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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER: 000-24215
PBOC HOLDINGS, INC.
DELAWARE 33-0220233
- ------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
5900 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
(323) 938-6300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) 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 / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest possible date:
CLASS SHARES OUTSTANDING AT NOVEMBER 4, 1999
----- ---------------------------------------
Common Stock, $.01 par value 20,423,705
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PBOC HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition - September 30, 1999
and December 31, 1998......................................................................... 3
Consolidated Statements of Operations - Three and nine months ended
September 30, 1999 and 1998................................................................... 4
Consolidated Statements of Comprehensive Loss - Three and nine months ended
September 30, 1999 and 1998................................................................... 5
Consolidated Statements of Cash Flows - Nine months ended September 30, 1999
and 1998...................................................................................... 6
Notes to Consolidated Financial Statements.................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................................ 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 20
PART II -- OTHER INFORMATION
----------------------------
ITEMS 1-5 NOT APPLICABLE................................................................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES....................................................................................... 21
2
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
1999 1998
-------------------- -------------------
ASSETS
------
Cash and cash equivalents................................................ $ 19,461 $ 22,401
Federal funds sold....................................................... -- 24,000
Securities available-for-sale, at estimated market values................ 992,352 1,004,937
Mortgage-backed securities held-to-maturity, market values $4,337 at
September 30, 1999 and $6,372 at December 31, 1998.................... 4,345 6,282
Loans receivable, net.................................................... 2,431,513 2,148,857
Real estate and other repossessed assets held for sale, net.............. 1,932 2,723
Premises and equipment, net.............................................. 6,859 7,212
Federal Home Loan Bank stock, at cost.................................... 65,678 63,150
Accrued interest receivable.............................................. 19,103 17,607
Other assets............................................................. 44,058 37,858
-------------------- -------------------
Total assets........................................................ $3,585,301 $3,335,027
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits................................................................. $1,691,116 $1,542,162
Securities sold under agreements to repurchase........................... 428,901 364,000
Advances from Federal Home Loan Bank..................................... 1,245,000 1,198,000
Accrued expenses and other liabilities................................... 22,109 17,009
-------------------- -------------------
Total liabilities..................................................... 3,387,126 3,121,171
-------------------- -------------------
Minority interest........................................................ 33,250 33,250
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 25,000,000 shares:
none issued and outstanding....................................... -- --
Common stock, par value $.01 per share. Authorized
75,000,000 shares; issued 21,876,205 shares; and
outstanding 20,423,705 and 21,041,205 shares........................ 219 219
Treasury stock, at cost (1,452,500 shares and 835,000 shares)......... (14,460) (8,308)
Additional paid-in capital............................................ 259,207 259,207
Accumulated other comprehensive loss.................................. (45,276) (14,025)
Accumulated deficit................................................... (34,765) (56,487)
-------------------- -------------------
Total stockholders' equity...................................... 164,925 180,606
-------------------- -------------------
Total liabilities and stockholders' equity...................... $3,585,301 $3,335,027
==================== ===================
See accompanying notes to consolidated financial statements.
3
PBOC HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------------------------------
1999 1998 1999 1998
------------------- --------------- ------------- ---------------
Interest, fees and dividend income:
Short term investments................................. $ 194 $ 437 $ 853 $ 1,513
Securities purchased under agreements to resell........ -- -- 396 519
Investment securities.................................. 6,064 6,794 17,894 12,019
Mortgage-backed securities............................. 9,387 8,368 26,219 22,902
Loans receivable....................................... 43,056 35,596 121,278 89,511
Federal Home Loan Bank stock........................... 857 784 2,494 1,608
------------------- -------------- --------------- ---------------
Total interest, fees and dividend income.......... 59,558 51,979 169,134 128,072
------------------- -------------- --------------- ---------------
Interest expense:
Deposits............................................... 18,189 18,273 53,867 51,909
Advances from the Federal Home Loan Bank............... 17,031 14,937 49,468 31,324
Securities sold under agreements to repurchase......... 6,382 7,385 16,957 16,365
Senior debt ........................................... -- -- -- 445
Hedging costs, net..................................... 32 52 113 162
------------------- -------------- --------------- ---------------
Total interest expense............................ 41,634 40,647 120,405 100,205
------------------- -------------- --------------- ---------------
Net interest income....................................... 17,924 11,332 48,729 27,867
Provision for loan losses.............................. 1,200 450 3,300 1,350
------------------- -------------- --------------- ---------------
Net interest income after provision for loan losses 16,724 10,882 45,429 26,517
------------------- -------------- --------------- ---------------
Other income:
Loan service and loan related fees..................... 116 76 183 101
Gain on mortgage-backed securities sales, net.......... 3 937 200 1,260
Gain on loan sales, net.............................. -- 574 49 574
Income (loss) from real estate operations, net ........ 418 (312) 533 1,473
Other income........................................... 579 563 1,799 1,699
------------------- -------------- --------------- ---------------
Total other income................................ 1,116 1,838 2,764 5,107
Operating expenses:
Personnel and benefits................................. 3,994 2,982 11,702 19,883
Occupancy.............................................. 2,651 2,102 7,203 6,133
FDIC insurance......................................... 368 296 1,041 7,011
Professional services.................................. 280 212 964 705
Office related expenses................................ 1,431 1,046 3,835 3,084
Other ............................................... 1,299 361 2,619 1,153
------------------- -------------- --------------- ---------------
Total operating expenses.......................... 10,023 6,999 27,364 37,969
------------------- -------------- --------------- ---------------
Earnings before income taxes and minority interest........ 7,817 5,721 20,829 (6,345)
Income tax (benefit) ..................................... (1,500) -- (3,500) (9,390)
------------------- -------------- --------------- ---------------
Earnings before minority interest......................... 9,317 5,721 24,329 3,045
Minority interest......................................... 869 869 2,607 2,607
------------------- -------------- --------------- ---------------
Net earnings ..................................... 8,448 4,852 21,722 438
Dividends on preferred stock.............................. -- -- -- 2,160
------------------- -------------- --------------- ---------------
Net earnings (loss) available to common
stockholders................................... $ 8,448 $ 4,852 $ 21,722 $ (1,722)
=================== ============== =============== ===============
Earnings (loss) per share basic and diluted .............. $ 0.41 $ 0.22 $ 1.06 $ (0.14)
Weighted average shares outstanding basic and diluted..... 20,423,705 21,832,944 20,533,824 12,641,791
See accompanying notes to consolidated financial statements.
