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 the transaction period from _____ to _____
For Quarter Ended March 31, 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 March 31, 1995
This Form 10-Q contains 23 pages.
Page 1
2
Index
-----
Part I -- Financial Information
Item 1 -- Consolidated Financial Statements
Consolidated Balance Sheets Page 3
Consolidated Statement of Operations Page 5
Consolidated Statement of Cash Flows Page 6
Note to Consolidated Financial Statements Page 8
Item 2 -- Management's Discussion and Analysis
Results of Operations Page 11
Capital Resources Page 16
Liquidity and Interest Rate Management Page 17
Regulatory Matters Page 19
Subsequent Events Page 20
Part II -- Other Information Page 22
Signature Page Page 23
Page 2
3
Part I, Item 1 -- Consolidated Financial Statements
BKLA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands) March 31, 1995 December 31, 1994
-------------- -----------------
ASSETS
- ------
Cash and due from banks $ 5,059 $ 5,177
Federal funds sold 3,700 3,000
-------- --------
Total cash and cash equivalents 8,759 8,177
Securities held to maturity (approximate market value of $12,848
and $14,687 in 1995 and 1994 respectively) 12,861 14,821
Securities held available for sale 15,466 15,781
Loans receivable, net of allowance for credit losses of $1,712
and $1,633 in 1995 and 1994 respectively 33,993 36,481
Accrued interest receivable 702 685
Premises and equipment, net 2,663 2,608
Real estate owned 512 --
Other assets 1,984 1,954
-------- --------
Total assets $ 76,940 $ 80,507
======== ========
Page 3
4
BKLA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in thousands) March 31, 1995 December 31, 1994
-------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 24,321 $ 25,128
Interest bearing:
Time certificates of deposit of $100,000 or more 6,083 7,422
Other 36,945 41,921
-------- --------
Total deposits 67,349 74,471
Obligation under capital lease 1,831 1,830
Accrued interest payable and other liabilities 406 389
-------- --------
Total liabilities 69,586 76,690
-------- --------
Shareholders' equity
Common stock, no par value; authorized, 10,000,000 shares:
issued and outstanding, 5,983,325 shares 14,517 11,078
Accumulated deficit (6,850) (6,788)
Unrealized loss on securities held available for sale (313) (473)
-------- --------
Total shareholders' equity 7,354 3,817
-------- --------
Total liabilities and shareholders' equity $ 76,940 $ 80,507
======== ========
Page 4
5
BKLA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Year Ended,
(dollars in thousands) March 31, 1995 March 31, 1994
--------------- --------------
Interest income:
Loans receivable $ 1,027 $ 1,025
Investment securities -- 311
Securities held to maturity 213 --
Securities available for sale 233 --
Federal funds sold 46 74
Deposits with financial institutions 1 --
----------- -----------
Total interest income 1,520 1,410
Interest expense:
Deposit accounts 316 354
Short-term borrowed funds 44 --
Capital lease obligation 64 64
----------- -----------
Total interest expense 424 418
----------- -----------
Net interest income 1,096 992
Provision for credit losses -- --
----------- -----------
Net interest income after provision for credit losses 1,096 992
Non-interest income:
Service charges and fees 174 287
Gain (loss) on sale of securities, net -- --
----------- -----------
Total non-interest income 174 287
Non-interest expense:
Employee compensation and benefits 643 687
Occupancy expense 242 295
Other expense 421 465
Goodwill amortization 26 26
Real estate owned -- 4
----------- -----------
Total non-interest expense 1,332 1,477
----------- -----------
Loss before taxes (62) (198)
Income tax expense -- --
----------- -----------
Net income $ (62) $ (198)
=========== ===========
Net loss per share of common stock $ (0.05) $ (0.16)
=========== ===========
Average shares outstanding 1,349,007 1,251,565
=========== ===========
Page 5
6
BKLA BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
(UNAUDITED)
(in thousands) March 31, 1995 December 31, 1994
-------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 1,533 $ 6,123
Fees received 174 923
Interest paid (509) (1,634)
Cash paid to suppliers and employees (1,151) (5,363)
Income taxes paid -- (2)
-------- ---------
Net cash provided (used) by operating activities 47 47
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and pay-downs of held to maturity securities 2,000 11,000
Proceeds from sale of held to maturity securities -- --
Purchases of held to maturity securities -- (16,740)
Proceeds from maturities and pay-downs of available for sale securities 393 2,764
