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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from N/A to N/A
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Commission file number 0-12851
BKLA BANCORP
(Exact name of registrant as specified in its charter)
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California 95-3840703
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8901 Santa Monica Boulevard
West Hollywood, California 90069
(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone number, including area code: (310) 550-8900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of March 31, 1995, the aggregate market value of the common stock
held by non-affiliates of the registrant was approximately $358,220.
Number of shares of common stock of the registrant outstanding as of
March 31, 1995: 5,983,325.
THIS REPORT INCLUDES A TOTAL OF __ PAGES
EXHIBIT INDEX ON PAGE __
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PART I
ITEM 1. BUSINESS
BKLA Bancorp
BKLA Bancorp (referred to herein on an unconsolidated basis as "BKLA"
and on a consolidated basis as the "Company") is a banking holding company
incorporated in California on March 9, 1983 and registered under the Bank
Holding Company Act of 1956, as amended. BKLA commenced business on September
19, 1984, when, pursuant to a reorganization, it acquired all of the voting
stock of Bank of Los Angeles (the "Bank"). At present, the Bank is BKLA's sole
subsidiary, and BKLA has no affiliated business other than the Bank.
Bank of Los Angeles
Bank of Los Angeles was incorporated under the laws of the State of
California on October 30, 1980, was licensed by the Superintendent of Banks,
State of California (the "Superintendent") and commenced operations as a
California state chartered bank on May 6, 1982. The Bank's accounts are
insured by the Federal Deposit Insurance Corporation (the "FDIC") up to
applicable limits. Like many state chartered banks of its size in California,
the Bank is not a member of the Federal Reserve System.
On July 28, 1994, the Company, the Bank and Investors Banking
Corporation, a bank holding company located in Salem, Oregon ("Investors"),
entered into a Stock Purchase Agreement pursuant to which Investors agreed to
invest approximately $5,000,000 in the Company over a period of approximately
six months. The first phase of the transaction (the "Initial Infusion") was
completed on March 29, 1995 and consisted of an infusion of $3,028,509 through
the purchase of 2,019,006 units of securities ("Units"). Each Unit was
comprised of two shares of the Company's common stock, no par value ("Common
Stock"), and one warrant, exercisable for three years after issuance, to
purchase Common Stock at $.75 per share. On March 30, 1995, Investors
purchased an additional 346,874 Units for $520,311 (the "Second Infusion" and
together with the Initial Infusion, the "Capital Infusion"). As a result of
the Capital Infusion, Investors purchased a total of 4,731,760 shares of Common
Stock, representing 79.0% of the total shares issued and outstanding as of
March 31, 1995. Following the consummation of the Capital Infusion and BKLA's
contribution to the Bank of $3,033,671 in additional capital, the Bank's
capital levels equal or exceed the levels required by the cease and desist
order (the "Cease and Desist Order") issued by the FDIC on February 23, 1994.
As of March 31, 1995, the Bank's Tier 1 Capital to average assets ratio
("leverage capital ratio") was approximately 7.40%, compared to the 6.50% ratio
required pursuant to the Cease and Desist Order.
The Stock Purchase Agreement also contemplates an offering of rights
(the "Rights Offering") to purchase Common Stock to the Company's shareholders
other than Investors. The Rights Offering will allow the Company's
shareholders, other than Investors, to increase their collective ownership in
the Company to approximately 45%. Investors will
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purchase any securities not purchased by the other shareholders up to a maximum
of $2,000,000. The Company expects to raise an additional $2,345,000 in the
Rights Offering.
On February 23, 1995, the FDIC delivered to the Bank a letter
notifying the Bank it was significantly undercapitalized under the "prompt
corrective action provisions" (the "Prompt Corrective Action Provisions") of
Section 38 of the Federal Deposit Insurance Corporation Improvement Act of 1991
(the "FDIC Improvement Act"). As a result of such classification, the Bank was
restricted in its ability to increase assets, make acquisitions, commence new
activities, open new branches, or pay dividends, management fees, or senior
executive compensation. In addition, the Bank may be subject to restrictions
as to the rates of interest it may pay on deposits.
On December 22, 1994, the Superintendent delivered to the Bank an
impairment order pursuant to California Financial Code Section 662 (the
"Impairment Order") to correct its capital impairment of $1,153,000 as of
September 30, 1994 within sixty days. As of December 31, 1994, the Bank's
contributed capital was impaired in the amount of $1,724,000. As a result of
the consummation of the Capital Infusion, the Bank increased its contributed
capital by $3,033,671 and cured the Bank's capital impairment as of September
30, 1994.
On February 23, 1994, the Bank consented to the issuance of the Cease
and Desist Order which became effective on March 20, 1994. The Order requires,
among other things, the Bank to increase its Tier 1 capital by at least
$3,000,000 on or before July 18, 1994 and to achieve, on or before such date,
and thereafter maintain a leverage capital ratio of at least 6.5%. As of
December 31, 1994, the Bank had Tier 1 capital of $2,507,000 and a leverage
capital ratio of 2.97%. As of March 31, 1995, the Bank had Tier 1 capital of
$5,712,000 and a leverage capital ratio of 7.40%. See "Item 1. BUSINESS -
Potential and Existing Enforcement Actions."
Banking Offices and Services
The Bank currently has two banking offices located at 8901 Santa
Monica Boulevard, West Hollywood, California ("West Hollywood Regional Office")
and 9601 Wilshire Boulevard, Beverly Hills, California ("Beverly Hills Regional
Office"). In November 1994, the Bank relocated its administrative office
formerly located at 825 North San Vicente Boulevard, West Hollywood, California
to the West Hollywood Regional Office and the Beverly Hills Regional Office.
The Bank is a community bank that offers personalized commercial
banking services to businesses, professionals and individuals located in and
around the West Hollywood, Beverly Hills/Century City and Hollywood areas of
Los Angeles County in Southern California. The Bank engages in a variety of
lending activities, including commercial, consumer and real estate mortgage
loans.
Commercial loans include loans to middle market businesses and
professionals located primarily in the Bank's service areas. The Bank provides
secured and unsecured loans and lines of credit for the operation and expansion
needs of businesses. The Bank typically
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looks to the borrower's business as the principal source of repayment. The
Bank may also take a first or junior deed of trust on real estate as additional
support for the loan.
Real estate loans consist primarily of short-term mortgage loans.
Real estate mortgage loans include residential loans to individuals and loans
on commercial and industrial properties to middle market businesses and
professionals. The portfolio is comprised principally of short-term loans with
floating rates of interest with maturities of not greater than five years.
Consumer loans are primarily automobile loans, home improvement loans
and unsecured loans for personal use. The majority of consumer loans have a
fixed interest rate during their term.
The Bank offers a variety of deposit instruments. These include
personal and business checking accounts and savings accounts, including
interest bearing negotiable order of withdrawal accounts, money market accounts
and time certificates of deposit. The Bank also offers a range of specialized
services designed to attract and service the needs of customers, ATM
facilities, traveller's checks, bank by mail, certain pick-up and delivery
services and automatic check deposit. Additionally, the Bank honors merchant
drafts for both Mastercard and Visa.
The Bank does not operate a trust department. The Bank holds no
patents, registered trademarks, licenses (other than licenses obtained from
bank regulatory agencies), franchises or concessions.
Market Area and Impact of Economic Conditions
The Bank concentrates on marketing to, and serving the needs of, small
and medium size businesses, professionals and individuals located in the West
Hollywood, Beverly Hills/Century City and Hollywood areas of Los Angeles County
in Southern California. The financial condition of the Bank has been, and is
expected to continue to be, effected by overall general economic conditions and
the real estate market in Southern California. The future success of the Bank
is dependent, in large part, upon the quality of its assets. Although
management of the Bank has devoted substantial time and resources to the
identification, collection and workout of nonperforming assets, the real
estate markets in Southern California and the overall economy in this area are
likely to continue to have a significant effect on the quality of the Bank's
assets in future periods and, accordingly, its financial condition and results
of operation.
Competition
The banking and financial services business in California generally,
and in the Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The
Bank competes for loans and deposits and customers for financial services with
other commercial banks, savings and loan associations, securities and brokerage
companies, mortgage
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companies, insurance companies, finance companies, money market funds, credit
unions, and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
the Bank. In order to compete with the other financial services providers, the
Bank principally relies upon local promotional activities, personal
relationships established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers' needs. In
those instances where the Bank is unable to accommodate a customer's needs, the
Bank will arrange for those services to be provided by its correspondents.
Employees
As of December 31, 1994, the Company employed 49 persons on a
full-time equivalency basis. The Company believes that its employee relations
are satisfactory.
Effect of Governmental Policies and Recent Legislation
Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Bank on its deposits and
its other borrowings and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio comprise
the major portion of the Company's earnings. These rates are highly sensitive
to many factors that are beyond the control of the Bank. Accordingly, the
earnings and growth of the Company are subject to the influence of domestic and
foreign economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Federal Reserve Board. The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in United States Government
securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
Federal Reserve Board in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans and
paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other
financial institutions are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
For example, legislation was recently introduced in Congress that would repeal
the current statutory restrictions on affiliations between commercial banks and
securities firms. Under the proposed legislation, bank holding companies would
be allowed to control both a commercial bank and a securities affiliate, which
could engage in the full range of investment banking activities, including
corporate underwriting. The
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likelihood of any major legislative changes and the impact such changes might
have on the Company are impossible to predict. See "Item 1. BUSINESS -
Supervision and Regulation."
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain
laws which relate to the regulation of the Company and the Bank. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
The Company
The Company, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA").
The Company is required to file with the Federal Reserve Board quarterly and
annual reports and such additional information as the Federal Reserve Board may
require pursuant to the BHCA. The Federal Reserve Board may conduct
examinations of BKLA and its subsidiary.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company
must file written notice and obtain approval from the Federal Reserve Board
prior to purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "Item 1. BUSINESS - Supervision and Regulation - Capital
Standards."
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank
or bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank
holding company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board or the terms of any regulatory order, may
engage in any, or acquire shares of companies engaged in, activities that are
deemed by the Federal Reserve
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Board to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In making any such determination, the Federal
Reserve Board is required to consider whether the performance of such
activities by the Company or an affiliate can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition or
gains in efficiency, that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The Federal Reserve Board is also
empowered to differentiate between activities commenced de novo and activities
commenced by acquisition, in whole or in part, of a going concern.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving
as a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity of the source of
strength doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Bank
The Bank, as a California state chartered bank, is subject to primary
supervision, periodic examination and regulation by the Superintendent and the
FDIC. If, as a result of an examination of a bank, the FDIC should determine
that the financial condition, capital resources, asset quality, earnings
prospects, management, liquidity or other aspects of the bank's operations are
unsatisfactory or that the bank or its management is violating or has violated
any law or regulation, various remedies are available to the FDIC. Such
remedies include the power to
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enjoin "unsafe or unsound" practices, to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the bank, to assess civil monetary
penalties, to remove officers and directors and ultimately to terminate a
bank's deposit insurance, which for a California state-chartered bank would
result in a revocation of the bank's charter. The Superintendent has many of
the same remedial powers. See "Item 1. BUSINESS -Potential and Existing
Enforcement Actions."
The deposits of the Bank are insured by the FDIC in the manner and to
the extent provided by law. For this protection, the Bank pays a semiannual
statutory assessment. See "Item 1. BUSINESS - Supervision and Regulation -
Premiums for Deposit Insurance." Although the Bank is not a member of the
Federal Reserve System, it is nevertheless subject to certain regulations of
the Federal Reserve Board.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices and capital requirements. Further, the Bank is
required to maintain certain levels of capital. See "Item 1. BUSINESS -
Supervision and Regulation - Capital Standards."
Restrictions on Transfers of Funds to the Company by the Bank
The Company is a legal entity separate and distinct from the Bank.
The Company's ability to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank. California law
restricts the amount available for cash dividends by state chartered banks to
the lesser of retained earnings or the bank's net income for its last three
fiscal years (less any distributions to shareholders made during such period).
Notwithstanding this restriction, a bank may, with the prior approval of the
Superintendent, pay a cash dividend in an amount not exceeding the greater of
the retained earnings of the Bank, the net income for such bank's last
preceding fiscal year, and the net income of the bank for its current fiscal
year.
The FDIC also has authority to prohibit the Bank from engaging in
activities that, in the FDIC's opinion, constitute unsafe or unsound practices
in conducting its business. It is possible, depending upon the financial
condition of the bank in question and other factors, that the FDIC could assert
that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further, the FDIC and
the Federal Reserve Board have established guidelines with respect to the
maintenance of appropriate levels of capital by banks or bank holding companies
under their jurisdiction. Compliance with the standards set forth in such
guidelines and the restrictions that are or may be imposed under the Prompt
Corrective Action Provisions could also limit the amount of dividends which the
Bank or the Company may pay. Pursuant to the Order and the Prompt Corrective
Action Provisions,
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the Bank is (i) required to maintain specified levels of capital; (ii)
prohibited from paying any cash dividends to BKLA without the prior consent of
the FDIC; and (iii) prohibited, subject to certain exceptions, from paying any
management, consulting or other fees or funds of any nature to BKLA. See "Item
1. BUSINESS - Supervision and Regulation - Prompt Corrective Action and Other
Enforcement Mechanisms, - Capital Standards and - Potential and Existing
Enforcement Actions" for a discussion of these additional restrictions on
capital distributions.
The Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of credit
on behalf of, the Company or other affiliates, the purchase of or investments
in stock or other securities thereof, the taking of such securities as
collateral for loans and the purchase of assets of the Company or other
affiliates. Such restrictions prevent the Company and such other affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank to or in the Company or to or in any other affiliate is limited to
10% of the Bank's capital and surplus (as defined by federal regulations) and
such secured loans and investments are limited, in the aggregate, to 20% of the
Bank's capital and surplus (as defined by federal regulations). California law
also imposes certain restrictions with respect to transactions involving the
Company and other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law. See "Item 1. BUSINESS -
Supervision and Regulation - Prompt Corrective Action and Other Enforcement
Mechanisms."
Capital Standards
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and
credit equivalent amounts of off-balance-sheet items are multiplied by one of
several risk adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets. The
regulators measure risk-adjusted assets, which includes off-balance-sheet
items, against both total qualifying capital (the sum of Tier 1 Capital and
limited amounts of Tier 2 Capital) and Tier 1 Capital. Tier 1 Capital consists
primarily of common stock, retained earnings, noncumulative perpetual preferred
stock (cumulative perpetual preferred stock for bank holding companies) and
minority interests in certain subsidiaries, less most intangible assets. Tier
2 Capital may consist of a limited amount of the allowance for possible loan
and lease losses, cumulative preferred stock, long term preferred stock,
eligible term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 Capital is
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies
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require a minimum ratio of qualifying total capital to risk-adjusted assets of
8% and a minimum ratio of Tier 1 Capital to risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 Capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 Capital to total assets is
3%. For all banking organizations not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
The federal banking regulators have issued a proposed rule to take
account of interest rate risk in calculating risk-based capital. The proposed
rule includes a supervisory model for taking account of interest rate risk.
Under that model, institutions would report their assets, liabilities and
off-balance-sheet positions in time bands based upon their remaining
maturities. The federal banking agencies would then calculate a net
risk-weighted interest rate exposure. If that interest rate risk exposure was
in excess of a certain threshold (1% of assets), the institution could be
required to hold additional capital proportionate to that excess risk.
Alternatively, the agencies have proposed making interest rate risk exposure a
subjective factor in considering capital adequacy. Exposures would be measured
in terms of the change in the present value of an institution's assets minus
the change in the present value of its liabilities and off-balance-sheet
positions for an assumed 100 basis point parallel shift in market interest
rates. However, the federal banking agencies have proposed to let banks use
their own internal measurement of interest rate risk if it is declared adequate
by examiners.
Effective January 17, 1995, the federal banking agencies issued a
final rule relating to capital standards and the risks arising from the
concentration of credit and nontraditional activities. Institutions which have
significant amounts of their assets concentrated in high risk loans or
nontraditional banking activities and who fail to adequately manage these
risks, will be required to set aside capital in excess of the regulatory
minimums. The federal banking agencies have not imposed any quantitative
assessment for determining when these risks are significant, but have
identified these issues as important factors they will review in assessing an
individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to
classified assets. The benchmark set forth by such policy statement is the sum
of (a) assets classified loss; (b) 50 percent of assets classified doubtful;
(c) 15 percent of assets classified substandard; and (d) estimated credit
losses on other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109. See "Item 1. BUSINESS-
Supervision and Regulation - Accounting
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Changes." The federal banking agencies recently issued final rules governing
banks and bank holding companies, which become effective April 1, 1995, which
limit the amount of deferred tax assets that are allowable in computing an
institution's regulatory capital. The standard has been in effect on an
interim basis since March 1993. Deferred tax assets that can be realized for
taxes paid in prior carryback years and from future reversals of existing
taxable temporary differences are generally not limited. Deferred tax assets
that can only be realized through future taxable earnings are limited for
regulatory capital purposes to the lesser of (i) the amount that can be
realized within one year of the quarter-end report date, or (ii) 10% of Tier 1
Capital. The amount of any deferred tax in excess of this limit is excluded
from Tier 1 Capital and total assets and regulatory capital calculations. As
of December 31, 1994, the Bank had $1,759,000 of intangible assets which were
excluded from the calculation of regulatory capital ratios.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
The capital adequacy guidelines of the Federal Reserve Board are
generally applicable to bank holding companies, such as the Company, while the
guidelines of the FDIC are generally applicable to state chartered banks, such
as the Bank. However, the Federal Reserve Board's guidelines do not apply to
bank holding companies with total consolidated assets of less than
$150,000,000. As of December 31, 1994, the Company had total consolidated
assets of $80,507,000. Accordingly, the Company is not subject to any capital
requirements other than those of the FDIC that are applicable to the Bank. In
addition, the Bank is subject to the Order which requires it to increase its
Tier 1 capital by no less than $3,000,000 on or before July 18, 1994 and to
achieve, on or before such date, and thereafter maintain a leverage capital
ratio of at least 6.50%. As of December 31, 1994, the Bank had a leverage
capital ratio of 2.97%. As a result of the consummation of the Capital
Infusion, as of March 31, 1995, the Bank had a leverage capital ratio of 7.40%.
See "Item 1. BUSINESS - Bank of Los Angeles."
Prompt Corrective Action and Other Enforcement Mechanisms
The Prompt Corrective Action Provisions require each federal banking
agency to take "prompt corrective action" to resolve the problems of insured
depository institutions, including but not limited to those that fall below one
or more prescribed minimum capital ratios. The law required each federal
banking agency to promulgate regulations defining the following five categories
in which an insured depository institution will be placed, based on the level
of its capital ratios: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the Prompt Corrective Action Provisions. An insured
depository institution generally will be classified in the following categories
based on capital measures indicated below:
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"Well capitalized" "Adequately capitalized"
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Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
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Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
---------------------------
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured
depository institution is subject to more restrictions. The federal banking
agencies, however, may not treat an institution as "critically
undercapitalized" unless its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot
accept a capital plan unless, among other things, it determines that the plan
(i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution as of the time the
institution fails to comply with its capital restoration plan. Finally, the
appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
Prompt Correction Action Provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital
12
<PAGE> 13
restoration plan, is subject to additional restrictions and sanctions. These
include, among other things: (i) a forced sale of voting shares to raise
capital or, if grounds exist for appointment of a receiver or conservator, a
forced merger; (ii) restrictions on transactions with affiliates; (iii) further
limitations on interest rates paid on deposits; (iv) further restrictions on
growth or required shrinkage; (v) modification or termination of specified
activities; (vi) replacement of directors or senior executive officers; (vii)
prohibitions on the receipt of deposits from correspondent institutions; (viii)
restrictions on capital distributions by the holding companies of such
institutions; (ix) required divestiture of subsidiaries by the institution; or
(x) other restrictions as determined by the appropriate federal banking agency.
Although the appropriate federal banking agency has discretion to determine
which of the foregoing restrictions or sanctions it will seek to impose, it is
required to force a sale of voting shares or merger, impose restrictions on
affiliate transactions and impose restrictions on rates paid on deposits unless
it determines that such actions would not further the purpose of the Prompt
Corrective Action Provisions. In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in which
the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. For
example, a critically undercapitalized institution generally would be
prohibited from engaging in any material transaction other than in the ordinary
course of business without prior regulatory approval and could not, with
certain exceptions, make any payment of principal or interest on its
subordinated debt beginning 60 days after becoming critically undercapitalized.
Most importantly, however, except under limited circumstances, the appropriate
federal banking agency, not later than 90 days after an insured depository
institution becomes critically undercapitalized, is required to appoint a
conservator or receiver for the institution. The board of directors of an
insured depository institution would not be liable to the institution's
shareholders or creditors for consenting in good faith to the appointment of a
receiver or conservator or to an acquisition or merger as required by the
regulator.
In addition to measures taken under the Prompt Corrective Action
Provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement with
the agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
13
<PAGE> 14
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The
standards, which were issued in the form of guidelines rather than regulations,
relate to internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are
expected to be issued in the near future.
In December 1992, the federal banking agencies issued final
regulations prescribing uniform guidelines for real estate lending. The
regulations, which became effective on March 19, 1993, require insured
depository institutions to adopt written policies establishing standards,
consistent with such guidelines, for extensions of credit secured by real
estate. The policies must address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan
or investment, including mortgage-backed securities.
Premiums for Deposit Insurance
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC is authorized to borrow up to $30 billion from the United
States Treasury; up to 90% of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of the BIF. Any borrowings not repaid
by asset sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate
on deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
14
<PAGE> 15
The FDIC has adopted final regulations implementing a risk-based
premium system required by federal law. Under the regulations, which cover the
assessment periods commencing on and after January 1, 1994, insured depository
institutions are required to pay insurance premiums currently within a range of
23 cents per $100 of deposits to 31 cents per $100 of deposits depending on
their risk classification. On January 31, 1995, the FDIC issued proposed
regulations that would establish a new assessment rate schedule of 4 cents per
$100 of deposits to 31 cents per $100 of deposits applicable to members of BIF.
There can be no assurance that the final regulations will be adopted as
proposed. To determine the risk-based assessment for each institution, the
FDIC will categorize an institution as well capitalized, adequately capitalized
or undercapitalized based on its capital ratios. A well-capitalized
institution is one that has at least a 10% total risk-based capital ratio, a 6%
Tier 1 risk-based capital ratio and a 5% Tier 1 leverage capital ratio. An
adequately capitalized institution will have at least an 8% total risk-based
capital ratio, a 4% Tier 1 risk-based capital ratio and a 4% Tier 1 leverage
capital ratio. An undercapitalized institution will be one that does not meet
either of the above definitions. The FDIC will also assign each institution to
one of three subgroups based upon reviews by the institution's primary federal
or state regulator, statistical analyses of financial statements and other
information relevant to evaluating the risk posed by the institution.
Interstate Banking and Branching
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after the date of enactment, a
bank holding company that is adequately capitalized and managed may obtain
approval under the BHCA to acquire an existing bank located in another state
without regard to state law. A bank holding company would not be permitted to
make such an acquisition if, upon consummation, it would control (a) more than
10% of the total amount of deposits of insured depository institutions in the
United States or (b) 30% or more of the deposits in the state in which the bank
is located. A state may limit the percentage of total deposits that may be
held in that state by any one bank or bank holding company if application of
such limitation does not discriminate against out-of-state banks. An
out-of-state bank holding company may not acquire a state bank in existence for
less than a minimum length of time that may be prescribed by state law except
that a state may not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the
laws of that state, subject to the same requirements and conditions as for a
merger transaction.
