<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
( X ) Quarterly Report under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
( ) Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1995 Commission File #0-12851
BKLA BANCORP
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3840703
--------------------------- ---------------------------
(State or other jurisdiction) (IRS Employer Identification)
8901 Santa Monica Blvd., West Hollywood, California 90069
--------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(310) 550-8900
---------------------------------------------------
(Registrant's telephone number, including area code)
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
----- -----
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value 5,983,325
-------------------------- ----------------------------
Class Outstanding on June 30, 1995
This Form 10-Q contains 20 pages.
<PAGE> 2
Index
<TABLE>
<S> <C>
Part I -- Financial Information
Item 1 -- Consolidated Financial Statements
Consolidated Balance Sheets Page 3
Consolidated Statement of Operations Page 4
Consolidated Statement of Cash Flows Page 5
Note to Consolidated Financial Statements Page 7
Item 2 -- Management's Discussion and Analysis
Results of Operations Page 9
Capital Resources Page 14
Liquidity and Interest Rate Management Page 15
Regulatory Matters Page 17
Other Events Page 18
Part II -- Other Information Page 19
Signature Page Page 20
</TABLE>
Page 2
<PAGE> 3
PART I, ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
BKLA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------- -------
(dollars in thousands) Unaudited
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 4,044 $ 5,177
Federal funds sold 4,725 3,000
------- -------
Total cash and cash equivalents 8,769 8,177
Securities held to maturity -- 14,821
Securities held available for sale 22,671 15,781
Loans receivable 38,601 38,114
Less allowance for credit losses 1,498 1,633
------- -------
Loans, net 37,103 36,481
Accrued interest receivable 547 685
Premises and equipment, net 2,635 2,608
Real estate owned 516 --
Other assets 1,957 1,954
------- -------
Total assets $74,198 $80,507
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities
Deposits
Demand, non-interest bearing $22,737 $25,128
Interest bearing
Time certificates of deposit of $100,000 or more 5,726 7,422
Other 35,970 41,921
------- -------
Total deposits 64,433 74,471
Obligation under capital lease 1,832 1,830
Accrued interest payable and other liabilities 360 389
------- -------
Total liabilities 66,625 76,690
------- -------
Shareholders' equity
Preferred stock; 5,000,000 shares; no shares issued and outstanding -- --
Common stock, no par value; authorized, 10,000,000 shares issued and 14,517 11,078
5,983,325 shares outstanding
Accumulated deficit (6,784) (6,788)
Unrealized loss on securities held available for sale (160) (473)
------- -------
Total shareholders' equity 7,573 3,817
------- -------
Total liabilities and shareholders' equity $74,198 $80,507
======= =======
</TABLE>
The accompanying notes are an integral part of these statements
Page 3
<PAGE> 4
BKLA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
(dollars in thousands) 1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income
Loans receivable $ 1,093 $ 1,029 $ 2,120 $ 2,054
Investment securities -- 252 -- 563
Securities held to maturity 290 -- 503 --
Securities available for sale 100 -- 333 --
Federal funds sold 41 95 87 169
Deposits with financial institutions 0 -- 1 --
---------- ---------- ---------- ----------
Total interest income 1,524 1,376 3,044 2,786
Interest expense
Deposit accounts 298 342 614 696
Short-term borrowed funds 7 -- 51 --
Capital lease obligation 64 64 128 128
---------- ---------- ---------- ----------
Total interest expense 369 406 793 824
---------- ---------- ---------- ----------
Net interest income 1,155 970 2,251 1,962
Provision for credit losses (182) -- (182) --
---------- ---------- ---------- ----------
Net interest income after provision for credit losses 1,337 970 2,433 1,962
Non-interest income
Service charges and fees 179 241 353 528
Gain (loss) on sale of securities, net (1) -- (1) --
---------- ---------- ---------- ----------
Total non-interest income 178 241 352 528
Non-interest expense
Employee compensation and benefits 835 674 1,478 1,361
Occupancy expense 193 295 435 590
Other expense 390 565 811 1,030
Goodwill amortization 26 26 52 52
Real estate owned 3 6 3 10
---------- ---------- ---------- ----------
Total non-interest expense 1,447 1,566 2,779 3,043
---------- ---------- ---------- ----------
Income (loss) before taxes 68 (355) 6 (553)
Income tax expense 2 1 2 1
---------- ---------- ---------- ----------
Net income (loss) $ 66 $ (356) $ 4 $ (554)
========== ========== ========== ==========
Net income (loss) per share of common stock $ 0.01 $ (0.28) $ 0.00 $ (0.44)
========== ========== ========== ==========
Average shares outstanding 7,158,240 1,251,565 4,867,369 1,251,565
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
Page 4
<PAGE> 5
BKLA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------- ------------
(dollars in thousands) Unaudited
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 3,265 $ 6,123
Fees received 353 923
Interest paid (905) (1,634)
Cash paid to suppliers and employees (2,526) (5,363)
Income taxes paid (2) (2)
