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 September 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 5,987,125
-------------------------- ---------
Class Outstanding on September 30, 1995
This Form 10-Q contains 24 pages.
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MANAGEMENT'S DISCUSSION AND ANALYSIS AND FINANCIAL STATEMENTS
BANK OF LOS ANGELES
September 30, 1995 and 1994 (unaudited) and December 31, 1994
CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL STATEMENTS
BALANCE SHEET PAGE 15
STATEMENTS OF OPERATIONS PAGE 16
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY PAGE 17
STATEMENTS OF CASH FLOWS PAGE 18
NOTES TO FINANCIAL STATEMENTS PAGE 20
OTHER INFORMATION PAGE 23
SIGNATURES PAGE 24
3
Management's Discussion and Analysis
I. Overview
Net income for the nine months ended September 30, 1995 was $288,000
or $0.05 per share, as compared to a net loss of $787,000 or $0.63 per share
for the same period of 1994. Net income for the quarter ended September 30,
1995 was $284,000 or $0.04 per share, as compared to a net loss of $233,000 or
$0.19 per share for the same period of 1994.
Management's evaluation of the allowance for credit losses has
concluded that the allowance is in excess of what is required for identified
risks and for losses inherent in the portfolio. At September 30,1995 the
allowance for credit losses balance was $1,486,000; $523,000 was determined to
be in excess of required reserves. Recoveries made in 1995 for loans
charged-off in prior years have been added to the allowance with a
corresponding reduction to the allowance by crediting the provision for credit
losses $260,000 for the nine months and $78,000 for the quarter ended September
30,1995. No provision or credit to the provision for credit losses was made
during the nine months or quarter ended September 30, 1994. The ratio of
allowance for credit losses to loans outstanding was 3.7% at September 30,
1995.
Gain on sale of loans of $118,000 was realized during the quarter
ended September 30, 1995 and there was no gain or loss on sale of loans during
1994. Gain on sale is from one loan as a result in an increase in the value of
the real estate securing the loan. The Bank does not have available for sale
loans.
In March of 1995, Investors Banking Corp., a holding company, invested
$3,549,000 into BKLA Bancorp becoming the owner of approximately 79% of the
BKLA Bancorp. Effective October 23, 1995, BKLA Bancorp and the Bank of Los
Angeles were merged, with the Bank of Los Angles as the survivor. At the same
time, a one-for-five reverse stock split was made to increase the potential
market price to obtain a listing on NASDAQ.
On November 15, 1995 shareholders of Bank of Los Angeles and
shareholders of World Trade Bank (WTB) will vote to adopt and approve the
Agreement and Plan of Reorganization for the Bank of Los Angeles to acquire
WTB, with the Bank of Los Angels as the surviving institution. All of the
directors and executive officers and principal shareholders owning
approximately 85% of the Bank of Los Angeles and 94% of WTB have indicated that
they intend to vote their shares in favor of the Reorganization Agreement.
Accordingly, the Reorganization Agreement will be approved and adopted by more
than the vote legally required. WTB is a Beverly Hills based Bank with
approximate assets of $49 million.
Current shareholders have been offered the right to purchase 15 shares
of Bank of Los Angeles Common Stock and five Warrants at a subscription price
of $56.25 for every six shares owned as of record date. Each Warrant entitles
the holder to purchase one share of BKLA Common Stock at an $3.75 exercise
price. The rights offering expires November 30, 1995. Investors Banking Corp.
has agreed to be a standby purchaser for shares that are not purchased by
current shareholders. The proceeds of this Offering are estimated to be at a
minimum, approximately $1,952,000 and at a maximum, approximately $2,443,000.