15
<PAGE> 16
The Interstate Act is likely to increase competition in the Company's
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Company's operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the other
state's laws permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two stages. The first stage allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states. The second stage, which
became effective January 1, 1991, allows interstate acquisitions on a national
"reciprocal" basis. California has also adopted similar legislation applicable
to savings associations and their holding companies.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. On December 21, 1993, the federal
banking agencies issued a proposal to change the manner in which they measure a
bank's compliance with its CRA obligations, but no final regulation has yet
been approved.
On March 8, 1994, the federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
Accounting Changes
In February 1992, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 109, "Accounting for Income Taxes," which superseded SFAS No.
96 of the same title. SFAS No. 109, which became effective for fiscal years
beginning after December 15, 1992, employs an asset and liability approach in
accounting for income taxes at the date of the financial statements as a result
of all events that have been recognized in the financial statements and as
measured by the provisions of enacted tax laws. Adoption by the Company of
SFAS No. 109 did not have a material impact on the Company's results of
operations.
In December 1991, the FASB issued SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments," which is effective for fiscal years
ending after December 15, 1992 (December 15, 1995 in the case of entities with
less than $150 million in total assets). SFAS No. 107 requires financial
intermediaries to disclose, either in the body of their financial
16
<PAGE> 17
statements or in the accompanying notes, the "fair value" of financial
instruments for which it is "practicable to estimate that value." SFAS No. 107
defines "fair value" as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Quoted market prices, if available, are deemed the
best evidence of the fair value of such instruments. Most deposit and loan
instruments issued by financial intermediaries are subject to SFAS No. 107, and
its effect will be to require financial statement disclosure of the fair value
of most of the assets and liabilities of financial intermediaries such as the
Company and the Bank. Management is unable to predict what effect, if any,
such disclosure requirements could have on the market price of the common stock
of the Company or its ability to raise funds in the financial markets.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan". SFAS No. 114 prescribes the recognition criterion
for loan impairment and the measurement methods for certain impaired loans and
loans whose terms are modified in troubled debt restructurings. SFAS No. 114
states that a loan is impaired when it is probable that a creditor will be
unable to collect all principal and interest amounts due according to the
contracted terms of the loan agreement. A creditor is required to measure
impairment by discounting expected future cash flows at the loan's effective
interest rate, or by reference to an observable market price, or by determining
the fair value of collateral if the loan is collateral-dependent and
foreclosure is probable. SFAS No. 114 also clarifies the existing accounting
for in-substance foreclosures by stating that a collateral-dependent real
estate loan would be reported as real estate owned only if the lender had
foreclosed upon or had taken possession of collateral.
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. To accomplish
that, it eliminated the provisions in SFAS No. 114 that described how a
creditor should report income on an impaired loan. SFAS No. 118 did not change
the provisions in SFAS No. 114 that require a creditor to measure impairment
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 observable
market price of the loan or the fair value of the collateral if the loan is
collateral-dependent. SFAS No. 118 amends the disclosure requirements in SFAS
No. 114 to require information about the recorded investments in certain
impaired loans and about how a creditor recognizes interest income related to
those impaired loans. SFAS No. 114 is effective for financial statements
issued for fiscal years beginning after December 15, 1994. Although earlier
application is encouraged, it is not required. SFAS No. 118 is effective
concurrent with the effective date of SFAS No. 114. The Company has adopted
SFAS No. 114 as of January 1, 1995 and it was not yet determined the impact of
the adoption of this statement.
In December 1990, FASB issued SFAS No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions" effective for fiscal years
beginning after December 15, 1992. In November 1992, FASB issued Statement of
Financial Standards No. 112, "Employers' Accounting For Post Employment
Benefits," effective for fiscal years beginning after December 15, 1993. SFAS
No. 106 and SFAS No. 112 focus primarily on post retirement health care
benefits. The Company does not provide post retirement benefits, and SFAS No.
106 and SFAS No. 112 will have no impact on net income in 1995.
17
<PAGE> 18
In May 1993, the FASB issued SFAS No. 115 "Accounting For Certain
Investments in Debt and Equity Securities" addressing the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. These investments
would be classified in three categories and accounted for as follows: (i) debt
and equity securities that the entity has the positive intent and ability to
hold to maturity would be classified as "held to maturity" and reported at
amortized cost; (ii) debt and equity securities that are held for current
resale would be classified as trading securities and reported at fair value,
with unrealized gains and losses included in operations; and (iii) debt and
equity securities not classified as either securities held to maturity or
trading securities would be classified as securities available for sale, and
reported at fair value, with unrealized gains and losses excluded from
operations and reported as a separate component of shareholders' equity. The
Company adopted SFAS No. 115 effective as of January 1, 1994 at which time the
impact was not material.
Potential and Existing Enforcement Actions
Commercial banking organizations, such as the Bank, and their
institution-affiliated parties, which include BKLA, may be subject to potential
enforcement actions by federal and state banking agencies for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease and desist order (such as the
Order) that can be judicially enforced, the termination of insurance of
deposits (in the case of the Bank), which would result in the closure and
takeover of the Bank by bank regulatory authorities, the imposition of civil
money penalties, the issuance of directives to increase capital, the issuance
of formal and informal agreements, the issuance of removal and prohibition
orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the Prompt Corrective Action Provisions.
Additionally, a holding company's inability to serve as a source of strength to
its subsidiary banking organizations could serve as an additional basis for a
regulatory action against the holding company.
On February 23, 1995, the FDIC delivered to the Bank a letter
notifying the Bank it was significantly undercapitalized under the Prompt
Corrective Action Provisions. As a result of such classification, the Bank is
restricted in its ability to increase assets, make acquisitions, commence new
activities, open new branches, or pay dividends, management fees, or senior
executive compensation. In addition, the Bank may be subject to restrictions
as to the rates of interest it may pay on deposits. To comply with the Prompt
Corrective Action Provisions, the Bank is required by March 21, 1995 to provide
a summary of specific steps taken to comply with these restrictions and by
April 7, 1995 provide a revised written capital restoration plan.
On December 22, 1994, the Superintendent issued an order to the Bank
advising it that under the provisions of the California Financial Code its
contributed capital was impaired as of September 30, 1994 in the amount of
$1,153,000 and that the Bank must correct such impairment of its contributed
capital within sixty (60) days of the order. Under the provisions of the
California Financial Code, the amount necessary to correct the impairment as of
18
<PAGE> 19
September 30, 1994 was approximately $2,882,544. Since the Bank did not
correct such impairment during the first quarter of 1995 the Bank's Board of
Directors levied an assessment on the Bank's outstanding shares of common
stock, all of which are owned by BKLA. In the event that BKLA cannot pay the
assessment due on any of those shares, such shares, or portion thereof, could
be sold to a bidder who is willing to pay the assessment and penalty thereon or
could be forfeited to the Bank if no such bidder is willing to pay such amount.
Any such sale of the Bank's outstanding common stock would reduce or possibly
eliminate BKLA's ownership in the Bank, which would, in turn, result in a
substantial diminution or the elimination of the value of BKLA shareholders'
interests in the Company. As of December 31, 1994, the Bank's contributed
capital was impaired in the aggregate amount of approximately $1,724,000.
Although the Superintendent has not yet issued an order to the Bank to correct
the additional impairment, the amount necessary to correct the aggregate
impairment as of December 30, 1994 was approximately $4,310,000.
Based on an examination of the Bank as of October 15, 1993, the FDIC
issued the Cease and Desist Order against the Bank which became effective on
March 20, 1994. The FDIC noted the deterioration in the Bank's capital levels
and asset quality and expressed concern regarding the adverse effect that
continued loan losses and high overhead expense would have on the Bank's
earnings.
The Cease and Desist Order requires the Bank to: (a) have and retain
qualified management with qualifications and experience commensurate with his
or her duties at the Bank which should include (i) a chief executive officer
with proven ability in managing a bank of comparable size and experience in
upgrading a low quality loan portfolio and (ii) a senior lending officer with
an appropriate level of lending, collection and loan supervision experience for
the type and quality of the Bank's loans; (b) increase its Tier 1 capital by no
less than $3,000,000 on or before July 18, 1994 and achieve, on or before such
date, and thereafter maintain a leverage capital ratio of at least 6.5%; (c)
eliminate from its books certain criticized assets and reduce other criticized
assets to specified levels at various dates until March 20, 1995; (d) not
extend any additional credit to any borrower who has a loan or other extension
of credit from the Bank that has been charged off or classified, in whole or in
part, "loss" or "substandard" and is uncollected without the prior written
approval of a majority of the board of directors or the loan committee; (e)
revise, adopt, and implement written lending and collection policies to provide
effective guidance and control over the Bank's lending functions by May 19,
1994; (f) develop a written plan to systematically reduce the amount of each
loan concentration specified in the FDIC's Report of Examination as of October
15, 1993 ("Report of Examination") to an amount less than 25% of the Bank's
Tier 1 capital for each individual loan concentration; (g) maintain an adequate
reserve for loan losses; (h) develop and adopt by May 19, 1994 a plan to
control overhead and other expenses and restore the Bank's profitability; (i)
eliminate and/or correct all violations of law set forth in the Report of
Examination by June 18, 1994; (j) develop, adopt and implement a written policy
by May 19, 1994 governing the relationship between the Bank and BKLA and
eliminating the payment of any management, consulting, or other fees to BKLA,
except for those services performed on behalf of the Bank; (k) restrict its
asset growth to an amount not to exceed 10%; (l) refrain from paying cash
dividends without the prior written consent of the FDIC and the Superintendent;
and (m) furnish
19
<PAGE> 20
written progress reports to the FDIC and the Superintendent on a quarterly
basis detailing the manner of any actions taken to comply with the Cease and
Desist Order and the results thereof.
On January 7, 1994, the FDIC delivered to the Bank a PCA Letter
notifying the Bank that it was undercapitalized under the Prompt Corrective
Action Provisions. As a result of such classification, the Bank is subject to
asset growth restrictions, and prohibitions on payment of dividends and
management fees and the elimination of "pass through" deposit insurance for
certain employee benefit accounts placed at the Bank. See "Item 1. Business -
Supervision and Regulation - Prompt Corrective Action and Other Enforcement
Mechanisms."
In accordance with the Prompt Corrective Action Provisions, on
February 16, 1994, the Bank submitted to the FDIC a capital restoration plan
and BKLA submitted to the FDIC a guarantee of the capital restoration plan.
The capital restoration plan provides for the Bank to increase its capital by
not less than $3,000,000 and to increase its leverage capital ratio to 6.5%
before June 30, 1994. The additional capital required by the plan was raised
pursuant to the Capital Infusion.
Acting under delegated authority from the Federal Reserve Board, the
Federal Reserve Bank of San Francisco (the "FRB SF") concluded its most recent
examination (the "February Examination") of the Company as of February 10,
1994. Based on its inspection, the FRB SF reported that the financial
condition of the Company was marginal as a result of the Bank's asset quality
problems, operating losses and insufficient capital. On April 11, 1994, the
Company and the FRB SF entered into a Memorandum of Understanding (the "MOU")
intended to address certain concerns of the FRB SF disclosed during its
inspection of the Company. The MOU provides, among other things, that without
the prior approval of the FRB SF, the Company will not declare dividends, incur
additional debt, repurchase any of its outstanding stock or enter into any
agreements to acquire any entities or portfolios. Prior to the execution of
the MOU, the Company was subject to the terms of a supervisory letter
previously issued by the FRB SF on April 16, 1993.
On January 27, 1993, the Board of Directors of the Company (the
"Board") adopted various resolutions to address certain issues raised by the
FRB SF prior to the February Examination. These resolutions included
commitments (a) to notify the FRB SF at least 15 days prior to considering the
declaration of any cash dividend on its Common Stock and (b) to refrain from
incurring any debt without the prior approval of the FRB SF.
As a result of the consummation of the Capital Infusion, (i) the
Bank's capital levels satisfy the requirements for being adequately capitalized
under the Prompt Corrective Action Provisions; (ii) the Bank's capital
impairment as of September 30, 1994 was corrected; and (iii) the Bank's
leverage capital ratio, as of March 31, 1995, has increased to 7.40%. Although
management of BKLA and the Bank has taken certain steps to comply with the
requirements of the regulatory orders referred to above, there can be no
assurance that the Bank will be able to comply with the terms of such orders.
Compliance with such terms will be determined by the various regulators at
subsequent examinations, and in the event that the Bank's regulators determine
that the Bank is not in compliance, they may take various enforcement or
corrective actions, including those discussed above.
20
<PAGE> 21
ITEM 2. PROPERTIES
The principal corporate offices of BKLA and the Bank are located at
the West Hollywood Regional Office, 8901 Santa Monica Boulevard, West
Hollywood, California. BKLA and the Bank occupy the premises for the West
Hollywood Regional Office and Beverly Hills Regional Office under leases
expiring on July 1, 1997 and July 1, 2007, respectively, and generally have
options to extend the terms of such leases.
The Company's total occupancy expense, exclusive of furniture and
equipment expense, for the year ended December 31, 1994 was $764,000. For
additional information concerning premises and lease rental expenses and
commitments, see Notes G and J of the Notes to the Consolidated Financial
Statements included elsewhere in this report.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Bank is a party to claims and legal proceedings
arising in the ordinary course of business. After taking into consideration
information furnished by counsel to the Bank as to the current status of
various claims and legal proceedings to which the Bank is a party, management
of the Bank believes that the ultimate aggregate liability represented thereby,
if any, will not have a material adverse effect on the Company's consolidated
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders of the Company in the
fourth quarter of 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Commencing November 1993, the Common Stock has been traded in the
over-the-counter market on the OTC Bulletin Board under the symbol "BKLA". The
Common Stock was de-listed from the NASDAQ National Market System ("NASDAQ
NMS") in November 1993 due to the Company's failure to meet applicable price
and market value requirements. The Common Stock was first included for
quotation in the NASDAQ NMS on November 21, 1989. Trading in the Common Stock
has not been extensive, and such trades cannot be characterized as constituting
an active trading market.
The following table sets forth high and low sales prices for the
Common Stock from January 1, 1993 through November 15, 1993 as reported in the
NASDAQ NMS, and the high and low bid quotations for the period from November
16, 1993 through December 31, 1994, as reported by the principal market maker
for the Common Stock. The market maker's quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
21
<PAGE> 22
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
March 31, 1993 $ 1.50 $ 1.25
June 30, 1993 1.50 .75
September 30, 1993 1.25 .50
December 31, 1993 .63 .13
March 31, 1994 .75 .13
June 30, 1994 .75 .38
September 30, 1994 .75 .38
December 31, 1994 .75 .38
</TABLE>
_______________________
As of February 28, 1995, there were approximately 633 holders of record of
the Common Stock.
BKLA has never paid a cash dividend on the Common Stock. Management
currently intends to retain all earnings, if any, to increase the capital of
the Company. There are various limitations on BKLA's ability to pay a cash
dividend. As part of its efforts to address the issues raised by the FRB SF in
its recent examinations of the Company, the Board adopted a resolution whereby
it agreed to notify the FRB SF at least 15 days prior to the day it proposes to
consider the declaration of a cash dividend. See "Item 1. BUSINESS -
Potential and Existing Enforcement Actions." Furthermore, the ability of BKLA
to pay a cash dividend depends largely upon the Bank's ability to pay a cash
dividend to BKLA. Pursuant to the terms of the Order, the Bank is prohibited
from paying any cash dividends without the prior consent of the FDIC. However,
pursuant to the Prompt Corrective Action Provisions, the Bank is prohibited
from paying any dividends to BKLA. There are also other statutory and
regulatory restrictions on the Bank's ability to pay cash dividends and the
amount of cash dividends which can be paid to BKLA. See "Item 1. BUSINESS -
Supervision and Regulation - Restrictions on Transfer of Funds to the Company
by the Bank."
22
<PAGE> 23
Item 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
(in thousands, except per share amounts) 1994 1993 1992 1991(1) 1990
FOR THE YEAR ENDED: --------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total interest income $ 5,794 $ 7,092 $ 10,934 $ 13,120 $ 15,741
Total interest expense 1,758 2,262 4,022 6,524 7,460
Net interest income 4,036 4,830 6,912 6,596 8,281
Provision for credit losses 0 1,953 4,975 1,150 2,050
Provision for security losses 0 0 0 (15) 361
Noninterest income (2) 923 1,725 2,768 1,330 1,403
Gain (loss) on securities sales 0 372 1,417 72 (88)
Noninterest expense 6,171 6,915 8,058 8,187 8,890
Net loss (1,212) (2,313) (3,353) (1,055) (941)
Net loss per share (0.97) (1.85) (2.68) (0.84) (0.74)
AT YEAR END:
Total assets 80,507 98,992 126,361 160,033 138,447
Total loans 38,250 50,930 79,383 91,512 95,580
Securities held to maturity 14,821 2,010 17,483 44,109 28,018
Securities available for sale 15,781 26,410 7,944 4,983 0
Total deposits 74,471 91,388 116,410 146,609 123,240
Total shareholders' equity 3,817 5,502 7,815 11,168 12,223
Book value per share 3.05 4.40 6.24 8.92 9.77
</TABLE>
- - ----------------
(1) In August 1991, the Bank assumed approximately $61 million in
deposit liabilities of the West Hollywood office of Unity Savings &
Loan Association, F.A. in a purchase and assumption transaction with
the Resolution Trust Corporation.
(2) Includes gain (loss) on securities sales.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion is intended to provide information to
facilitate the understanding and assessment of significant changes in trends to
the consolidated financial condition and results of operations of the Company.
The discussion and analysis should be read in conjunction with the Company's
consolidated financial statements and notes to the consolidated financial
statements that follow.
Summary
The Company reported a net loss in 1994 of $1,212,000 as compared to
a net loss of $2,313,000 for 1993. The loss per share for 1994 was $.97 as
compared to a loss per
23
<PAGE> 24
share of $1.85 in 1993 and a loss per share of $2.68 in 1992. The loss for 1994
is a result of high levels of noninterest expense and a declining earning asset
base. Losses in 1993 and 1992 are primarily because of substantial provisions
for credit losses and high levels of noninterest expense. No provision for
credit losses was made in 1994. The credit loss provision was $1,953,000 in
1993 and $4,975,000 in 1992.
Although the aggregate dollar amount of noninterest expense has
declined in each of the last three years, the ratio of noninterest expense to
average earning assets remains high. Noninterest expense as a percentage of
average earning assets was 7.7 % in 1994, as compared to 6.9% in 1993 and 6.1.%
in 1992. The increase in 1994 is due to a reduction of $20,059,000 or 20% in
average earning assets. The Company's average earning assets declined to
$80,058,000 in 1994 from $100,117,000 in 1993. At December 31, 1994, total
earning assets were approximately $71,852,000. While management is continuing
its efforts to reduce noninterest expense, it does not anticipate that the
Bank's earning assets will increase materially, if at all, until such time as
the Bank's capital is increased to a level that will permit growth given the
Bank's minimum capital requirements under the Order and FDIC regulations.
On July 28, 1994, the Company, the Bank and Investors entered into a
Stock Purchase Agreement pursuant to which Investors agreed to invest
approximately $5,000,000 in the Company over a period of approximately six
months. The Initial Infusion was consummated on March 29, 1995 and consisted
of an infusion of $3,028,509 through the purchase of 2,019,006 Units, with each
Unit comprised of two shares of Common Stock, and one warrant, exercisable for
three years after issuance, to purchase Common Stock at $.75 per share. On
March 30, 1995, Investors purchased an additional 346,874 Units for $520,311.
The Stock Purchase Agreement also contemplates a Rights Offering in
which the Company's shareholders other than Investors will be given the right
to purchase Common Stock. The Rights Offering will allow the Company's
shareholders, other than Investors, to increase their collective ownership in
the Company to approximately 45%. Investors will purchase any securities not
purchased by the other shareholders up to a maximum of $2,000,000. The Company
expects to raise an additional $2,345,000 in the Rights Offering.
On February 23, 1995, The FDIC delivered to the Bank a letter
notifying the Bank it was significantly undercapitalized under the Prompt
Corrective Provisions. As a result of such classification, the Bank is subject
to restrictions as to asset growth, acquisitions, new activities, new
branches, payment of dividends or the making of any other capital distribution,
management fees, or senior executive compensation. In addition the Bank may be
subject to restrictions as to the rates of interest it may pay on deposits. To
comply with the Prompt Corrective Action Provisions, the Bank is required by
March 21, 1995 to provide a summary of specific steps taken to comply with
these restrictions and by April 7, 1995 provide a revised written capital
restoration plan. In response to a letter dated January 7, 1994 from the FDIC
notifying the Bank that it was undercapitalized under the Prompt Corrective
Action Provisions, the Bank on February 16, 1994 submitted a capital
restoration plan and BKLA submitted a guarantee of such plan, of which the
capital infusion by Investors Banking Corporation was an integral part. As a
result of the consummation of the Transaction, the Bank's capital levels
24
<PAGE> 25
satisfy the requirements for being adequately capitalized under the Prompt
Corrective Action provisions.
On December 22, 1994, the Superintendent issued an order to the Bank
advising it that under the provisions of the California Financial Code its
contributed capital was impaired as of September 30, 1994 in the amount of
$1,153,000 and that the Bank must correct such impairment of its contributed
capital within sixty (60) days of the order. Under the provisions of the
California Financial Code, the amount necessary to correct the impairment as of
September 30, 1994 was approximately $2,882,544. Since the Bank did not
correct such impairment during the first quarter of 1995, the Bank's Board of
Directors requested permission to levy an assessment on the Bank's outstanding
shares of common stock, all of which are owned by BKLA. In the event that BKLA
cannot pay the assessment due on any of those shares, such shares, or a portion
thereof, could be sold to a bidder who is willing to pay the assessment and
penalty thereon or could be forfeited to the Bank if no such bidder is willing
to pay such amount. Any such sale of the Bank's outstanding common stock would
reduce or possibly eliminate BKLA's ownership in the Bank, which would, in
turn, result in a substantial diminution or the elimination of the value of
BKLA shareholders' interests in the Company. In addition, if a bank's
contributed capital is impaired, the Superintendent is authorized to take
possession of the property and business of the bank. As of December 31, 1994,
the Bank's contributed capital was impaired in the aggregate amount of
approximately $1,724,000. Although the Superintendent has not yet issued an
order to the Bank to correct the additional impairment, the amount necessary to
correct the aggregate impairment as of December 31, 1994 was approximately
$4,310,000. As a result of the consummation of the Capital Infusion, the
capital impairment as of September 30, 1994 was cured. There can be no
assurances that the Bank will cure the capital impairment as of December 31,
1994.
On February 23, 1994, the Bank consented to the issuance by the FDIC
of the Order, which became effective on March 20, 1994. The FDIC Order
requires, among other things, the Bank to increase its Tier 1 capital by at
least $3,000,000 on or before July 18, 1994 and to achieve, on or before such
date, and thereafter maintain a leverage capital ratio of at least 6.50%. As
of December 31, 1994, the Bank had Tier 1 capital of $2,507,000 and a leverage
capital ratio of 2.97%. The Order supersedes the Memorandum of Understanding
entered into by the Bank with the FDIC and the Superintendent of Banks on
January 14, 1993. As a result of the consummation of the Capital Infusion, the
Bank has received an infusion of approximately $3,400,000 in Tier 1 Capital and
has increased its leverage capital ratio to approximately 7.40%. There can be
no assurances that the Bank will be able to meet minimum regulatory capital
requirements or to comply with the requirements of the Order.
