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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, 1998
Commission File number: 000-24215
PBOC Holdings, Inc.
Delaware 33-0220233
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
5900 Wilshire Boulevard
Los Angeles, California 90036
(213) 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 October 30, 1998
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Common Stock, $.01 par value 21,876,205
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PBOC Holdings, Inc.
FORM 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements Page
------------------- ----
Consolidated Statements of Financial Condition - September 30, 1998
and December 31, 1997......................................................................... 3
Consolidated Statements of Operations - Three and nine months ended
September 30, 1998 and 1997................................................................... 4
Consolidated Statements of Comprehensive Earnings (Loss) - Three and nine
months ended September 30, 1998 and 1997...................................................... 5
Consolidated Statements of Cash Flows - Nine months ended September 30, 1998
and 1997...................................................................................... 6
Notes to Consolidated Financial Statements.................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................... 19
PART II -- OTHER INFORMATION
Items 1-5 Not Applicable................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K
Signatures....................................................................................... 20-21
2
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Dollars in thousands, except share data)
September 30, December 31,
1998 1997
--------------------- -------------------
ASSETS
Cash and cash equivalents............................................... $ 16,947 $ 14,113
Federal funds sold...................................................... 30,000 7,004
Securities available-for-sale, at estimated market values............... 946,346 571,160
Mortgage-backed securities held-to-maturity, market
values $7,023 and $9,743 at September 30, 1998 and
December 31, 1997.................................................... 6,930 9,671
Loans receivable, net................................................... 2,043,442 1,533,212
Real estate held for investment and sale, net........................... 4,850 15,191
Premises and equipment, net............................................. 7,212 6,676
Federal Home Loan Bank stock, at cost................................... 60,650 23,634
Accrued interest receivable............................................. 18,607 13,216
Other assets ........................................................ 75,990 19,177
--------------------- -------------------
Total assets....................................................... $3,210,974 $2,213,054
--------------------- -------------------
--------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................................................ $1,477,095 $1,266,615
Securities sold under agreements to repurchase.......................... 364,000 340,788
Advances from Federal Home Loan Bank.................................... 1,143,000 472,000
Senior debt ........................................................ -- 11,113
Accrued expenses and other liabilities.................................. 18,339 9,686
--------------------- -------------------
Total liabilities 3,002,434 2,100,202
--------------------- -------------------
Minority interest....................................................... 33,250 33,250
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 1,000,000 shares:
Preferred stock Series C, voting issued and outstanding
85,000 shares; liquidation value $8,500.......................... -- 1
Preferred stock Series D, voting issued and outstanding
68,000 shares; liquidation value $6,800.......................... -- 1
Preferred stock Series E, nonvoting issued and outstanding
332,000 shares; liquidation value $33,200........................ -- 3
Common stock, par value $.01 per share. Authorized
75,000,000 and 500,000 shares; issued and outstanding
21,876,205 and 98,502 shares; ................................... 219 1
Treasury stock, at cost (295,000 shares)............................. (3,128) --
Additional paid-in capital........................................... 259,207 129,814
Unrealized losses on securities available-for-sale................... (13,763) (1,974)
Minimum pension liability, net of tax ............................... (293) (293)
Accumulated deficit.................................................. (66,952) (47,951)
--------------------- -------------------
Total stockholders' equity..................................... 175,290 79,602
--------------------- -------------------
Total liabilities and stockholders' equity..................... $3,210,974 $2,213,054
--------------------- -------------------
--------------------- -------------------
See accompanying notes to consolidated financial statements.