4
PBOC HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ ---------------------------------
1999 1998 1999 1998
---------------- --------------- --------------- ---------------
Net earnings .............................................. $ 8,448 $ 4,852 $ 21,722 $ 438
Other comprehensive earnings (loss):
Unrealized loss on securities available-for-sale........ (12,326) (11,681) (31,451) (13,049)
Reclassification of realized gains included in earnings 3 937 200 1,260
---------------- --------------- --------------- ---------------
Other comprehensive loss................................ (12,323) (10,744) (31,251) (11,789)
---------------- --------------- --------------- ---------------
Comprehensive loss......................................... $ (3,875) $ (5,892) $ (9,529) $ (11,351)
================ =============== =============== ===============
See accompanying notes to consolidated financial statements.
5
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
Nine Months Ended September 30,
-----------------------------------------
1999 1998
------------------- -------------------
Cash flows from operating activities:
Net earnings ................................................................... $ 21,722 $ 438
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Provision for loan losses................................................... 3,300 1,350
Depreciation................................................................ 1,359 827
Decrease in valuation allowance............................................. 3,500 9,512
Amortization/accretion of premiums, discounts and deferred fees ............ 8,960 9,043
Amortization of purchase accounting intangibles............................. 139 135
(Gain) loss on sale of securities available-for-sale........................ (200) 1,260
Gain on sale of real estate owned........................................... (562) (2,113)
FHLB stock dividend......................................................... (2,528) (403)
Increase in accrued interest receivable.................................... (1,496) (5,391)
Increase (decrease) in accrued interest payable............................. (1,086) 5,915
Increase in other assets................................................... (9,940) (66,365)
Amortization for discontinued lease operations.............................. 38 42
Increase in accrued expenses................................................ 6,148 2,696
Gain on sale of loans ...................................................... (49) (574)
Amortization of goodwill.................................................... 240 40
------------------- -------------------
Net cash provided (used in) by operating activities......................... 29,545 (43,588)
------------------- -------------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale............................ 121,331 333,955
Proceeds from sale of loans .................................................... 92,548 42,987
Investment and mortgage-backed securities principal repayments and maturities 128,457 121,690
Loan originations, net of repayments............................................ (196,237) 194,796
Purchases of investments and mortgage-backed securities available-for-sale...... (270,731) (844,297)
Purchases of loans.............................................................. (193,148) (758,121)
Cost capitalized on real estate, net of insurance settlements................... 46 (2,131)
Proceeds from the sale of real estate........................................... 7,691 18,032
Purchases of premises and equipment............................................. (1,145) (1,498)
Purchase of FHLB stock.......................................................... -- (36,613)
------------------- -------------------
Net cash used in investing activities........................................... (311,188) (931,200)
------------------- -------------------
Cash flows from financing activities:
Proceeds from sale of common stock.............................................. -- 129,611
Redemption of preferred stock................................................... -- (5)
Purchases of treasury stock..................................................... (6,152) (3,128)
Net increase in deposits....................................................... 148,954 210,480
Net increase in securities sold under agreements to repurchase.................. 64,901 23,212
Issuance of FHLB advances....................................................... 721,950 2,666,900
Repayments of FHLB advances..................................................... (674,950) (1,995,900)
Repayments of senior debt....................................................... -- (11,113)
Cash dividend paid on preferred stock .......................................... -- (19,439)
------------------- -------------------
Net cash provided by financing activities...................................... 254,703 1,000,618
------------------- -------------------
Net change in cash.................................................................. (26,940) 25,830
Cash and cash equivalents at beginning of period.................................... 46,401 21,117
------------------- -------------------
Cash and cash equivalents at end of period.......................................... $ 19,461 $ 46,947
=================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................................................... $ 121,377 $ 93,973
=================== ===================
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate.......................................................... $ 6,384 $ 8,476
Loans originated in connection with sale of foreclosed real estate.............. $ -- $ 5,029
Transfer of loans held for investment to loans held for sale.................... $ 92,499 $ 42,413
=================== ===================
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF CONSOLIDATION
The consolidated financial statements include all the accounts of PBOC
Holdings, Inc. (the "Company") and its subsidiaries, all of which are wholly
owned, except for People's Preferred Capital Corporation ("PPCC") in which
People's Bank of California (the "Bank") owns all of the common stock. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Actual results could differ significantly
from those estimates. Prior period's consolidated financial statements have been
reclassified to conform to the 1999 presentation.
3. EARNINGS PER SHARE
Under SFAS 128, basic earnings per share excludes dilution and is
computed by dividing earnings (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in earnings.
On March 20, 1998 and April 20, 1998, the Board of Directors of the
Company approved an amendment to the Company's Certificate of Incorporation to
(i) increase the number of authorized shares of common stock from 500,000 to
75,000,000 and (ii) effect a 32 for 1 stock split of the issued common stock of
the Company prior to the commencement of the Company's initial public offering.
On September 2, 1998, the Board of Directors of the Company authorized
the repurchase of up to 1 million shares of the Company's common stock to be
effected from time to time in open-market or privately-negotiated transactions.
On January 4, 1999, the Company's Board of Directors authorized an additional
repurchase of up to 1 million shares. Through September 30, 1999, the Company
had repurchased 1,452,500 shares pursuant to these programs for a total purchase
price of $14.5 million. The shares are held as treasury shares and reduce the
weighted average number of shares outstanding.