Page 3
4
Management's Discussion and Analysis -- continued
II. Statistical Information
1. Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials
The following table shows BKLA's average balances of assets, liabilities and
stockholders' equity; the amount of interest income or interest expense; and
the average yield or rate for each category of interest-earning assets and
interest-bearing liabilities, the net interest spread and net interest yield
for the periods indicated:
Nine Month Period Ending September 30,
-----------------------------------------------------------------------
1995 1994
Average Interest Average Average Interest Average
Balance Earned/Paid Rate Balance Earned/Paid Rate
------- ----------- ---- ------- ----------- ----
Assets:
- -------
Interest earning assets:
Federal funds sold $ 4,796 $ 205 5.7% $ 10,360 $ 281 3.6%
------- ----- ---- -------- ----- ---
Deposits with financial institutions 24 1 5.6% -- -- --
Securities held to maturity 7,215 333 6.2% 8,457 264 4.2%
Securities available for sale 18,677 828 5.9% 17,964 644 4.8%
Loans 37,956 3,282 11.5% 44,571 3,073 9.2%
------- ------ ---- -------- ------ ---
Total interest earning assets 68,668 4,649 9.0% 81,352 4,262 7.0%
Nonearning assets:
Cash and due from banks 4,334 5,669
Other assets 5,596 5,434
Allowance for credit losses (1,676) (2,200)
------- --------
Total assets 76,922 90,255
======= ========
Liabilities and Shareholders' Equity:
- -------------------------------------
Interest bearing liabilities:
Demand, interest bearing 9,321 90 1.3% 14,664 143 1.3%
Money market 11,856 220 2.5% 16,212 278 2.3%
Savings (including IRAs) 9,491 227 3.2% 13,275 303 3.0%
Time certificates of deposits 12,960 442 4.5% 13,387 306 3.0%
------- ----- ---- -------- ----- ---
Total interest bearing deposits 43,628 979 3.0% 57,538 1,030 2.4%
Capital lease obligation 1,832 195 14.2% 1,828 192 14.0%
Securities sold under agreement to
repurchase 1,062 51 6.4% -- -- --
------- ----- ---- -------- ----- ---
Total interest bearing
liabilities 46,522 1,225 3.5% 59,366 1,222 2.7%
------- ----- ---- -------- ----- ---
Demand deposits, noninterest bearing 23,383 25,178
Other liabilities 1,104 765
Shareholders' equity 5,913 4,946
-------- --------
Total liabilities and
shareholders' equity $ 76,922 $ 90,255
======== ========
Net interest margin spread $ 3,424 5.5% $ 3,040 4.3%
======= ==== ======= ====
Net interest income earned as a
percentage of average earning
assets 5.9% 4.5%
==== ====
Management's Discussion and Analysis -- continued
Page 4
5
2. Investment Portfolio
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. BKLA adopted SFAS No. 115
effective January 1, 1994. Under this statement, investments will be
classified into three categories, as follows: Securities Held to Maturity --
debt securities that BKLA 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).
In March of 1995, Investors Banking Corp., a holding company, invested
$3,549,000 into Bank of Los Angeles becoming the owner of approximately 79% of
the Bank. The new management determined that the securities held to maturity
portfolio could restrict the Bank's ability to manage its interest rate risk
and profitability. As a result, the securities held to maturity portfolio was
reclassified to securities 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, market value was $9,965,313
with an unrealized gain of $70,000. The table below summarizes the maturities
of BKLA's available for sale portfolio and their weighted average yields at
September 30, 1995:
Available for Sale
----------------------------------
Amortized Estimated
($000s) Cost Fair Value Yield
--------- ---------- ------
In one year or less . . . . . . . . $ 6,993 $ 6,994 5.4%
After one year through five years . 4,935 4,987 7.5%
Mortgage-backed securities . . . . 3,763 3,726 6.5%
SBA securities . . . . . . . . . . 3,020 2,991 6.6%
-------- --------
$ 18,711 $ 18,698 6.4%
======== ========
The following table summarizes the maturities of BKLA's available for sale
portfolio and BKLA's held to maturity portfolio and their weighted average
yields at December 31, 1994.
Available for Sale Held to Maturity
--------------------------- --------------------------------------------
Amortized Estimated Carrying Estimated
($000s) Cost Fair Value Yield Value Fair Value Yield
------------ ------------ ----- ---------- ---------- -----
In one year or less . . . . . . . . . . . $ 2,055 $ 2,026 5.5% $ 7,944 $ 7,889 5.4%
After one year through five years . . . . 3,056 2,931 5.9% 6,877 6,778 6.6%
Mortgage-backed securities . . . . . . . 4,094 3,870 6.5% $ -- $ -- --
SBA securities . . . . . . . . . . . . . 7,049 6,954 5.5% -- -- --
------------ ------------ ---------- -----------
$ 16,254 $ 15,781 5.8% $ 14,821 $ 14,667 6.0%
============ ============ ========== ==========
Management's Discussion and Analysis -- continued
Page 5
6
2. Investment Portfolio -- continued
The following table presents gross unrealized losses and gains on the
investment portfolio at September 30, 1995 and December 31, 1994:
September 30, 1995 December 31, 1994
--------------------------------------- -----------------------------------------
Gross Gross
Estimated Unrealized Estimated Unrealized
Amortized Fair --------------- Amortized Fair -----------------
($000s) Cost Value Losses Gains Cost Value Losses Gains
--------- --------- ------ ------ --------- ---------- ------- ------
Securities held to maturity: . . $ -- $ -- $ -- $ -- $ 14,281 $ 14,667 $ 154 $ --
Securities available for sale:
Securities of U.S.