Proceeds from sale of available for sale securities -- --
Purchases of available for sale securities -- --
Net decrease in loans receivable 1,976 11,802
Acquisition of premises and equipment (151) (310)
Proceeds for the sale of premises and equipment -- --
-------- ---------
Net cash provided (used) by investing activities 4,218 8,516
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 3,439 --
Net (decrease) increase in deposits (7,122) (16,917)
-------- ---------
Net cash provided (used) by financing activities (3,683) (16,917)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 582 (8,354)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,177 16,531
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,759 $ 8,177
======== =========
Page 6
7
BKLA BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
(UNAUDITED)
(in thousands) March 31, 1995 December 31, 1994
-------------- -----------------
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net loss: $ (62) $ (1,212)
Adjustments for non-cash items:
Depreciation and amortization of fixed assets, investments and goodwill 165 942
Provisions for loan losses -- --
(Decrease) increase in deferred loan origination fees, net (14) (34)
Net realized gains on available for sale securities -- --
Loss (gain) on disposal of premises and equipment -- 22
(Gain) loss or other real estate owned -- --
Decrease (increase) in accrued interest receivable (17) 22
Decrease in other assets (41) 176
Decrease (increase) in interest payable and other liabilities 16 131
------ --------
Net cash provided (used) by operating activities $ 47 $ 47
====== ========
Page 7
8
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
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.
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).
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 8
9
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 March 31, 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. 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 could 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.
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.
Page 9
10
Notes to Consolidated Financial Statements continued
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.
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 1,349,007
at March 31, 1995 and 1,251,565 at December 31, 1994. Due to the antidilutive
effect, stock options and warrants are not considered common stock equivalents
at March 31, 1995 and December 31, 1994.
Page 10
11
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. Summary
Net income changes -- The Company reported a net loss for the three months ended
March 31, 1995, of $62,000 as compared to a net loss of $198,000 for the three
months ended March 31, 1994. The loss per share for 1995 was $.05 as compared to
a loss per share of $.16 in 1994. No provision for credit losses was made for
the three months ended March 31, 1995 and for the three months ended March 31,
1994.
Net interest income for the period ended March 31, 1995, was $1,096,000, an
increase of $104,000 compared to net interest income for the period ended March
31, 1994, of $992,000. Net interest income increased due to rates by $309,000
and was substantially offset by $205,000 decline in net interest income due to
volume.
Non-interest income for the period ended March 31, 1995, was $174,000 a decrease
of $113,000 compared to $287,000 for the period ended March 31, 1994. In the
fourth quarter of 1994, the Bank discontinued its escrow operations. There were
no escrow fee income for the period ended March 31, 1995, compared to $26,000
for the period ended March 31, 1994. The additional decline of $87,000 in period
to period non-interest income was due to lower fee income from a declining
deposit base.
Non-interest expense for the period ended March 31, 1995, was $1,332,000, a
decrease of $145,000 compared to $1,477,000 for the period ended March 31, 1994.
The Bank is continuing efforts to reduce expense by the consolidation of the
administrative and customer service functions into the two branch buildings. The
administrative building lease at 8901 San Vicente, West Hollywood, was allowed
to expire in the fourth quarter of 1994. which resulted in $53,000 decrease in
occupancy expense for the period ended March 31, 1995. Employee compensation and
benefits was $643,000 for the period ended, March 31, 1995, a decrease of
$44,000 compared to $687,000 for the period ended March 31, 1994. Other
non-interest expense was $421,000 for the period ended March 31, 1995, a
decrease of $44,000 compared to $465,000 for the period ended March 31, 1994.