Earnings per share is calculated by taking the net earnings (loss)
available to the common stockholders and dividing by the weighted average number
of shares of common stock outstanding. The weighted average number of shares of
common stock for the nine months ended September 30, 1999 and 1998 were
20,533,824 and 12,641,791, respectively, for both basic and diluted earnings per
share. The weighted average number of shares of common stock for the three
months ended September 30, 1999 and 1998 were 20,423,705 and 21,832,944,
respectively. The weighted average number of shares of common stock outstanding
reflects the exchange of all of the Company's then outstanding classes of
preferred stock into common stock and the subsequent 32 to 1 stock split
referenced above.
7
4. STOCK OPTION PLAN
On January 25, 1999, the Company adopted the 1999 Stock Option Plan
(the "Plan") which is designed to improve the growth and profitability of the
Company and its subsidiaries by providing employees with a proprietary interest
in the Company as an incentive to contribute to the success of the Company and
its subsidiaries. Options to acquire 1,018,000 shares of common stock were
awarded to officers and key employees of the Company and the Bank with an
exercise price of $13.75, which was in excess of the fair value of the common
stock on the date of grant. A total of 1,020,390 shares of common stock was
reserved for future issuance pursuant to the Plan. The Plan was approved by the
Company's shareholders on April 26, 1999. The shares granted under Company's
Plan were not considered in earnings per share calculations since these shares
were antidilutive.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities,"
as amended by SFAS No. 137. Among other things, it amends SFAS No.107,
"Disclosure about Fair Value of Financial Instruments," to include in SFAS No.
107 disclosure provisions about concentrations of credit risk from SFAS No. 105.
SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management believes that adoption of SFAS 133 will not have a material impact on
the Company's financial position and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
WHEN USED IN THIS FORM 10-Q OR FUTURE FILINGS BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC"), IN THE COMPANY'S PRESS RELEASES OR
OTHER PUBLIC OR STOCKHOLDER COMMUNICATIONS, OR IN ORAL STATEMENTS MADE WITH AN
APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR PHRASES "WOULD BE",
"WILL ALLOW", "INTENDS TO", "WILL LIKELY RESULT", "ARE EXPECTED TO", "WILL
CONTINUE", "IS ANTICIPATED", "ESTIMATE", "PROJECT", OR SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE LITIGATION REFORM ACT OF 1995.
THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON
ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE, AND
TO ADVISE READERS THAT VARIOUS FACTORS, INCLUDING REGIONAL AND NATIONAL ECONOMIC
CONDITIONS, SUBSTANTIAL CHANGES IN LEVELS OF MARKET INTEREST RATES, CREDIT AND
OTHER RISK OF LENDING AND INVESTMENT ACTIVITIES AND COMPETITIVE AND REGULATORY
FACTORS, COULD AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE
COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM THOSE
ANTICIPATED OR PROJECTED. THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY
DISCLAIMS ANY OBLIGATION, TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT
OCCURRENCES OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH
STATEMENTS.
PENDING ACQUISITION
On June 23,1999, the Company announced the execution of an agreement to
acquire The Bank of Hollywood ("BOH"), a California chartered, commercial bank
with approximately $138 million in assets. Under the terms of the agreement, BOH
shareholders will receive $19.00 in cash for each share of BOH common stock with
an aggregated estimated value of $28.6 million. The transaction will be
accounted for as a purchase, and is expected to close in the fourth quarter of
1999.
8
FINANCIAL CONDITION
The Company had consolidated total assets of $3.6 billion at September
30, 1999, compared to $3.3 billion in December 31, 1998. The increase of 7.5% in
total assets over the past nine months was primarily due to loan originations of
$712.0 million and loan purchases of $193.1 million during the period. This
increase in loans receivable was partially offset by a loan sale of $92.5
million and loan repayments of $422.6 million. Securities classified as
available-for-sale decreased by $12.6 million mainly due to a reduction in
market value.
The increase in earning assets during the first nine months of 1999 was
funded by deposits, which increased by $149.0 million. Over the past nine
months, FHLB advances also increased by $47.0 million to $1.2 billion at
September 30, 1999. The Company's stockholders' equity decreased by $15.7
million to $164.9 million at September 30, 1999 from December 31, 1998. This
decrease was due to stock repurchases of $6.2 million and $31.3 million increase
in the unrealized loss on the Company's securities classified as available-for
sale during the nine months ended September 30, 1999.
RESULTS OF OPERATIONS
Net earnings amounted $8.4 million for the third quarter ended
September 30, 1999, compared to a net earnings of $4.9 million, for the third
quarter ended September 30,1998. The Company's basic and diluted earnings per
common share amounted to $.41 and $.22 during the quarters ended September 30,
1999 and 1998, respectively.
For the nine months ended September 30, 1999, the Company reported net
earnings of $21.7 million, or $1.06 per share on a basic and diluted basis,
compared to a net earnings of $438,000, before preferred dividends of $2.2
million, or $(.14) per share on a basic and diluted basis, for the nine months
ended September 30, 1998. The net earnings for the nine months ended September
30, 1998 were impacted by one-time expenses of $15.6 million ($9.2 million net
of applicable income tax benefits) in connection with the Company's initial
public offering of common stock including the one-time Savings Association
Insurance Fund ("SAIF") assessment of $4.5 million during the period. Excluding
one-time expenses related to the initial public offering, net earnings during
the first nine months of 1998 would have been $7.5 million, or $.59 per share on
a basic and diluted basis. The Company's preferred stock was redeemed in May
1998 with proceeds received from the initial public offering.
The Company's return on average equity amounted to 16.97% for the nine
months ended September 30, 1999, compared to .46% for the nine months ended
September 30, 1998.
NET INTEREST INCOME
Net interest income after provision for loan losses increased
significantly during the third quarter ended September 30, 1999 to $16.7 million
compared to $10.9 million for the third quarter ended September 30, 1998. For
the nine months ended September 30, 1999 net interest income after provision for
loan losses increased 71.32% to $45.4 million from $26.5 million during the
first nine months of 1998. These increases were mainly due to loan and
investment securities income growth generated by substantially higher average
outstanding balances.
9
The following tables set forth, for the periods indicated, information
regarding (a) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (b) the total dollar
amount of interest expense on interest-bearing liabilities and resultant average
rates; (c) net interest income; (d) interest rate spread; and (e) net interest
margin. Information is based on average daily balances during the indicated
periods.