Acting under delegated authority from the Federal Reserve Board, the
Federal Reserve Bank of San Francisco (the "FRB SF") concluded its most recent
examination (the "February Examination") of the Company as of February 10,
1994. Based on its inspection, the FRB SF reported that the financial
condition of the Company was marginal as a result of the Bank's asset quality
problems, operating losses and insufficient capital. On April 11, 1994, the
Company and the FRB SF entered into a Memorandum of Understanding (the "MOU")
intended to address certain concerns of the FRB SF disclosed during its
inspection of the Company. The MOU provides, among other things, that without
the prior approval of the FRB SF, the
25
<PAGE> 26
Company will not declare dividends, incur additional debt, repurchase any of
its outstanding stock or enter into any agreements to acquire any entities or
portfolios. Prior to the execution of the MOU, the Company was subject to the
terms of a supervisory letter previously issued by the FRB SF on April 16,
1993.
The following table presents certain important ratios for the Company for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Loss on average assets (1.4%) (2.1%) (2.3%)
Loss on average shareholders' equity (26.0%) (32.3%) (30.6%)
Average equity to average assets 5.2% 6.4% 7.5%
</TABLE>
The following discussion explains in greater detail the consolidated financial
condition and results of the operations of the Company. This discussion should
be read with the consolidated financial statements and notes to the
consolidated financial statements.
Results of Operations
NET INTEREST INCOME. Net interest income is the major source of
operating income of the Company. Net interest income is the difference between
the interest income from earning assets and the interest paid on interest
bearing liabilities. Net interest income declined $794,000, or 16.4%, to
$4,036,000 in 1994 from $4,830,000 in 1993. In 1992, net interest income was
$6,912,000. The decrease in net interest income was largely due to the
reduction in the volumes of earning assets and was partially offset by
increases in rates earned.
Interest income declined to $5,794,000 in 1994 from $7,092,000 in
1993. Average earning assets declined to $80,058,000 in 1994 from $100,117,000
in 1993 or 20.0%. The decline in earning assets was greater among the highest
earning category of loans. Average loans were $42,939,000 in 1994 and
$64,315,000 in 1993. Decline in average loan balances from 1993 to 1994 was
$21,376.000 or 33.2% At December 31, 1994, total earning assets were
$71,852,000 compared to $90,750,000 at December 31, 1993. The weighted average
rates earned on average earning assets were 7.2% and 7.1% for 1994 and 1993,
respectively. The average rate earned on loans, the major component of earning
assets, increased to 9.5% in 1994 from 8.5% in 1993, resulting in a $430,000
increase in interest income.
The Company's interest expense decreased $504,000 in 1994. The
decrease was primarily due to decreased deposit volume resulting in a
$528,000 decline in interest expense. This decline was partially offset by a
$24,000 increase in interest rates. Interest expense declined to $1,758,000 in
1994 as compared to $2,262,000 in 1993. Average interest bearing deposits in
1994 and 1993 were $56,052,000 and $74,973,000, respectively. The average
interest rate paid on interest bearing deposits was 2.7% for both 1994 and
1993.
26
<PAGE> 27
In 1993, net interest income declined $2,082,000, or 30.1%, to
$4,830,000 in 1993 from $6,912,000 in 1992. The decrease in net interest income
was largely due to the reduction in the volumes of earning assets resulting in
a $2,875,000 decline in interest income and, to a lesser extent, a decline in
the average interest rate on earning assets resulting in a $967,000 decline in
interest income. Gross interest income declined to $7,092,000 in 1993, as
compared to $10,934,000 in 1992. Average earning assets declined to
$100,117,000 in 1993 from $131,952,000 in 1992 or 24%. The decline in earning
assets was greater among the higher earning categories of investments and
loans. The lower earning category, federal funds sold, increased its share of
average earning assets to 11.8% for 1993 from 6.3% for 1992. Average federal
funds sold were $11,783,000 and $8,434,000 for 1993 and 1992 respectively. At
December 31, 1993, total earning assets were $90,750,000 as compared to
$111,537,000 at December 31, 1992.
The weighted average rates earned on average earning assets were 7.1%
and 8.3% for 1993 and 1992, respectively. The average rate earned on loans,
the major component of earning assets, declined to 8.5% in 1993 from 9.2% in
1992, resulting in a $454,000 decline in interest income.
The Company's interest expense also decreased in 1993 due to declines
primarily in volumes resulting in a $1,043,000 decline in interest expense and
to a lesser extent declines in interest rates resulting in a $717,000 decline
in interest expense. Interest expense declined to $2,262,000 in 1993 as
compared to $4,022,000 in 1992. Average interest bearing deposits in 1993 and
1992 were $74,973,000 and $100,368,000, respectively. The average interest
rates paid on interest bearing deposits in 1993 and 1992 were 2.7% and 3.7%,
respectively.
The table on the following page present changes in interest income and interest
expense for 1994 compared to 1993. Interest income includes loan fees. The
total change is segmented into the change due to volume and change due to
interest rate. Change due to volume is calculated as the change in average
balance times the average rate in the preceding year. Change due to rate is
calculated as the change in average rate times the average balance in the
current year.
27
<PAGE> 28
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1994 1993
------------------------------ ------------------------------
Average Interest Average Average Interest Average
( dollars in thousands ) Balance Earned/Paid Rate Balance Earned/Paid Rate
-------- ----------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
- - -------
Earnings assets:
Federal Funds $ 10,267 $ 406 4.0% $ 11,783 $ 325 2.8%
Interest bearing deposits with
financial institutions 0 0 0.0% 100 3 3.0%
Securities 26,852 1,301 4.8% 23,919 1,287 5.4%
Loans (1) 42,939 4,087 9.5% 64,315 5,477 8.5%
-------- ------ -------- ------
Total earning assets 80,058 5,794 7.2% 100,117 7,092 7.1%
-------- ------ -------- ------
Nonearning assets:
Cash and due from banks on demand 5,611 6,712
Other assets 5,374 7,054
Allowance for credit losses (2,121) (2,725)
-------- --------
Total assets
$ 88,922 $111,158
======== ========
Liabilities and Shareholders' Equity:
- - -------------------------------------
Interest bearing liabilities:
Demand, interest bearing $ 13,910 $ 176 1.3% $ 15,574 $ 275 1.8%
Money market 16,313 373 2.3% 24,057 609 2.5%
Savings (including IRAs) 12,961 536 4.1% 16,418 518 3.2%
Time certificates of deposit 12,868 417 3.2% 18,924 606 3.2%
-------- ------ -------- ------
Total interest bearing deposits 56,052 1,502 2.7% 74,973 2,008 2.7%
Capital lease obligation 1,828 256 14.0% 1,825 254 13.9%
-------- ------ -------- ------
Total interest bearing liabilities 57,880 1,758 3.0% 76,798 2,262 2.9%
-------- ------ -------- ------
Demand deposits, noninterest bearing 25,451 26,825
Other liabilities 931 375
Shareholders' equity 4,660 7,160
-------- --------
Total liabilities and shareholders'
equity $ 88,922 $111,158
======== ========
Net interest margin spread 4.2% 4.2%
==== ====
Net interest income earned as a
percentage of average earning assets(1) $ 80,058 $ 4,036 5.0% $100,117 $ 4,830 4.8%
==== ====
</TABLE>
(1) Includes loan fees of $170,000 in 1994 and $432,000 in 1993. Interest
foregone on nonaccrual loans is not included.
28
<PAGE> 29
<TABLE>
<CAPTION>
1994 Compared to 1993 1993 Compared to 1992
Increases (Decreases) Increases (Decreases)
(in thousands) Due to Change in, Due to Change in,
------------------------------- ---------------------------------
Net Net
Volume Rate Change Volume Rate Change
-------- ----- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
- - -------
Earnings assets:
Federal Funds $ (42) $ 123 $ 81 $ 115 $ (79) $ 36
Interest bearing deposits with
financial institutions (3) 0 (3) (14) 0 (14)
Securities 166 (152) 14 (851) (434) (1,285)
Loans (1,819) 429 (1,390) (2,125) (454) (2,579)
-------- ----- -------- -------- ------ --------
Total earning assets $ (1,698) $ 400 $ (1,298) $ (2,875) $ (967) $ (3,842)
======== ===== ======== ======== ====== ========
Liabilities and Shareholders' Equity:
- - -------------------------------------
Interest bearing liabilities:
Demand, interest bearing $ (30) (69) $ (99) $ (74) $ (138) $ (212)
Money market (202) (34) (236) (136) (221) (357)
Savings (including IRAs) (105) 123 18 (253) (145) (398)
Time certificates of deposit (189) 0 (189) (537) (212) (749)
-------- ----- -------- -------- ------ --------
Total interest bearing deposits (526) 20 (506) (1,000) (716) (1,716)
Capital lease obligation 1 1 2 1 (1) 0
Federal funds purchased and securities
sold under agreement to repurchase (44) 0 (44)
-------- ----- -------- -------- ------ --------
Total interest bearing liabilities $ (525) $ 21 $ (504) $ (1,043) $ (717) $ (1,760)
-------- ----- -------- -------- ------ --------
Net change in net interest income $ (1,173) $ 379 $ (794) $ (1,832) $ (250) $ (2,082)
======== ===== ======== ======== ====== ========
</TABLE>
PROVISION FOR CREDIT LOSSES. The provision for credit losses creates
an allowance for estimated future loan losses. When losses occur they are
charged against the appropriate allowance.
There was no provision for credit losses in 1994, compared to
$1,953,000 in 1993 and $4,975,000 in 1992. No additional provision for credit
losses was made to the allowance for credit losses due to recoveries of
$456,000 and to the decline in loan balances and to the improvement in the
quality of the loan portfolio. Gross charge offs were $1,301,000 in 1994,
compared to $3,241,000 in 1993 and $5,006,000 in 1992. The ratio of allowance
for credit losses to loans outstanding at December 31, 1994 and December 31,
1993 were 4.3% and 4.9% respectively. For further information on nonperforming
and classified loans and the allowance for credit losses, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Financial Condition - Nonperforming Assets - and - Allowance for Credit
Losses".
29
<PAGE> 30
NONINTEREST INCOME. The following table presents information by
category of noninterest income for the Company for periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(in thousands) 1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Service charges on deposit accounts $ 480 $ 654 $ 738
Escrow fees 127 318 302
Gain on sale of securities 0 372 1,417
Other 316 381 311
------- ------- -------
Total noninterest income $ 923 $ 1,725 $ 2,768
======= ======= =======
</TABLE>
Service charges on deposit accounts decreased in 1994 as a result of
servicing fewer deposit accounts. Escrow fees declined in 1994 primarily due
to closing the escrow operations as of November 15, 1994. Bank management
closed escrow operations as a part of its plan to consolidate operations and
focus on the Bank's primary product lines.
The Bank had no sales of securities in 1994. In 1993, the Bank sold
$8,667,000 principal amount of securities resulting in a net gain of $372,000.
In 1992, the Bank sold $34,661,000 principal amount of securities resulting in
a net gain of $1,417,000. Declining interest rates in 1993 increased the value
of fixed rate securities held by the Bank and provided the opportunity to
realize gains on the sale of those securities. In 1994, an increasing interest
rate environment did not allow the Bank opportunities to realize gains from
sales of securities.
NONINTEREST EXPENSE. The following table presents information by
category of noninterest expense for the Company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(in thousands) 1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Employee compensation and benefits $ 2,720 $ 2,984 $ 3,711
Occupancy 764 1,029 905
Furniture and equipment 533 562 634
Business promotion 88 111 168
Professional services 885 986 930
Printing and supplies 337 348 397
FDIC assessment 253 302 319
Insurance 179 181 152
Other 412 412 842
------- ------- -------
Total noninterest expense $ 6,171 $ 6,915 $ 8,058
======= ======= =======
</TABLE>
30
<PAGE> 31
Non interest expense decreased to $6,171,000 in 1994 from $6,915,000
in 1993. Noninterest expense was $8,058,000 in 1992. Total noninterest
expense as a percentage of average earning assets was 7.7% in 1994 as compared
to 6.9% in 1993 and 6.1% in 1992.
The Bank continued to implement its plan to reduce operating expenses.
On November 4, 1994 the Bank closed its administrative office located at 825 N.
San Vicente, West Hollywood, California and consolidated those offices with the
Bank's main branch office located at 8901 Santa Monica Boulevard, West
Hollywood. Total rent expense for the San Vicente location was approximately
$168,000 for 1994.
During 1993, the Company closed its Hollywood regional branch office.
As of December 31, 1993, twenty-two months remained on the term of the lease of
the Hollywood facility. The lease obligation amounted to $147,000 and was
charged to 1993's operating expenses. In February 1994, the Company recovered
$50,700 on this lease obligation.
During 1993, the Company made a rights offering to shareholders.
Since this offering was unsuccessful the costs associated with the offering are
included in professional services, printing and supplies and other noninterest
expense. Rights offering expense included in these categories amounted to
approximately $159,000, $42,000 and $57,000 respectively.
Operating losses for 1992 include $265,000 relating to an uninsured
check kiting loss. The Bank does maintain insurance policies customary for its
size for operation losses. However, this specific check kiting was not covered
by those policies.
INCOME TAXES. In 1994 and 1993 and 1992, the Company had no income
tax credits or expenses.
FINANCIAL CONDITION.
Total consolidated assets decreased $18,485,000, or 18.7%, to
$80,507,000 as of December 31, 1994 from $98,992,000 as of December 31, 1993.
At December 31, 1994, total consolidated deposits were $74,471,000 or 18.5%
less than the December 31, 1993 total of $91,388,000. Interest bearing
deposits decreased $17,029,000 to $49,343,000 at December 31, 1994 from
$66,372,000 at December 31, 1993. Noninterest bearing demand deposits have
remained stable, $25,128,000 at December 31, 1994 and $25,016,000 at December
31, 1993. The Company's ability to increase its assets in the future is
limited by the minimum capital ratios that the Bank must achieve and maintain,
including the Bank's obligation to achieve and maintain a leverage capital
ratio of at least 6.5%.
LOANS. Reflecting the slow recovery in the local economy and a
decline in loan originations, total loans declined $12,680,000 or 24.9%. Total
loans outstanding at December 31, 1994 were $38,250,000 or 51.4% of total
deposits compared to $50,930,000, or 55.7% of total deposits, at December 31,
1993.
31
<PAGE> 32
The following table presents the amount of loans in each category and
the percentage of total loans outstanding for each category. Loan balances
are adjusted for net deferred loan origination fees and the allowance for
credit losses as of the dates indicated:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
-------------------- --------------------
(dollars in thousands) Amount Percentage Amount Percentage
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Commercial loans $10,165 26.5% $14,461 28.4%
Real estate loans:
Single family 2,510 6.6% 5,774 11.3%
Multi-family 270 0.7% 899 1.8%
Commercial 20,457 53.5% 23,820 46.8%
------- -------
Total real estate loans 23,237 60.8% 30,493 59.9%
Consumer loans 4,848 12.7% 5,976 11.7%
------- -------
Total loans $38,250 100.0% $50,930 100.0%
Less deferred loan origination fees, net (136) (170)
Less allowance for credit losses (1,633) (2,478)
------- -------
Net loans $36,481 $48,282
======= =======
</TABLE>
The following table presents the maturity distribution of the loan portfolio
and the sensitivity of loans to changes in interest rates as of December 31,
1994:
<TABLE>
<CAPTION>
After 1 Year
(dollars in thousands) Within 1 Year Within 5 Years After 5 Years
----------------- ------------------- ----------------
Floating Fixed Floating Fixed Floating Fixed Total
-------- ----- -------- ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial loans $ 6,181 $449 $ 1,573 $ 906 $ 684 $372 $10,165
Real estate loans 5,198 192 16,596 644 569 38 23,237
Consumer loans 2,843 341 958 528 0 178 4,848
------- ---- ------- ------ ------ ---- -------
Total loans $14,222 $982 $19,127 $2,078 $1,253 $588 $38,250
======= ==== ======= ====== ====== ==== =======
</TABLE>
32
<PAGE> 33
NONPERFORMING ASSETS. The following table provides information for
nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
December 31,
--------------------
(dollars in thousands) 1994 1993
------ -------
<S> <C> <C>
Loans delinquent for ninety days but still accruing $ 0 $ 0
Nonaccrual loans 838 3,619
Restructured loans 0 0
Other real estate owned 0 0
---- ------
Total nonperforming loans $838 $3,619
==== ======
Nonperforming assets to period end loans plus other real
estate owned 2.2% 7.1%
==== ======
</TABLE>
Generally, the Company's policy is to discontinue accrual of interest
on loans which are delinquent for 90 days or more, unless management determines
that a loan is adequately collateralized or other circumstances justify
treating a loan as fully collectible. Interest income which has been
previously accrued is reversed when a loan is placed on a nonaccrual status,
and income is not recognized until payment is actually received. Additional
income that would have been recognized was approximately $114,000 if nonaccrual
loans as of December 31, 1994 had performed in accordance with their original
terms.
At December 31, 1994, the Bank had $838,000 in nonaccrual loans. There
were six loans, one of which was for $544,000 and secured by a trust deed on an
unimproved lot.
The Company records other real estate owned at the lower of the
carrying value of the loan or the fair market of the real estate as of the date
of foreclosure or in-substance foreclosure. Loan balances in excess of fair
value or real estate acquired at the date of foreclosure or in-substance
foreclosure are charged to the allowance for credit losses. An allowance is
recorded against the foreclosed assets based on management's estimates of
selling costs and subsequent declines in fair value. As of December 31, 1994
and December 31, 1993, the Bank had no assets acquired through foreclosure.
The policy of the Company is to review each loan in the portfolio to
identify problem credits. There are three classifications for problem loans:
"substandard", "doubtful" and "loss". Substandard loans have one or more
defined weaknesses and are characterized by the distinct possibility that the
Bank will sustain some loss if the deficiencies are not corrected. Doubtful
loans have the weakness of substandard loans with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. A loan classified loss is considered uncollectible
and of such little value that the continuance as an asset of the
33
<PAGE> 34
institution is not warranted. Another category designated "special mention"
is maintained for loans which do not currently expose the Bank to a sufficient
degree of risk to warrant classification as substandard, doubtful or loss but
do possess credit deficiencies or potential weakness deserving management's
close attention.
Excluding loans which have been classified loss and charged off by the
Bank, classified and special mentioned loans were as follows at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
--------------------
(dollars in thousands) 1994 1993
------ -------
<S> <C> <C>
Substandard $4,581 $12,159
Doubtful 13 279
Special mention 3,157 1,325
------ -------
Total classified and special mention loans $7,751 $13,763
====== =======
Classified and special mention loans as a percentage of
total loans 20.3% 27.0%
</TABLE>
At December 31, 1994, the Bank's $4,581,000 of loans classified as
substandard consisted of $3,743,000 of performing loans and $838,000 of
nonaccrual loans. The performing loans classified as substandard were
comprised of 25 loans. Three of the performing loans are secured by
commercial real estate and total $2,598,000. Eight loans are commercial loans
and total $813,000, 13 loans are consumer loans and total $255,000 and one loan
of $77,000 is secured by a second trust deed for a single family residential.
The Bank's $13,000 of loans classified as doubtful are two loans to
individuals.
Prior to 1991, the Bank made a substantial number of unsecured loans
to persons engaged in real estate and real estate related activities with high
net worths but limited liquidity and real estate working capital loans secured
by second trust deeds on property. The continuing general economic slow down
and declining real estate values left the Bank in a substantially unsecured
position on many of these loans, adversely impacting the ability of the
borrowers on these loans to comply with their loan repayment terms and has
resulted in the continuing high levels of nonperforming assets, classified
loans, provisions for credit losses and loan charge-offs experienced in recent
periods. The making of these types of loans has been curtailed, and the Bank
has strengthened its underwriting and collection to require more extensive
monitoring of cash flows and the financial condition of commercial and real
estate borrowers both at the time loans are originated and at any subsequent
renewal of such loans. The Bank has established loan to value limitations on
real estate loans which are more restrictive than that set forth in the
regulatory guidelines for real estate lending.
With the exception of these classified and special mention loans,
management is not aware of any loans as of December 31, 1994 where the known
credit problems of the
34
<PAGE> 35
borrower would cause it to have serious doubts as to the ability of such
borrowers to comply with their present loan repayment terms and which would
result in such loans being included in the nonperforming asset table above at
some future date. Management cannot, however, predict the extent to which the
current economic environment may persist or worsen or the full impact such
environment may have on the Bank's loan portfolio. Furthermore, management
cannot predict the results of any subsequent examinations of the Bank's loan
portfolio by its primary regulators. Accordingly, there can be no assurance
that other loans will not become 90 days or more past due, be placed on
nonaccrual or become restructured loans, in-substance foreclosures or other
real estate owned in the future.
Delinquent Loans. The following table is for loans of the Bank
delinquent less than 90 days at the dates indicated:
<TABLE>
<CAPTION>
December 31,
---------------------
(dollars in thousands) 1994 1993
---- ----
<S> <C> <C>
Commercial loans $ 0 $ 40
Real Estate loans 0 154
Consumer loans 6 15
--- ----
Total loans delinquent less than ninety days $ 6 $209
=== ====
</TABLE>
ALLOWANCE FOR CREDIT LOSSES.
The provision for credit losses creates a reserve for estimated future
loan losses, by a charge to operations based upon the composition of the loan
portfolio, the performance of loans in the portfolio, evaluations of loan
collateral, prior loss experience, current economic conditions, and the
prospects or worth of the respective borrowers or guarantors. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for credit losses. Such agencies
may require the Company to recognize additions to the allowance based upon
their judgment of the information available to them at the time of their
examination. The Bank was most recently examined by the FDIC and the State
Banking Department in November 1994. See "Item 7. MANAGEMENT'S DISCUSSIONS AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - Results of
Operations and 1992 - Provision for Credit Losses."
Management utilizes its best judgment in providing for possible loan
losses and establishing the allowance for credit losses. However, the
allowance is an estimate which is inherently uncertain and depends on the
outcome of future events. The Bank has emphasized direct lending on real
estate and lending to businesses and persons engaged in the real estate and
real estate related industries. Substantially all of the Bank's loans are
derived from businesses and persons located in the greater Los Angeles region
of Southern California. Accordingly, the ultimate collectability of a
substantial portion of the Bank's loans, as well as its financial condition, is
affected by general economic conditions and the real estate market in Southern
35
<PAGE> 36
California. Southern California has experienced, and is expected to continue
to experience, adverse economic conditions and a declining real estate market.
These conditions have adversely affected certain borrowers' ability to repay
loans. A continuation of these conditions or a further decline in the local
economy could result in further deterioration in the quality of the loan
portfolio and high levels of nonperforming assets and charge offs, which would
require increased provisions for credit losses and would adversely effect the
financial condition and results of operations of the Company.
Senior management, in conjunction with the Board of Directors, reviews
the adequacy of the allowance for credit losses monthly. Loans which are
identified as special mention, substandard or doubtful are assigned specific
allocations within the allowance for credit losses. An amount equal to 2% of
the loan balance is maintained in the allowance for credit losses for loans
classified special mention, 10% to 20% of the loan balance is maintained in the
allowance for credit losses for loans deemed substandard, 10% for a substandard
loan that is secured by a first trust deed or all inclusive trust deed that
conforms to specified appraisal and loan-to-value criteria and 20% for all
other substandard loans; and 50% of the loan balance is maintained in the
allowance for credit losses for loans deemed doubtful. A general reserve of
.6% is also maintained for all unclassified loans, other than cash secured
loans for which no reserve is maintained. Additional reserves may be assigned
based upon management's assessment of the quality of the credit.
