------------------
Percent
of
Pretax
Amount Loss
------------ -------
Federal Income Tax Benefit Based on
Federal Statutory Rate $(10,936,000) (34)%
Increase (Reduction) in Taxes Resulting
From:
Tax-Exempt Income (77,000) --
Nondeductible Expenses 23,000 --
State Income Taxes Net of Federal Income
Tax Benefit (2,358,000) (7)
Other (158,000) (1)
------------ ------
$(13,506,000) (42)%
============ ======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1993 are
presented below:
Deferred Tax Assets:
Loan Loss Deductions $12,621,000
Write-Down of Other Real Estate Owned 3,194,000
Deferred Loan Fees and Costs 538,000
Other Accrued Expenses 574,000
Accrued Interest Receivable 391,000
Net Operating Loss Carryforwards 3,534,000
-----------
Total Deferred Tax Assets 20,852,000
-----------
Deferred Tax Liabilities:
Premises and Equipment--Primarily due to
Differences in Depreciation (955,000)
Franchise Taxes (1,093,000)
Other (92,000)
-----------
Total Deferred Tax Liabilities (2,140,000)
-----------
Total Net Deferred Tax Account $18,712,000
===========
The total net deferred tax account of $18,712,000 is included in Accrued
Interest Receivable and Other Assets in the Statement of Financial Condition.
Management believes that the deferred tax asset will be fully realizable during
the applicable net operating loss carryforward periods. These net operating
losses resulted primarily from the high level of loan losses that the Bank
incurred in 1993. Management expects that loan losses incurred by the Bank will
not continue at the high level that it experienced in 1993, and that it will be
able to generate sufficient taxable income during the net operating loss
carryforward period to fully absorb all net operating loss carryforwards.
At December 31, 1993, the Bank has net operating loss carryforwards for federal
income tax purposes of $5,566,000 that are available to offset future federal
taxable income. These federal net operating losses expire in full in 1998. The
Bank has net operating loss carryforwards for California franchise tax purposes
of $14,774,000. $7,858,000 of this amount expires in 1997 and $6,916,000 expires
in 1998.
The Bank's federal and California state franchise tax returns are currently
under audit by the respective taxing authorities. Management believes that the
results of these audits, if any, will not have a material effect on the Bank's
financial position.
A-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST LOS ANGELES BANK
DECEMBER 31, 1993
NOTE 8 -- PROFIT-SHARING
AND EMPLOYEE INCENTIVE/
INVESTMENT PLAN
The Bank established a profit-sharing and employee incentive/investment plan
for employees who meet certain age and service requirements specified in the
plan. The Bank's contribution to the plan, as determined by the Board of
Directors, is discretionary. The Bank's contribution was $0 in 1993.
NOTE 9 -- COMMITMENTS AND
CONTINGENCIES
The Bank is a defendant in various lawsuits arising from the normal course of
business. Management believes that the ultimate resolution of the pending
litigation will not have a material effect on the Bank's financial position.
The Bank occupies land and premises under lease agreements with initial lease
terms expiring at various dates through 2006. Certain of these leases are
subject to renewal at the then-prevailing rental rate for periods of up to 15
years. The lease for the land on which one of the Bank's facilities is located
provides for additional rents based on the size of the Bank's demand deposits
and is subject to cancellation with one year's notice at the option of the
lessor and upon payment by the lessor of an amount equal to the Bank's remaining
book value for tenant improvements attached to the premises. The aggregate
minimum commitments under these non-cancelable operating leases are as follows:
1994 $ 3,998,000
1995 4,149,000
1996 4,231,000
1997 4,119,000
1998 3,871,000
Thereafter 10,359,000
-----------
Total Minimum Payments Required 30,727,000
Less Sublease Rentals 5,868,000
-----------
$24,859,000
===========
NOTE 10 -- FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
form of unfunded loan commitments, standby letters of credit and an interest
rate swap. These financial instruments, while not recorded as assets and
liabilities in the consolidated statement of financial condition, expose the
Bank to a risk of loss. This risk takes two forms: credit risk, the risk that
the Bank is committed to advance funds to borrowers who will not be able to
repay those amounts; and interest rate risk, the risk that interest rates will
fluctuate between the time that the Bank has contracted and fixed the terms for
these agreements and the time the Bank actually transacts them.