Three months ended September 30,
----------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------------- ---------- ------------ -------------- ------------ -----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1).............. $2,382,557 $ 43,056 7.23% $2,094,033 $ 35,596 6.80%
Mortgage-backed securities (2) 659,544 9,387 5.69 559,604 8,368 5.98
Other interest-earning assets (3) 415,639 6,258 6.02 416,320 7,231 6.95
FHLB stock....................... 65,505 857 5.19 56,650 784 5.48
-------------- ---------- --------------- ------------
Total interest-earning assets.... 3,523,245 59,558 6.76 3,126,607 51,979 6.65
---------- =========== ------------ ==========
Non-interest-earning assets........ 27,230 101,840
-------------- ===============
Total assets................. $3,550,475 $3,228,447
============== ===============
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)........ $ 441,724 3,269 2.94% $ 399,545 3,247 3.22%
Term certificates of deposit... 1,190,516 14,920 4.97 1,035,354 15,026 5.76
-------------- ---------- --------------- ------------
Total deposits............. 1,632,240 18,189 4.42 1,434,899 18,273 5.05
Other borrowings................. 1,699,195 23,413 5.47 1,556,862 22,322 5.69
Hedging costs.................... -- 32 -- 52
-------------- ---------- --------------- ------------
Total interest-bearing
liabilities............... 3,331,435 41,634 4.96 2,991,761 40,647 5.39
---------- =========== ------------ ==========
Non-interest-bearing liabilities... 52,967 64,284
--------------- ---------------
Total liabilities........... 3,384,402 3,056,045
Stockholders' equity............... 166,073 172,402
--------------- ---------------
Total liabilities and
stockholders' equity...... $ 3,550,475 $3,228,447
============== ===============
Net interest-earning assets........ $ 191,810 $ 134,846
============== ===============
Net interest income/interest rate
spread........................ $ 17,924 1.80% $ 11,332 1.26%
========== =========== ============ ==========
Net interest margin................ 2.03% 1.45%
=========== ==========
Ratio of average interest-earning
assets to average interest-
bearing liabilities........... 105.76% 104.51%
=========== ==========
10
Nine months ended September 30,
----------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------------- ----------- ------------ -------------- ------------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1).............. $2,253,816 $121,278 7.17% $1,731,388 $ 89,511 6.89%
Mortgage-backed securities (2) 632,738 26,219 5.52 514,817 22,902 5.93
Other interest-earning
assets (3)................... 430,339 19,143 5.93 285,594 14,051 6.56
FHLB stock....................... 64,669 2,494 5.16 37,279 1,608 5.77
-------------- ----------- --------------- ------------
Total interest-earning assets.... 3,381,562 169,134 6.67 2,569,078 128,072 6.65
----------- =========== ------------ ===========
Non-interest-earning assets........ 52,813 85,079
-------------- ---------------
Total assets................. $3,434,375 $2,654,157
============== ===============
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)........ $ 355,234 9,357 3.52% $ 358,538 9,413 3.51%
Term certificates of deposit... 1,147,839 44,510 5.18 995,050 42,496 5.71
-------------- ----------- --------------- ------------
Total deposits............. 1,503,073 53,867 4.79 1,353,588 51,909 5.13
Senior debt...................... -- -- -- 5,972 445 9.96
Other borrowings................. 1,622,273 66,425 5.47 1,116,177 47,689 5.71
Hedging costs.................... -- 113 -- -- 162 --
-------------- ----------- --------------- ------------
Total interest-bearing
liabilities............... 3,125,346 120,405 5.15% 2,475,737 100,205 5.41%
----------- =========== ------------ ===========
Non-interest-bearing liabilities... 137,939 51,418
-------------- ---------------
Total liabilities........... 3,263,285 2,527,155
Stockholders' equity............... 171,090 127,002
---------------
--------------
Total liabilities and
stockholders' equity...... $3,434,375 $2,654,157
============== ===============
Net interest-earning assets........ $ 256,216 $ 93,341
============== ===============
Net interest income/interest
rate spread................... $ 48,729 1.52% $ 27,867 1.24%
=========== =========== ============ ===========
Net interest margin................ 1.92% 1.45%
=========== ===========
Ratio of average interest-earning
assets to average interest-
bearing liabilities........... 108.20% 103.77%
=========== ===========
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes mortgage-backed securities classified as held-to-maturity and
available-for-sale.
(3) Includes short-term investments, securities purchased under agreements
to resell and investment securities.
(4) Includes passbook, checking and money market accounts.
The Company's interest rate spread was 1.80% for the third quarter of
1999, an increase of 54 basis points compared to 1.26% for the same period in
1998. For the nine months ended September 30, 1999, the interest spread was
1.52%, an increase of 28 basis points as compared to 1.24% for the same period
in 1998. The increases in interest rate spread were mainly due to increases in
the Bank's yield on loans receivable, which was caused by higher yields earned
on the loan portfolio.
The Company's net interest margin was 2.03% for the three months ended
September 30, 1999, an increase of 58 basis points compared to 1.45% for the
same period in 1998. The net interest margin was 1.92% for the nine months ended
September 30, 1999, an increase of 47 basis points compared to 1.45% for the
same period in 1998. This increase in net interest margin was mainly due to
higher yields on the Company's loan portfolio as well as a lower cost of funds.
11
The following tables set forth the effects of changing rates and
volumes on net interest income of the Company. Information is provided with
respect to (a) effects on interest income attributable to changes in rate
(changes in rate multiplied by prior volume); (b) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate);
and (c) changes in rate/volume (change in rate multiplied by change in volume).