As described above, the Bank assesses and reviews the adequacy of the
allowance for credit losses by applying a methodology which assigns a risk
factor to each loan in the portfolio generally based upon classifications of
such loans as pass, special mention, substandard or doubtful. The amount of
the required allowance for credit losses is determined by multiplying the
aggregate principal amount of loans in each category by the specified
percentage. Therefore, the provision for credit losses in any period is equal
to the amount required to be added to the allowance for credit losses at the
beginning of the period, after taking into account net charge-offs during the
period, to bring the allowance to the required level.
The following table presents loans outstanding at the end of period,
average loans outstanding for the year, the beginning of the year allowance for
credit losses, loan charge-offs, recoveries, the amount of the provision
charged to operations, the end of the year allowance for credit losses, the
ratio of net charge-offs to average loans and the allowance for credit losses
as a percentage of loans outstanding as of the end of the period for the years
indicated:
36
<PAGE> 37
<TABLE>
<CAPTION>
December 31,
----------------------
(dollars in thousands) 1994 1993
------- -------
<S> <C> <C>
Loans outstanding at end of period $38,250 $50,930
======= =======
Average loans outstanding $42,939 $64,315
======= =======
Allowance for credit losses at beginning of period $ 2,478 $ 2,789
Charge-offs:
Commercial (907) (1,800)
Real estate (257) (1,195)
Consumer (137) (246)
------- -------
Total (1,301) (3,241)
Recoveries:
Commercial 380 606
Real estate 44 247
Consumer 32 124
------- -------
Total 456 977
------- -------
Net loans charged off (845) (2,264)
Provision charged to operations 0 1,953
------- -------
Allowance for credit losses as of end of period $ 1,633 $ 2,478
======= =======
Ratio of net charge-offs to average loans outstanding 2.0% 3.5%
======= =======
Ratio of allowance for credit losses to loans
outstanding at end of period 4.3% 4.9%
======= =======
</TABLE>
37
<PAGE> 38
Although the Bank does not normally allocate the allowance for credit
losses to specific loan categories, an allocation has been made for the
purposes of this report in the table below.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
(dollars in thousands) 1994 1993
------------------------------- -------------------------------
Ratio of Loan Ratio of Loan
Category to Category to
Allowance for Outstanding Allowance for Outstanding
Credit Losses Total Loans Credit Losses Total Loans
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Real estate $ 690 60.8% $1,398 59.9%
Commercial 234 26.6% 784 28.4%
Consumer 122 12.7% 158 11.7%
Not allocated 587 N/A 138 N/A
------ ------
Total $1,633 100.0% $2,478 100.0%
====== ======
</TABLE>
The allowance for credit losses should not be interpreted as an
indication that charge-offs will occur in these amounts or proportions, or that
the allocation indicates future charge-off trends. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories, since even on the above basis
there is an unallocated portion.
Loans charged off in 1994 were $1,301,000. Of these loans, $948,000
had been classified as substandard and $122,000 had been classified as
doubtful at December 31, 1993. Loans charged off that were not classified or
special mention were $231,000 in 1994.
INVESTMENT PORTFOLIO. The Bank's investment portfolio provides
investment income and serves as a source to meet liquidity needs. The Bank
adopted SFAS No. 115 "Accounting For Certain Investments in Debt and Equity
Securities" effective January 1, 1994. SFAS No. 115 requires investments to be
classified in three categories and accounted for as follows: (i) debt and
equity securities that the Bank has the positive intent and ability hold to
maturity are classified as "held to maturity" and reported at amortized cost;
(ii) debt and equity securities held for current resale are classified as
trading securities and reported at fair value with unrealized gains and losses
reported in the statement of operations; and (iii) debt and equity securities
not classified as either securities held to maturity or trading securities are
classified as securities available for sale and are reported at fair value, with
unrealized gains and losses excluded from operations and reported as a separate
component of shareholders' equity.
38
<PAGE> 39
The unrealized losses on securities available for sale was $473,000 at
December 31, 1994 and was reported as a separate component of shareholder's
equity. The unrealized losses on securities held to maturity was $154,000 at
December 31, 1994.
The following table presents the maturity distribution of securities
held to maturity and securities available for sale as of December 31, 1994:
<TABLE>
<CAPTION>
Available for sale Held to maturity
---------------------- ----------------------
Estimated Amortized Estimated Carrying
fair value Cost fair value value
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Less than one year $ 2,026 $ 2,055 $ 7,889 $ 7,944
One to five years 2,931 3,056 6,778 6,877
Mortgage-backed securities 4,866 5,091 -- --
SBA securities 5,958 6,052 -- --
------- ------- ------- -------
$15,781 $16,254 $14,667 $14,821
======= ======= ======= =======
</TABLE>
For additional information concerning investment securities, see Note
C of the Notes to Consolidated Financial Statements.
DEPOSITS. Deposits have historically been the major source of the
Bank's funds for lending and other investment purposes. In addition to
deposits, the Bank derives funds from principal and interest repayments on
loans and investment securities, maturity and sale of investment securities,
securities sold under agreements to repurchase and other borrowings. The Bank's
deposit strategy is to emphasize retail branch deposits by offering a variety
of rates and deposit programs to suit customers' needs. At December 31, 1994
and 1993, the Bank had no brokered deposits.
The following table sets forth information concerning total deposits
outstanding at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------
(dollars in thousands) 1994 1993
------- -------
<S> <C> <C>
Noninterest bearing demand $25,128 $25,016
Interest bearing demand 9,926 15,721
Money market 14,541 21,751
Savings 11,382 14,594
Time deposits under $100,000 6,072 7,363
Time deposits over $100,000 7,422 6,943
------- -------
Total deposits $74,471 $91,388
======= =======
</TABLE>
39
<PAGE> 40
The following table presents information regarding the average
deposits and the average rate paid for certain deposit categories for each of
the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
(dollars in thousands) 1994 1993
Amount % Amount %
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Noninterest bearing demand $25,451 0.0% $ 26,825 0.0%
Interest bearing demand 13,910 1.3% 15,574 1.8%
Savings and money market 29,274 3.1% 40,475 2.8%
Time certificates of deposit 12,868 3.2% 18,924 3.2%
------- --------
Total $81,503 $101,798
======= ========
</TABLE>
The following table presents the maturity distributions of time
certificates of deposit of $100,000 or more at December 31, 1994:
<TABLE>
<CAPTION>
(dollars in thousands) Amount %
-------- -----
<S> <C> <C>
Three months or less $4,681 63.1%
Over three months through six months 1,732 23.3%
Over six months through twelve months 709 9.6%
Over twelve months 300 4.0%
------
Total $7,422
======
</TABLE>
40
<PAGE> 41
CAPITAL RESOURCES.
The following table sets forth the actual levels achieved by the Bank
at December 31, 1994 and the minimum levels of capital required by the FDIC
regulations and the Order to Cease and Desist:
<TABLE>
<CAPTION>
FDIC Levels
Minimum Required by
Level Achieved by Regulatory the Order to
the Bank at Capital Cease and
December 31, 1994 Requirements Desist
----------------- ------------ ------------
Amount
( 000's) Percent Percent Percent
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Tier 1 risk based capital ( 1 ) $ 2,507 6.02% 4.00% 6.50%
Total risk-based capital $ 3,047 7.30% 8.00% N/A
Leverage capital ( 1 ) $ 2,507 2.97% 4.00% 6.50%
</TABLE>
( 1 ) At December 31, 1994, the Bank had intangible assets of $1,759,000,
which were required to be deducted from Tier 1 risked-based capital,
total risked-based capital and leverage capital. Such amounts include
$1,675,000 relating to the net book value of the bargain lease element
relative to the lease, for the Beverly Hills Regional Office, acquired
in 1983 and $84,000 relating to goodwill arising from the Unity
Transaction.
As a result of the consummation of the Capital Infusion, (i) the
Bank's capital levels satisfy the requirements for being adequately capitalized
under the Prompt Corrective Action Provisions; (ii) the Bank's capital
impairment as of September 30, 1994 was corrected, and (iii) the Bank's
leverage capital ratio, as of March 31, 1995, has increased to 7.40%. See
"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Summary." There can be no assurances that the Bank
will be able to continue to meet minimum regulatory capital requirements or
comply with the requirements of the Order. Further, there can be no assurances
that the Bank will be able to cure its capital impairment as of December 31,
1994.
Liquidity and Interest Rate Sensitivity Management
The primary function of asset liability management is to assure
adequate liquidity and maintain an appropriate balance between interest
sensitive earning assets and interest sensitive liabilities. Liquidity
management involves the ability to meet the cash flow requirements of customers
who may be either depositors wanting to withdraw funds, or borrowers seeking
to meet their credit needs. Interest rate sensitivity management seeks to
41
<PAGE> 42
minimize fluctuations in net interest margins and to enhance consistent growth
of net interest income and net profits through periods of changing interest
rates.
As reflected in the Company's Consolidated Statements of Cash Flows,
net cash flows provided by operating activities for years ending December 31,
1994, 1993 and 1992 were $47,000, $480,000 and $2,292,000, respectively.
Amounts fluctuate from period to period primarily as a result of changes in the
net interest income. The Company's principal cash flows relate to investing
and financing activities rather than operating activities.
Net cash flows provided by investing activities totaled $8,516,000,
$24,083,000 and $31,436,000 for the years ended December 31, 1994, 1993, and
1992, respectively. Cash flows provided by investing activities are a result
of payments and maturities of loans and securities in excess of purchases of
securities and loan originations. Net cash used in financing activities
totaled $16,917,000, $25,022,000 and $30,199,000 for the years ended December
31, 1994, 1993, and 1992 respectively. Net cash used in financing is a result
of net deposit outflows in 1994, 1993 and 1992.
Management monitors its liquidity position continuously in relation to
trends of loans and deposits, and relates the data to short and long term
requirements. The Bank no longer has lines of credit with other financial
institutions. As a result the Bank must rely on it's own assets for liquidity.
Liquid assets are defined to include federal funds sold, interest bearing
deposits in other financial institutions, unpledged marketable investment
securities and cash and due from banks. The Company's liquidity ratio (the sum
of liquid assets divided by the difference of total deposits and public
deposits) was 47.1% as of year end 1994 and 44.0% as of year end 1993. The
loan-to-deposit ratio at year ends 1994 and 1993 was 51.4% and 55.7%,
respectively.
Core deposits are defined as the difference between total deposits and
time certificates of deposit of $100,000 and over. As of December 31, 1994,
the ratio of core deposits to total deposits was 90.0%, as compared to 92.4% as
of December 31, 1993. The Company believes that the concentration in core
deposits improves the stability of the deposit base and provides a less
expensive source of funds.
The Company has adopted policies designed to minimize the exposure to
interest rate fluctuations, and regularly measures the differences in the
amounts of rate sensitive assets and rate sensitive liabilities over a variety
of time periods. A gap for a specified period is positive (negative) when the
amount of rate sensitive assets (liabilities) maturing or repricing within that
period exceeds the amount of rate sensitive liabilities (assets) maturing or
repricing within the same period. A positive gap will generally produce a
higher net interest margin in a rising rate environment and a lower net
interest margin in a declining rate environment. Conversely, a negative gap
will generally produce a lower net interest margin in a rising rate environment
and a higher net interest margin in a declining rate environment. However,
because interest rates for different asset and liability products offered by
depository institutions respond in a different manner, both in terms of the
responsiveness as well as the extent of responsiveness, to changes in the
interest rate environment, the gap is only a general indicator of interest rate
sensitivity.
42
<PAGE> 43
The following table is a gap analysis for the Company as of December 31, 1994:
<TABLE>
<CAPTION>
0-1 2-30 31-180 181-365 Within Over Noninterest
(in thousands) Days Days Days Days 5 Years 5 Years Bearing Total
------- -------- ------ ------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $ 3,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 3,000
Securities held to maturity 4,996 2,949 6,876 14,821
Securities available for sale 4,148 2,807 2,791 4,947 1,088 15,781
Loans 34,038 22 365 320 2,079 588 838 38,250
------- -------- ------ ------ ------- ------- -------- -------
Total rate sensitive assets 37,038 4,170 8,168 6,060 13,902 1,676 838 71,852
Allowance for credit losses (1,633) (1,633)
Other nonearning assets 10,288 10,288
------- -------- ------ ------ ------- ------- -------- -------
Total assets $37,038 $ 4,170 $8,168 $6,060 $13,902 $ 1,676 $ 9,493 $80,507
======= ======== ====== ====== ======= ======= ======== =======
Liabilities and Capital
Interest bearing demand $ $ 9,926 $ $ $ $ $ $ 9,926
Savings and money market 25,923 25,923
Certificates of deposit 19 4,898 6,305 1,859 413 13,494
Capital lease 1,830 1,830
------- -------- ------ ------ ------- ------- -------- -------
Total rate sensitive liabilities 19 40,747 6,305 1,859 413 1,830 0 51,173
Demand deposits 25,128 25,128
Other liabilities 389 389
Capital 3,817 3,817
------- -------- ------ ------ ------- ------- -------- -------
Total liabilities and capital $ 19 $ 40,747 $6,305 $1,859 $ 413 $ 1,830 $ 29,334 $80,507
======= ======== ====== ====== ======= ======= ======== =======
- - --------------------------------------------------------------------------------------------------------------------------
GAP: Assets (Liabilities) $37,019 $(36,577) $1,863 $4,201 $13,489 $ (154) $(19,841)
Cumulative GAP:
Assets (Liabilities) $37,019 $ 442 $2,305 $6,506 $19,995 $19,841 $ 0
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The liquidity of BKLA is limited. At December 31, 1994, BKLA had
deposits of $24,000. Presently, BKLA derives funds from interest on deposits
with the Bank. Although management believes that the deposits and the interest
earned on such deposits are adequate to meet current cash flow requirements,
the Bank cannot be considered to be a source of liquidity for BKLA. Pursuant
to the FDIC Order, the Bank cannot declare and pay any dividends to BKLA
without obtaining prior regulatory approval.
43
<PAGE> 44
Financial Instruments With Off-Balance-Sheet Risk
For information concerning financial instruments with
off-balance-sheet risk, see Note J of the Notes to Consolidated Financial
Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K" below for financial statements filed as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As set forth in the Company's Report on Form 8-K, filed with the
Securities and Exchange Commission on November 8, 1994, the Company appointed,
effective as of November 2, 1994, Grant Thornton LLP as its independent public
accountants for the year ending December 31, 1994.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Six persons were elected as directors for a one year term at annual
shareholder meetings of BKLA and the Bank that were held in November 1993. One
of the directors, Richard Kaplan, died subsequent to the Annual Meeting.
The following table sets forth certain information, as of March 15,
1995, with respect to those persons who are currently serving as directors of
BKLA. Each of these persons also currently serves as a director of the Bank.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED OR
APPOINTED PRINCIPAL OCCUPATION
NAME AND TITLE AGE A DIRECTOR (2) FOR PAST FIVE YEARS
- - -------------- --- -------------- -------------------
<S> <C> <C> <C>
Arlen H. Andelson(1) 51 1987 Attorney and Senior
Director Partner of Andelson &
Andelson, a Law
Corporation; Principal of
Andelson Properties, a
real estate investment
and property management
company
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C> <C> <C>
Sherman L. Andelson(1) 70 1984 Certified Public Accountant; Chairman of
Chairman of the Board the Board of the Bank and BKLA since July
1987 and January 1988, respectively, to
the present; Interim President and Chief
Executive Officer of BKLA and the Bank,
October 1992 to March 1993
Mary Anne Chalker 65 1981 Insurance Broker; President of LFC
Director Insurance Brokers and Agents, Inc.
Irving Fuller 58 1981 Attorney at Law; President/Owner of
Director Fulvest Corporation, a real estate
investment and property management
company, 1988 to present; Executive Vice
President, Metropolitan Theatres Corp.,
1970 to 1988
Paul G. Ling 58 1993 President and Chief Executive Officer of
President and Chief the Bank, March 1, 1993 to present;
Executive Officer and President and Chief Executive Officer of
Director BKLA commencing March 24, 1993; Executive
Vice President/California Department
Manager of Manufacturer's Bank, January
1989 to December 1991; Senior Vice
President/Regional Manager, Manufacturer's
Bank, 1986 to January 1989
- - -------------
</TABLE>
(1) Arlen H. Andelson and Sherman L. Andelson are brothers.
(2) On March 30, 1995 M. J. Burford, president of Investors Banking
Corporation, was appointed Chairman of the Board of the Company and
the Bank.
Executive Officers
Each officer of BKLA and the Bank is appointed by the respective
boards of directors and serves at their pleasure.
The following table provides certain information, as of March 15,
1995, concerning those persons who serve as executive officers of BKLA or the
Bank.
45
<PAGE> 46
<TABLE>
<CAPTION>
Name Age Position (3)
- - ---- --- ------------
<S> <C> <C>
Sherman L. Andelson(1) 70 Chairman of the Board of BKLA and the Bank
Paul G. Ling(1) 58 President and Chief Executive Officer of BKLA
and the Bank
Allen Partridge(2) 54 Senior Vice President/Chief Financial Officer
and Chief Operating Officer of BKLA and the Bank
</TABLE>
____________________
(1) For information concerning principal occupation for past five years,
see the preceding table concerning directors.
(2) Mr. Partridge was Executive Vice President and Chief Financial Officer
of Channel Islands National Bank from July 1988 to July 1992. From
November 1992 to April 1993, Mr. Partridge served as Interim Cashier
and Chief Financial Officer at Camarillo Community Bank.
(3) On March 30, 1995 M. J. Burford, president of Investors Banking
Corporation, was appointed Chairman of the Board of the Company
and the Bank.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than ten
percent of a registered class of BKLA's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission") and the NASDAQ National Market System. Executive officers,
directors and greater than ten-percent shareholders are required by the
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely on a review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the fiscal year ended December 31, 1994 all Section 16(a)
filing requirements applicable to its executive offices, directors and greater
than ten-percent beneficial owners were complied with.
46
<PAGE> 47
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer (the "Named Executive") as of December 31, 1994 for
each of the fiscal years ended December 31, 1994, and 1993 and 1992. No other
person serving as an executive officer of the Company as of December 31, 1994
earned a salary and bonus in excess of $100,000 in the fiscal year ended
December 31, 1994.
47
<PAGE> 48
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------
Annual Compensation Awards Payout
------------------------------------ ------------------------- ---------
Name and Other Annual Restricted Options/ LTIP All Other
Principal Position Year Salary($) Bonus($) Compensation($) Stock Awards($) SARs(#) Payout($) Compensation
- - ------------------ ---- --------- -------- --------------- --------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul G. Ling 1994 145,000 11,788 0 0 0 0 0
President and Chief 1993 130,872 0 0 0 40,000 0 0
Executive Officer(1)
</TABLE>
____________________________
(1) Mr. Ling was appointed President and Chief Executive Officer of BKLA
on March 24, 1993. Prior to such time, Mr. Ling was not employed by
BKLA or the Bank (see the preceding table concerning directors).
Employment Agreement
The Bank and BKLA entered into an employment agreement with Paul G.
Ling dated as of March 1, 1993 and sets forth the compensation Mr. Ling will
receive for his services as President and Chief Executive Officer of the Bank.
The Agreement provides for an annual base salary of $145,000 and provides that
Mr. Ling will be eligible to receive a bonus in an amount to be determined in
the sole discretion of the Board of Directors of the Bank. Pursuant to the
agreement, BKLA granted Mr. Ling an employee stock option pursuant to the 1988
Stock Option Plan, as amended (the "Option Plan"), to purchase 40,000 shares of
the Common Stock at an exercise price equal to the fair market value of such
stock on the date of grant. The option has a 10 year term and becomes
exercisable as to 10,000 shares on the first year anniversary of the date of
the grant, as to an additional 20,000 shares on the second year anniversary
date of the grant and an additional 10,000 shares on the third year anniversary
date of the grant. The Bank also agreed to provide Mr. Ling with participation
in the Bank's medical, dental, accident, health and life insurance benefit
plans and an additional life insurance policy of $1,000,000, of which $500,000
would be payable to Mr. Ling's estate and $500,000 would be payable to the Bank
on Mr. Ling's death.
The Bank may terminate Mr. Ling's employment as President and Chief
Executive Officer of the Bank at any time with or without a cause. If Mr.
Ling's employment is terminated by the Bank without cause, Mr. Ling is entitled
to receive a sum equal to one-half of the then annual rate of base salary being
paid to him at the time of termination payable in equal installments over a six
month period.
48
<PAGE> 49
Stock Options
No options were granted in 1994.
Options Exercises and Holdings
The following table provides information with respect to the Named
Executive concerning the exercise of options, during the fiscal year ended
December 31, 1994 and unexercised options held by the Named Executive as of
December 31, 1994.
AGGREGATED OPTION(1) EXERCISES IN FISCAL YEAR 1994
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Values of Unexercised In-the-
Shares Number of Unexercised Money Options at 12/31/94
Acquired Options at 12/31/94(#) ($)
on Value -------------------------------- ------------------------------
Exercise Realized Unexercisable
Name (#) ($) Exercisable Unexercisable(1) Exercisable (1) (2)
---- -------- -------- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul G. Ling 0 0 10,000 30,000 NA NA
</TABLE>
- - --------------------
(1) The remaining 10,000 shares will become exercisable on March 1, 1996.
(2) The closing price of the Common Stock on December 31, 1994 was $.38.
Director Compensation
During 1994, the Company paid Mr. Sherman Andelson, the Chairman of
the Board, a $1,300 per month automobile allowance. The Company also paid Mr.
Sherman Andelson $18,000 for his assistance in securing additional capital for
the Bank. Additionally, each of the non-officer directors were granted options
to purchase 1,900 shares under the Option Plan and received medical insurance
benefits comparable to the Bank's employees. Except as provided above, during
the fiscal year ended December 31, 1994, the Company did not compensate the
directors of BKLA and the Bank.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Board of Directors of BKLA knows of no person who owned
beneficially more than 5% of the outstanding Common Stock as of March 31, 1995
("Principal Shareholder"), except for Investors. The following table sets
forth the number of shares of Common Stock beneficially owned as of March 31,
1995 by each current director, the Named Executive and each Principal
Shareholder and by all directors and executive officers as a group:
49
<PAGE> 50
<TABLE>
<CAPTION>
Common Stock Beneficially Owned(1)
-----------------------------------
Name of Beneficial Owner and Number of Percent
Relationship with Company Shares of Class(2)
- - ---------------------------- -------------- -----------
<S> <C> <C>
Arlen H. Andelson, Director(3) 154,303(4)(5) 2.6 %
Sherman L. Andelson, 58,756(6) * %
Chairman of the Board
Mary Anne Chalker, Director 68,029(4) * %
Irving Fuller, Director 68,029(4)(7) * %
Paul G. Ling, President and Chief 30,000(8) *
Executive Officer and Director
Directors and Executive Officers
as a group (5 persons) 379,117(9) 6.2 %
Investors Banking Corporation(3) 7,097,640(10) 85.0 %
Principal Shareholder(3)
</TABLE>
- - --------
* Less than 1%.
(1) Except as otherwise noted below, each person directly or indirectly
has sole or shared voting and investment power with respect to the
shares listed.
(2) The percentage of each of these persons or group is based upon the
total number of shares of the Common Stock outstanding plus the shares
which the respective individual or group has the right to acquire
within 60 days after March 31, 1995 by the exercise of stock options
vested pursuant to the Option Plan.
(3) The business address of Mr. Andelson is 825 North San Vicente
Boulevard, 3rd Floor, West Hollywood, California 90069. The business
address of Investors Banking Corporation is 3735 Cherokee Drive South,
Salem, Oregon 97302.
(4) Includes 12,600 shares which each individual has the right to acquire
within 60 days after March 31, 1995 by the exercise of stock options
vested pursuant to the Option Plan.