The Bank uses the same underwriting criteria when entering into
off-balance-sheet financial instruments with credit risk as when it makes other
lending decisions, including obtaining collateral when deemed appropriate.
Financial instruments with off-balance-sheet credit risk at December 31 are as
follows:
1993
-------------
Unfunded Loan Commitments $113,699,000
Standby Letters of Credit 16,265,000
------------
$129,964,000
============
Additionally, the Bank has entered into one transaction that involves
off-balance-sheet interest rate and credit risk. This transaction involves an
interest rate swap agreement with a notional principal amount of $10,000,000
whereby the Bank has exchanged its obligation on floating rate deposits for a
fixed-rate obligation. Notional principal amounts often are used to express the
volume of these transactions, but the amounts potentially subject to credit risk
are smaller. This agreement will expire in 1995.
NOTE 11 -- FAIR VALUE OF
FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure of the fair value of
financial instruments. The majority of the Bank's assets and liabilities are
considered financial instruments. The fair values estimated are dependent on
subjective assumptions and involve significant uncertainties resulting in
estimates that vary with changes in assumptions. Any change in assumptions or
estimation methodologies may have a material effect on the estimated fair values
disclosed. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in these estimates. The fair values have
been estimated as of December 31, 1993, and the amounts that will be realized or
paid at settlement or maturity of the instruments could be significantly
different from these estimates. Additionally, due to the wide range of permitted
valuation techniques, the results may not be comparable between financial
institutions.
The following methods and assumptions were used to estimate the fair value of
each class of the Bank's financial instruments for which it is practicable to
estimate value:
Cash and Due From Banks and
Federal Funds Sold
The fair value for Cash and Due From Banks and Federal Funds Sold is estimated
to be book value, due to the short maturity of, and negligible credit concerns
within, those instruments.
A-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Los Angeles Bank
December 31, 1993
Trading Account Securities and
Investment Securities
The fair value of marketable securities is based on quoted market prices, dealer
quotes, and prices obtained from independent pricing services.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real estate,
and consumer, and are further segmented for fixed and adjustable rate interest
terms.
Loans that are subject to repricing in the short term are valued for fair value
purposes by using the carrying amount for such loans. For other loans, fair
value is estimated by discounting scheduled cash flows through estimated
maturity using a discount rate equal to the rate that the Bank was offering to
make such loans at the reporting date. The balances determined using this
methodology have been reduced by the allowance for loan losses as an estimate of
the reduction from fair value attributable to credit risk.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as non-interest-bearing
demand deposits, savings and NOW accounts, and money market and checking
accounts, is estimated to equal the amount payable on demand as of December 31,
1993. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
offered for such deposits on the reporting date.
Securities Sold Under Agreements to Repurchase
Book Value is reflective of fair value due to the short maturity of, and
negligible credit concerns within, those instruments.
Off-Balance-Sheet Financial Instruments
The fair value of the Bank's interest rate swap was estimated by discounting
the contractual future cash flows using a current market rate of interest. The
fair value of the Bank's commitments to extend credit and standby letters of
credit is estimated based on terms currently offered for similar agreements and
approximates their carrying value.