Three Months Ended September 30, 1999
Compared to September 30, 1998
(In Thousands)
---------------------------------------------------------------------------
Increase (Decrease) Due to
-----------------------------------------------------
Total Net
Rate Volume Rate/Volume Increase/(Decrease)
---------------- -------------- -------------- ----------------------
Interest-earning assets:
Loans receivable............................. $ 2,246 $ 4,904 $ 310 $7,460
Mortgage-backed securities................... (404) 1,495 (72) 1,019
Other interest-earning assets ............... (963) (12) 2 (973)
FHLB stock................................... (43) 123 (7) 73
---------------- -------------- -------------- ----------------------
Total net change in income on interest-
earning assets ............... 836 6,510 233 7,579
---------------- -------------- -------------- ----------------------
Interest-bearing liabilities:
Deposits:
Transaction accounts.................... (290) 343 (31) 22
Term certificates of deposit............ (2,051) 2,252 (307) (106)
---------------- -------------- -------------- ----------------------
Total deposits........................ (2,341) 2,595 (338) (84)
Other borrowings............................ (870) 2,041 (80) 1,091
Hedging costs............................... -- -- (20) (20)
---------------- -------------- -------------- ----------------------
Total net change in expense on interest-
bearing liabilities........................ (3,211) 4,636 (438) 987
---------------- -------------- -------------- ----------------------
Change in net interest income.................. $ 4,047 $ 1,874 $ 671 $ 6,592
---------------- -------------- -------------- ----------------------
---------------- -------------- -------------- ----------------------
Nine Months Ended September 30, 1999
Compared to September 30, 1998
(In Thousands)
---------------------------------------------------------------------------
Increase (Decrease) Due to
-----------------------------------------------------
Total Net
Rate Volume Rate/Volume Increase/(Decrease)
---------------- -------------- -------------- ----------------------
Interest-earning assets:
Loans receivable............................. $ 3,655 $27,009 $ 1,103 $31,767
Mortgage-backed securities................... (1,569) 5,246 (360) 3,317
Other interest-earning assets ............... (1,347) 7,121 (682) 5,092
FHLB stock................................... (171) 1,182 (125) 886
---------------- -------------- -------------- ----------------------
Total net change in income on interest-
earning assets ............... 568 40,558 (64) 41,062
---------------- -------------- -------------- ----------------------
Interest-bearing liabilities:
Deposits:
Transaction accounts.................... 31 (87) -- (56)
Term certificates of deposit............ (3,911) 6,525 (600) 2,014
---------------- -------------- -------------- ----------------------
Total deposits........................ (3,880) 6,438 (600) 1,958
Senior debt................................ -- (445) -- (445)
Other borrowings........................... (1,987) 21,624 (901) 18,736
Hedging costs.............................. -- -- (49) (49)
---------------- -------------- -------------- ----------------------
Total net change in expense on interest-
bearing liabilities........................ (5,867) 27,617 (1,550) 20,200
---------------- -------------- -------------- ----------------------
Change in net interest income.................. $ 6,435 $12,941 $ 1,486 $20,862
---------------- -------------- -------------- ----------------------
---------------- -------------- -------------- ----------------------
12
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses increased by $750,000 and $2.0
million for the three and nine months ended September 30, 1999, respectively,
compared to the same periods in 1998. These increases were primarily due to loan
portfolio growth and the change in current portfolio mix to a higher proportion
of consumer and commercial loans. The provision for loan losses was $3.3 million
for the nine months ended September 30, 1999 compared to $1.4 for the nine
months ended September 30, 1998. At September 30, 1999, the Company's allowance
for loan losses amounted to $20.4 million, or .79% of total gross loans, and
412.95% of total non-performing loans.
OTHER INCOME
The Company's total other income decreased by $722,000 for the quarter
ended September 30, 1999 compared to the same period in 1998, primarily due to a
decrease of $1.5 million in gains on sales of mortgage backed securities and
loans partially offset by a $730,000 increase in income from real estate
operations. Other income for the nine months ended September 30, 1999 also
decreased by $2.3 million compared to the nine months ended September 30, 1998.
This decrease was mainly due to a decrease in gains on sale of real estate owned
and real estate held for investment and a $1.6 million decrease in gain on sale
of mortgage-backed securities and loans. During the nine months ended September
30, 1999 and 1998, gains on sales of real estate owned and real estate held for
investment amounted to $562,000 and $2.1 million, respectively.
OPERATING EXPENSES
Total operating expenses increased by $3.0 million for the three months
ended September 30, 1999 compared to the three months ended September 30, 1998.
The Company's total operating expenses were $10.0 million for the three months
ended September 30, 1999 compared to $7.0 million for the same period last year.
Operating expenses increased 43.21%, with compensation and benefits growing $1.0
million and occupancy and office related expenses increasing $934,000 during the
third quarter compared to the third quarter a year ago. The increase in
compensation and occupancy expense was mainly due to two branch acquisitions and
additional personnel hired for the commercial and consumer lending areas. In the
first nine months of 1999, operating expenses amounted to $27.4 million compared
to $38.0 million for the nine months ended September 30, 1998. One-time
IPO-related costs included $11.1 million in compensation and benefits and $4.5
million charge related to the industry-wide SAIF assessment levied in 1996.
Operating expenses excluding one-time IPO-related costs and SAIF assessment
increased 22.33% during the first nine months of 1999 versus the first nine
months of 1998.
INCOME TAXES
During the September 1999 quarter, the Company reported a $1.5 million
income tax benefit compared to none for the same period last year, resulting
from an increase in its deferred tax assets which the Company expects will be
realizable in future periods. The Company reported a $3.5 million income tax
benefit during the first nine months of 1999 and a $9.4 million income tax
benefit for the first nine months of 1998. On a fully-taxed basis, net earnings
would have been $3.8 million for the third quarter and $9.9 million for the
first nine months of 1999.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control the risk associated with interest rate movements.
In general, management's strategy is to match asset and liability balances
within maturity categories to limit the Bank's exposure to earnings variations
and variations in the value of assets and liabilities as interest rates change
over time. The Company's asset and liability management strategy is formulated
and monitored by the Bank's Asset/Liability Management Committee, which is
comprised of senior officers of the Bank, in accordance with policies approved
by the Board of Directors of the Bank.
The Asset/Liability Management Committee's methods for evaluating
interest rate risk include an analysis of the Bank's interest rate sensitivity
"gap," which is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities.
13
A gap is considered negative when the amount of interest-rate sensitive
liabilities exceeds interest-rate sensitive assets. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely.