3
PBOC HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands, except per share data)
Three Months Ended Nine months Ended
September 30, September 30,
------------------------------------ ----------------------------------------
1998 1997 1998 1997
----------------- ----------------- ------------------ ------------------
Interest, fees and dividend income:
Short term investments......................... $ 437 $ 223 $ 1,513 $ 747
Securities purchased under agreements to
resell....................................... -- 546 519 2,097
Investment securities.......................... 6,794 941 12,019 2,276
Mortgage-backed securities..................... 8,368 9,445 22,902 25,642
Loans receivable............................... 35,596 20,954 89,511 62,307
Federal Home Loan Bank stock................... 784 233 1,608 691
----------------- ----------------- ------------------ ------------------
Total interest, fees and dividend income.. 51,979 32,342 128,072 93,760
----------------- ----------------- ------------------ ------------------
Interest expense:
Deposits....................................... 18,273 16,850 51,909 50,807
Advances from the Federal Home Loan Bank....... 14,937 1,934 31,324 4,312
Securities sold under agreements to repurchase. 7,385 4,932 16,365 13,025
Senior debt ................................... -- 349 445 966
Hedging costs, net............................. 52 59 162 209
----------------- ----------------- ------------------ ------------------
Total interest expense.................... 40,647 24,124 100,205 69,319
----------------- ----------------- ------------------ ------------------
Net interest income............................... 11,332 8,218 27,867 24,441
Provision for loan losses...................... 450 450 1,350 1,105
----------------- ----------------- ------------------ ------------------
Net interest income after provision for
loan losses............................. 10,882 7,768 26,517 23,336
----------------- ----------------- ------------------ ------------------
Other income:
Loan service and loan related fees............. 76 16 101 418
Gain on mortgage-backed securities sales, net.. 937 469 1,260 591
Gain on loan and loan servicing sales, net... 575 -- 574 3,413
(Loss) income from real estate operations, net (312) (146) 1,473 (34)
Other income................................... 563 419 1,699 1,214
----------------- ----------------- ------------------ ------------------
Total other income........................ 1,788 758 5,107 5,602
Operating expenses:
Personnel and benefits......................... 2,982 2,929 19,883 8,475
Occupancy...................................... 2,102 1,729 6,133 5,116
FDIC insurance................................. 296 1,216 7,011 3,715
Professional services.......................... 212 135 705 435
Office related expenses........................ 1,046 950 3,084 2,862
Other....................................... 361 293 1,153 775
----------------- ----------------- ------------------ ------------------
Total operating expenses.................. 6,999 7,252 37,969 21,378
----------------- ----------------- ------------------ ------------------
Earnings (loss) before income taxes and minority
interest........................................ 5,721 1,274 (6,345) 7,560
Income taxes (benefit) ........................... -- -- (9,390) --
----------------- ----------------- ------------------ ------------------
Earnings before minority interest................. 5,721 1,274 3,045 7,560
Minority interest................................. 869 -- 2,607 --
----------------- ----------------- ------------------ ------------------
Net earnings ............................. 4,852 1,274 438 7,560
Dividends on preferred stock.............. -- 1,451 2,160 5,889
----------------- ----------------- ------------------ ------------------
----------------- ----------------- ------------------ ------------------
Net earnings (loss) available to common
stockholders............................ $ 4,852 $ (177) $ (1,722) $ 1,671
----------------- ----------------- ------------------ ------------------
----------------- ----------------- ------------------ ------------------
Earnings (loss) per share basic and diluted ...... $ 0.22 $ (0.06) $ (0.14) $ 0.53
Weighted average shares outstanding............... 21,832,944 3,152,064 12,641,791 3,152,064
See accompanying notes to consolidated financial statements.
4
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) EARNINGS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands)
Three Months Ended Nine months Ended
September 30, September 30,
---------------------------------------- ------------------------------------
1998 1997 1998 1997
------------------ ----------------- ------------------ ---------------
Net earnings...................................... $ 4,852 $1,274 $ 438 $ 7,560
Other comprehensive earnings (loss):
Unrealized (loss) gain on securities available-
for-sale ................................... (11,681) 1,040 (13,049) 2,600
Reclassification of realized gains
included in earnings........................ 937 469 1,260 591
Minimum pension liability, net of tax.......... -- -- -- (293)
------------------ ----------------- ------------------ ---------------
Other comprehensive earnings (loss)............ (10,744) 1,509 (11,789) 2,898
------------------ ----------------- ------------------ ---------------
Comprehensive (loss) earnings..................... $ (5,892) $2,783 $(11,351) $10,458
------------------ ----------------- ------------------ ---------------
------------------ ----------------- ------------------ ---------------
See accompanying notes to consolidated financial statements.