(5) Includes 12,553 shares held by Union Bank as Trustee, FBO Arlen H.
Andelson under master IRA Rollover Plan, 2,125 shares held by Arlen H.
Andelson TR U2A Aug. 15 84 Education Trust No. 1 FB Bobbie Jennifer
Andelson 2,125 shares held by Arlen H. Andelson TR UA Aug 15 84
Education Trust No.1 FBO Amy Alice Weirick Andelson, 7,788 shares held
by Arlen H. Andelson & Michele W. Andelson TR UA Sep 12 86 Revocable
Andelson Family Trust, 528 shares held by Michele W. Andelson Cust.
Bobbie Jennifer Andelson UGMA CA, 225 shares held by Michele W.
Andelson Cust. Amy Alice Weirick Andelson AGMA CA, 302 shares held on
account of Arlen H. and
50
<PAGE> 51
Michele Andelson TR US September 12, 1986 Revocable Andelson Family
Trust with Sutro & Company, 115,122 shares held by Arlen Andelson
Family Trust UTD July 23, 1980, of which Arlen H. Andelson is the
trustee, and 180 shares held by Arlen H. Andelson.
(6) Includes 15,004 shares which Mr. Sherman Andelson has the right to
acquire within 60 days after March 31, 1995 by the exercise of stock
options vested pursuant to the Option Plan.
(7) Includes 755 shares held by Mr. Fuller's spouse, as to which Mr.
Fuller disclaims beneficial ownership.
(8) Includes 30,000 shares which Mr. Ling has the right to acquire within
60 days after March 31, 1995 by the exercise of stock options vested
pursuant to the Option Plan.
(9) Includes 82,804 shares which members of the group have a right to
acquire within 60 days after March 31, 1995 by the exercise stock
options vested pursuant to the Option Plan.
(10) Includes 2,019,006 shares which Investors has the right to purchase
within 60 days after March 31, 1995 by the exercise of warrants issued
in connection with the Capital Infusion.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors, officers and principal shareholders of the
Company and the entities with which they are associated are customers of, and
have had banking transactions with, the Bank in the ordinary course of the
Bank's business during 1991, and the Bank expects to have banking transactions
with such persons in the future. All loans and commitments to lend included in
such transactions were made in compliance with applicable laws and on
substantially the same terms, including interest rates, collateral and
repayment terms, as those prevailing for comparable transactions with other
persons of similar creditworthiness and, in the opinion of the Board of
Directors of the Bank, did not involve more than a normal risk of
collectability or present any other unfavorable features.
The Bank leases its West Hollywood Regional Office from the Arlen
Andelson Family Trust, of which Arlen H. Andelson, a director of BKLA and the
Bank, is trustee. The lease provided for an initial term of five years ending
in June 1987 with five consecutive five-year renewal options. The Bank has
exercised its second five year renewal option. The lease provides for monthly
rent of $13,400 during the present term and increased rent in each subsequent
renewal term, determined from the consumer price index, except that rent in any
renewal period may not exceed 150 % of the rent in the previous five year term.
The total lease payments in 1994 by the Bank under this lease were $161,000.
The Bank anticipates that lease payments in 1995 will total approximately
$161,000. Prior to entering into such lease, the Board of Directors of the
Bank determined that the premises were the best available for the Bank
51
<PAGE> 52
and that the terms of the agreement were no less favorable to the Bank than
could have been obtained in a similar transaction with a person unaffiliated
with the Bank.
On December 15, 1984, BKLA entered into a sublease with Andelson &
Andelson, a Law Corporation, as the sublessor and Hilldale Investment Group,
Ltd., a California limited partnership, as the landlord (the "Sublease").
Arlen H. Andelson, as trustee of the Arlen Andelson Family Trust, Arlen
Andelson, individually, and Sherman L. Anderson own or control a 75% equity
interest in Hilldale Investment Group, Ltd. Immediately after BKLA executed
the Sublease, it assigned all its interest therein to the Bank. The lease
expired and BKLA vacated the premises in December 1994. The total payments in
1994 under the Sublease were $188,000. Prior to entering into the Sublease,
the Board of Directors of the Company determined that the premises were the
best available for the Company and that the terms of the Sublease were no less
favorable to the Company than could have been obtained in a similar transaction
with any person or entity not affiliated with the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, FORM 8-K
(a) Financial Statements. Reference is made to the Index to
Financial Statements at Page F-1 for a list of financial statements filed as a
part of this report.
(b) Reports on Form 8-K On November 8, 1994, the Company filed a
Report on Form 8-K pursuant to Item 4.
(c) Exhibits. Following is a list of Exhibits filed with this
report.
<TABLE>
<CAPTION>
EXHIBIT NO.
- - -------------
<S> <C>
3.1 Articles of Incorporation of Registrant. [Filed as Exhibit 3.1(1)]
3.2 Bylaws of Registrant, as amended. [Filed as Exhibit 3.2(1)]
4.1 Reserved
4.2 Proofs of Certificates for Common Stock. [Filed as Exhibit 4.2(2)]
4.3 Proofs of Certificate of Warrants
10.1 Reserved
10.2 Reserved
</TABLE>
52
<PAGE> 53
<TABLE>
<S> <C>
10.3 Lease dated July 1, 1981, by and between Bank of Los Angeles and Arlen Andelson Family Trust (successor to the
Sheldon Andelson Trust) for the Main Office/West Hollywood Regional Office. [Filed as an Exhibit (3)]
10.4 Office lease dated March 17, 1977, by and between American City Bank and 9601 Associates, assigned to Bank of
Los Angeles by the Federal Deposit Insurance Corporation as Receiver for American City Bank for the Beverly Hills
Regional Offices. [Filed as an Exhibit (3)]
10.5 Sublease dated December 15, 1984, by and among BKLA Bancorp, Andelson & Andelson and Hilldale Investment Group,
Ltd. for the Corporate Offices. [Filed as Exhibit 10.5(4)]
10.6 Reserved
10.7 Reserved
10.8 Office lease dated September 19, 1986, by and between J. Ned-Pantages, a California general partnership, and Bank
of Los Angeles for the Hollywood Regional Office. [Filed as Exhibit 10.11(5)]
10.9 BKLA Bancorp 1988 Stock Option Plan, as amended. [Filed as Exhibit 10.12(6)]
10.10 Bank of Los Angeles Profit Sharing Plan and Trust Agreement, as amended. [Filed as Exhibit 10.10(6)]
10.11 Employment Agreement dated as of March 1, 1993 between Paul Ling and Bank of Los Angeles and BKLA Bancorp [Filed
as Exhibit 10.11(8)]
10.12 Sublease of the Mezzanine Level of the Beverly Hills Regional Office dated September 17, 1987, by and between
Bank of Los Angeles and Shearson Lehman Brothers, Inc. [Filed as Exhibit 10.14(2)]
10.13 Form of Indemnification Agreement. [Filed as Exhibit 10.13(1)]
10.14 Office Lease dated July 19, 1989, as amended, by and between RREEF USA Fund-I, a California Group Trust and BKLA
Bancorp for the General Office Use/Data Processing Center. [Filed as Exhibit 10.14(7)]
10.15 Office Lease dated January 19, 1990, by and between Wilshire-Camden Associates, a California limited partnership
and Bank of Los Angeles for the Escrow Offices. [Filed as Exhibit 10.15(7)]
10.16 Stock Purchase Agreement dated July 28, 1994, by and among BKLA Bancorp, Bank of Los Angeles and Investors Banking
Corporation [filed as Exhibit 10.16(9)]
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C>
10.17 Amendment No. 1 to Stock Purchase Agreement by and Among BKLA Bancorp, Bank of Los Angeles and Investors Banking
Corporation. [Filed as Exhibit 2.1(10)]
10.18 Amendment No. 2 to Stock Purchase Agreement By and Among BKLA Bancorp, Bank of Los Angeles and Investors Banking
Corporation.
10.19 Warrant Agreement, dated March 19, 1995, between BKLA Bancorp and Investors Banking Corporation.
21. List of Subsidiaries of Registrant. [Filed as Exhibit 22(2)]
23.1. Consent of Deloitte & Touche
23.2 Consent of Grant Thornton LLP
27.1 Financial Data Schedule
</TABLE>
- - ---------------------
(1) To Registrant's Annual Report on Form 10-K for the year ended December
31, 1988 (Commission File No. 0-10140), which are incorporated herein
by this reference.
(2) To Registrant's Annual Report on Form 10-K for the year ended December
31, 1987 (Commission File No. 0-10140), which are incorporated herein
by this reference.
(3) To Registrant's Registration Statement on Form S-1 and Amendments
thereto (Registration No. 2-90449), which are incorporated herein by
this reference.
(4) To Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1984 (Commission File No. 0-10140), which is incorporated
herein by this reference.
(5) To Registrant's Annual Report on Form 10-K for the year ended December
31, 1986 (Commission File No. 0-10140), which are incorporated herein
by this reference.
(6) To Registrant's Annual Report on Form 10-K for the year ended December
31, 1991 (Commission File No. 0-10140), which are incorporated herein
by this reference.
(7) To Registrant's Annual Report on Form 10-K for the year ended December
31, 1989 (Commission File No. 0-10140), which are incorporated herein
by this reference.
(8) To Registrant's Annual Report on Form 10-K for the year ended December
31, 1992 (Commission File No. 0-10140), which are incorporated herein
by this reference.
(9) To Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994.
(10) To Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
54
<PAGE> 55
Undertaking for Registration Statement on Form S-8:
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows, which undertaking
shall be incorporated by reference into registrant's Registration Statement on
Form S-8 No. 33-30974 (filed May 2, 1990):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
55
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 14th day of
April, 1995.
BKLA BANCORP
(Registrant)
By: /s/ Paul G. Ling
-----------------------
Paul G. Ling
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Arlen H. Andelson Director April 14, 1995
-------------------------------------------
Arlen H. Andelson
/s/ Sherman L. Andelson Director April 14, 1995
-------------------------------------------
Sherman L. Andelson
/s/ M. J. Burford Chairman of the Board/ April 14, 1995
-------------------------------------------- Chief Executive Officer and Director
M. J. Burford (Principal Executive Officer)
/s/ Mary Anne Chalker Director April 14, 1995
-------------------------------------------
Mary Anne Chalker
Director April , 1995
-------------------------------------------
Irving Fuller
/s/ Paul G. Ling President and Director April 14, 1995
-------------------------------------------
Paul G. Ling
/s/ Allen Partridge Chief Financial Officer (Principal April 14, 1995
------------------------------------------- Financial and Accounting Officer)
Allen Partridge
</TABLE>
56
<PAGE> 57
April 12, 1995
BKLA-94.DOC
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BKLA BANCORP AND SUBSIDIARY
December 31, 1994, 1993 and 1992
<PAGE> 58
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 5
CONSOLIDATED STATEMENTS OF OPERATIONS 7
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY 9
CONSOLIDATED STATEMENTS OF CASH FLOWS 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12
</TABLE>
<PAGE> 59
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of BKLA Bancorp and Subsidiary
West Hollywood, California
We have audited the accompanying consolidated balance sheet of BKLA Bancorp
and subsidiary (the "Company") as of December 31, 1994, and the related
consolidated statements of operations, changes in shareholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BKLA Bancorp and
its subsidiary as of December 31, 1994, and the consolidated results of their
operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
<PAGE> 60
GRANT THORNTON, LLP
As discussed in Note B to the consolidated financial statements, at December
31, 1994, the Company and its subsidiary, Bank of Los Angeles (the "Bank"), are
not in compliance with enforcement actions entered into with the Federal
Deposit Insurance Corporation, Federal Reserve Board and the California State
Banking Department covering a wide range of business operations and procedures.
The Federal Deposit Insurance Corporation, Federal Reserve Board and the
California State Banking Department have not indicated what, if any, additional
regulatory sanctions could be imposed. The financial statement impact, if any,
of regulatory sanctions that may result from the failure of the Company and the
Bank to comply with the enforcement actions cannot presently be determined.
Accordingly, no adjustments that may result from the ultimate resolution of
this uncertainty have been made in the accompanying consolidated financial
statements.
/s/ Grant Thornton LLP
Los Angeles, California
January 27, 1995 (except for the third, fourth and ninth paragraphs
of Note B and Note P, as to which the date is March 31, 1995)
<PAGE> 61
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
BKLA Bancorp and Subsidiary
West Hollywood, California:
We have audited the accompanying consolidated balance sheets of BKLA Bancorp
and subsidiary (the "Company") as of December 31, 1993, and the related
consolidated statements of operations, changes in shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We 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, such consolidated financial statements present fairly, in all
material respects, the financial position of BKLA Bancorp and its subsidiary
as of December 31, 1993, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1993 in
conformity with generally accepted accounting principles.
The accompanying 1993 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note B to the consolidated financial statements, at December 31, 1993, the
Company and its subsidiary, Bank of Los Angeles (the "Bank"), did not meet
their minimum capital requirements prescribed by the Federal Deposit Insurance
Corporation, Federal Reserve Board and the California State Banking Department.
The Company has entered into a Memorandum of Understanding (the "MOU") with the
Federal Reserve Bank of San Francisco. The Bank is operating under a Cease and
Desist Order (the "Order") with the Federal Deposit Insurance Corporation that,
among other things, requires it to meet prescribed capital requirements by no
later than July 18, 1994. In addition, the Bank's capital is impaired under the
California Financial Code of the State of California at December 31, 1993. If
the Company or the Bank is unable to comply with the terms of the MOU or the
Order, or cure the capital impairment, one or more regulatory sanctions may
result, including restrictions as to the source of deposits, the appointment of
a conservator or receiver and an assessment on, or sale of, the Bank's common
stock.
<PAGE> 62
These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note B. The consolidated financial statements do not include
any adjustments relating to the recovery of reported asset amounts that might
result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
March 25, 1994
(April 11, 1994 as to Note B)
<PAGE> 63
BKLA Bankcorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
(In Thousands, Except Share Data)
ASSETS
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Cash and due from banks $ 5,177 $ 5,131
Federal funds sold 3,000 11,400
------- -------
Cash and cash equivalents 8,177 16,531
Investment securities, at cost (approximate market value
of $2,029 in 1993) - 2,010
Securities held for sale (approximate market value
of $26,478 in 1993) - 26,410
Securities held to maturity, at cost (approximate market
value of $14,667 in 1994) 14,821 -
Securities available for sale 15,781 -
Loans receivable, net of allowance for credit losses of $1,633
in 1994 and $2,478 in 1993 36,481 48,282
Accrued interest receivable 685 707
Premises and equipment, net 2,608 2,817
Other assets 1,954 2,235
------- -------
$80,507 $98,992
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 64
BKLA Bankcorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
(In Thousands, Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
LIABILITIES:
Deposits
Interest-bearing
Certificates of deposit of $100,000 or more $ 7,422 $ 6,943
Other 41,921 59,429
Noninterest-bearing 25,128 25,016
------- -------
Total deposits 74,471 91,388
Capital lease obligation 1,830 1,827
Accrued interest payable and other liabilities 389 275
------- -------
Total liabilities 76,690 93,490
------- -------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Preferred stock; authorized 5,000,000 shares; no shares
issued and outstanding - -
Common stock, no par value; authorized, 10,000,000 shares;
issued and outstanding, 1,251,565 shares 11,078 11,078
Accumulated deficit (6,788) (5,576)
Net unrealized holding loss on securities available for sale (473) -
------- -------
Total shareholders' equity 3,817 5,502
------- -------
$80,507 $98,992
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 65
BKLA Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1994
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Interest income
Loans receivable (including origination fees) $ 4,087 $ 5,477 $ 8,056
Investment securities - 1,287 2,572
Securities held to maturity 427 - -
Securities available for sale 874 - -
Federal funds sold and securities purchased
under agreements to resell 406 325 289
Deposits with financial institutions - 3 17
------- ------- -------
Total interest income 5,794 7,092 10,934
------- ------- -------
Interest expense
Deposit accounts 1,502 2,008 3,724
Short-term borrowed funds - - 44
Capital lease obligation 256 254 254
------- ------- -------
Total interest expense 1,758 2,262 4,022
------- ------- -------
Net interest income before provision for credit losses 4,036 4,830 6,912
Provision for credit losses - 1,953 4,975
------- ------- -------
Net interest income after provision for credit losses 4,036 2,877 1,937
------- ------- -------
Noninterest income
Service fees 480 654 738
Escrow fees 127 318 302
Gain on sales of investment securities, net - 372 1,417
Merchant discount 130 133 118
Other 186 248 193
------- ------- -------
Total noninterest income 923 1,725 2,768
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 66
BKLA Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
Three Years Ended December 31, 1994
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Noninterest expense
Employee compensation and benefits $ 2,720 $ 2,984 $ 3,711
Occupancy 764 1,029 905
Furniture and equipment 533 562 634
Business promotion 88 111 168
Professional services 885 986 930
Printing and supplies 337 348 397
FDIC assessment 253 302 319
Insurance 179 181 152
Other 412 412 842
------- ------- -------
Total noninterest expense 6,171 6,915 8,058
------- ------- -------
Loss before income tax expense (1,212) (2,313) (3,353)
Income tax expense - - -
------- ------- -------
NET LOSS $(1,212) $(2,313) $(3,353)
======= ======= =======
NET LOSS PER COMMON SHARE $(.97) $(1.85) $(2.68)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE> 67
BKLA Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1994
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Net unrealized
holding loss Total
Accumulated on securities Shareholders'
Shares Amount Deficit available for sale Equity
--------- ------- ----------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992 1,251,565 $11,078 $ 90 $ N/A $11,168
Net loss - - (3,353) N/A (3,353)
--------- ------- ------- ----- -------
Balance, December 31, 1992 1,251,565 11,078 (3,263) N/A 7,815
Net loss - - (2,313) N/A (2,313)
Balance, December 31, 1993 1,251,565 11,078 (5,576) N/A 5,502
Net change in unrealized
loss on securities
available for sale - - - (473) (473)
Net loss - - (1,212) - (1,212)
--------- ------- ------- ----- -------
Balance, December 31, 1994 1,251,565 $11,078 $(6,788) $(473) $ 3,817
========= ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of this statement.
9
<PAGE> 68
BKLA Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1994
(In Thousands)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Interest received $ 6,123 $ 7,089 $12,036
Fees and commissions received 923 1,353 1,349
Interest paid (1,634) (2,322) (4,132)
Cash paid to suppliers and employees (5,363) (6,113) (7,078)
Income taxes (paid) refunded (2) 473 117
-------- ------- -------
Net cash provided by operating activities 47 480 2,292
-------- ------- -------
Cash flows from investing activities
Proceeds from maturities of investment securities - 10,500 8,087
Proceeds from sales of securities - 8,667 34,661
Securities purchased - (21,858) (17,599)
Proceeds from maturities and paydowns of securities available for sale 2,764 - -
Purchases of securities held to maturity (16,740) - -
Proceeds from maturities of securities held to maturity 11,000 - -
Net decrease in loans receivable 11,802 26,189 5,868
Acquisition of premises and equipment (310) (19) (215)
Proceeds from the sale of premises and equipment
and other real estate owned - 604 634
-------- ------- -------
Net cash provided by investing activities 8,516 24,083 31,436
-------- ------- -------
Cash flows from financing activities
Net decrease in deposits (16,917) (25,022) (30,199)
-------- ------- -------
Net (decrease) increase in cash and cash equivalents (8,354) (459) 3,529
Cash and cash equivalents, beginning of year 16,531 16,990 $13,461
-------- ------- -------
Cash and cash equivalents, end of year $ 8,177 $16,531 $16,990
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE> 69
BKLA Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Three Years Ended December 31, 1994
(In Thousands)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Reconciliation of net loss to net cash provided
by operating activities:
Net loss $(1,212) $(2,313) $(3,353)
Adjustments for noncash items
Depreciation and amortization 942 890 682
Provision for credit losses - 1,953 4,975
(Decrease) increase in deferred loan origination fees, net (34) (67) 90
Net realized gains on securities - (372) (1,417)
Loss on disposal of premises and equipment 22 30 -
(Gain) loss on other real estate owned - (63) 425
Decrease (increase) in interest receivable 22 (3) 858
Decrease in other assets 176 463 156
Increase (decrease) in interest payable and other liabilities 131 (38) (124)
------- ------- -------
Net cash provided by operating activities $ 47 $ 480 2,292
======= ======= =======
Supplemental disclosure of noncash transactions:
Transfer of loans to real estate owned through
foreclosure and in-substance foreclosure, net $ - $ - $ 541
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE> 70
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements of BKLA Bancorp (the "Company")
include the accounts of BKLA Bancorp and its wholly-owned subsidiary, Bank
of Los Angeles (the "Bank"). All intercompany accounts and transactions
have been eliminated.
2. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investments with terms to
maturity at acquisition of three months or less, including federal funds
sold.
3. Investment Securities
The Bank classifies its investment securities in two categories: securities
available for sale and securities held to maturity. Securities available
for sale are stated at fair value, with net unrealized gains and losses
reported as a separate component of shareholders' equity. Securities held
to maturity are stated at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income using a
method which approximates the interest method over the period to maturity.
The amortized cost or carrying value of the specific security sold is used
to compute the gain or loss on the sale.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." This statement
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and all investments in debt
securities. Under this statement, investments will be classified into three
categories, as follows:
Securities held to maturity - Debt securities that the Bank has the
positive intent and ability to hold to maturity. These securities are
to be reported at amortized cost.
Trading Securities - Debt and equity securities that are bought and
held for the purpose of selling them in the near term. These securities
are to be reported at fair values, with unrealized gains and losses
included in earnings.
12
<PAGE> 71
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Investment Securities (continued)
Securities Available for Sale - Debt and equity securities not
classified as either held-to-maturity or trading securities. These
securities are to be reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity (net of tax effects).
The Bank adopted this statement on January 1, 1994 at which time the impact
was immaterial. The ongoing impact of this new accounting method will
depend on changes in the market values of the Bank's securities classified
available for sale. For example, significant increases in market interest
rates could depress the values of the Bank's investments and result in the
recording of direct charges to equity (for securities available for sale).
Prior to January 1, 1994, investment securities that management intended and
was able to hold to maturity were stated at cost, net of discounts or
premiums accreted or amortized using a method not materially different from
the level yield method. The carrying amount of such securities would be
adjusted if a permanent impairment of their market value occurred.
Securities held for sale were stated at the lower of cost or market value.
Realized gains and losses were determined on a specific identification
basis.
4. Loans Receivable
Interest on loans is credited to income as earned and is accrued only if
deemed collectible. Nonrefundable fees, net of incremental costs,
associated with the origination or acquisition of loans are deferred and
recognized as an adjustment of the loan yield over the life of the loan in a
manner that approximates the level yield method. Other loan fees and
charges, representing service costs for the prepayment of loans, for
delinquent payments or for miscellaneous loan services are recorded as
income when collected.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This statement amends SFAS No. 5, "Accounting for
Contingencies," and SFAS No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings." This statement prescribes that a loan is
impaired when it is probable that a creditor will be unable to collect all
amounts due (principal and interest) according to the contractual terms of
the loan agreement. Measurement of the impairment can be based on either
the discounted future cash flows of the impaired loan or the fair market
value of the collateral for a collateral- dependent loan. Creditors may
select the measurement method on a loan-by-loan basis, except that
collateral-dependent loans
13
<PAGE> 72
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
for which foreclosure is probable must be measured at the fair value of the
collateral. Additionally, the statement prescribes measuring impairment of
a restructured loan by discounting the total expected future cash flows
using the loan's effective rate of interest in the original loan agreement.