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
September 30, 1999, based on the information and assumptions set forth in notes
below.
More Than More Than
Three to One Year Three Years
Within Three Twelve to to Five Over Five
Months Months Three Years Years Years Total
------------ ----------- ----------- ----------- ----------- ----------
(Dollars in Thousands)
Interest-earning assets: (1)
Loans receivable(2)
Single-family residential:
Fixed.............................. $ 43,693 $ 193,456 $ 328,349 $ 202,224 $ 319,682 $1,087,404
Adjustable ........................ 155,084 160,367 70,370 25,422 -- 411,243
Multi-family residential:
Fixed.............................. 595 2,817 7,919 4,132 11,000 26,463
Adjustable ........................ 302,100 3,744 280 -- -- 306,124
Commercial, industrial and land:
Fixed.............................. 5,090 24,161 58,709 48,567 99,599 236,126
Adjustable ........................ 75,544 67,708 7,202 4,968 5,766 161,188
Other loans(3)........................ 106,521 104,793 67,667 49,210 8,935 337,126
Mortgage-backed and other securities (4). 105,344 36,642 5,872 77,469 412,256 637,583
Other interest-earning assets (5)........ 256,697 14,443 30,000 -- 168,514 469,654
------------ ----------- ----------- ----------- ---------- ----------
Total......................... $1,050,668 $ 608,131 $ 576,368 $ 411,992 $1,025,752 $3,672,911
------------ ----------- ----------- ----------- ---------- ----------
------------ ----------- ----------- ----------- ---------- ----------
Interest-bearing liabilities:
Deposits:
Checking accounts.................... $ 107,079 $ -- $ -- $ -- $ -- $ 107,079
Passbook accounts.................... 139,301 -- -- -- -- 139,301
Money market accounts................ 145,869 -- -- -- -- 145,869
Term certificates of deposit......... 122,962 963,960 92,043 11,921 175 1,191,061
Other borrowings......................... 125,901 314,000 160,000 714,000 360,000 1,673,901
------------ ----------- ----------- ----------- ---------- ----------
Total......................... $ 641,112 $ 1,277,960 $ 252,043 $ 725,921 $ 360,175 $3,257,211
------------ ----------- ----------- ----------- ---------- ----------
------------ ----------- ----------- ----------- ---------- ----------
Excess (deficiency) of interest earning
assets over interest-bearing
liabilities............................ 409,556 (669,829) 324,325 (313,929) 665,577 415,700
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets........... 11.42% (18.68%) 9.05% (8.76%) 18.56% 11.59%
------------ ----------- ----------- ----------- ----------
------------ ----------- ----------- ----------- ----------
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities.................... $ 409,556 $ (260,273) $ 64,052 $ (249,877) $ 415,700
------------ ----------- ----------- ----------- ----------
------------ ----------- ----------- ----------- ----------
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percentage of
total assets........................... 11.42% (7.26%) 1.79% (6.97%) 11.59%
------------ ----------- ----------- ----------- ----------
------------ ----------- ----------- ----------- ----------
- ----------------------
(1) Adjustable-rate loans are included in the period in which interest
rates are next scheduled to adjust rather than in the period in which
they are due, and fixed rate loans are included in the periods in which
they are scheduled to be repaid, based on scheduled amortization, in
each case as adjusted to take into account estimated prepayments based
on assumptions used by the Office of Thrift Supervision ("OTS") in
assessing the interest rate sensitivity of savings associations in the
Company's region.
(2) Balances have been reduced for non-performing loans, which amounted to
$4.9 million at September 30,1999.
(3) Comprised of commercial and consumer loans and loans secured by
deposits.
(4) Does not include an unrealized loss on securities available for sale of
$44.9 million.
(5) Comprised of short-term investments, securities purchased under
agreements to resell, investment securities and FHLB stock
LIQUIDITY AND CAPITAL RESOURCES
14
LIQUIDITY
Liquidity refers to a company's ability to generate sufficient cash to
meet the funding needs of current loan demand, deposit withdrawals, principal
and interest payments with respect to outstanding borrowings and to pay
operating expenses. The Bank monitors its liquidity in accordance with
guidelines established by the Bank and applicable regulatory requirements. The
Bank's need for liquidity is affected by loan demand, net changes in deposit
levels and the scheduled maturities of its borrowings. The Bank can minimize the
cash required during the times of heavy loan demand by modifying its credit
policies or reducing its marketing effort. Liquidity demand caused by net
reductions in deposits are usually caused by factors over which the Bank has
limited control. The Bank derives its liquidity from both its assets and
liabilities. Liquidity is derived from assets by receipt of interest and
principal payments and prepayments, by the ability to sell assets at market
prices and by utilizing unpledged assets as collateral for borrowings. Liquidity
is derived from liabilities by maintaining a variety of funding sources,
including deposits, advances from the FHLB of San Francisco and other short and
long-term borrowings.
At September 30, 1999, the Bank had $1.4 billion in borrowing capacity
under a collateralized line of credit with the FHLB of San Francisco. At
September 30, 1999, the Bank had total FHLB advances of $1.2 billion with a
weighted average interest rate of 5.38%, which mature between 1999 and 2008.
Additionally, at September 30, 1999, the Bank had securities sold under
agreements to repurchase totaling $428.9 million with a weighted average
interest rate of 5.57%, which mature between 1999 and 2008.
At September 30, 1999, the Bank had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and non-mortgage
loans of $110.4 million. Certificates of deposit which are scheduled to mature
within one year totaled $1.1 billion at September 30, 1999, and borrowings that
are scheduled to mature within the same period amounted to $439.9 million.
Management anticipates that it will have sufficient funds available to meet its
current loan commitments.
CAPITAL RESOURCES
The OTS capital regulations include three separate minimum capital
requirements for savings institutions - a "tangible capital requirement," a
"leverage limit" and a "risk based capital requirement." These capital standards
must be no less stringent than the capital standards applicable to national
banks.