government agencies and
corporations . . . . . . . . . 11,928 11,981 13 65 5,111 4,957 154 --
Mortgage-backed securities. . . . 3,763 3,726 38 1 4,094 3,870 224 --
SBA securities . . . . . . . . . 3,020 2,991 33 5 7,049 6,954 95 --
---------- ------- ---- ---- -------- --------- ------- -----
$ 18,711 $18,698 $ 84 $ 71 $ 16,254 $ 15,781 $ 473 $ --
========== ======= ==== ==== ======== ========= ======= =====
The following is information relating to sales of debt securities at the end of
the periods indicated
Nine Months
Ended Year Ended
($000s) September 30, December 31,
1995 1994
------------- ------------
Proceeds from sale of securities . . . . . $ 4,623 $--
Gross realized losses . . . . . . . . . . . 33 --
Gross realized gains . . . . . . . . . . . -- --
Page 6
7
Management's Discussion and Analysis -- continued
3. Loan Portfolio
TYPES OF LOANS. Predominantly all of BKLA's loans, commitments, and commercial
and standby letters of credit have been granted to customers in BKLA's market
area. To comply with regulatory requirements, BKLA does not extend credit to
any single borrower or group of related borrowers in excess of 25% of capital
for secured credits and 15% of capital for unsecured credits. Capital is
defined as the total of the allowance for credit losses plus shareholders'
equity.
September 30, 1995 1994
------------------------- -------------------------
($000s) Amount Percentage Amount Percentage
----------- ---------- ------------ ----------
Commercial loans . . . . . . . . $ 10,206 25.5% $ 10,165 26.5%
Real estate loans:
Single family . . . . . . . . . 3,219 8.1% 2,510 6.6%
Multi-family . . . . . . . . . 1,196 3.0% 270 0.7%
Commercial . . . . . . . . . . 21,516 53.7% 20,457 53.5%
----------- ----- ------------ -----
Total real estate loans . . . . 25,931 64.8% 23,237 60.8%
Consumer loans . . . . . . . . . 3,876 9.7% 4,848 12.7%
----------- ----- ------------ -----
Total loans . . . . . . . . . . 40,013 100.0% $ 38,250 100.0%
Less deferred loan origination (143) ===== (136) =====
fees . . . . . . . . . . . . .
Less allowance for credit losses (1,486) (1,633)
----------- ------------
Net loans . . . . . . . . . . . . $ 38,384 $ 36,481
=========== ============
RISK ELEMENTS
BKLA places a loan on nonaccrual status if any of the following conditions
occur: deterioration in the financial condition of the borrower, payment in
full of principal or interest is not expected, or principal or interest has
been in default for a period of 90 days or more unless the asset is both well
secured and in the process of collection.
The following table presents loans past due 30 through 89 days and still
accruing, loans on nonaccrual and restructured loans for the periods indicated
December 31,
September 30, -------------------------
($000s) 1995 1994 1993
-------------- ----------- ------------
Past due 30 through 89 days . $ 200 $ 6 $ 209
Loans on nonaccrual . . . . . 23 838 3,619
Restructured loans . . . . . . -- -- --
------------- ----------- ------------
Total . . . . . . . . . . $ 223 $ 844 $ 3,828
============= =========== ============
Page 7
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Management's Discussion and Analysis -- continued
3. Loan Portfolio, Risk Elements -- continued
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 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:
September 30, December 31,
($000s) 1995 1994
----------------- ------------------
Doubtful loans . . . . . . . . . . $ 17 $ 13
Substandard . . . . . . . . . . . . 3,826 4,581
Special mentioned loans . . . . . . 2,374 3,157
------------------ ------------------
$ 6,217 $ 7,751
================== ==================
Classified and special mention
loans as a percentage of total
loans . . . . . . . . . . . . . . 15.6% 20.3%
4. Summary of Loan Loss Experience
ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES. BKLA's management believe that
the allowance for credit losses is maintained at a level adequate to absorb
probable losses. Management determines the adequacy of the allowance based
upon reviews of individual credits, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans and
other pertinent factors. Credits deemed uncollectible are charged to the
allowance. At September 30, 1995 $523,000 of the total $1,486,000 in allowance
for credit loss was not allocated to the loan portfolio, representing an
additional allowance above the identified required allowance. The ratio of
allowance for credit losses to loans outstanding at September 30, 1995 was
3.7%. Provisions for credit losses and recoveries on loans previously charged
off are added to the allowance.
Commercial and real estate loans are charged off when principal and
interest are past due and unpaid for six months, unless the loan is well
secured and in the process of collection or management determines that loan is
uncollectible and the charge off should be taken prior to the six month
delinquency period. Consumer loans are charged off when three or more
contractual payments have not been received unless management determines that
special circumstances require alternative treatment.