-------- --------
Net cash provided (used) by operating activities 185 47
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities -- --
Proceeds from sales of securities -- --
Securities purchased -- --
Proceeds from maturities and pay downs of held to maturity securities 5,000 --
Purchases of held to maturity securities -- --
Proceeds from maturities and pay downs of available for sale securities 1,131 2,764
Proceeds from sale of available for sale securities 2,033 (16,740)
Purchases of available for sale securities -- 11,000
Net decrease (increase) in loans receivable (461) 11,802
Net increase in real estate owned (516) --
Acquisition of premises and equipment (182) (310)
Proceeds for the sale of premises and equipment and other real estate owned 1 --
-------- --------
Net cash provided (used) by investing activities 7,006 8,516
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 3,439 --
Net (decrease) increase in deposits (10,038) (16,917)
-------- --------
Net cash provided (used) by financing activities (6,599) (16,917)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 592 (8,354)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,177 16,531
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,769 $ 8,177
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
Page 5
<PAGE> 6
BKLA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------- ------------
(dollars in thousands) Unaudited
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income (loss) $ 4 $(1,212)
Adjustments for non-cash items:
Depreciation and amortization of fixed assets, investments and goodwill 305 942
Provisions for loan losses (credit to provision expense) (182) --
(Decrease) increase in deferred loan origination fees, net -- (34)
Net realized (gains)/loss on available for sale securities 1 --
Loss (gain) on disposal of premises and equipment -- 22
(Gain) loss or other real estate owned -- --
Decrease (increase) in accrued interest receivable 138 22
Decrease (increase) in other assets (54) 176
Increase (decrease) in interest payable and other liabilities (27) 131
------ -------
Net cash provided (used) by operating activities $ 185 $ 47
====== =======
Supplemental disclosure of noncash transactions:
Transfer of loans to real estate owned through foreclosure and in-substance
foreclosure, net $ 516 $ --
------ -------
Transfer of securities from held to maturity to available for sale $9,885 $ --
====== =======
</TABLE>
The accompanying notes are an integral part of these statements
Page 6
<PAGE> 7
BKLA Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
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
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." 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. 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 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.
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 30, 1995, consisted of an infusion of
$3,438,000, through the purchase of 4,731,760 shares of the Company's common
stock. These shares are 79% of total shares outstanding. As a result in the
change of ownership of the Company and the Company's senior management, the new
management determined that the held to maturity portfolio would not meet the
Company's future objectives and reclassified the portfolio to available for
sale. The transfer from held to maturity to available for sale occurred on June
1, 1995 and the unamortized cost of the portfolio was $9,885,000.
4. Loans Receivable
Interest on loans is credited to income as earned and is accrued only if deemed
collectible. Non-refundable 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.
Page 7
<PAGE> 8
Notes to Consolidated Financial Statements continued
5. Allowance for Credit Losses
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 Restructuring." 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 for which foreclosure is probable must be measured at the fair value of
the collateral. The Bank has applied SFAS No. 114 as of January 1, 1995.
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 June 30, 1995, 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.
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.
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.
SFAS No. 109 "Accounting for Income Taxes" 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.
Page 8
<PAGE> 9
Notes to Consolidated Financial Statements continued
9. Earnings per Share
Gain per share is computed on the basis of the total average number of shares
outstanding, and warrants and options outstanding adjusted by the "treasury
stock" method. Under this method earnings per share data are computed as if the
options and warrants were exercised at the beginning of the period and as if
the funds obtained were used to purchase common stock at the average market
price during the period. The method is limited to the lessor of shares to be
purchased or 20% of outstanding average shares. 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. Due to the
antidilutive effect, stock options and warrants are not considered common stock
equivalents in computing loss per share at December 31, 1994. The weighted
average number of shares outstanding was 7,158,440 and 1,251,565 and 4,867,369
and 1,251,565 for the six months and three months ended June 30, 1995 and
1994, respectively.