At December 31, 1993, the Bank's estimated fair values of financial instruments
based on disclosed assumptions are as follows:
(In thousands)
Carrying, Estimated
Contractual or Fair
Notional Amount Value
- --------------------------------------------------------------------------------
Financial Assets
Cash and Due From Banks $ 93,835 $ 93,835
Federal Funds Sold 12,000 12,000
Trading Account Securities 5,968 5,968
Investment Securities 324,329 324,016
Loans, Net 685,313 685,812
Financial Liabilities
Deposits 1,080,206 1,082,530
Securities Sold Under Agreement
to Repurchase 9,952 9,952
Off-Balance-Sheet Financial Instruments
Commitments to Extend Credit 113,699 113,699
Standby Letters of Credit 16,265 16,265
Interest Rate Swap
In a Net Receivable Position 10,000 9,969
In a Net Payable Positon 10,000 10,752
NOTE 12 - REGULATORY MATTERS
The Board of Directors has agreed to take certain actions as a result of a 1993
regulatory examination by the FDIC, as documented in a memorandum of
understanding. The most significant provisions of the memorandum of
understanding are as follows:
. have and retain qualified management
. maintain Tier 1 capital equal to or greater than 7%
. reduce classified assets to specified levels by certain deadlines
. maintain an adequate reserve for loan losses
. obtain adequate and current documentation for all loans in the Bank's
loan portfolio
. periodically report these compliance matters to the FDIC
At December 31, 1993, the Bank was in compliance with the aforementioned
requirements with respect to qualified management, capital maintenance, the
adequacy of its reserve for loan losses, and reporting to the FDIC. In 1993,
the Bank hired new personnel, developed new policies, and initiated new
procedures to strengthen internal controls, including controls over loan
documentation. Certain of these measures were not implemented as of year-end.
A-25
<PAGE>
First Los Angeles Bank
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
October 31, October 31,
1995 1994
---------- -----------
<S> <C> <C>
Assets
Cash and due from banks $ 66,412 $ 86,746
Federal funds sold and securities purchased
under resale agreements 36,000 -
Investment securities 186,018 200,052
Securities available for sale 48,782 57,194
Loans 483,608 636,131
Less allowance for credit losses (20,398) (27,950)
----------- -----------
Net loans 463,210 608,181
Premises and equipment 5,270 6,259
Other real estate 3,227 1,705
Deferred tax asset 3,873 20,738
Other assets 9,775 6,708
----------- -----------
Total assets $ 822,567 $ 987,583
=========== ===========
Liabilities
Demand deposits $ 245,170 $ 324,418
Money market accounts 169,682 245,545
Savings and interest checking deposits 102,061 117,162
Time deposits 216,311 173,856
----------- -----------
Total deposits 733,224 860,981
Federal funds purchased and securities sold under
under repurchase agreements 4,135 43,963
Other liabilities 8,973 7,184
----------- -----------
Total liabilities 746,332 912,128
Shareholder's equity
Common stock 3,335 3,335
Aditional paid in capital 96,540 81,540
Retained earnings (deficit) (22,668) (6,962)
Unrealized loss on securities available for sale (972) (2,458)
----------- -----------
Total shareholder's equity 76,235 75,455
----------- -----------
Total liabilities and shareholder's equity $ 822,567 $ 987,583
=========== ===========
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
A-26
<PAGE>
First Los Angeles Bank
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the ten months ended October 31,
(In thousands, except per share amounts) 1995 1994
----------- -----------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 44,110 $ 42,203
Interest on securities 11,354 11,058
----------- -----------
Total 55,464 53,261
Interest Expense
Interest on deposits 17,883 14,394
Interest on federal funds purchased and securities sold under
repurchase agreements 4,314 1,126
----------- -----------
Total 22,197 15,520
Net interest income 33,267 37,741
Provision for credit losses 7,725 19,500
----------- -----------
Net interest income after provision for credit losses 25,542 18,241
Noninterest Income
Service charges on deposit accounts 1,333 1,704
Gain on sale of assets 45 35
Loss on sale of securities -- (457)
All other income 2,570 2,626
----------- -----------