Management's Discussion and Analysis -- continued
Page 8
9
3. Loan Portfolio, Analysis of the Allowance for Credit Losses --
Continued
BKLA adopted SFAS No. 114, as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures"
("SFAS No. 114"). SFAS No. 114 requires that a creditor recognize impairment
of a loan if the present value of expected future cash flows discounted at the
loan's effective interest rate is less than the recorded investment in the
impaired loan. If the present value of expected future cash flows is equal to
or greater than the recorded investment in the impaired loan, no impairment is
recognized. If the measurement of the impaired loan is less than the recorded
investment in the loan, a creditor shall recognize an impairment by creating a
valuation allowance with a corresponding charge to bad-debt expense or by
adjusting an existing valuation allowance for the impaired loan with a
corresponding charge or credit to bad-debt expense. BKLA's adoption was
effective January 1, 1995 and did not materially impact the allowance for
credit losses and had no impact the provision for credit losses expense.
Impaired loan valuation analysis is independent of the specific and general
allowances for credit losses. The Bank identifies loans as impaired when one
of the following four conditions has occurred: 1) loan is maintained on a cash
basis because of deterioration in the financial condition of the borrower; 2)
full payment of principal and interest is not expected for the loan; 3)
principal or interest on loan has been in default for a period of 90 days or
more; and 4) management has determined that a loan is impaired from other
credit reviews of the loan. Loans are identified and evaluated individually.
Loans are not aggregated by similar risk and characteristics. At September 30,
1995, $23,000 of loans were identified as impaired for which no additions to
the allowance for credit losses were made. Average recorded investment in
these loans is $430,000 for the nine month period ended September 30, 1995.
Nine Months
Ended Years Ended
September 30, December 31,
($000s) 1995 1994
-------------- --------------
Loans outstanding at end of period . . . . . . . $ 39,870 $ 38,250
Average loans outstanding . . . . . . . . . . . $ 37,956 $ 42,939
Allowance for credit losses at beginning of period $ 1,633 $ 2,478
Charge-offs:
Commercial . . . . . . . . . . . . . . . . (96) (907)
Real estate . . . . . . . . . . . . . . . (32) (257)
Consumer . . . . . . . . . . . . . . . . . (19) (137)
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . (147) (1,301)
Recoveries:
Commercial . . . . . . . . . . . . . . . . 125 380
Real estate . . . . . . . . . . . . . . . 115 44
Consumer . . . . . . . . . . . . . . . . . 20 32
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . 260 456
---------- ---------
Net loans charged off . . . . . . . . . . . . . 113 (845)
Provision charged to operations . . . . . . . . (260) 0
Allowance for credit losses as of end of period $ 1,486 $ 1,633
========== =========
Ratio of net charge-offs to average loans (0.3)% 2.0%
outstanding . . . . . . . . . . . . . . . . . . ========== =========
Ratio of allowance for credit losses to loans
outstanding at the end of the period . . . . 3.7% 4.3%
========== =========
Page 9
10
Management's Discussion and Analysis -- continued
5. Deposits
DEPOSITS BY CATEGORY. Deposits have historically been the major source of
BKLA's funds for lending and investments. Noninterest-bearing demand deposits
payable immediately upon demand or are issued with an original maturity or
required notice period of less than seven days. On interest-bearing demand
deposits accounts BKLA has reserved the right to require at least seven days
written notice prior to withdrawal of any funds in that account. Money market
deposit accounts are interest-bearing and are limited to six transfers to third
parties. Savings deposits are interest-bearing and do not allow third-party
transfers. Time certificates of deposit have a minimum maturity of seven days
and are subject to early withdrawal penalties.
The following table presents information concerning total deposits outstanding
at the dates indicated.
September 30, December 31,
($000s) 1995 1994
----------------- ------------------
Demand, noninterest-bearing . . . . . . . . $ 23,579 $ 25,128
Demand, interest-bearing . . . . . . . . . . 10,252 9,926
Money market . . . . . . . . . . . . . . . . 12,474 14,541
Savings . . . . . . . . . . . . . . . . . . 8,120 11,382
Time certificates of deposit under $100,000 8,532 6,072
Time certificates of deposit $100,000 and
over . . . . . . . . . . . . . . . . . . . 7,465 7,422
----------------- ------------------
Total deposits . . . . . . . . . . . . . . $ 70,422 $ 74,471
================= ==================
DEPOSITS AVERAGE BALANCE AND RATE PAID. The following table presents
information for average deposits and the average rate paid on those
deposits for each of the periods indicated.