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
A. RESULTS OF OPERATIONS
1. COMPARISONS
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.
The Company reported a net income for the six months ended June 30, 1995, of
$4,000 as compared to a net loss of $554,000 for the six months ended June 30,
1994. Income per share for 1995 was less than $.01 as compared to a loss per
share of $.44 in 1994.
Management's evaluation of the allowance for credit losses concluded that the
allowance was in excess of what is adequate to provide for losses inherent in
the loan portfolio. A reduction to the allowance for credit losses was made
resulting in a credit to the credit loss provision expense during the six
months ended June 30, 1995 for $182,000. No provision or credit to the
provision for credit losses expense was made during the six months ended June
30, 1994.
Net interest income before provision for credit losses for the six months ended
June 30, 1995, was $2,251,000, an increase of $289,000 compared to net interest
income for the period ended June 30, 1994, of $1,962,000. Net interest income
increased due to rates by $496,000 and was partially offset by $207,000 decline
in net interest income due to volume.
Non-interest income for the six month period ended June 30, 1995, was $353,000
a decrease of $175,000 compared to $528,000 for the six month period ended June
30, 1994. In the fourth quarter of 1994, the Bank discontinued its escrow
operations. There was no escrow fee income for the six month period ended June
30, 1995, compared to $75,000 for the period ended June 30, 1994. During the
six month period ended June 30, 1994 a recovery of $51,000 was recognized from
the settlement the lease obligation due to the closing of the Hollywood branch
in 1993. The additional decline of $49,000 in period to period non-interest
income was due to lower fee income from a declining deposit base.
Page 9
<PAGE> 10
Management's Discussion and Analysis continued
Non-interest expense for the six month period ended June 30, 1995, was
$2,779,000, a decrease of $264,000 compared to $3,043,000 for the six month
period ended June 30, 1994. Salary expense for the six month period ended June
30, 1995 was $1,478,000, an increase of $117,000 compared to $1,361,000 for the
six month period ended June 30, 1994. During the six month period ended June
30, 1995 additional salary expense of $174,000 was incurred for severance pay
for former senior management. Occupancy expense for the six month period ended
June 30, 1995 was $435,000, a decrease of $155,000 compared to $590,000 for the
six month period ended June 30, 1994. In the fourth quarter of 1994 the Bank
relocated administrative and customer service personnel to the two branch
buildings. As a result, the administrative building leased at 825 San Vicente,
West Hollywood, was allowed to expire, which resulted in $107,000 decrease in
occupancy expense for the six month period ended June 30, 1995. Other
non-interest expense was $811,000 for the six month period ended June 30, 1995,
a decrease of $219,000 compared to $1,030,000 for the period ended June 30,
1994. The decrease in other non-interest expense is due primarily to a $154,000
decrease in expenses incurred for legal, audit and consulting services.
Common stock increased $3,439,000 to $14,517,000 at March 31, 1995 due
Investors Banking Corporation investment in BKLA Bancorp. Total assets at
June 30, 1995, were $74,198,000 a decline of $6,309,000 from total assets of
$80,507,000 at December 31, 1994. Total deposits were $64,433,000, a decline of
10,038,000 compared to total deposits of $74,471,000 at December 31, 1994.