Balance sheet changes. -- 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 March 31, 1995, were $76,940,000 a decline of $3,567,000 from
total assets of $80,507,000 at December 31, 1994. Total deposits were
$67,349,000, a decline of $7,122,000 compared to total deposits of $74,471,000
at December 31, 1994.
Page 11
12
Management's Discussion and Analysis continued
The following table presents certain important ratios for the Company for the
periods indicated:
Period Ending
-------------
March 31, 1995 March 31, 1994
-------------- --------------
Average Net Average Average Net Average
Balance Income Rate Balance Income Rate
------- ------ ------- ------- ------ -------
Loss on average assets 78,705 (62) -0.3% 94,267 (198) -0.8%
Loss on average shareholders' equity 4,332 (62) -5.7% 5,142 (198) -15.4%
Average equity to average assets 5.5% 5.5%
2. Securities
The maturity distribution of investment securities at March 31, 1995, is as
follows:
Available for Sale Held to Maturity
------------------ ----------------
Amortized Estimated Carrying Estimated
(in thousands) Cost Fair Value Value Fair Value
---------- ---------- --------- ----------
Less than one year -- -- $ 7,939 $ 7,913
One to five years -- -- 4,922 4,935
Mortgage-backed securities 9,099 8,907 -- --
SBA securities 6,680 6,559 -- --
---------- ---------- --------- ----------
$ 15,779 $ 15,466 $ 12,861 $ 12,848
========== ========== ========= ==========
The amortized cost, carrying value and estimated fair value of investment
securities as of March 31, 1995, are as follows:
Amortized Estimated Gross Unrealized
----------------
Cost Fair Value Losses Gains
--------- ---------- ------ ------
Securities held to maturity:
U.S. Treasury securities $ 12,861 $ 12,848 $ 43 $ 30
Securities available for sale:
Securities of U.S. government
agencies and corporations 5,085 4,999 86 --
Mortgage backed securities 4,013 3,908 105 --
SBA securities 6,681 6,559 122 --
--------- ---------- ------ ------
$ 28,640 $ 28,314 $ 356 $ 30
========= ========== ====== ======
Page 12
13
Management's Discussion and Analysis continued
3. Loans Receivable
The components of loans in the consolidated balance sheets were as follows:
March 31, 1995 December 31, 1994
(dollars in thousands) Amount Percentage Amount Percentage
-------- ---------- -------- ----------
Commercial loans $ 8,867 24.7% $ 10,165 26.6%
Real estate loans:
Single family 1,943 5.4% 2,510 6.6%
Multi-family 408 1.1% 270 0.7%
Commercial 20,109 56.2% 20,457 53.5%
-------- --------
Total real estate loans 22,460 62.6% 23,237 60.8%
Consumer loans 4,500 12.6% 4,848 12.7%
-------- --------
Total loans $ 35,827 100.0% $ 38,250 100.0%
Less deferred loan origination fees (122) (137)
Less allowance for loan losses (1,712) (1,633)