September 30, December 31,
---------------------- --------------------
($000s) 1995 % 1994 %
---------- ----- ---------- ----
Noninterest-bearing demand . . $ 23,383 0.0% $ 25,451 0.0%
Interest-bearing demand . . . 9,321 1.3% 13,910 1.3%
Money Market . . . . . . . . . 11,856 2.5% 16,313 2.3%
Savings . . . . . . . . . . . 9,491 3.2% 12,961 4.1%
Time certificates of deposit . 12,960 4.5% 12,868 3.2%
---------- ----- ---------- ----
Total deposits . . . . $ 67,011 1.9% $ 81,503 1.8%
========== ===== ========== ====
Page 10
11
Management's Discussion and Analysis -- continued
5. Deposits
TIME CERTIFICATES OF DEPOSIT MATURITIES. The following table presents the
maturity distribution of time certificates of deposit in categories of $100,000
and over and under $100,000 as of September 30, 1995.
Time Time
Certificates Certificates of Total Time
of Deposit Deposit $100,000 Certificates
($000s) Under $100,000 and Over of Deposit
-------------- ---------------- ------------
Three months or less . . . . . . . . . $ 4,288 $ 4,805 $ 9,093
Over three months through six months . 2,051 1,577 3,628
Over six months through twelve months 1,940 1,083 3,023
Over twelve months . . . . . . . . . . 253 -- 253
------------- ------------- -----------
Total . . . . . . . . . . . . . . . . $ 8,532 $ 7,465 $ 15,997
============= ============= ===========
6. Return on Equity and Assets
The following table presents certain important ratios from BKLA for the periods
indicated.
Nine Months
Ended Year Ended
September 30, December 31,
1995 1994
------------- ------------
Return on average assets . . . . . . . 0.5% (1.4)%
Return on average shareholders' equity 6.5% (26.0)%
Average equity to average assets . . . 7.7% 5.2%
7. Short-term Borrowings
The following table presents short-term borrowings outstanding and the maximum
month-end balance during the six-month period ended for September 30, 1995.
For the years 1994 and 1993 no agreements to repurchase securities were made.
September 30, 1995
----------------------------
Maximum
Month-end
($000s) Amount Balance of
Period
-------- -----------
Securities sold under an agreement to repurchase $ -- $ 4,000
Federal funds purchased . . . . . . . . . . . -- --
-------- -------
Total . . . . . . . . . . . . . . . . . . . . $ 0 $ 4,000
======== =======
Page 11
12
Management's Discussion and Analysis -- continued
7. Short-term Borrowings
The following table presents the average balance and average rate paid for
short-term borrowings for the nine-month period ended September 30, 1995. For
the year 1994 no agreements to repurchase securities were made.
September 30, 1995
----------------------
Average Average
($000s) Balance Rate Paid
---------- ---------
Securities sold under an agreement to repurchase $ 1,062 6.4%
Federal funds purchased . . . . . . . . . . . -- --
---------- ---
Total . . . . . . . . . . . . . . . . . . . . $ 1,062 6.4%
========== ===
III Capital Resources
Total stockholders' equity totaled $8,008,000 or $1.34 per share as of
September 30, 1995, and $3,817,000 or $3.05 per share as of December 31, 1994.
The following table reflects various measures of capital at September 30, 1995
and December 31, 1994.
FDIC
September 30, December 31, Minimum Regulatory
1995 1994 Capital Requirements
------------- ------------ --------------------
Tier 1 capital to total average
assets . . . . . . . . . . . . 7.7% 3.0% 4.0%
Tier 1 capital to total risk-
weighted assets . . . . . . . . 13.0% 6.0% 4.0%
Total capital to total risk-
weighted assets . . . . . . . . 14.3% 7.3% 8.0%
The FDIC on June 15, 1995 issued an order terminating BKLA's cease and
desist order issued March 10, 1994 (the "C&D Order") which had placed certain
restrictions on BKLA. The C&D Order was terminated on June 15, 1995
principally due to the successful completion of the first phase of the Capital
Infusion Transaction. In addition, the Federal Reserve Bank of San Francisco
on September 22, 1995 notified Bancorp that it was terminating its Memorandum
of Understanding entered into on April 11, 1995, which placed certain
restrictions on Bancorp and BKLA. On December 22, 1994, the Superintendent
delivered to BKLA an impairment order pursuant to California Financial Code
Section 662 because BKLA's accumulated deficit was greater than 40% of
"contributed capital." As of September 30, 1995, the capital impairment of BKLA
was cured as the net adjusted accumulated deficit was less that 40%.
Page 12
13
Management's Discussion and Analysis -- continued
IV. 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. BKLA does not have lines of credit with other financial
institutions. As a result, BKLA must rely on its own assets for liquidity.
Liquid assets are defined to include federal funds sold, interest-earning
deposits in other financial institutions, unpledged securities available for
sale and cash and due from banks. The loan-to-deposit ratio at September 30,
1995 was 57% and at year end 1994 was 51%.