Finally, the impact of initially applying the statement will be reported as
a part of the provision for credit losses in the income statement. The Bank
adopted this statement as of January 1, 1995 and has not yet determined the
impact of the adoption of this statement.
5. Allowance for Credit Losses
The allowance for credit losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio. The
allowance is increased by provisions for credit losses charged against
operations and recoveries of previously charged off loans.
Management believes that, as of December 31, 1994, the allowance for credit
losses is adequate to provide for losses inherent in the loan portfolio.
However, the allowance is an estimate which is inherently uncertain and
depends on the outcome of future events. Management's estimates are based
on previous loan loss experience; volume, growth and composition of the loan
portfolio; the value of collateral; and current economic conditions. The
Bank's lending is concentrated in real estate secured and unsecured loans in
Southern California, which has recently experienced adverse economic
conditions and declining real estate values. These conditions have
adversely affected many borrowers' ability to repay loans. Additional
declines in the economy would result in increasing loan losses that cannot
be reasonably predicted. Such losses would also result in unanticipated
erosion of the Bank's capital.
6. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation on furniture, fixtures and equipment is computed
using the straight-line method over the estimated useful lives of the
related assets, which range from three to ten years. Capitalized leases are
amortized over the term of the lease on the straight-line method. Leasehold
improvements are amortized over the term of the lease or the estimated
useful lives of the improvements, whichever is shorter, and computed on the
straight-line method.
14
<PAGE> 73
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
7. Other Real Estate Owned
The Bank records other real estate owned at the fair value of the real
estate less management's estimates of selling costs as of the date of
foreclosure or in-substance foreclosure. Loan balances in excess of fair
value of real estate acquired at the date of foreclosure or in-substance
foreclosure are charged to the allowance for credit losses. An allowance is
recorded against the foreclosed assets for any subsequent declines in fair
value. Any subsequent operating expenses or income, reduction in fair
value, and gains or losses on disposition of such properties are charged to
current operations.
8. Income Taxes
Deferred income taxes are provided for temporary differences in the
recognition of items of income and expense reported in different accounting
periods for tax and financial reporting purposes.
The Bank adopted SFAS No. 109 "Accounting for Income Taxes" as of January 1,
1993. This statement requires an asset and liability approach for
determining the amount of income taxes for financial reporting. A current
or deferred tax liability or asset is measured based on the amount of taxes
calculated at the then-effective tax rates payable or refundable currently
or in future years. This statement also requires that a valuation allowance
be recorded if it is more likely than not that some or any of the deferred
tax asset will not be realized. As a result of this adoption, no cumulative
effect adjustment was recorded in 1993.
9. Loss per Share
Loss per share is computed on the basis of the weighted average number of
shares outstanding during the year plus shares issuable upon the assumed
exercise of stock options. The weighted average number of shares
outstanding was 1,251,565 in 1994, 1993 and 1992. Due to the antidilutive
effect, stock options are not considered common stock equivalents in 1994,
1993 or 1992.
10. Reclassification
Certain reclassifications have been made in the prior years' financial
statements to conform to the current year presentation.
15
<PAGE> 74
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE B - REGULATORY MATTERS
Potential and Existing Enforcement Actions
The Federal Deposit Insurance Corporation (the "FDIC") examined the Bank
and, through the FDIC's Report of Examination (the "Report") dated October
15, 1993, noted certain deficiencies in the Bank's compliance with a
memorandum of understanding ("MOU") which was issued on January 14, 1993.
As a result, the FDIC issued an Order to Cease and Desist (the "Order") on
February 23, 1994 which became effective on March 20, 1994. The FDIC Order
supersedes the MOU entered into by the Bank with the FDIC and the
Superintendent of Banks, State of California (the "Superintendent"). The
Order requires the Bank to: (a) have and retain qualified management with
qualifications and experience commensurate with his or her duties at the
Bank which should include (i) a chief executive officer with proven ability
in managing a bank of comparable size and experience in upgrading a low
quality loan portfolio, and (ii) a senior lending officer with an
appropriate level of lending, collection and loan supervision experience for
the type and quality of the Bank's loans; (b) increase its Tier 1 capital by
no less than $3,000,000 on or before July 18, 1994 and achieve, on or before
such date, and thereafter maintain, a leverage ratio of at least 6.5%; (c)
eliminate from its books certain criticized assets to specified levels at
various dates until March 20, 1995; (d) not extend any additional credit to
any borrower who has a loan or other extension of credit from the Bank that
has been charged off or classified, in whole or in part, "loss" or
"substandard" and is uncollected without the prior written approval of a
majority of the board of directors or the loan committee; (e) revise, adopt,
and implement written lending and collection policies to provide effective
guidance and control over the Bank's lending functions by May 19, 1994; (f)
develop a written plan to systematically reduce the amount of each loan
concentration specified in the Report to an amount less than 25% of the
Bank's Tier 1 capital for each individual loan concentration; (g) maintain
an adequate reserve for loan losses; (h) develop and adopt by May 19, 1994 a
plan to control overhead and other expenses and restore the Bank's
profitability; (i) eliminate and/or correct all violations of law set forth
in the Report by June 18, 1994; (j) develop, adopt and implement a written
policy by May 19, 1994 governing the relationship between the Bank and its
parent company and eliminating the payment of any management, consulting, or
other fees to its parent company, except for those services performed on
behalf of the Bank; (k) restrict its asset growth to an amount not to exceed
10%; (l) refrain from paying cash dividends without the prior written
consent of the FDIC and the Superintendent; and (m) furnish written progress
reports to the FDIC and the Superintendent on a quarterly basis detailing
the manner of any actions taken to comply with the Order and the results
thereof.
16
<PAGE> 75
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE B - REGULATORY MATTERS - Continued
On January 7, 1994, the FDIC delivered to the Bank a letter notifying the
Bank it was undercapitalized under the Prompt Corrective Action Provisions
of Section 38 of the Federal Deposit Insurance Corporation Improvement Act
of 1991 (the "FDIC Improvement Act"). In accordance with the Prompt
Corrective Action Provisions, on February 16, 1994, the Bank submitted to
the FDIC a capital restoration plan and BKLA submitted to the FDIC a
guarantee of the capital restoration plan. The capital restoration plan
provides for the Bank to increase its capital by not less than $3,000,000
and to increase its leverage capital ratio to 6.5 % before June 30, 1994.
On February 23, 1995 the FDIC delivered to the Bank a letter notifying the
Bank it was significantly undercapitalized under the Prompt Corrective
Action Provisions. As a result of such classification, the Bank is subject
to restrictions as to asset growth, acquisitions, new activities, new
branches, payment of dividends or the making of any other capital
distribution, management fees, or senior executive compensation. In
addition, the Bank may be subject to restrictions as to the rates of
interest it may pay on deposits. To comply with the Prompt Corrective
Action Provisions, the Bank is required by March 21, 1995 to provide a
summary of specific steps taken to comply with these restrictions and by
April 7, 1995 provide a revised written capital restoration plan.
On December 22, 1994, the Superintendent delivered to the Bank an impairment
order pursuant to California Financial Code Section 662 (the "Impairment
Order") to correct its capital impairment as of September 30, 1994 within
sixty (60) days of the Impairment Order. Since the capital impairment had
not been corrected within the sixty days, the Bank had, pursuant to a
resolution by the Board of Directors of the Bank (the "Board"), submitted a
request to the California State Banking Department for a permit to levy an
assessment on the Bank's outstanding shares of common stock. As a result of
the consummation of the capital infusion transaction described in the ninth
paragraph of this Note, the Company increased its contributed capital and
cured the Bank's capital impairment. Accordingly, on March 30, 1995, the
Board rescinded its previous request to levy an assessment on the Bank's
outstanding shares of common stock.
The Federal Reserve Bank of San Francisco (the "FRB SF") concluded its most
recent examination (the "Examination") of the Company as of February 10,
1994. Based on its inspection, the FRB SF reported that the financial
condition of the Company was marginal as a result of the Bank's asset
quality problems, operating losses and insufficient capital. Pursuant to a
letter dated March 2, 1994 delivered to the Company, the FRB SF informed the
Company that it must continue to abide by a
17
<PAGE> 76
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE B - REGULATORY MATTERS - Continued
supervisory letter previously delivered to the Company on April 16, 1993
(the "Supervisory Letter"). The Supervisory Letter provides that the
Company may not pay any cash dividends, incur any debt or repurchase any of
its outstanding stock without the prior approval of the FRB SF. On April
11, 1994, the FRB SF and the Company entered into a Memorandum of
Understanding (the "MOU"), intending to address certain concerns of the FRB
SF disclosed during its inspection of the Company. The MOU provides, among
other things, that without the prior approval of the FRB SF, the Company
will not declare dividends, incur additional debt, repurchase any of its
outstanding stock or enter into any agreements to acquire any entities or
portfolios.
Capital Requirements
Notwithstanding the Order or the MOU, federal laws and regulations require
the Bank to adhere to capital standards which include maintenance by the
Bank of a ratio of total capital to risk-weighted assets of 8.0%, of which
at least 4.0% must consist of Tier 1 capital, and a leverage ratio of at
least 4.0%. At December 31, 1994, the Bank had a total capital to
risk-weighted assets ratio (unaudited) of 7.30%, a Tier 1 capital to
risk-weighted assets ratio (unaudited) of 6.02%, and a leverage ratio
(unaudited) of 2.97% In the event that the Bank's ratio of tangible equity
to total assets (as defined by federal regulations) declines to 2% or less,
except under limited circumstances, the FDIC is required not later than 90
days thereafter to appoint a conservator or receiver for the Bank.
In addition, under the provisions of the California Financial Code, the
capital of the Bank is considered to be "impaired" whenever its accumulated
deficit exceeds 40% of the contributed capital of the Bank. As of December
31, 1994, the Bank's accumulated deficit totaled 53.6% of contributed
capital.
Management's strategies to increase the Bank's capital include a private
placement of the Company's equity securities (see the next paragraph below
and Note P), sale of the lease for the Beverly Hills regional office,
continued consolidation of the Bank's operating units, a merger with another
institution, or the sale of the Bank. The Bank is pursuing all of the above
alternatives simultaneously. However, there are no assurances that any of
such alternatives will materialize, in which case the strategies could fail
to meet their objectives.
18
<PAGE> 77
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE B - REGULATORY MATTERS - Continued
On July 28, 1994, the Company, the Bank and Investors Banking Corporation
("Investors"), a bank holding company located in Salem, Oregon, entered into
a Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to
which Investors agreed to invest up to approximately $5,000,000 in the
Company (the "Transaction") over a period of approximately six months. The
first phase of the Transaction, which was completed on March 29, 1995,
consisted of an infusion of approximately $2,900,000, net of costs of
approximately $90,000, through the purchase of 2,019,006 units of securities
("Units"), with each Unit comprised of two shares of the Company's common
stock, no par value ("Common Stock"), and one warrant, exercisable for three
years after issuance, to purchase Common Stock at $.75 per share. On March
30, 1995, Investors made an additional infusion of approximately $500,000,
net of costs of approximately $20,000, through the purchase of an additional
346,874 Units. The second phase of the Transaction will involve an offering
of rights to existing shareholders, other than Investors, of the Company to
purchase Common Stock. Investors may purchase any securities not purchased
by the other shareholders. The Company expects to raise an additional
$2,000,000 in the rights offering, which is designed to enable shareholders
of the Company, other than Investors, to increase their collective ownership
of the Company to approximately 45%.
If the Bank continues to incur operating losses or fails to comply with
other significant terms of the Order or the MOU, further significant
regulatory intervention is likely. Such intervention could include
restrictions on asset growth, interest rates paid on deposits and engaging
in new lines of business, a forced sale of voting shares to raise capital,
or, if grounds exist for appointment of a receiver or conservator, a forced
merger.
Dividend Restrictions
The FDIC and the Federal Reserve Board have established guidelines with
respect to the maintenance of appropriate levels of capital by banks or bank
holding companies under their jurisdiction. Compliance with the standards
set forth in such guidelines limits the amount of dividends which the Bank
may pay. Further, the Bank is subject to the Order, the MOU and the Prompt
Corrective Action Provisions which require it to maintain specified levels
of capital and prohibit it from paying any cash dividends to its parent
without the prior consent of regulatory agencies.
19
<PAGE> 78
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE B - REGULATORY MATTERS - Continued
Parent Company Transaction Restrictions
Pursuant to the Order, the MOU and the Prompt Corrective Action Provisions,
the Bank is also prohibited, subject to certain exceptions, from paying any
management, consulting or other fees or funds of any nature to its parent.
Lending Restrictions
Section 23A of the Federal Reserve Act restricts the Bank from making loans
or advances to the Company and other affiliates. Such restrictions prevent
the Company and such other affiliates from borrowing from the Bank unless
the loans are secured by marketable obligations of designated amounts.
Further, such secured loans and investments by the Bank to or in the Company
or to or in any other affiliate is limited to 10% of the Bank's capital and
surplus (as defined by federal regulations), and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations).
Reserve Requirements
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. On December 31, 1994 and 1993, the reserve requirement was
approximately $120,000 and $81,000, respectively.
20
<PAGE> 79
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE C - INVESTMENT SECURITIES
Effective January 1, 1994, the Bank changed its method of accounting for
investment securities (Note A3). The amortized cost, carrying value and
estimated fair values of investment securities as of December 31, are as
follows (in thousands):
<TABLE>
<CAPTION>
1994
---------------------------------------------------------
Gross unrealized
Carrying Estimated ----------------------
value fair value Losses Gains
------- ---------- ------ -------
<S> <C> <C> <C> <C>
Securities held to maturity
U.S. Treasury securities $14,821 $14,667 $154 $ -
======= ======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------------------------
Gross unrealized
Amortized Estimated ----------------------
Cost fair value Losses Gains
--------- ---------- ------ -------
<S> <C> <C> <C> <C>
Securities available for sale
Securities of U.S. government
agencies and corporations $ 5,111 $ 4,957 $154 $ -
Mortgage-backed securities 4,094 3,870 224 -
SBA securities 7,049 6,954 95 -
------- ------- ---- ------
$16,254 $15,781 $473 $ -
======= ======= ==== ======
</TABLE>
<TABLE>
<CAPTION>
1993
---------------------------------------------------------
Gross unrealized
Carrying Estimated ----------------------
value fair value Losses Gains
------- ---------- ------ -------
<S> <C> <C> <C> <C>
Investment securities
U.S. Treasury securities $2,010 $2,029 $ - $19
====== ====== ==== ===
</TABLE>
21
<PAGE> 80
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE C - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
1993
--------------------------------------------------------
Carrying Estimated Gross unrealized
value fair value -------------------
--------- ---------- Losses Gains
------ ------
<S> <C> <C> <C> <C>
Securities held for sale
U.S. Treasury securities $ 7,048 $ 7,051 $ - $ 3
Securities of U.S. government
agencies and corporations 5,215 5,333 - 118
Mortgage-backed securities 4,766 4,743 41 18
SBA securities 9,381 9,351 53 23
------- ------- --- ----
$26,410 $26,478 $94 $162
======= ======= === ====
</TABLE>
The maturity distribution of investment securities at December 31, 1994 is
as follows (in thousands):
<TABLE>
<CAPTION>
Available for sale Held to maturity
---------------------------- --------------------------
Amortized Estimated Carrying Estimated
cost fair value value fair value
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Less than one year $ 2,055 $ 2,026 $ 7,944 $ 7,889
One to five years 3,056 2,931 6,877 6,778
Mortgage-backed securities 4,094 3,870 - -
SBA securities 7,049 6,954 - -
------- ------- ------- -------
$16,254 $15,781 $14,821 $14,667
======= ======= ======= =======
</TABLE>
Information relating to sales of investment securities for the three years
ended December 31, 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------ ---------- -----------
<S> <C> <C> <C>
Proceeds from sale of securities $ - $8,667,000 $34,661,000
Gross realized losses - 5,000 53,000
Gross realized gains 377,000 1,470,000
-
</TABLE>
22
<PAGE> 81
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE C - INVESTMENT SECURITIES - Continued
Securities with carrying and estimated fair values of $3,678,000 and
$3,620,000, respectively at December 31, 1994 and of $5,092,000 and
$5,093,000, respectively at December 31, 1993, were pledged as collateral
for public and for other purposes required or permitted by law.
NOTE D - LOANS RECEIVABLE
It has been the Bank's policy to grant loans to customers in its immediate
service area. The Bank therefore has a natural concentration of borrowers
in the greater Los Angeles area of Southern California, which has recently
experienced adverse economic conditions, including declining real estate
values. These weaknesses in the local economy negatively impacted the
ability of some of the Bank's customers to honor their loan agreements.
Loans receivable consist of the following as of December 31:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Portfolio loans - Commercial $10,165 $14,461
Real estate
Trust deeds secured 23,237 30,493
Consumer 4,848 5,976
------- -------
Total loans 38,250 50,930
Less:
Allowance for credit losses on loans 1,633 2,478
Deferred loan origination fees, net 136 170
------- -------
$36,481 $48,282
======= =======
</TABLE>
23
<PAGE> 82
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE D - LOANS RECEIVABLE - Continued
Nonaccrual and renegotiated loans for which interest has been reduced
totaled approximately $838,000 and $3,619,000 at December 31, 1994 and 1993,
respectively. The reduction in interest income related to loans on
nonaccrual status was $114,000, $208,000, and $62,000 for 1994, 1993, and
1992, respectively.
NOTE E - ALLOWANCE FOR CREDIT LOSSES
Activity in the allowance for credit losses for the years ended December 31,
1994, 1993, and 1992 was as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Balance, January 1, 1992 $ 2,475
Recoveries of charge-offs 345
Provision charged to operations 4,975
Charge-offs (5,006)
-------
Balance, December 31, 1992 2,789
Recoveries of charge-offs 977
Provision charged to operations 1,953
Charge-offs (3,241)
-------
Balance, December 31, 1993 2,478
Recoveries of charge-offs 456
Provision charged to operations -
Charge-offs (1,301)
-------
Balance, December 31, 1994 $ 1,633
=======
</TABLE>
24
<PAGE> 83
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE F - TRANSACTIONS INVOLVING DIRECTORS AND OFFICERS
In the ordinary course of business, the Bank has granted and extended loans
to certain directors, executive officers and the companies with which they
are associated. All such loans and commitments to lend were made under
terms which are consistent with the Bank's normal lending policies.
The following is an analysis of all such loans as of December 31:
<TABLE>
<CAPTION>
1994 1993
------ -------
(In thousands)
<S> <C> <C>
Outstanding balance, beginning of year $1,201 $ 4,612
Credit granted, including renewals 427 245
Repayments (351) (2,853)
Reclassifications due to director resignations - (803)
------ -------
Outstanding balance, end of year $1,277 $ 1,201
====== =======
</TABLE>
Interest earned on these loan transactions approximated $116,000, $227,000
and $341,000 in 1994, 1993 and 1992, respectively.
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
------ -------
(In thousands)
<S> <C> <C>
Premises under capital lease $1,749 $1,749
Leasehold improvements 2,124 2,255
Furniture, fixtures and equipment 3,017 2,993
Construction in process 273 -
------ ------
7,163 6,997
Less accumulated depreciation and amortization 4,555 4,180
------ ------
$2,608 $2,817
====== ======
</TABLE>
25
<PAGE> 84
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE G - PREMISES AND EQUIPMENT - Continued
The Bank is continuing efforts to reduce expense by the consolidation of the
administrative and customer service functions into the two branch network
buildings and the outsourcing of data processing operations. The decision
to outsource data processing was made in the fourth quarter of 1994 and is
expected to occur in the first quarter of 1995. Because of this decision,
the data processing equipment's useful life decreased. This required an
adjustment in accumulated depreciation for these assets which resulted in
additional depreciation expense of $123,000 for 1994.
NOTE H - OTHER ASSETS
The net carrying value of the bargain lease element relative to a lease
acquired in a 1983 acquisition is reflected in other assets at December 31,
1994 and 1993 in the amounts of approximately $1,675,000 and $1,727,000,
respectively. The bargain lease element is being amortized on a
straight-line basis over a period of thirty-nine years. At December 31,
1994 and 1993, other assets also include approximately $84,000 and $137,000,
respectively, relative to the acquisition of a branch of a failed savings
and loan association from the Resolution Trust Corporation. The acquisition
cost is being amortized on a straight-line basis over a five-year period.
NOTE I - DEPOSIT ACCOUNTS
Deposits include funds held in trust relating to the Bank's escrow
operations. In the fourth quarter of 1994 the Bank discontinued its escrow
operations. Some deposits remain pending settlement of transfer to assuming
escrow companies. Escrow deposits amounted to $274,000 and $1,009,000 at
December 31, 1994 and 1993, respectively.
Interest expense for certificates of deposit of $100,000 or more amounted to
$207,000, $294,000 and $615,000 for 1994, 1993 and 1992, respectively.
26
<PAGE> 85
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE J - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY
TRANSACTIONS
1. Leases
The Bank leases certain premises under operating leases which expire in
various years through 1997 with options to renew. Rental expense related to
operating leases amounted to approximately $416,000, $669,000 and $527,000
in 1994, 1993 and 1992, respectively. The capital lease expires in 2007
with options to renew. The amortization of the capital lease asset is
included in depreciation expense.
At December 31, 1994, the future minimum rental commitments under capital
and noncancelable operating leases for premises are as follows:
<TABLE>
<CAPTION>
Capitalized Operating
Year Leases Leases
- - ---- ---------- ---------
(In thousands)
<S> <C> <C>
1995 $ 252 $191
1996 252 172
1997 252 81
1998 252 -
1999 252 -
Thereafter 8,103 -
------ ----
Total minimum lease payments 9,363 444
Less amount representing imputed at 14% 7,533 -
------ ----
$1,830 $444
====== ====
</TABLE>
Minimum payments under the capitalized lease have not been reduced by annual
minimum sublease rentals of $259,000 due through 1997 under noncancelable
subleases which aggregate to approximately $777,000.
Lease commitments under the operating leases are subject to cost-of-living
adjustments to reflect future changes in the Consumer Price Index.
27
<PAGE> 86
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE J - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY
TRANSACTIONS - Continued
1. Leases (continued)
The Bank leases its West Hollywood office from a director and principal
stockholder under an operating lease which was renewed in June 1992 for five
years, and there are three renewal options available of five years each.
Rental expense relating to this lease was $161,000, $161,000 and $156,000 in
1994, 1993 and 1992, respectively.
The Bank subleased additional office space from a director and principal
stockholder, who leases the space from an investment group in which he and
another director are partners. The operating lease expired on December 14,
1994. The administrative and customer service functions were relocated into
the two branch buildings. Rental expense related to this lease was
$188,000, $215,000 and $187,000 in 1994, 1993 and 1992, respectively.
During 1993, the Bank closed its Hollywood regional branch office. As of
December 31, 1993, 22 months remained on the term of the lease of the
Hollywood facility. The remaining lease obligation of $147,000 was charged
to occupancy expense in 1993. In February 1994, the Bank settled the
remaining lease obligation for $90,000 and realized a net recovery of
$51,000.
2. Litigation
In the ordinary course of business, the Bank becomes involved in litigation.
In the opinion of management, based upon consultation with the Bank's legal
counsel, the disposition of such litigation will not have a material effect
on the Bank's consolidated financial position.
3. Off-Balance-Sheet Items
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers
and to manage the Bank's interest rate risk. These financial instruments
include commitments to extend credit. When viewed in terms of the maximum
exposure, those instruments may involve, to varying degrees, credit and
interest- rate risk in excess of the amount recognized in the balance sheet.
At December 31, 1994 and 1993, undisbursed loan commitments approximated
$5,651,000 and $5,551,000, respectively, of which $457,000 and $727,000,
respectively represented standby letters of credit.