-------- --------
Net loans $ 33,993 $ 36,480
======== ========
4. Commitments to extend credit and standby letters of credit.
Commitments to extend credit -- At March 31, 1995, the Bank had commitments to
extend credit of $6,001,000. 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 March 31, 1995, the Bank had $520,000 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 13
14
Management's Discussion and Analysis continued
5. Allowance for credit losses
An analysis of the change in the allowance for credit losses follows:
March 31, 1995 December 31, 1994
-------------- -----------------
Loans outstanding at end of period $ 35,827 $ 38,250
Average loans outstanding $ 37,280 $ 42,939
Allowance for credit losses at beginning of period $ 1,633 $ 2,478
Charge-offs:
Commercial 0 (907)
Real estate (32) (257)
Consumer (6) (137)
-------- --------
Total (38) (1,301)
Recoveries
Commercial 28 380
Real estate 85 44
Consumer 4 32
-------- --------
Total 117 456
-------- --------
Net loans charged-off 79 (845)
Provision charged to operations 0 0
Allowance for credit losses as of end of period $ 1,712 $ 1,633
======== ========
Ratio of net charge-offs to average loans outstanding 0.2% -2.0%
======== ========
Ratio of allowance for credit losses to loans
outstanding at end of period 4.7% 4.3%
======== ========
Page 14
15
Management's Discussion and Analysis continued
6. Non-performing assets
(in thousands) March 31, 1995 December 31, 1994
-------------- -----------------
Past due 30 through 89 days $ 171 $ 6
Loans on non-accrual 202 838
Total $ 373 $ 844
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 March 31, 1995
and December 31, 1994 in the amounts of approximately $1,662,000 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 March 31, 1995 and December 31,
1994, other assets also include approximately $71,000 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:
(in thousands) March 31, 1995 December 31, 1994
-------------- -----------------
Non-interest bearing demand $ 24,321 $ 25,128
Interest bearing demand 9,659 9,926
Money market 11,270 14,541
Savings 10,629 11,382
Time deposits under $100,000 5,387 6,072
Time deposits over $100,000 6,083 7,422
-------- --------
Total deposits $ 67,349 $ 74,471
The maturity of time deposits are as follows:
Time Deposits Time Deposits Total Time
(dollars in thousands) Under $100,000 Over $100,000 Deposits
-------------- ------------- ----------
Three months or less $ 2,484 $ 4,369 $ 6,853
Over three months through six months 1,353 1,009 2,362
Over six months through twelve months 1,345 705 2,050
Over twelve months 205 205
------- ------- --------
Total $ 5,387 $ 6,083 $ 11,470
Page 15
16
Management's Discussion and Analysis continued
9. Short term borrowings
In the first quarter of 1995 the Bank sold securities under an agreement to
repurchase those securities at a later date. On a quarterly average for the
period ended March 31, 1995, repurchase agreements were $2,753,000.
10. Income taxes
In 1995 and 1994 the Bank had no income tax expense or credits.
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 $2,300,000 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 Federal Deposit Insurance Corporation (the "FDIC") issued an Order to Cease
and Desist (the "Order") which became effective on March 20, 1994. The Order
requires, among other items (refer to "Management's Discussion and Analysis",
Section "Regulatory Matters"), that the Bank to adhere to capital standards
which include maintenance by the Bank of a ratio of total Tier 1 capital to
risk-weighted assets of 6.5%, and a leverage ratio of at least 6.5%. At March
31, 1995, the Bank had a Tier 1 capital to risk-weighted assets ratio
(unaudited) of 14.25%, and a leverage ratio (unaudited) of 7.42% At December 31,
1994, the Bank had 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. The FDIC issued a letter on May 8, 1995 stating that the Order had
achieved the desired effect of recapitalization. No further reporting under the
Order is required.
Page 16
17
Management's Discussion and Analysis continued
The FDIC issued a letter on May 5, 1995 stating that the Bank's capitalization
has improved sufficiently so that the bank is no longer subject to the Prompt
Corrective Action restrictions contained in Section 38 of the Federal Deposit
Insurance Act.