To meet liquidity needs within one year, a portfolio of investment
securities is maintained. Anticipated liquidity needs from either decline in
deposits or growth in loans are met from the maturity of the investment
securities. The investment portfolio is also available for either sale or sale
under an agreement to repurchase for unexpected deposit declines or lending
opportunities.
For periods over a year the BKLA plans key indicators as follows; loans to
deposits ratio not to exceed 75%, investment to deposits not to fall below 15%,
federal funds sold to total assets not fall below 5%, and earning assets to
fall assets not to fall below 85%. Adherence to these ratios will allow the
Bank to provide the ability to fund asset growth, meet deposit withdrawals and
fund reserve requirements.
Additionally, the Bank plans improvement in the quality of its deposit base
to reduce liquidity risk. The Bank has not and will not have brokered
deposits. BKLA is working to meet the needs of the small depositor, retail
deposits, to maintain a high ratio of core deposits. Core deposits are defined
as the difference between total deposits and time certificates $100,000 and
over.
INTEREST RATE SENSITIVITY MANAGEMENT
BKLA 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. The Bank's goal is to match
interest variable assets to interest variable liabilities within one year. A
15% variance in either direction is considered to meet this goal. Additional
variances are monitored and correction changes made for material variances.
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 table is on the following page
Page 13
14
GAP Analysis
Non-
0 - 89 90-365 1 year to Over Interest %
(dollars in thousands) Days Days 5 years 5 years Bearing Total Assets
-------- -------- --------- ------- -------- -------- -------
ASSETS
Federal funds sold 12,850 -- -- -- -- 12,850 15.9%
Time certificates -- -- -- -- -- -- 0.0%
Fixed rate securities 3,992 3,089 6,999 1,001 -- 15,081 18.7%
Variable rate securities 1,195 1,796 626 -- -- 3,617 4.5%
--------- -------- ------- ------- ------ --------- -------
Investments 18,037 4,885 7,625 1,001 -- 31,548 39.0%
Loans, variable 35,034 35,034 43.4%
Loans fixed 682 428 2,450 1,253 -- 4,813 6.0%
Nonaccrual -- -- -- -- 23 23 0.0%
--------- -------- ------- ------- ------ --------- -------
Loans 35,716 428 2,450 1,253 23 39,870 49.4%
--------- -------- ------- ------- ------ --------- -------
Total earning assets 53,753 5,313 10,075 2,254 23 71,418 88.4%
--------- -------- ------- ------- ------ --------- -------
Other assets -- -- -- -- -- 9,371 11.6%
--------- -------- ------- ------- ------ --------- -------
Total 53,753 5,313 10,075 2,254 23 80,789 100.0%
========= ======== ======= ======= ====== ========= =======
LIABILITIES AND EQUITY
CDs $100,000 or more 4,805 2,660 -- -- -- 7,465 9.2%
CDs less than $100,000 4,288 3,991 253 -- -- 8,532 10.6%
Money Market 12,474 -- -- -- -- 12,474 15.4%
NOW 10,252 -- -- -- -- 10,252 12.7%
Savings 8,120 -- -- -- -- 8,120 10.1%
--------- -------- ------- ------- ------ --------- -------
Total deposits 39,939 6,651 253 -- -- 46,843 58.0%
Repurchase agreements -- -- -- -- -- -- --
Capital Lease -- -- -- 1,835 -- 1,835 2.3%
Non-interest bearing deposits -- -- -- -- 23,579 23,579 29.2%
Other liabilities and equity -- -- -- -- 8,532 8,532 10.6%
--------- -------- ------- ------- ------ --------- -------
Total 39,939 6,651 253 1,835 32,111 80,789 100.0%
========= ======== ======= ======= ====== ========= =======
GAP (Assets less liabilities) (13,814) 1,338 (9,822) (419) 32,088
Cumulative Gap (13,814) (12,476) (22,298) (22,717) 9,372
Percent of Assets (1) -17.1% -15.4% -27.6% -28.1% 11.6%
Impact of .5% increase (2) 17 47 446
Cumulative Impact of .5% increase 17 64 510
(1) The Bank's goal is to match interest variable assets to interest variable
liabilities within one year. A 15% variance in either direction is
considered to meet this goal.
(2) These figures shown are based on the assumption that every interest
variable asset and every interest variable liability within in the period
category will change rates at the same time and that the new rates will
remain in effect throughout the time period shown.