28
<PAGE> 87
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE J - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS -
Continued
3. Off-Balance-Sheet Items (continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. At
December 31, 1994, all of the Bank's credit commitments were scheduled to
expire in less than five years.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for extending loan facilities to customers. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable;
inventory; property, plant and equipment; and income-producing commercial
properties.
NOTE K - SHAREHOLDERS' EQUITY
The Bank has a stock option plan that provides for the issuance of up to
372,610 shares of the Bank's authorized but unissued common stock to all
employees, employees directors and nonemployee directors. Employees and
employee directors are eligible to receive incentive and nonqualified stock
options. Nonemployee directors are only eligible to receive nonqualified
stock options. The Bank may issue incentive stock options provided that the
aggregate fair market value (determined at the time the incentive stock
option is granted) of the stock with respect to which incentive stock
options are exercisable for the first time by the optionee during any
calendar year shall not exceed $100,000. Should it be determined that any
incentive stock option granted pursuant to the 1988 option plan exceeds such
maximum, such incentive stock option shall be considered to be a
nonqualified stock option. Option prices may not be less than 100% of the
fair market value at the date of the grant. Options granted under the stock
option plan expire not more than ten years after the date of grant and must
be fully paid when exercised.
29
<PAGE> 88
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE K - SHAREHOLDERS' EQUITY - Continued
Activity in the stock option plan for the three years in the period ended
December 31, 1994 is as follows:
<TABLE>
<CAPTION>
Shares Shares
Available under Price
in Plan Option per share
--------- -------- -------------
<S> <C> <C> <C>
Balance at January 1, 1992 151,577 211,155 $4.63 - $8.98
Options granted (13,300) 13,300 $3.56
Options canceled 24,920 (24,920) $3.56 - $8.86
------- -------- -------------
Balance at December 31, 1992 163,197 199,535 $3.56 - $8.98
Options granted (47,600) 47,600 $1.25 - $1.38
Options canceled 135,340 (135,340) $3.56 - $8.98
------- -------- -------------
Balance at December 31, 1993 250,937 111,795 $1.25 - $8.98
Options granted (5,700) 5,700 $0.75
Options canceled 12,600 (12,600) $1.25 - $8.86
------- -------- -------------
Balance at December 31, 1994 257,837 104,895 $0.75 - $8.86
======= ======== =============
</TABLE>
At December 31, 1994, 66,537 of the shares currently under option are
exercisable, and 26,888 options will become exercisable in 1995 at prices
ranging from $0.75 to $8.86 per share.
NOTE L - INCOME TAXES
In 1993, the Bank adopted SFAS No. 109, "Accounting for Income Taxes".
Under the provisions of SFAS No. 109, the Bank elected not to restate prior
years and the cumulative effect of implementation was not material to the
Company's consolidated financial position.
No provision (benefit) for income tax was recognized in 1994, 1993 and 1992.
30
<PAGE> 89
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE L - INCOME TAXES - Continued
Deferred tax provision related to the following timing differences for the
year ended December 31, 1992 are as follows (in thousands):
<TABLE>
<S> <C>
Provision for credit losses $(110)
Franchise taxes (1)
Depreciation (54)
Capital lease (1)
Nonrecognition of potential unrealized deferred tax benefits 171
Other, net (5)
-----
Total $ -
=====
</TABLE>
Reconciliation of the differences between the federal statutory income tax
rate and the effective tax rate as of December 31 is shown in the following
table:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate (34)% (35)% (34)%
Loss of state net operating loss carryforward - 5 -
Unrecognized portion of current year
deferred tax benefit 34 29 33
--- --- ---
Other, net - 1 1
Total - % - % - %
=== === ===
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences and the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforward. The tax effects of significant
items composing the Bank's net deferred assets are as follows at December
31:
31
<PAGE> 90
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE L - INCOME TAXES - Continued
<TABLE>
<CAPTION>
1994 1993
------- ------
(In thousands)
<S> <C> <C>
Federal
Deferred tax assets:
Loan loss reserve $ 555 $ 358
Net operating losses 1,435 1,588
Credits 16 26
Contributions 14 12
Nonaccrual loans 260 -
------ ------
2,280 1,984
Deferred tax liabilities:
State taxes 174 165
Depreciation and intangibles 508 286
------ ------
682 451
------ ------
Net deferred tax asset - federal $1,598 $1,533
====== ======
</TABLE>
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
State
Deferred tax assets:
Loan loss reserve $ 187 $ 237
Net operating losses 409 341
Contributions - 4
Nonaccrual loans 88 -
------- -------
684 582
------- -------
Deferred tax liabilities:
Depreciation and intangibles 171 97
------- -------
Net deferred tax asset - state $ 513 $ 485
======= =======
Total deferred tax asset $ 2,111 $ 2,018
Valuation allowance (2,111) (2,018)
Net deferred tax asset $ - $ -
======= =======
</TABLE>
32
<PAGE> 91
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE L - INCOME TAXES - Continued
The valuation allowance was established at December 31, 1994 and 1993
because it is more likely than not that the net deferred tax asset will not
be realized due to the Bank's current and previous losses and their effect
on the ability to generate future taxable income.
The Company has federal net operating loss carryforwards in the amount of
$4,221,000 as follows: $2,200,000 expiring in 2007, $1,305,000 expiring in
2008 and approximately $716,000 expiring in 2009. Additionally, the Company
has state net operating loss carryforwards of $3,569,000 as follows:
$1,581,000 expiring in 1997, $1,206,000 expiring in 1998, and approximately
$782,000 expiring in 1999.
NOTE M - PROFIT SHARING PLAN
The Bank has a defined contribution plan (the "Plan") which qualifies for
salary deferral under Internal Revenue Code Section 401(k). The Plan
provides that employees may contribute up to the lesser of the amount
allowed by law or 20% of their annual gross salary. In addition, the Bank
may make discretionary matching contributions under the 401(k) provisions of
the Plan as well as discretionary profit-sharing contributions. The Company
contributed $14,000, $17,000 and $18,000 in 1994, 1993 and 1992,
respectively, under the provisions for matching employee contributions and
did not make any discretionary profit-sharing contributions in 1994, 1993 or
1992.
NOTE N - CONDENSED FINANCIAL INFORMATION OF PARENT
Condensed Balance Sheets as of December 31:
<TABLE>
<CAPTION>
1994 1993
------- --------
(In thousands)
<S> <C> <C>
Assets
Cash $ 24 $ 23
Investment in subsidiary 3,793 5,479
------- --------
$ 3,817 $ 5,502
======= =======
Liabilities and Shareholders' Equity
Shareholders' equity:
Common stock $11,078 $11,078
Accumulated deficit (7,261) (5,576)
------- --------
$3,817 $ 5,502
======= =======
</TABLE>
33
<PAGE> 92
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE N - CONDENSED FINANCIAL INFORMATION OF PARENT - Continued
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Equity in undistributed loss of Bank of
Los Angeles $(1,213) $(2,222) $(3,354)
Interest income 1 3 19
Expenses - professional fees and other - (94) (18)
------- ------- -------
Net loss $(1,212) $(2,313) $(3,353)
======= ======= =======
</TABLE>
Condensed Statements of Cash Flows for the years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,212) $(2,313) $(3,353)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Undistributed loss of Bank of Los
Angeles 1,213 2,222 3,354
Amortization - - 1
Decrease in other liabilities - - (7)
------- ------- -------
Total adjustments 1,213 2,222 3,348
------- ------- -------
Net cash provided by(used in)
operating activities 1 (91) (5)
------- ------- -------
</TABLE>
34
<PAGE> 93
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE N - CONDENSED FINANCIAL INFORMATION OF PARENT - Continued
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- -----
(In thousands)
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from sale and maturity of
investments - 76 375
Acquisition of investments - - (76)
--- ---- -----
Net cash provided by
investing activities - 76 299
Cash flows from financing activities-
Capital contributions to subsidiary - - (400)
--- ---- -----
Net increase (decrease) in cash and
due from banks 1 (15) (106)
Cash, beginning of year 23 38 144
--- ---- -----
Cash, end of year $24 $ 23 $ 38
=== ==== =====
</TABLE>
NOTE O - SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994
---------------------------------------------------
(In thousands, except per share data)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total interest income $1,410 $1,376 $1,477 $1,531 $5,794
Total interest expense 418 405 399 536 1,758
Net interest income 992 971 1,078 995 4,036
Provision for credit losses - - - - -
Noninterest income (*) 287 240 219 177 923
Gain on security sales, net - - - - -
Noninterest expense 1,477 1,567 1,528 1,597 6,171
Net loss (198) (356) (233) (425) (1,212)
Net loss per share $(.16) $(.28) $ (.19) $ (.34) $ (.97)
</TABLE>
*Excludes gains on security sales.
35
<PAGE> 94
BKLA Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1994
NOTE O - SELECTED QUARTERLY DATA (UNAUDITED) - Continued
<TABLE>
<CAPTION>
1993
-------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total interest income $2,025 $1,841 $1,778 $1,448 $ 7,092
Total interest expense 652 584 541 485 2,262
Net interest income 1,373 1,257 1,237 963 4,830
Provision for credit losses 500 350 250 853 1,953
Noninterest income (*) 311 360 261 421 1,353
Gain on security sales, net 219 - 153 - 372
Noninterest expense 1,684 1,645 2,088 1,498 6,915
Net loss (281) (378) (687) (967) (2,313)
Net loss per share $(0.22) $(0.31) $(0.55) $(0.77) $ (1.85)
</TABLE>
*Excludes gains on security sales.
NOTE P - SUBSEQUENT EVENT
On March 31, 1995, pursuant to a Stock Purchase Agreement dated July 28,
1994, the Company completed the issuance of 2,365,880 units of securities
("Units") to Investors Banking Corporation ("Investors"), a bank holding
company located in Salem, Oregon, and received proceeds of approximately
$3,400,000, net of costs of approximately $110,000. Each Unit is comprised
of two shares of the Company's no par value common stock and one warrant,
exercisable for three years after issuance, to purchase common stock at $.75
per share. As a result of this transaction, Investors purchased 4,731,760
shares of the Company's common stock representing 79% of total shares issued
and outstanding as of March 31, 1995 and indirectly acquired 79% of the
Bank's issued and outstanding common stock.
36
<PAGE> 95
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
- - ----------- ----
<S> <C>
3.1 Articles of Incorporation of Registrant. [Filed as Exhibit 3.1(1)]
3.2 Bylaws of Registrant, as amended. [Filed as Exhibit 3.2(1)]
4.1 Reserved
4.2 Proofs of Certificates for Common Stock. [Filed as Exhibit 4.2(2)]
4.3 Proofs of Certificates of Warrants.
10.1 Reserved
10.2 Reserved
10.3 Lease dated July 1, 1981, by and between Bank of Los Angeles and Arlen
Andelson Family Trust (successor to the Sheldon Andelson Trust) for the
Main Office/West Hollywood Regional Office. [Filed as an Exhibit (3)]
10.4 Office lease dated March 17, 1977, by and between American City Bank and
9601 Associates, assigned to Bank of Los Angeles by the Federal Deposit
Insurance Corporation as Receiver for American City Bank for the Beverly
Hills Regional Offices. [Filed as an Exhibit (3)]
10.5 Sublease dated December 15, 1984, by and among BKLA Bancorp, Andelson &
Andelson and Hilldale Investment Group, Ltd. for the Corporate Offices.
[Filed as Exhibit 10.5(4)]
10.6 Reserved
10.7 Reserved
10.8 Office lease dated September 19, 1986, by and between J. Ned-Pantages, a
California general partnership, and Bank of Los Angeles for the Hollywood
Regional Office. [Filed as Exhibit 10.11(5)]
10.9 BKLA Bancorp 1988 Stock Option Plan, as amended. [Filed as Exhibit 10.12(6)]
10.10 Bank of Los Angeles Profit Sharing Plan and Trust Agreement, as amended.
[Filed as Exhibit 10.10(6)]
</TABLE>
<PAGE> 96
<TABLE>
<S> <C>
10.11 Employment Agreement dated as of March 1, 1993 between Paul Ling and Bank of
Los Angeles and BKLA Bancorp [Filed as Exhibit 10.11(8)]
10.12 Sublease of the Mezzanine Level of the Beverly Hills Regional Office dated
September 17, 1987, by and between Bank of Los Angeles and Shearson Lehman
Brothers, Inc. [Filed as Exhibit 10.14(2)]
10.13 Form of Indemnification Agreement. [Filed as Exhibit 10.13(1)]
10.14 Office Lease dated July 19, 1989, as amended, by and between RREEF USA Fund-I,
a California Group Trust and BKLA Bancorp for the General Office Use/Data
Processing Center. [Filed as Exhibit 10.14(7)]
10.15 Office Lease dated January 19, 1990, by and between Wilshire-Camden Associates,
a California limited partnership and Bank of Los Angeles for the Escrow Offices.
[Filed as Exhibit 10.15(7)]
10.16 Stock Purchase Agreement dated July 28, 1994, by and among BKLA Bancorp, Bank of
Los Angeles and Investors Banking Corporation [filed as Exhibit 10.16(9)]
10.17 Amendment No. 1 to Stock Purchase Agreement by and Among BKLA Bancorp, Bank of
Los Angeles and Investors Banking Corporation. [Filed as Exhibit 2.1(10)]
10.18 Amendment No. 2 to Stock Purchase Agreement By and Among BKLA Bancorp, Bank of
Los Angeles and Investors Banking Corporation.
10.19 Warrant Agreement, dated March 29, 1995, between BKLA Bancorp and Investors Banking
Corporation.
21. List of Subsidiaries of Registrant. [Filed as Exhibit 22(2)]
23.1 Consent of Deloitte & Touche
23.2 Consent of Grant Thornton LLP
27.1 Financial Data Schedule
</TABLE>
- - ---------------------
(1) To Registrant's Annual Report on Form 10-K for the year ended December 31,
1988 (Commission File No. 0-10140), which are incorporated herein by this
reference.
(2) To Registrant's Annual Report on Form 10-K for the year ended December 31,
1987 (Commission File No. 0-10140), which are incorporated herein by this
reference.
(3) To Registrant's Registration Statement on Form S-1 and Amendments thereto
(Registration No. 2-90449), which are incorporated herein by this
reference.
(4) To Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1984 (Commission File No. 0-10140), which is incorporated
herein by this reference.
<PAGE> 97
(5) To Registrant's Annual Report on Form 10-K for the year ended December 31,
1986 (Commission File No. 0-10140), which are incorporated herein by this
reference.
(6) To Registrant's Annual Report on Form 10-K for the year ended December 31,
1991 (Commission File No. 0-10140), which are incorporated herein by this
reference.
(7) To Registrant's Annual Report on Form 10-K for the year ended December 31,
1989 (Commission File No. 0-10140), which are incorporated herein by this
reference.
(8) To Registrant's Annual Report on Form 10-K for the year ended December 31,
1992 (Commission File No. 0-10140), which are incorporated herein by this
reference.
(9) To Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1994.
(10) To Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
<PAGE> 1
EXHIBIT 4.3
Exhibit A
[FORM OF WARRANT CERTIFICATE]
VOID AFTER 5:00 P.M., LOS ANGELES TIME,
ON MARCH 29, 1998
No. 1 2,019,006 Warrants
------- ---------------
BKLA BANCORP
WARRANTS TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, FOR VALUE RECEIVED, Investors Banking
Corporation, an Oregon bank holding company ("Investors Banking Corporation")
or its registered assigns, is the registered holder of the number of Warrants
(the "Warrants") set forth above. Each Warrant entitles the holder thereof to
purchase from BKLA Bancorp, a corporation incorporated under the laws of the
State of California (the "Company"), subject to the terms and conditions set
forth hereinafter and in the Warrant Agreement hereinafter referred to, one
fully paid and nonassessable share of Common Stock, no par value, of the
Company (the "Common Stock"). The Warrants may be exercised on or after March
29, 1995 at any time or from time to time and will expire at 5:00 P.M., Los
Angeles time, on March 29, 1998 (the "Expiration Date"). Upon the Expiration
Date, all rights evidenced by the Warrants shall cease and the Warrants shall
become void. Subject to the provisions of the Warrant Agreement, the holder of
each Warrant shall have the right to purchase from the Company until the
Expiration Date (and the Company shall issue and sell to such holder of a
Warrant) one fully paid and nonassessable share of Common Stock (a "Warrant
Share") at an exercise price (the "Exercise Price") of $.75 per share upon
surrender of this Warrant Certificate to the Company at the Company's offices
in West Hollywood with the form of election to purchase appearing on this
Warrant Certificate duly completed and signed, together with payment of the
Exercise Price by wire transfer or other immediately available funds.
The Exercise Price and the number of Warrant Shares for which
the Warrants are exercisable are subject to change or adjustment upon the
occurrence of certain events set forth in the Warrant Agreement.
REFERENCE IS MADE TO THE PROVISIONS OF THIS WARRANT
CERTIFICATE SET FORTH BELOW, AND SUCH FURTHER PROVISIONS SHALL
1
<PAGE> 2
FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF
THIS CERTIFICATE.
This Warrant shall be governed by and construed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be executed by its duly authorized officers.
<TABLE>
<S> <C>
DATED: BKLA BANCORP
--------------------------
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
ATTEST:
By
--------------------------------
</TABLE>
2
<PAGE> 3
This Warrant Certificate is subject to all of the terms and
conditions of the Warrant Agreement, dated as of March 29, 1995 (the "Warrant
Agreement"), between the Company and Investors Banking Corporation, to all of
which terms and conditions the registered holder of the Warrant consents by
acceptance hereof. The Warrant Agreement is incorporated herein by reference
and made a part hereof and reference is made to the Warrant Agreement for a
full description of the rights, limitations of rights, obligations, duties and
immunities of the Company and the registered holders of Warrant Certificates.
Copies of the Warrant Agreement are available for inspection at the offices of
the Company or may be obtained upon written request addressed to the Company at
its offices in Los Angeles, California.
The Company shall not be required upon the exercise of the
Warrants evidenced by this Warrant Certificate to issue fractional shares, but
shall make adjustment therefor in cash on the basis of the current market value
of any fractional interest as provided in the Warrant Agreement.
If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon
surrender hereof another Warrant Certificate or Certificates evidencing the
number of Warrants not so exercised.
The holder of this Warrant Certificate shall not, by virtue
hereof, be entitled to any of the rights of a stockholder in the Company,
either at law or in equity, and the rights of the holder are limited to those
expressed in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise
within any period during which the transfer books for the Company's Common
Stock are closed for any purpose, the Company shall not be required to make
delivery of certificates for shares purchasable upon such transfer until the
date of the reopening of said transfer books.
Every holder of this Warrant Certificate, by accepting the
same, consents and agrees with the Company and with every other holder of a
Warrant Certificate that:
(i) this Warrant Certificate is transferable on
the registry books of the Company only upon the terms and conditions set forth
in the Warrant Agreement and
(ii) the Company may deem and treat the person in
whose name this Warrant Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing hereon made by
anyone other than the Company) for all purposes whatever and the Company shall
not be affected by any notice to the contrary.
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ELECTION TO PURCHASE
Dated: _____________________, 19___
The undersigned hereby irrevocably exercises this Warrant to
purchase ___________ shares of Common Stock and herewith makes payment of
$_______________ in payment of the Exercise Price thereof on the terms and
conditions specified in this Warrant Certificate, surrenders this Warrant
Certificate and all right, title and interest herein to the Company and directs
that the Warrant Shares deliverable upon the exercise of such Warrants be
registered in the name and at the address specified below and delivered
thereto.
Name: _________________________________________________________________________
(Please Print)
Address: ______________________________________________________________________
City, State and Zip Code ______________________________________________________
If such number of Warrant Shares is less than the aggregate number of Warrant
Shares purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the balance of such Warrant Shares to be registered in
the name and at the address specified below and delivered thereto.
Name: _________________________________________________________________________
(Please Print)
Address: ______________________________________________________________________
City, State and Zip Code ______________________________________________________
Taxpayer Identification or Social Security Number ____________________________
Signature _____________________________
NOTE: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatsoever.
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EXHIBIT 10.18
AMENDMENT NO. 2 TO
STOCK PURCHASE AGREEMENT
BY AND AMONG
BKLA BANCORP,
BANK OF LOS ANGELES
AND
INVESTORS BANCORP
This Amendment No. 2 (the "Amendment") to the Stock Purchase
Agreement dated July 28, 1994 (the "Agreement") by and among BKLA Bancorp (the
"Company"), Bank of Los Angeles (the "Bank") and Investors Bancorp ("IBC")
(collectively, the "Parties"), is entered into as of December 31, 1994 by and
among the Parties. Capitalized terms not otherwise defined herein shall have
the meaning ascribed to such terms in the Agreement.
R E C I T A L S
WHEREAS, the Agreement, as previously amended, provides, among
other things, that the Agreement shall terminate if the Closing has not
occurred by December 31, 1994, unless mutually extended by the parties; and
WHEREAS, the Parties have decided to extend the term of the
Agreement as provided herein.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing and other
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the Parties hereby agree as follows:
1. Section 10.1(b) shall be amended to read in its
entirety as follows:
"This Agreement shall be terminated if the Closing
has not occurred by March 31, 1995, unless mutually
extended by the parties hereto."
2. This Amendment may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to each party hereto.
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IN WITNESS WHEREOF, the parties to this Amendment have duly
executed this Amendment as of the day and year first above written.
BKLA BANCORP
/s/ Paul G. Ling
---------------------------------------
President and Chief Executive Officer
BANK OF LOS ANGELES
/s/ Paul G. Ling
---------------------------------------
President and Chief Executive Officer
INVESTORS BANCORP
/s/ M.J. Burford
---------------------------------------
President and Chief Executive Officer
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EXHIBIT 10.19
WARRANT AGREEMENT
This WARRANT AGREEMENT, dated as of March 29, 1995, is made and entered into
by and among BKLA Bancorp, a California corporation (the "Company"), and
Investors Banking Corporation, an Oregon bank holding company ("IBC"), with
reference to the following facts:
WHEREAS, the Company, its wholly owned subsidiary, Bank of Los Angeles, a
California state-chartered bank (the "Bank"), and IBC, have entered into a
Stock Purchase Agreement dated July 28, 1994, as amended;
WHEREAS, pursuant to the terms of the Stock Purchase Agreement, the Company
shall sell to IBC a total of 2,019,006 units (collectively, "Units") consisting
of in the aggregate 4,038,012 shares (collectively, "Shares") of the Company's
authorized but unissued common stock, no par value ("Common Stock"), and
2,019,006 warrants to purchase shares of Common Stock;
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants, agreements and conditions contained
herein, and intending to be legally bound hereby, the parties hereto agree as
follows:
SECTION 1. CERTAIN DEFINITIONS.
For the purposes of this Agreement,
(a) "CLOSING PRICE" means the average of the closing bid and asked prices
of a share of Common Stock as reported by the Company's principal market maker.
(b) "COMMON STOCK EQUIVALENTS" means securities that are convertible into
or exercisable for shares of Common Stock.
(c) "EXERCISE PERIOD" means the period during which the Warrants may be
exercised.
(d) "EXERCISE PRICE" has the meaning specified in Section 4.1(b) hereof.
(e) "EXPIRATION DATE" has the meaning specified in Section 4.1(a) hereof.
(f) "WARRANTS" means this Warrant and all other Warrants issued pursuant
to the terms of the Stock Purchase Agreement.
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(g) "WARRANT CERTIFICATE" has the meaning specified in Section 2.1
hereof.
(h) "WARRANT SHARES" means the Common Stock and "WARRANT SHARE" means one
share of Common Stock purchased or purchasable upon exercise of the Warrants.