The following table presents certain important ratios for the Company for the
periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Gain/loss on average assets 0.0% -1.4%
Gain/loss on average shareholders' equity 0.1% -26.0%
Average equity to average assets 7.4% 5.2%
</TABLE>
2. SECURITIES
The maturity distribution of investment securities at June 30, 1995, is as
follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------------------- --------------------------------
Amortized Estimated Carrying Estimated
(dollars in thousands) Cost Fair Value Yield Value Fair Value Yield
--------- ---------- ----- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
In one year or less $ 6,993 $ 6,988 5.5% $ -- $ -- --
After one year through five years 5,936 6,000 7.0% -- -- --
After five years through ten years -- -- -- -- -- --
After ten years -- -- -- -- -- --
Mortgage-backed securities 3,850 3,766 6.5% -- -- --
SBA securities 6,052 5,917 6.5% -- -- --
------- ------- ----- -----
$22,831 $22,671 6.3% $ 0 $ 0 --
======= ======= ===== =====
</TABLE>
Page 10
<PAGE> 11
Management's Discussion and Analysis on Securities continued
The amortized cost, carrying value and estimated fair value of investment
securities as of June 30, 1995, are as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized Estimated -------------------
(dollars in thousands) Cost Fair Value Losses Gains
--------- ---------- ------ -----
<S> <C> <C> <C> <C>
Securities held to maturity:
None $ -- $ -- $ -- $ --
Securities available for sale:
Securities of U.S. government
agencies and corporations 12,929 12,987 21 78
Mortgage backed securities 3,850 3,766 82 --
SBA securities 6,052 5,917 135 --
------- ------- ---- ----
$22,831 $22,670 $238 $ 78
======= ======= ==== ====
</TABLE>
3. LOANS RECEIVABLE
The components of loans in the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
--------------------- ---------------------
(dollars in thousands) Amount Percentage Amount Percentage
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Commercial loans $ 9,391 24.2% $10,165 26.6%
Real estate loans:
Single family 2,502 6.5% 2,510 6.6%
Multi-family 1,442 3.7% 270 0.7%
Commercial 20,783 53.6% 20,457 53.5%
------- -------
Total real estate loans 24,727 63.8% 23,237 60.8%
Consumer loans 4,621 11.9% 4,849 12.7%
------- -------
Total loans $38,739 100.0% $38,251 100.0%
Less deferred loan origination fees (138) (137)
Less allowance for loan losses (1,498) (1,633)
------- -------
Net loans $37,103 $36,481
======= =======
</TABLE>
4. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
Commitments to extend credit -- At June 30, 1995, the Bank had commitments to
extend credit of $7,815,000. 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.
Standby letters of credit -- At June 30, 1995, the Bank had $521,000 in
financial standby letters of credit. Standby letters of credit are a
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party.
Page 11
<PAGE> 12
Management's Discussion and Analysis continued
5. ALLOWANCE FOR CREDIT LOSSES
An analysis of the change in the allowance for credit losses follows:
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Loans outstanding at end of period $38,601 $38,250
Average loans outstanding $37,428 $42,939
Allowance for credit losses at beginning of period $ 1,633 $ 2,478
Charge-offs:
Commercial (87) (907)
Real estate (32) (257)
Consumer (16) (137)
------- -------
Total (135) (1,301)
Recoveries
Commercial 75 380
Real estate 94 44
Consumer 13 32
------- -------
Total 182 456
Net loans charged-off 47 (845)
------- -------
Provision charged to operations (182) 0
Allowance for credit losses as of end of period $ 1,498 $ 1,633
======= =======
Ratio of net charge-offs to average loans outstanding 0.1% -2.0%
======= =======
Ratio of allowance for credit losses to loans outstanding at end of period 3.9% 4.3%
======= =======
</TABLE>
6. NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
(in thousands) June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Past due 30 through 89 days $ 2 $ 6
Loans on non-accrual 171 838
---- ----
Total $173 $844
==== ====
</TABLE>
Page 12
<PAGE> 13
Management's Discussion and Analysis continued
7. 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 June 30, 1995
and December 31, 1994 in the amounts of approximately $1,649,000 and
$1,675,000, respectively. The bargain lease element is being amortized on a
straight-line basis over a period of thirty-nine years. At June 30, 1995 and
December 31, 1994, other assets also include approximately $57,000 and $84,000,
respectively, relative to the acquisition of deposits 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.
8. DEPOSIT ACCOUNTS
The components of deposits in the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Non-interest bearing demand $22,737 $25,128
Interest bearing demand 9,194 9,926
Money market 10,201 14,541
Savings 8,845 11,382
Time deposits under $100,000 7,730 6,072
Time deposits over $100,000 5,726 7,422
------- -------
Total deposits $64,433 $74,471
======= =======
</TABLE>
The maturity of time deposits are as follows:
<TABLE>
<CAPTION>
Time Deposits Time Deposits Total Time
(dollars in thousands) Under $100,000 Over $100,000 Deposits
-------------- ------------- --------
<S> <C> <C> <C>
Three months or less $2,309 $2,870 $ 5,179
Over three months through six months 3,114 1,923 5,037
Over six months through twelve months 2,072 933 3,005
Over twelve months 235 -- 235
------ ------ -------
Total $7,730 $5,726 $13,456
====== ====== =======
</TABLE>
9. SHORT TERM BORROWINGS
During the six month period ended June 30, 1995 the Bank sold securities under
an agreement to repurchase those securities at a later date. No repurchase
agreements were entered into for the six month period ended June 30, 1994. On a
quarterly average repurchase agreements were $433,000 and $2,753,000 for the
six month period ended June 30, 1995 and the three month period ended March 31,
1995 respectively.