Page 14
15
BKLA BANCORP
BALANCE SHEET
At September 30, At December 31,
1995 1994
---------------- ---------------
(dollars in thousands except share data) Unaudited
Assets
- ------
Cash and due from banks $ 5,250 $ 5,177
Federal funds sold 12,850 3,000
------------- -------------
Total cash and cash equivalents 18,100 8,177
Securities held to maturity, at cost (approximate market value of -- 14,821
$14,667 in 1994)
Securities held available for sale 18,698 15,781
Loans receivable 39,870 38,114
Less allowance for credit losses 1,486 1,633
------------- -------------
Loans, net 38,384 36,481
Accrued interest receivable 542 685
Premises and equipment, net 2,570 2,608
Real estate owned 516 --
Other assets 1,978 1,954
------------- -------------
Total assets $ 80,788 $ 80,507
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities
Deposits
Demand, noninterest bearing $ 23,579 $ 25,128
Interest bearing
Time certificates of deposit of $100,000 or more 7,465 7,422
Other 39,378 41,921
------------- -------------
Total deposits 70,422 74,471
Capital lease obligation 1,835 1,830
Accrued interest payable and other liabilities 523 389
------------- -------------
Total liabilities 72,780 76,690
------------- -------------
Shareholders' equity
Preferred stock; 25,000,000 shares; no shares issued and -- --
outstanding
Common stock, no par value; authorized, 75,000,000 shares:
issued and outstanding, 5,987,125 shares at September 30, 1995
and 1,251,565 at December 31, 1994 14,521 11,078
Accumulated deficit (6,500) (6,788)
Net unrealized holding loss on securities available for sale (13) (473)
------------- -------------
Total shareholders' equity 8,008 3,817
------------- -------------
Total liabilities and shareholders' equity $ 80,788 $ 80,507
============= ============
The accompanying notes are an integral part of these statements.
Page 15
16
BKLA BANCORP
STATEMENTS OF OPERATIONS
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
(dollars in thousands except share data) Unaudited Unaudited Unaudited Unaudited
Interest income
Loans receivable $ 3,282 $ 3,073 $ 1,162 $ 1,019
Investment securities -- -- -- 346
Securities held to maturity 333 262 -- --
Securities available for sale 828 647 325 --
Federal funds sold 205 281 118 112
Deposits with financial institutions 1 -- -- --
Total interest income 4,649 4,263 1,605 1,477
------------ ------------- ------------- -------------
Interest expense
Deposit accounts 979 1,030 365 335
Short-term borrowed funds 51 -- -- --
Capital lease obligation 195 192 66 64
------------ ------------- ------------- -------------
Total interest expense 1,225 1,222 431 399
------------ ------------- ------------- -------------
Net interest income before provision
(credit) for credit losses 3,424 3,041 1,174 1,078
Provision (credit) for credit los ses (260) -- (78) --
------------ ------------- ------------- -------------
Net interest income after provision
(credit) for credit losses 3,684 3,040 1,252 1,078
Non-interest income
Service charges and fees 537 746 184 219
Gain (loss) on sale of securities, net (33) -- (32) --
Gain on sale of loans, net 118 -- 118 --
------------ ------------- ------------- -------------
Total non-interest income 622 746 270 219
Non-interest expense
Employee compensation and benefits 2,052 2,000 574 609
Occupancy 446 599 156 197
Furniture and equipment 237 313 67 99
Professional services 444 725 166 296
Other 837 936 275 327
------------ ------------- ------------- -------------
Total non-interest expense 4,016 4,572 1,238 1,528
------------ ------------- ------------- -------------
Income (loss) before income tax expense 290 (785) 284 (231)
Income tax expense 2 2 -- 2
------------ ------------- ------------- -------------
Net income (loss) $ 288 $ (787) $ 284 $ (233)
============ ============= ============= =============
Net income (loss) per common share $ 0.05 $ (0.63) $ 0.04 $ (0.19)
============ ============= ============= =============
Weighted average common shares outstanding 5,641,462 1,251,565 7,159,760 1,251,565
============ ============= ============= =============
The accompanying notes are an integral part of these statements.
Page 16
17
BKLA BANCORP
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994, AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
Net unrealized
Common Stock holding loss Total
------------------------- Accumulated on securities Shareholders'
Shares Amount Deficit available for sale Equity
--------- ------- ----------- ------------------ ------------
Balance, December 31, 1993 1,251,565 $11,078 $(5,576) $ -- $ 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
Net change in unrealized
loss on securities
available for sale -- -- -- 460 460
Issuance of common stock 4,735,560 3,443 -- -- 3,443
Net income -- -- 288 -- 288
--------- ------- ------- ------ -------
Balance, September 30, 1995
(Unaudited) 5,987,125 $14,521 $(6,500) $ (13) $ 8,008
========= ======= ======= ====== =======
The accompanying notes are an integral part of this statement.