SECTION 2. FORM OF WARRANT CERTIFICATE; PURCHASE PRICE.
2.1 The certificates evidencing the Warrants (the "Warrant Certificates")
(and the forms of election to purchase Warrant Shares and of assignment to be
printed on the reverse thereof) shall be substantially in the form set forth in
Exhibit A hereto and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement or the Stock
Purchase Agreement, or as may be required to comply with any law or with any
rule or regulation made pursuant thereto.
2.2 Each Warrant shall entitle the holder thereof to purchase one (1)
Warrant Share upon the exercise thereof at the applicable Exercise Price
subject to adjustment as provided in Section 10 hereof during the time period
specified in Section 4 hereof and subject to the limitations specified in
Section 13 hereof; PROVIDED, HOWEVER, that the Warrants are exercisable only
for whole shares; cash will be paid in lieu of fractional shares in accordance
with Section 4.3. Each Warrant Certificate shall be executed on behalf of the
Company by the manual or facsimile signature of the present or any future
President or any authorized officer of the Company, under its corporate seal,
affixed or in facsimile, attested by the manual or facsimile signature of the
present or any future Secretary or Assistant Secretary of the Company.
Warrants shall be dated as of the date of their initial issuance.
SECTION 3. REGISTRATION AND COUNTERSIGNATURE.
Prior to due presentment for registration or transfer of the Warrant
Certificates, the Company may deem and treat the registered holder thereof as
the absolute owner of the Warrant Certificates (notwithstanding any notation of
ownership or other writing thereon made by anyone other than the Company), for
the purpose of any exercise thereof and for all other purposes, and the Company
shall not be affected by any notice to the contrary.
SECTION 4. DURATION AND EXERCISE OF WARRANTS.
4.1 (a) The Warrants may be exercised on or after March 29, 1995 at any
time or from time to time and will expire at 5:00 P.M., Los Angeles time, on
March 29, 1998 (the "Expiration Date"). On the Expiration Date, all rights
evidenced by the Warrants shall cease and the Warrants shall become void.
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<PAGE> 3
(b) Subject to the provisions of this Agreement, the registered holder
of each Warrant shall have the right to purchase from the Company (and the
Company shall issue and sell to such registered holder) the number of fully paid
and nonassessable Warrant Shares set forth on such holder's Warrant Certificate
(or such number of Warrant Shares as may result from adjustments made from time
to time as provided in this Agreement), at the price of $.75 per Warrant Share
in lawful money of the United States of America (such exercise price per Warrant
Share, as adjusted from time to time as provided herein, being referred to
herein as the "Exercise Price"), upon (i) surrender of the Warrant Certificate
to the Company at the Company's principal office in West Hollywood with the
exercise form on the reverse thereof duly completed and signed by the
registered holder or holders thereof, and (ii) payment by wire transfer or
other immediately available funds, in lawful money of the United States of
America, of the Exercise Price for the Warrant Shares in respect of which such
Warrant is then exercised. Upon surrender of the Warrant Certificate, and
payment of the Exercise Price as provided above, the Company shall issue and
cause to be delivered to or upon the written order of the registered holder of
such Warrants and in such name or names as such registered holder may
designate, a certificate or certificates for the number of Warrant Shares so
purchased upon the exercise of such Warrants, together with payment in respect
of any fraction of a Warrant Share issuable upon such surrender pursuant to
Section 4.3 hereof. Upon the exercise of any Warrant, the Company may require
the registered holder of any Warrant or the party or parties in whose name or
names the certificate or certificates for the Warrant Shares to be so purchased
upon exercise of such Warrant will be issued to make such representations, and
may place such legends on certificates representing the Warrant Shares, as may
be reasonably required in the opinion of counsel to the Company to permit the
Warrant Shares to be issued without registration under the Securities Act of
1933, as amended (the "Securities Act").
(c) Each person in whose name any certificate for Warrant Shares is
issued upon the exercise of Warrants shall for all purposes be deemed to have
become the holder of record of the Warrant Shares represented thereby, and such
certificate shall be dated the date upon which the Warrant Certificate
evidencing such Warrants was duly surrendered and payment of the Exercise Price
(and any applicable transfer taxes pursuant to Section 5 hereof) was made;
PROVIDED, HOWEVER, that if the date of such surrender and payment is a date
upon which the Common Stock transfer books of the Company are closed, such
person shall be deemed to have become the record holder of such Warrant Shares
on, and such certificate shall be dated, the next succeeding business day on
which the Common Stock transfer books of the Company are open.
4.2 In the event that less than all of the Warrants represented by a
Warrant Certificate are exercised on or prior to the Expiration Date, a new
Warrant Certificate, duly executed by the Company, will be issued for the
remaining number of Warrants exercisable pursuant to the Warrant Certificate so
surrendered, and the Company shall deliver the required new Warrant Certificate
pursuant to the provisions of this Section 4.
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<PAGE> 4
4.3 No fractional shares of Common Stock or scrip shall be issued to any
holder in connection with the exercise of a Warrant. Instead of any fractional
shares of Common Stock that would otherwise be issuable to such holder, the
Company will pay to such holder a cash adjustment in respect of such fractional
interest in an amount equal to that fractional interest of the then current
Closing Price per share of Common Stock.
4.4 The number of Warrant Shares to be received upon the exercise of a
Warrant and the price to be paid for a Warrant Share are subject to adjustment
from time to time as hereinafter set forth.
SECTION 5. PAYMENT OF TAXES.
The Company will pay all documentary stamp taxes attributable to the
original issuance of the Warrants and of the Warrant Shares issuable upon the
exercise of Warrants; PROVIDED, HOWEVER, that the Company shall not be required
to (a) pay any tax which may be payable in respect of any transfer involving
the transfer and delivery of Warrant Certificates or the issuance or delivery
of certificates for Warrant Shares in a name other than that of the registered
holder of the Warrant Certificate surrendered upon the exercise of a Warrant or
(b) issue or deliver any certificate for Warrant Shares upon the exercise of
any Warrants until any such tax required to be paid under clause (a) shall have
been paid, all such tax being payable by the holder of such Warrant at the time
of surrender.
SECTION 6. MUTILATED OR MISSING WARRANTS.
In case any of the Warrants shall be mutilated, lost, stolen or destroyed,
the Company may in its discretion issue and deliver in exchange and
substitution for and upon cancellation of, the mutilated Warrant Certificate,
or in substitution for the lost, stolen or destroyed Warrant Certificate, a new
Warrant Certificate of like tenor evidencing the number of Warrant Shares
purchasable upon exercise of the Warrant Certificate so mutilated, lost, stolen
or destroyed, but only upon receipt of evidence satisfactory to the Company of
such loss, theft or destruction of such Warrant Certificate and an indemnity,
if requested, reasonably satisfactory to it. Applicants for such substitute
Warrant Certificate shall also comply with such other reasonable regulations
and pay such other reasonable charges as the Company may prescribe. Any such
new Warrant Certificate shall constitute an original contractual obligation of
the Company, whether or not the allegedly lost, stolen, mutilated or destroyed
Warrant Certificate shall be at any time enforceable by anyone.
SECTION 7. RESERVATION OF WARRANT SHARES.
The Company shall at all times reserve for issuance and delivery upon
exercise of the Warrants, such number of Warrant Shares or other shares of
capital stock of the Company from time to time issuable upon exercise of the
Warrants. All such shares shall be duly authorized and, when issued upon such
exercise, shall be validly issued, fully paid and
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<PAGE> 5
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances and free and clear of all preemptive rights. After 5:00
P.M., Los Angeles time, on the Expiration Date, no shares of Common Stock shall
be subject to reservation in respect of such Warrants.
SECTION 8. RESTRICTIONS ON TRANSFER.
Neither the Warrants nor the Warrant Shares may be disposed of, transferred
or encumbered (any such action, a "Transfer"), except in accordance with and
subject to the provisions of the Securities Act and the rules and regulations
promulgated thereunder. At the time of a Transfer, the Company may request
prior to any proposed Transfer an opinion of counsel to the effect that such
Transfer is permissible under applicable law. The Company may also place such
legends on the Warrant Certificates as may be reasonably required in the
opinion of counsel to the Company to permit a Transfer without such
registration.
SECTION 9. RIGHTS OF WARRANT CERTIFICATE HOLDER.
The holder of any Warrant Certificate or Warrant shall not, by virtue
thereof, be entitled to any rights of a stockholder of the Company, either at
law or in equity, and the rights of the holder are limited to those expressed
in this Agreement.
SECTION 10. ANTIDILUTION PROVISIONS.
The Exercise Price and the number of Warrant Shares that may be purchased
upon the exercise of a Warrant and the number of Warrants outstanding will be
subject to change or adjustment as follows:
(a) STOCK DIVIDENDS AND STOCK SPLITS. If at any time after the date
of the issuance of the Warrants and before 5:00 P.M., Los Angeles time, on the
Expiration Date, (i) the Company shall fix a record date for the issuance of
any dividend payable in shares of its capital stock or (ii) the number of
shares of Common Stock shall have been increased by a subdivision or split-up
of shares of Common Stock, then, on the record date fixed for the determination
of holders of Common Stock entitled to receive such dividend or immediately
after the effective date of such subdivision or split-up, as the case may be,
the number of shares to be delivered upon exercise of any Warrant will be
appropriately increased so that each holder thereafter will be entitled to
receive the number of shares of Common Stock that such holder would have owned
immediately following such action had the Warrant been exercised immediately
prior thereto, and the Exercise Price will be appropriately adjusted. The time
of occurrence of an event giving rise to an adjustment made pursuant to this
Section 10(a) shall, in the case of a subdivision or split-up, be the effective
date thereof and shall, in the case of a stock dividend, be the record date
thereof.
(b) COMBINATION OF STOCK. If the number of shares of Common Stock
outstanding at any time after the date of the issuance of the Warrants and
before 5:00
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P.M., Los Angeles time, on the Expiration Date shall have been decreased by a
combination of the outstanding shares of Common Stock, then, immediately after
the effective date of such combination, the number of shares of Common Stock to
be delivered upon exercise of any Warrant will be appropriately decreased so
that each holder thereafter will be entitled to receive the number of shares of
Common Stock that such holder would have owned immediately following such
action had the Warrant been exercised immediately prior thereto, and the
Exercise Price will be appropriately adjusted.
(c) REORGANIZATION. If any capital reorganization of the Company, or
any reclassification of the Common Stock, or any consolidation of the Company
with or merger of the Company with or into any other corporation or any sale,
lease or other transfer of all or substantially all of the assets of the
Company to any other person (including any individual, partnership, joint
venture, corporation, trust or group thereof) shall be effected in such a way
that the holders of the Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then,
upon exercise of the Warrants in accordance with the terms of this Agreement
and the Warrant Certificate, each holder shall have the right to receive the
kind and amount of stock, securities or assets receivable upon such
reorganization, reclassification, consolidation, merger or sale, lease or
other transfer by a holder of the number of shares of Common Stock that such
Warrant holder would have been entitled to receive upon exercise of the
Warrants pursuant to Section 2 hereof had the Warrants been exercised
immediately prior to such reorganization, reclassification, consolidation,
merger or sale, lease or other transfer.
(d) SPECIAL DIVIDENDS. If (other than in a dissolution or
liquidation) securities of the Company (other than shares of Common Stock or
securities issued pursuant to any shareholder rights plan or any similar plan
of the Company) or assets (other than cash) are issued by way of a dividend on
outstanding shares of Common Stock, then the Exercise Price shall be adjusted
so that immediately after the date fixed by the Company as the record date in
respect of such issuance, it shall equal the price determined by multiplying
the Exercise Price in effect immediately prior to the close of business on the
record date for the determination of the shareholders entitled to receive such
dividend by a fraction, the numerator of which shall be the Closing Price on
such record date less the then fair market value of the portion of the
securities or assets distributed applicable to one share of Common Stock
determined by the Board of Directors of the Company, whose determination shall
be conclusive, and the denominator of which shall be such Closing Price. Such
adjustment shall become effective immediately prior to the opening of business
on the day following such record date.
(e) NO ADJUSTMENTS TO EXERCISE PRICE. No adjustment in the Exercise
Price in accordance with the provisions of paragraphs (a), (b), (c) or (d)
above need be made if such adjustment would amount to a change in such Exercise
Price of less than $.01; PROVIDED, HOWEVER, that the amount by which any
adjustment is not made by reason of the provisions of this section shall be
carried forward and taken into account at the time of any subsequent adjustment
in the Exercise Price.
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(f) READJUSTMENTS, ETC. If an adjustment is made under paragraph
(a), (b), (c) or (d) above, and the event to which the adjustment relates does
not occur, then any adjustments in the Exercise Price or Warrant Shares that
were made in accordance with such paragraphs shall be adjusted back to the
Exercise Price and the number of Warrant Shares that were in effect immediately
prior to the record date for such event.
(g) NO ADJUSTMENTS FOR CASH DIVIDENDS. There shall be no adjustment
in the Exercise Price as a result of any cash dividend paid in respect of the
Common Stock during the Exercise Period.
SECTION 11. OFFICER'S CERTIFICATE.
Whenever the number of Warrant Shares that may be purchased upon exercise of
the Warrants is adjusted as required by the provisions of this Agreement, the
Company will forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office an officer's certificate showing the adjusted
number of Warrant Shares that may be purchased upon exercise of the Warrants
and the adjusted Exercise Price (if any), determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment and the
manner of computing such adjustment. Each such officer's certificate shall be
made available at all reasonable times for inspection by the holder. The
Company shall, forthwith after each such adjustment, cause a copy of such
certificate to be mailed to the holder.
SECTION 12. LIMITATIONS ON EXERCISABILITY OF WARRANTS.
12.1 Notwithstanding anything to the contrary contained herein, the Company
may decline to issue any shares of Common Stock upon a requested exercise of
any Warrant if, in the Company's sole judgment and discretion, the holder
desiring to exercise such Warrant is required to obtain prior clearance,
approval or nondisapproval from any state or federal regulatory authority to
acquire such shares and has not, prior to the date of requested exercise,
provided evidence of such clearance, approval or nondisapproval to the Company.
12.2 Notwithstanding anything to the contrary contained herein, the Company
may limit the number of shares of Common Stock issuable upon the exercise of
any Warrant if necessary, in the Company's sole judgment and discretion, to
reduce the risk that certain tax benefits of the Company will be subject to
limitation under Section 382 of the Internal Revenue Code of 1986, as amended,
or the risk of any other adverse tax consequence to the Company at any time
after the date hereof. Such limitation will be applied to the minimum extent
necessary in the sole judgment and discretion of the Company to avoid any such
adverse effect.
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SECTION 13. AVAILABILITY OF INFORMATION.
The Company will comply with all applicable periodic public information
reporting requirements of the Securities and Exchange Commission to which it
may from time to time be subject.
SECTION 14. SUCCESSORS.
All covenants and provisions of this Agreement by or for the benefit of the
Company or the holders of the Warrants shall bind and inure to the benefit of
their respective successors, assigns, heirs and personal representatives.
SECTION 15. TERMINATION.
This Agreement shall terminate at 5:00 p.m., Los Angeles time, on the
Expiration Date or upon such earlier date on which all Warrants have been
exercised.
SECTION 16. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each of
such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same agreement.
SECTION 17. HEADINGS.
The headings of sections of this Agreement have been inserted for
convenience of reference only, are not to be considered a part hereof and shall
in no way modify or restrict any of the terms or provisions hereof.
SECTION 18. AMENDMENTS.
This Agreement may be amended by the written consent of the Company and the
affirmative vote or the written consent of the holders of not less than a
majority in interest of the then outstanding Warrants: PROVIDED, HOWEVER,
that, except as expressly provided herein, this Agreement may not be amended to
change (a) the Exercise Price, (b) the Exercise Period, (c) the number or type
of securities to be issued upon the exercise of the Warrants, or (d) the
provisions of this Section 19, without the consent of each holder of the
Warrants so affected.
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SECTION 19. NOTICES.
Any notice pursuant to this Agreement to be given by the registered holder
of any Warrant to the Company shall be sufficiently given if sent by
first-class mail, postage prepaid, addressed as follows:
BKLA Bancorp
8901 Santa Monica Boulevard
West Hollywood, CA 90069
Attention: President
SECTION 20. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any person or
corporation, other than the Company and the registered holders of the Warrant
Certificates, any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and exclusive benefit of
the Company and the registered holders of the Warrants.
SECTION 21. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the first date written above.
BKLA BANCORP
By:_/s/ Paul G. Ling____________
Name:___________________________
Title:__________________________
Investors Banking Corporation
By:_/s/_M.J. Burford____________
Name:___________________________
Title:__________________________
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Exhibit A
[FORM OF WARRANT CERTIFICATE]
VOID AFTER 5:00 P.M., LOS ANGELES TIME,
ON MARCH 29, 1998
No. 1 2,019,006 Warrants
------- ---------------
BKLA BANCORP
WARRANTS TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, FOR VALUE RECEIVED, Investors Banking Corporation, an
Oregon bank holding company ("Investors Banking Corporation") or its registered
assigns, is the registered holder of the number of Warrants (the "Warrants")
set forth above. Each Warrant entitles the holder thereof to purchase from
BKLA Bancorp, a corporation incorporated under the laws of the State of
California (the "Company"), subject to the terms and conditions set forth
hereinafter and in the Warrant Agreement hereinafter referred to, one fully
paid and nonassessable share of Common Stock, no par value, of the Company (the
"Common Stock"). The Warrants may be exercised on or after March 29, 1995 at
any time or from time to time and will expire at 5:00 P.M., Los Angeles time,
on March 29, 1998 (the "Expiration Date"). Upon the Expiration Date, all
rights evidenced by the Warrants shall cease and the Warrants shall become
void. Subject to the provisions of the Warrant Agreement, the holder of each
Warrant shall have the right to purchase from the Company until the Expiration
Date (and the Company shall issue and sell to such holder of a Warrant) one
fully paid and nonassessable share of Common Stock (a "Warrant Share") at an
exercise price (the "Exercise Price") of $.75 per share upon surrender of this
Warrant Certificate to the Company at the Company's offices in West Hollywood
with the form of election to purchase appearing on this Warrant Certificate
duly completed and signed, together with payment of the Exercise Price by wire
transfer or other immediately available funds.
The Exercise Price and the number of Warrant Shares for which the Warrants
are exercisable are subject to change or adjustment upon the occurrence of
certain events set forth in the Warrant Agreement.
REFERENCE IS MADE TO THE PROVISIONS OF THIS WARRANT CERTIFICATE SET FORTH
BELOW, AND SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT
AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS CERTIFICATE.
This Warrant shall be governed by and construed in accordance with the laws
of the State of California.
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IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
executed by its duly authorized officers.
<TABLE>
<S> <C>
DATED: __________________________ BKLA BANCORP
By ______________________________
Name: ___________________________
Title: __________________________
ATTEST:
By ______________________________
</TABLE>
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This Warrant Certificate is subject to all of the terms and conditions
of the Warrant Agreement, dated as of March 29, 1995 (the "Warrant Agreement"),
between the Company and Investors Banking Corporation, to all of which terms
and conditions the registered holder of the Warrant consents by acceptance
hereof. The Warrant Agreement is incorporated herein by reference and made a
part hereof and reference is made to the Warrant Agreement for a full
description of the rights, limitations of rights, obligations, duties and
immunities of the Company and the registered holders of Warrant Certificates.
Copies of the Warrant Agreement are available for inspection at the offices of
the Company or may be obtained upon written request addressed to the Company at
its offices in Los Angeles, California.
The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractional shares, but shall
make adjustment therefor in cash on the basis of the current market value of
any fractional interest as provided in the Warrant Agreement.
If the Warrants evidenced by this Warrant Certificate shall be exercised
in part, the holder hereof shall be entitled to receive upon surrender hereof
another Warrant Certificate or Certificates evidencing the number of Warrants
not so exercised.
The holder of this Warrant Certificate shall not, by virtue hereof, be
entitled to any of the rights of a stockholder in the Company, either at law or
in equity, and the rights of the holder are limited to those expressed in the
Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock are
closed for any purpose, the Company shall not be required to make delivery of
certificates for shares purchasable upon such transfer until the date of the
reopening of said transfer books.
Every holder of this Warrant Certificate, by accepting the same,
consents and agrees with the Company and with every other holder of a Warrant
Certificate that:
(a) this Warrant Certificate is transferable on the registry
books of the Company only upon the terms and conditions set forth in the
Warrant Agreement and
(b) the Company may deem and treat the person in whose name
this Warrant Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing hereon made by
anyone other than the Company) for all purposes whatever and the Company shall
not be affected by any notice to the contrary.
13
<PAGE> 14
ELECTION TO PURCHASE
Dated: _____________________, 19___
The undersigned hereby irrevocably exercises this Warrant to
purchase ___________ shares of Common Stock and herewith makes payment of
$_______________ in payment of the Exercise Price thereof on the terms and
conditions specified in this Warrant Certificate, surrenders this Warrant
Certificate and all right, title and interest herein to the Company and directs
that the Warrant Shares deliverable upon the exercise of such Warrants be
registered in the name and at the address specified below and delivered
thereto.
Name: _________________________________________________________________________
(Please Print)
Address: ______________________________________________________________________
City, State and Zip Code ______________________________________________________
If such number of Warrant Shares is less than the aggregate number of Warrant
Shares purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the balance of such Warrant Shares to be registered in
the name and at the address specified below and delivered thereto.
Name: _________________________________________________________________________
(Please Print)
Address: ______________________________________________________________________
City, State and Zip Code ______________________________________________________
Taxpayer Identification or Social Security Number ____________________________
Signature _______________________________
NOTE: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatsoever.
14
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-30974 of BKLA Bancorp (the "Company") on Form s-8 of our report dated
March 25, 1994 (april 11, 1994 as to Note B), which report includes an
explanatory paragraph relating to the uncertainty about the company's ability
to continue as a going concern, appearing in the Annual Report on Form 10-K of
BKLA Bancorp for the year ended December 31, 1993.
Deloitte & Touche LLP
Los Angeles, California
April 10, 1995
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 27, 1995 (except for the third, fourth
and ninth paragraphs of Note B and Note P, as to which the date is March 31,
1995), accompanying the consolidated financial statements of BKLA Bancorp and
Subsidiary included in the annual Report of BKLA Bancorp on Form 10-K for the
year ended December 31, 1994. We hereby consent to the incorporation by
reference of said report in the Registration Statement of BKLA Bancorp on
Form S-8 (File No. 33-30974).
/s/ Grant Thornton LLP
Los Angeles, California
January 27, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 5,177
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 14,821
<INVESTMENTS-MARKET> 15,781
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 80,507
<DEPOSITS> 74,471
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,219
<LONG-TERM> 0
<COMMON> 11,078
0
0
<OTHER-SE> (7,261)
<TOTAL-LIABILITIES-AND-EQUITY> 80,507
<INTEREST-LOAN> 4,087
<INTEREST-INVEST> 1,707
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,794
<INTEREST-DEPOSIT> 1,502
<INTEREST-EXPENSE> 1,758
<INTEREST-INCOME-NET> 4,036
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,171
<INCOME-PRETAX> (1,210)
<INCOME-PRE-EXTRAORDINARY> (1,212)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,212)
<EPS-PRIMARY> (0.97)
<EPS-DILUTED> (0.97)
<YIELD-ACTUAL> 7.20
<LOANS-NON> 838
<LOANS-PAST> 6
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,478
<CHARGE-OFFS> 1,301
<RECOVERIES> 456
<ALLOWANCE-CLOSE> 1,633
<ALLOWANCE-DOMESTIC> 1,633
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