10. INCOME TAXES
In 1995 and 1994 the Bank had no income tax expense or credits.
Page 13
<PAGE> 14
Management's Discussion and Analysis continued
B. CAPITAL RESOURCES
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 $2,400,000 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%.
The FDIC on June 15, 1995 issued an order terminating its order cease and
desist which was issued March 10, 1994 which placed certain restrictions on the
Bank. The order was terminated June 15, 1995 due to the completion of the first
phase of the Transaction. The Federal Reserve Bank of San Francisco on June
22,1995 notified the Company that it was terminating its Memorandum of
understanding entered into on April 11, 1995, which placed certain restrictions
on the Company. On December 22, 1994, the Superintendent delivered to the Bank
an impairment order pursuant to California Financial Code Section 662. The
Bank was impaired because its accumulated deficit was greater than 40% of
"Contributed Capital". As of June 30, 1995, the impairment was cured as the
accumulated deficit was less that 40%.
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:
<TABLE>
<S> <C>
"Well capitalized" "Adequately capitalized"
---------------- ----------------------
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"
---------------- ------------------------------
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.
Page 14
<PAGE> 15
Management's Discussion and Analysis on Capital Resources continued
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 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 following table presents the Bank's capital ratios for the periods
indicated.
<TABLE>
<CAPTION>
FDIC Minimum
December 31, Regulatory
June 30, ----------------- Capital
1995 1994 1993 Requirements
-------- ------ ------ ------------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital 14.0% 6.0% 6.5% 4.0%
Total risk-based capital 15.3% 7.3% 7.8% 8.0%
Leverage capital 8.0% 3.0% 3.6% 4.0%
</TABLE>
C. LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
1. Liquidity
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 50.1% at March 31, 1995 and 47.1% as of year end 1994. The
loan-to-deposit ratio at March 31, 1995 was 53.0% and at year end 1994 was
51.4%.
Page 15
<PAGE> 16
Management's Discussion and Analysis continued
2. Interest Rate Sensitivity Management
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.
The following table is a gap analysis for the Company as of June 30, 1995:
<TABLE>
<CAPTION>
0 - 1 2 - 30 31 - 180 181 - 365 1 YEAR TO OVER NON-INTEREST
(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 4,725 4,725
Time certificates 0
Fixed rate securities 996 4,010 2,067 8,001 1,008 16,082
Variable rate securities 2,774 3,144 671 6,589
------ ------ ------ ------ ------ ------ ------ ------
Investments 4,725 3,770 7,154 2,738 8,001 1,008 0 27,396
Loans, variable 34,128 34,128
Loans fixed 141 82 483 889 1,892 815 4,302
Nonaccruals 171 171
------ ------ ------ ------ ------ ------ ------ ------
Loans 34,269 82 483 889 1,892 815 171 38,601
------ ------ ------ ------ ------ ------ ------ ------
Total earning assets 38,994 3,852 7,637 3,627 9,893 1,823 171 65,997
====== ====== ====== ====== ====== ====== ====== ======
Other assets 8,201 8,201
------ ------ ------ ------ ------ ------ ------ ------
Total 38,994 3,852 7,637 3,627 9,893 1,823 8,372 74,198
====== ====== ====== ====== ====== ====== ====== ======
Liabilities and Equity
CDS $100,000 or more 1,736 3,057 933 5,726
CDS less than $100,000 1,205 4,122 2,168 235 7,730
Money Market 10,042 10,042
NOW 8,548 8,548
Public 803 803
Savings 8,845 8,845
------ ------ ------ ------ ------ ------ ------ ------
Total deposits 0 31,179 7,179 3,101 235 0 0 41,694
Repurchase agreements 0
Capital Lease 1,832 1,832
Non-interest deposits 22,737 22,737
Other liabilities and equity 7,935 7,935
------ ------ ------ ------ ------ ------ ------ ------
Total 0 31,179 7,179 3,101 235 1,832 30,672 74,198
====== ====== ====== ====== ====== ====== ====== ======
GAP (Assets less liabilities) (38,994) 27,327 (458) (526) (9,658) 9 22,300 0
Cumulative Gap (38,994) (11,667) (12,125) (12,651) (22,309) (22,300) 0
Percent of Assets -52.6% -15.7% -16.3% -17.1% -30.1% -30.1%
Impact of .5% increase 1 5 25 32 558
Cumulative Impact 1 5 30 62 620
</TABLE>
Page 16
<PAGE> 17
Management's Discussion and Analysis continued
D. REGULATORY MATTERS
Bank of Los Angeles (the "Bank") is wholly-owned by BKLA Bancorp (the
"Company"). The Company does not have any additional investments in banks or
nonbank corporations. 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 Company is required by the
Federal Reserve Board to maintain certain levels of capital.