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%
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 March 31, 1995
Page 17
18
Management's Discussion and Analysis continued
0 - 1 2 - 30 31 - 181 - 1 YEAR OVER %
180 365 TO NON-INTEREST
(IN THOUSANDS) DAYS DAYS DAYS DAYS 5 YEARS 5 YEARS BEARING TOTAL ASSETS
---- ---- ---- ---- ------- ------- ------- ----- ------
ASSETS
Federal funds sold 3,700 3,700 4.8%
Time certificates 112 112 0.1%
Fixed rate securities 1,998 2,968 4,999 9,970 1,088 21,023 27.3%
Variable rate securities 3,019 3,541 744 7,304 9.5%
------- ------ ------ ------- ------- ------- ------ ------ -----
Investments 3,700 5,129 6,509 5,743 9,970 1,088 0 32,139 41.8%
Loans, variable 31,154 31,154 40.5%
Loans fixed 150 259 444 800 1,851 845 4,349 5.7%
------- ------ ------ ------- ------- ------- ------ ------ -----
Loans 31,304 259 444 800 1,851 845 0 35,503 46.1%
------- ------ ------ ------- ------- ------- ------ ------ -----
Total earning assets 35,004 5,388 6,953 6,543 11,821 1,933 0 67,642 87.9%
Other assets 9,298 9,298 12.1%
------- ------ ------ ------- ------- ------- ------ ------ -----
Total 35,004 5,388 6,953 6,543 11,821 1,933 9,298 76,940 100.0%
======= ====== ====== ======= ======= ======= ====== ====== =====
Liabilities and Equity
CDs $100,000 or more 0 2,401 2,978 704 6,083 7.9%
CDs less than $100,000 4 1,371 2,425 1,382 205 5,387 7.0%
Money Market 11,270 11,270 14.6%
NOW 9,147 9,147 11.9%
Super NOW 512 512 0.7%
Savings 10,629 10,629 13.8%
------- ------ ------ ------- ------- ------- ------ ------ -----
Total deposits 4 35,330 5,403 2,086 205 0 0 43,028 55.9%
======= ====== ====== ======= ======= ======= ====== ====== =====
Repurchase agreements 0 0.0%
Capital Lease 1,831 1,831 2.4%
Non-interest deposits 24,321 24,321 31.6%
Other liabilities and equity 7,760 7,760 10.1%
------- ------ ------ ------- ------- ------- ------ ------ -----
Total 4 35,330 5,403 2,086 205 1,831 32,081 76,940 100.0%
======= ====== ====== ======= ======= ======= ====== ====== =====
GAP (Assets less liabilities) (35,000) 29,942 (1,550) (4,457) (11,616) (102) 22,783 0
Cumulative Gap (35,000) (5,058) (6,608) (11,065) (22,681) (22,783) 0
Percent of Assets -45.5% -6.6% -8.6% -14.4% -29.5% -29.6%
Impact of .5% increase (a) 0 2 14 28 567
Cumulative Impact 0 2 16 44 611
a) This figures shown are based on the assumption that every asset and every
liability within the category change rate
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19
at the same time and that the new rate remains in effect throughout the time
period shown.
Management's Discussion and Analysis continued
D. REGULATORY MATTERS
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.
The FDIC issued a letter on May 8, 1995 stating that the Order had achieved the
desired effect of recapitalization. No further reporting under the Order is
required and the Order will be formally terminated in the near future.
Management believes that the FDIC will take formal action within the next thirty
days.
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.
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20
Management's Discussion and Analysis continued
The FDIC issued a letter on May 8, 1995 stating that the Bank's capitalization
has improved sufficiently so that the bank is no longer subject to the Prompt
Corrective Action restrictions contained in Section 38 of the Federal Deposit
Insurance Act.
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 "Section II -- Management's
Discussion and Analysis; Item C, Capital Resources", 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 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.
E. SUBSEQUENT 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. The precise form of the transaction will be determined mutually in
conjunction with the preparation of a definitive acquisition agreement and plan
of reorganization and will be subject to the terms and conditions. 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. Book value shall be
equal to book value as determined in accordance with generally accepted
accounting principles, applied on a basis consistent with
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21
Management's Discussion and Analysis continued
prior periods, on a fully diluted basis (including all outstanding warrants but
excluding all outstanding stock options), as of the date of the closing or the
immediately preceding month-end, as agreed upon by the parties. Book value shall
be adjusted by (i) a reduction of 50% of the total unrealized loss on its
investment securities portfolio as of the determination date, (ii) an increase
of 100% of the unrealized loss in the available for sale portion of the
securities portfolio, and (iii) an increase of the estimated aggregate amount of
recoveries subsequent to the closing on previously charged off loans. Additional
shares of common stock of Bancorp may be issuable to the WTB stockholders at the
end of a 24-month period commencing on the date of the closing based upon (i)
changes in the relative value of the investment securities portfolio of the
Bancorp and WTB based upon differences between market value and book value
thereof and (ii) actual recoveries on loans previously charged off prior to the
closing.
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22
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 22
23
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: May 9, 1995 _________________________________
M.J. Burford
Chairman of the Board and Chief Executive Officer
Date: May 9, 1995
_________________________________
Allen Partridge
Chief Financial Officer
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