As of September 30, 1999 the Bank was deemed to be "well capitalized"
under applicable requirements. To be categorized as "well capitalized", the Bank
must maintain minimum tier 1 leverage capital, tier 1 risk-based capital and
risk-based capital ratios as set forth in the table below. The following table
reflects the Bank's actual levels of regulatory capital and applicable
regulatory capital requirements at September 30, 1999:
Well Capitalized
Minimum Requirement Actual Excess
------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Tangible capital...................... $ 72,180 2.00% $220,863 6.12% $148,683 4.12%
Tier 1 leverage capital .............. 180,451 5.00 220,863 6.12 40,412 1.12
Tier 1 risk-based capital ............ 124,192 6.00 220,863 10.67 96,671 4.67
Risk-based capital ................... 206,986 10.00 238,582 11.53 31,596 1.53
15
LOAN PORTFOLIO COMPOSITION
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated:
September 30, 1999 December 31, 1998
------------------------------------- --------------------------------------
Percent of Percent of
Amount Total Amount Total
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
Mortgage loans:
Single-family residential.................. $1,501,329 58% $1,494,756 68%
Multi-family residential................... 337,990 13 366,625 17
Commercial................................. 391,927 15 206,402 9
Land and other ............................ 852 -- 880 --
---------------- ---------------- ---------------- ----------------
Total mortgage loans ................... 2,232,098 86 2,068,663 94
---------------- ---------------- ---------------- ----------------
Other loans:
Commercial business........................ 166,345 7 62,665 3
Consumer................................... 170,181 7 53,826 3
Secured by deposits........................ 1,978 -- 3,537 --
---------------- ---------------- ---------------- ----------------
Total loans receivable.................. 2,570,602 100.0% 2,188,691 100.0%
---------------- ================ ---------------- ================
Less:
Undisbursed loan proceeds ................. 110,408 17,152
Unamortized net loan discounts and
deferred originations fees.............. 6,031 814
Deferred gain on servicing sold............ 2,300 2,971
Allowance for loan losses ................. 20,350 18,897
---------------- ----------------
Loans receivable, net.......................... $2,431,513 $2,148,857
================ ================
16
The following table sets forth information with respect to
non-performing assets identified by the Bank, including non-accrual loans, real
estate owned and troubled debt restructurings at the dates indicated:
September 30, 1999 December 31, 1998
------------------ -----------------
(Dollars in Thousands)
Non-performing loans, net:
Mortgage loans:
Single-family residential loans.................... $ 3,352 $ 3,959
Multi-family residential loans..................... -- 428
Commercial real estate loans....................... 942 3,613
Commercial business loans.............................. 590 99
Consumer loans......................................... 44 408
---------------------- -----------------------
Total non-performing loans, net........................ 4,928 8,507
---------------------- -----------------------
Real estate owned, net:
Single-family residential.......................... 1,208 2,723
Multi-family residential........................... 724 --
---------------------- -----------------------
Total real estate owned, net........................... 1,932 2,723
---------------------- -----------------------
Total non-performing assets............................ $ 6,860 $ 11,230
====================== =======================
Troubled debt restructurings........................... $ 5,037 $ 3,576
====================== =======================
Total non-performing assets and troubled debt
restructurings..................................... $ 11,897 $ 14,806
====================== =======================
Non-performing loans to total loans, net............... 0.20% 0.40%
Non-performing loans to total assets................... 0.14 0.26
Non-performing assets to total assets.................. 0.19 0.34
Total non-performing assets and troubled debt
restructurings to total assets..................... 0.33 0.44
17
Non-performing assets as of September 30, 1999 and December 31, 1998
were $6.9 million and $11.2 million, respectively. The decrease in
non-performing assets was due primarily to a net decrease in non-performing
commercial real estate loans. The following table sets forth the activity in the
Bank's allowance for loan losses during the periods indicated:
For the Nine Months Ended
September 30,
-----------------------------------------
1999 1998
------------------- -------------------
(Dollars in Thousands)
BEGINNING BALANCE....................................................... $ 18,897 $ 17,824
------------------- -------------------
Provision for loan losses............................................... 3,300 1,350
------------------- -------------------
CHARGE-OFFS:
Single-family residential loans......................................... (303) (505)
Multi-family residential loans.......................................... (131) (163)
Commercial real estate loans............................................ (175) --
Commercial business loans............................................... (703) (16)
Consumer loans.......................................................... (823) (44)
------------------- -------------------
Total charge-offs.................................................... (2,135) (728)
------------------- -------------------
RECOVERIES:
Single-family residential loans......................................... 32 85
Commercial business..................................................... 11 --
Consumer................................................................ 245 --
------------------- -------------------
Total recoveries........................................................ 288 85
------------------- -------------------
Net charge-offs......................................................... (1,847) (643)
------------------- -------------------
ENDING BALANCE AS OF SEPTEMBER 30, 1999 AND 1998........................ $ 20,350 $ 18,531
=================== ===================
Allowance for loan losses to total non-performing loans at end of
period............................................................... 412.95% 177.42%
Allowance for loan losses to total non-performing loans and
troubled debt restructurings at the end of period.................... 204.21% 119.84%
Allowance for loan losses to total gross loans, at the end of period. 0.79% 0.89%
Net loan charge-offs were $1.8 million for the nine months ended
September 30, 1999, an increase of $1.2 million compared to $643,000 for nine
months ended September 30, 1998. The increase in net charge-offs was primarily
due to charge-offs in the indirect auto and commercial business loan portfolios.
Total non-performing assets were $6.9 million at September 30, 1999, compared to
$15.3 million at September 30, 1998. As a result, the ratio of non-performing
assets to total assets declined to .19% at September 30, 1999 from .48% at
September 30, 1998.
On an ongoing basis, management monitors the loan portfolio and
evaluates the adequacy of the allowance for loan losses. In determining the
adequacy of the allowance for loan losses, management considers such factors as
historical loan loss experience, underlying collateral values, evaluations made
by bank regulatory authorities, assessment of economic conditions and other
appropriate data to identify the risks in the loan portfolio.