Total 3,948 3,908
Noninterest Expense
Salaries and employee benefits 11,413 11,370
Occupancy 4,709 4,387
Furniture and equipment 1,343 1,214
Other operating expense 11,929 18,652
ORE expense (income) (170) 5,289
----------- -----------
Total 29,224 40,912
----------- -----------
Income (loss) before income taxes 266 (18,763)
Income taxes (benefit) -- --
----------- -----------
Net income (loss) $ 266 $ (18,763)
=========== ===========
Net income (loss) per share $ 0.15 $ (11.26)
=========== ===========
Shares used to compute income (loss) per share 1,667 1,667
=========== ===========
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
A-27
<PAGE>
First Los Angeles Bank
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the ten months ended October 31,
--------------------------------------
(In thousands) 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 266 $ (18,763)
Adjustment to net income (loss):
Provision for credit losses 7,725 19,500
Net (gain) loss on ORE (170) 5,289
Net (increase) decrease in trading securities - 5,968
Net (increase) decrease in deferred tax benefits 14,839 (2,026)
Net increase in other liabilities (assets) 1,606 9,248
Other, net 499 (999)
----------- -----------
Net cash provided by operating activities 24,765 18,217
----------- -----------
Cash Flows From Investing Activities
Purchase of securities available for sale - (8,248)
Sales and maturities of securities available for sale 7,850 37,028
Maturities of investment securities 11,495 88,784
Purchase of investment securities - (54,706)
(Loan originations) and principal collections, net 111,249 56,440
Proceeds from sales of ORE - 26,845
Other, net - 4,225
----------- -----------
Net cash provided by investing activities 130,594 150,368
----------- -----------
Cash Flows From Financing Activities
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements (49,250) 34,010
Net decrease in deposits (79,857) (219,226)
Other, net - (2,458)
----------- -----------
Net cash used in financing activities (129,107) (187,674)
----------- -----------
Net increase (decrease) in cash and cash equivalents 26,252 (19,089)
Cash and cash equivalents at beginning of year 76,160 105,835
----------- -----------
Cash and cash equivalents at end of period $ 102,412 $ 86,746
=================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the year for:
Interest $ 55,465 $ 15,520
Non-cash Investing Activities:
Transfers from (to) investment securities (to) from
securities available for sale - 90,199
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
A-28
<PAGE>
Notes to the Unaudited Consolidated Financial Statements of First Los Angeles
Bank
1. The results of operations reflect the interim adjustments, all of which are
of a normal recurring nature and which, in the opinion of management, are
necessary for a fair presentation of the results of such interim periods. These
unaudited financial statements should be read in conjunction with the audited
financial statements for the years ended December 31, 1993 and 1994.
2. First Los Angeles Bank, (the Bank) adopted Statement of Financial Accounting
Standard (SFAS) No. 115 effective January 1, 1994. Under SFAS 115 securities are
classified as either trading, available for sale, or held to maturity. Because
the Bank has the ability and intent to hold investment securities to maturity,
investment securities are stated at cost, adjusted for amortization of premiums
and accretion of discounts. Unrealized gains or losses on securities available
for sale are excluded from earnings and reported as a net amount after taxes, in
a separate component of shareholder's equity, until realized.
3. For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, federal funds sold and securities purchased
under resale agreements, and do not include items with original maturities of
over 90 days.
4. On August 17, 1995, San Paolo U.S. Holding Company, the parent of the Bank,
entered into an agreement to sell the Bank to City National Bank for $85 million
cash, subject to adjustment for certain conditions. The necessary regulatory
approvals were received in November of 1995 and the acquisition was consummated
on December 31, 1995 at the price of $85 million. Concurrent with the close of
the acquisition, the Bank was merged into City National Bank.