Page 17
18
BKLA BANCORP
STATEMENTS OF CASH FLOWS
For the Nine
Months Ended For the Year
September 30, Ended December
1995 31, 1994
------------- --------------
(dollars in thousands) Unaudited
Cash flows from operating activities:
Interest received $ 4,921 $ 6,123
Fees and commissions received 537 923
Interest paid (1,262) (1,634)
Cash paid to suppliers and employees (3,632) (5,363)
Income taxes (paid) refunded (2) (2)
-------- --------
Net cash provided by (used in) operating activities 562 47
Cash flows from investing activities:
Proceeds from maturities and pay downs of
securities held to maturity 5,000 11,000
Purchases of securities held to maturity -- (16,740)
Proceeds from maturities and pay downs of
securities available for sale 3,780 2,764
Proceeds from sale of securities available for sale 4,623 --
Purchases of securities available for sale (976) --
Net (increase) decrease in loans receivable (2,272) 11,802
Acquisition of premises and equipment (190) (310)
Proceeds for the sale of premises and equipment
and other real estate owned 2 --
-------- --------
Net cash provided by investing activities 9,967 8,516
Cash flows from financing activities:
Proceeds from the issuance of common stock 3,443 --
Net decrease in deposits (4,049) (16,917)
-------- --------
Net cash used in financing activities (606) (16,917)
Net increase (decrease) in cash and cash 9,923 (8,354)
equivalents
Cash and cash equivalents, beginning of period 8,177 16,531
-------- --------
Cash and cash equivalents, end of period $ 18,100 $ 8,177
======== ========
The accompanying notes are an integral part of these statements.
Page 18
19
BKLA BANCORP
STATEMENTS OF CASH FLOWS
For the Nine
Months Ended
September 30, For the Year Ended
1995 December 31, 1994
------------- ------------------
(dollars in thousands) Unaudited
Reconciliation of net income (loss) to net cash
provided by operating activities:
Net income (loss) $ 288 $ (1,212)
Adjustments for noncash items:
Depreciation and amortization 432 942
Provisions (credit) for credit losses (260) --
(Decrease) increase in deferred loan
origination fees, net 6 (34)
Net realized losses (gains) on securities 33 --
Net realized (gains) on sale of loans (118) --
Loss on disposal of premises and equipment 4 22
(Gain) loss or other real estate owned -- --
Decrease (increase) in accrued interest
receivable 143 22
(Increase) decrease in other assets (100) 176
(Decrease) increase in interest payable and
other liabilities 134 131
----------- ----------
Net cash provided by (used in) by operating $ 562 $ 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 $ --
=========== ==========
The accompanying notes are an integral part of these statements.
Page 19
20
BKLA BANCORP
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND
YEAR ENDED DECEMBER 31, 1994,
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Presentation
On October 23, 1995, the Bank of Los Angeles (the "Bank") merged with its
parent corporation BKLA Bancorp ("BKLA"), effectively eliminating the bank
holding company. The financial statements include the accounts of BKLA Bancorp.
All intercompany accounts and transactions have been eliminated. The merger
resulted in one share of Bank stock being issued for very five shares of BKLA
Bancorp stock.
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" which 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 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 increase 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.
Page 20
21
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
3. Investment Securities, Continued
In March of 1995, Investors Banking Corp., a holding company, invested
$3,549,000 into Bank of Los Angeles becoming the owner of approximately 79% of
the Bank. The new management determined that the securities held to maturity
portfolio could restrict the Bank's ability to manage its interest rate risk
and profitability. As a result, the securities held to maturity portfolio was
reclassified to securities 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, market value was $9,965,313
with an unrealized gain of $70,000.
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.
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 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 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 is reported as a part of the
provision for credit losses in the income statement. The Bank adopted SFAS No.
114 as of January 1, 1995 with no material impact on the provision for credit
losses in the income statement.
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 September 30, 1995, and 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 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.
Page 21
22
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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.
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. Income and (loss) per Share
Income per share is computed on the basis of the weighted average number of
shares outstanding during the period, plus shares issuable upon the assumed
excercise of stock warrants and options outstanding as computed using the
"treasury stock" method. Under this method, weighted average number of shares
outstanding are computed assuming the stock options and warrants were exercised
at the beginning of the period and the proceeds obtained were used to purchase
outstanding common stock at the average market price during the period. The
method is limited to the lesser of shares to be purchased or 20% of outstanding
shares. Due to the antidilutive effect, stock options and warrants are not
considered common stock equivalents in computing loss per share at December 31,
1994, 1993 and 1992. The weighted average number of shares outstanding was
5,641,462 and ,251,565 for the nine months September 30, 1995 and 1994,
respectively and 1,251,565 for the year ended December 31, 1994.
Page 22
23
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 23
24
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: November 8, 1995 /s/ M.J. Buford
--------------------------------
M.J. Burford
Chairman of the Board and
Chief Executive Officer
Date: November 8, 1995 /s/ Mark W. Bidwell
--------------------------------
Mark W. Bidwell
Vice President Controller
Page 24