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 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 has made an application to the Federal Deposit Insurance Corporation
to merge with the Company with the surviving entity being the Bank.
Shareholders of the Company would exchange Company shares for shares of the
Bank. The Company and the Bank are essentially one entity that have duplicated
regulatory reporting requirements to the FDIC and the Federal Reserve Board.
The proposed merger would reduce the costs of duplicated reporting.
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 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.
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. Although the Bank is not a member of the Federal Reserve
System, it is nevertheless subject to certain regulations of the Federal
Reserve Board.
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. See Part I, Item 2 -- B. Capital Resources.
Page 17
<PAGE> 18
Management's Discussion and Analysis continued
E. OTHER EVENTS
On April 24, 1995, the Bancorp signed a letter of intent to merge World Trade
Bank N.A. ("WTB") into the Bank. WTB's total assets are approximately
$50,000,000. A definitive agreement to merge was signed June 30, 1995. The
proposed acquisition is conditioned upon the receipt of all necessary
governmental approvals, including without limitation, all required approvals of
the California Superintendent of Banks, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency and Board of
Governors of the Federal Reserve System.
Upon consummation of the proposed acquisition, each share of common stock of
WTB will be converted into a right to receive a certain number of shares of
common stock of the Bancorp. The number of shares of Bancorp common stock
issuable to each WTB shareholder will be determined in accordance with an
exchange ratio based upon the relationship between the adjusted book value per
share of common stock of both the Bancorp and WTB at the time of closing
Page 18
<PAGE> 19
PART II -- OTHER INFORMATION
Item 2: Changes in securities
None
Item 3: Defaults upon senior securities
None
Item 4: Submission of matters to a vote of security holders
None
Item 5: Other information not previously reported on form 8-K
None
Item 6: Exhibits and reports on form 8-K
a. Exhibits
None
b. Reports on Form 8-K.
April 13, 1995 -- Changes in Control of Registrant
April 27, 1995 -- Resignation of a Registrant's Director
Page 19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BKLA BANCORP
Date: July 19, 1995 /s/ M.J. Burford
---------------------------------
M.J. Burford
Chairman of the Board and Chief
Executive Officer
Date: July 19, 1995 /s/ Mark W. Bidwell
---------------------------------
Mark W. Bidwell
Vice President Controller
Page 20
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 4,044
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,725
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,671
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 38,601
<ALLOWANCE> 1,498
<TOTAL-ASSETS> 78,923
<DEPOSITS> 64,433
<SHORT-TERM> 0
<LIABILITIES-OTHER> 531
<LONG-TERM> 0
<COMMON> 7,708
0
0
<OTHER-SE> 3,512
<TOTAL-LIABILITIES-AND-EQUITY> 4,725
<INTEREST-LOAN> 1,093
<INTEREST-INVEST> 390
<INTEREST-OTHER> 41
<INTEREST-TOTAL> 1,524
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 369
<INTEREST-INCOME-NET> 1,155
<LOAN-LOSSES> (182)
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 1,447
<INCOME-PRETAX> 68
<INCOME-PRE-EXTRAORDINARY> 68
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<YIELD-ACTUAL> 9.03
<LOANS-NON> 171
<LOANS-PAST> 2
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,633
<CHARGE-OFFS> 135
<RECOVERIES> 182
<ALLOWANCE-CLOSE> 1,498
<ALLOWANCE-DOMESTIC> 1,498
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