A-29
<PAGE>
City National Corporation and First Los Angeles Bank
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
First Los
($ in thousands, except per share amounts) City National Angeles Pro Forma City National
Historical Historical Adjustments Pro Forma
------------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Interest Income
- ---------------------------
Interest and fees on loans $ 168,862 $ 51,370 $ (6,956) $ 213,276
Interest on securities 39,704 14,241 383 54,328
Interest on federal funds sold and securities
purchased under agreement to resell 7,013 0 (823) 6,190
Other interest income 2,015 0 2,015
------------------ -------------- ------------- ---------------
Total interest income 217,594 65,611 (7,396) 275,809
Interest Expense
- ----------------
Interest on deposits 32,039 21,482 (615) 52,906
Interest on federal funds purchased and
securities sold under agreement to repurchase 17,855 2,274 20,129
Interest on other borrowed funds 5,437 0 5,437
------------------ -------------- ------------- ---------------
Total interest expense 55,331 23,756 (615) 78,472
Net interest income 162,263 41,855 (6,781) 197,337
Provision for credit losses 0 14,225 14,225
------------------ -------------- ------------- ---------------
Net interest income after provision for credit 162,263 27,630 (6,781) 183,112
losses
Noninterest Income
- ------------------
Service charges on deposits 8,073 1,612 9,685
Income from fiduciary activities 6,496 0 6,496
Trading account income 8,779 0 8,779
Gain (loss) on sales of securities (596) 45 (551)
Other income 11,814 3,024 14,838
------------------ -------------- ------------- ---------------
Total noninterest income 34,566 4,681 0 39,247
Noninterest expense
- -------------------
Salaries and benefits 65,375 15,199 80,574
Occupancy and equipment 7,923 5,612 (2,940) 10,595
Professional 8,836 3,127 11,963
FDIC insurance 2,486 1,680 4,166
Data processing 7,476 4,648 12,124
Amortization of intangibles 0 0 1,777 1,777
Other expense 25,980 9,122 (532) 34,570
------------------ -------------- ------------- ---------------
Total noninterest expense 118,076 39,388 (1,695) 155,769
------------------ -------------- ------------- ---------------
Income (loss) before taxes 78,753 (7,077) (5,086) 66,590
Income taxes (benefit) 29,961 0 0 29,961
------------------ -------------- ------------- ---------------
Net income (loss) $ 48,792 $ (7,077) $ (5,086) $ 36,629
================== ============== ============= ===============
Weighted average shares outstanding 45,886 45,886
================== ===============
Earnings per share $ 1.06 $ 0.80
================== ===============
See accompanying notes to unaudited pro forma combined financial statements
</TABLE>
A-30
<PAGE>
Notes to Unaudited Pro Forma Financial Statements
1. The pro forma information presented is not necessarily indicative of the
results of operations that would have resulted had the First Los Angeles (First
LA) merger been consummated at the beginning of the period indicated, nor is it
necessarily indicative of the results of operations of future periods. The pro
forma financial statements give effect to the First LA merger as if it had
occurred on January 1, 1995.
On December 31, 1995 City National Bank (the Bank), a wholly owned subsidiary of
City National Corporation (the Corporation), purchased all the outstanding
stock of First LA, which was immediately merged into the Bank. The business
combination was accounted for as a purchase transaction. Consequently the
assets and liabilities of First LA were consolidated, at market value, with
those of the Corporation as of December 31, 1995, but the results of operations
of First LA were not consolidated with those of the Corporation for the year
ended December 31, 1995. Since the December 31, 1995 Consolidated Balance Sheet
of the Corporation reflects the acquisition of First LA, a pro forma balance
sheet at December 31, 1995 is not included.
The pro forma combined statement of operations does not give effect to any
anticipated cost savings in connection with the First LA acquisition. Cost
savings are expected to be realized through the consolidation of certain
branches, reductions in staff, and the consolidation of data processing and
certain other back-office operations. The extent to which cost savings will be
achieved is dependent upon various factors, some of which are beyond the control
of the Corporation, including economic conditions, the regulatory environment,
unanticipated changes in business conditions and inflation.
2. The Bank purchased all the outstanding stock of First LA for a total
consideration of $85 million. Concurrent with the completion of the acquisition,
First LA sold $71.5 million of loans to its former parent.
3. The pro forma adjustments include purchase accounting adjustments to reflect
the fair value of assets acquired, (including reversals of $17.2 million of
First LA's valuation allowance for deferred tax assets), and liabilities
assumed, the elimination of First LA's shareholders' equity and the recording of
$12.6 million of core deposit intangibles in accordance with the purchase method
of accounting. The adjustments are based on the information available at
December 31, 1995. After adding the effect of the estimated fair value
adjustments of $15.4 million to the historical net tangible assets of $69.6
million acquired from First LA, there remained no additional cost in excess of
net assets acquired (goodwill).
A-31
<PAGE>
Additional pro forma adjustments are included in the statement of operations to
give effect to the sale of loans described in Note 2 above, as if they had
occurred on January 1, 1995.
4. The City National pro forma weighted average number of shares outstanding
for the year ended December 31, 1995 are the same as the actual weighted average
shares for that period because the acquisition was paid for entirely in cash.
A-32
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