Loans deemed by management to be uncollectible are charged to the
allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense and
credited to the allowance in amounts deemed appropriate by management based upon
its evaluation of the known and inherent risks in the loan portfolio.
18
YEAR 2000 COMPLIANCE ISSUES
During 1997, the Bank finalized its plan to address issues related to
the Year 2000 ("Y2K") problem. The Y2K issue is primarily a result of computer
software recognizing a two-digit date field rather than the full four digits,
which identify the appropriate year. Date-sensitive computer programs, hardware
or equipment controlled by microprocessor chips may not appropriately deal with
the year "00".
The Bank's objective was to manage the process by determining the scope
of the problem and to focus its efforts and attention on solving it. The Bank's
plan followed the Federal Financial Institution's Examination Council ("FFIEC")
guideline that manages the process in five phases: 1) Awareness 2) Assessment 3)
Renovation 4) Validation and 5) Implementation. To help manage the process the
Bank developed a detailed project plan that identifies various milestones and
deadlines. The Bank also established budgets for manpower resources and
financial expenditures.
The Bank utilizes Fiserv CBS, a third party vendor, to process
substantially all of its data processing functions. Also, a significant portion
of the single-family residential loan portfolio is serviced by other
institutions. The Bank has contacted its critical vendors and has received
confirmation that they will be Y2K compliant. The Bank is working with Fiserv
CBS and other critical vendors to ensure that their operational and financial
systems will not be adversely effected by the Y2K problem.
The Bank has analyzed its loan and deposit customers that may present
some exposure to Y2K compliance. Non-compliant commercial loan customers may be
at risk of default and large depositors may cause liquidity problems if the
funds are withdrawn. In an effort to educate borrowers and to gather information
for the risk assessments, questionnaires were sent to the commercial loan
customers. The initial assessment of commercial loan and deposit customers
indicates that there would be minimal impact on the Bank's statement of
operations. The Bank will continue to monitor and evaluate the risks on a
quarterly basis.
The Bank reviews its loan servicers and investment securities issuers
quarterly to determine the liquidity and credit risks associated with their
failure to remit payments in a timely manner due to Y2K problems.
The Bank has also implemented a customer awareness program to keep
customers informed of the progress of the Y2K project. The Bank's quarterly
customer newsletter contains Y2K articles and statement stuffers are also
utilized to keep the customers aware of the Bank's efforts. Customers with
questions are encouraged to call the Y2K office.
The Bank has completed the validation or testing phase of the Y2K
compliance plan. The Bank developed a test plan that contains test requirements
and criteria, manpower assignments and target dates. A dedicated Y2K local area
network testing was established to communicate with the Fiserv CBS test system.
Detailed test scripts designed to test date-related functions are processed on
the system for the FFIEC's recommended critical test dates. The results were
reviewed to ensure the system was functioning properly. The Bank successfully
tested dates up through and including December 31, 2001. The Bank has also
successfully completed testing with other critical vendors such as the Federal
Reserve Bank. Various non-critical stand-alone applications were also
successfully tested on the Y2K local area network.
The Bank's costs associated with the Y2K project include 1) an
additional assessment from Fiserv CBS for the test system 2) lease expense for
the test local area network equipment 3) various hard costs for the upgrading of
the operating network for the corporate office and retail branch system and 4)
replacing hardware in branches. Excluding the "soft" costs of Bank management
and personnel time, the Bank estimates that the total Y2K project costs will not
exceed $800,000. Approximately $500,000 of the costs is attributable to a
planned 1999 purchase of new hardware for the branches that will be amortized
over a five-year period. As of September 30, 1999, the Bank estimates that it
has incurred approximately $740,000 in total costs in connection with its Y2K
project plan.
The Bank has developed a contingency plan to address a plan of action
in the unlikely event that the Bank or its vendors and/or business partners are
not ready for Y2K. If Fiserv CBS experiences some unforeseen Y2K problem after
the turn of the century, the contingency plan will include off-line, manual
postings of transactions to ledger cards or a database. The plan will be
thoroughly tested during the upcoming months to ensure an orderly continuation
of key operations in the event a problem occurs. Even though operating in this
19
manner would severely tax resources, the Bank will be able to continue business
while Fiserv CBS corrects the problem.
The Bank's Y2K efforts are being closely monitored by the OTS, its
primary regulator, which conducts periodic Y2K examinations of the Bank's Y2K
project progress.
The Bank's plans to complete Y2K compliance are based on management's
and the Board's best estimates. There can be no guarantee that these estimates
will be achieved, and the ending results could be significantly different due to
unforeseen circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
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.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
LIST OF EXHIBITS (FILED HEREWITH UNLESS INDICATED)
No. Description
- ------------ -----------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of PBOC Holdings, Inc.(1)
3.2 Bylaws of PBOC Holdings, Inc.(1)
4 Stock Certificate of PBOC Holdings, Inc.(2)
10.1 Employment Agreement between PBOC Holdings, Inc.,
People's Bank of California and Rudolf P. Guenzel (1)
10.2 Employment Agreement between PBOC Holdings, Inc.,
People's Bank of California and J. Michael Holmes (1)
10.3 Employment Agreement between PBOC Holdings, Inc.,
People's Bank of California and William W. Flader (1)
10.4 Employment Agreement between the People's Bank of California and Doreen J. Blauschild (2)
10.5 Deferred Compensation Plan (1)
10.6 Grantor Trust (1)
10.7 Shareholder Rights Agreement (1)
10.8 Stockholders' Agreement (1)
27 Financial Data Schedule
- ------------------
1 Incorporated by reference from the Company's Form 10-K filed by the
Registrant with the SEC on March 22, 1999.
2 Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-48397) filed by the Registrant with the SEC on March
20, 1998, as amended.
No reports on form 8-K have been filed during the quarter ended September
30, 1999.
21
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.
PBOC HOLDINGS, INC.
Date: November 8, 1999 By: /s/ Rudolf P. Guenzel
-------------------------------------
Rudolf P. Guenzel
President and Chief Executive Officer
By: /s/ J. Michael Holmes
-------------------------------------
J. Michael Holmes
Executive Vice President and
Chief Financial Officer
22