5
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Nine Months Ended September 30,
-----------------------------------------
1998 1997
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(Dollars in thousands)
Cash flows from operating activities:
Net earnings ................................................................... $ 438 $ 7,560
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses................................................... 1,350 1,105
Depreciation................................................................ 827 926
Decrease in valuation in net deferred tax assets............................ 9,512 742
Amortization/accretion of premiums, discounts and deferred fees ............ (9,043) 6,588
Amortization of purchase accounting intangibles............................. 135 139
Gain on sale of mortgage-backed securities available-for-sale............... 1,268 551
Gain on sale of real estate owned........................................... (9,275) (1,317)
FHLB stock dividend......................................................... (403) (711)
(Increase) decrease in accrued interest receivable......................... (5,391) 307
Increase (decrease) in accrued interest payable............................. 5,915 (2,231)
Increase in other assets.................................................... (66,365) (3,499)
Amortization for discontinued lease operations.............................. 42 86
Pension liability in equity change.......................................... -- (293)
Increase (decrease) in accrued expenses..................................... 2,696 (14,644)
Gain on sale of loans and servicing rights.................................. (575) (3,413)
Amortization of goodwill.................................................... 40 --
------------------- -------------------
Net cash used in operating activities....................................... (50,743) (8,104)
------------------- -------------------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities available-for-sale........... 333,947 107,804
Proceeds from sale of loans and servicing rights ............................... 42,988 88,654
Investment and mortgage-backed securities principal repayments and maturities 121,690 76,262
Loan originations, net of repayments............................................ 194,796 4,296
Purchases of investments and mortgage-backed securities available-for-sale...... (844,297) (209,581)
Purchases of loans.............................................................. (758,121) (111,850)
Purchases of treasury stock..................................................... (3,128) --
Cost capitalized on real estate................................................. (2,131) (1,123)
Proceeds from the sale of real estate........................................... 25,194 19,884
Purchases of premises and equipment............................................. (1,498) (758)
(Purchase) redemption of FHLB stock............................................. (36,613) 1,172
------------------- -------------------
Net cash used in investing activities........................................... (927,173) (25,240)
------------------- -------------------
Cash flows from financing activities:
Proceeds from sale of common stock.............................................. 129,611 18
Redemption of preferred stock................................................... (5) --
Net increase (decrease) in deposits............................................. 210,480 (94,167)
Net increase in securities sold under agreements to repurchase.................. 23,212 148,355
Issuance of FHLB advances....................................................... 2,666,900 169,000
Repayments of FHLB advances..................................................... (1,995,900) (190,000)
Repayment of senior debt........................................................ (11,113) (399)
Cash dividend paid on preferred stock........................................... (19,439) --
------------------- -------------------
Net cash provided by financing activities...................................... 1,003,746 32,807
------------------- -------------------
Net change in cash.................................................................. 25,830 (537)
Cash and cash equivalents at beginning of period.................................... 21,117 21,920
------------------- -------------------
Cash and cash equivalents at end of period.......................................... $ 46,947 $ 21,383
------------------- -------------------
------------------- -------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................................................... $ 93,973 $ 68,029
------------------- -------------------
------------------- -------------------
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate.......................................................... $ 8,476 $ 30,584
Loans originated in connection with sale of foreclosed real estate.............. $ 5,029 $ 7,183
------------------- -------------------
------------------- -------------------
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, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
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 year's consolidated financial statements have been reclassified
to conform to the 1998 presentation.
3. Earnings per share
During the year ended December 31, 1997, the Company adopted SFAS No.128,
"Earnings Per Share" (SFAS 128). Under SFAS 128 basic earnings per share
excludes dilution and is computed by dividing income 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 initial public offering referenced
in Note 5, respectively.
On September 2, 1998 the Board of Directors of the Company authorized the
repurchase of up to 1,000,000 shares or approximately five percent, of the
Company's common stock. During the third quarter, the Company repurchased
295,000 shares. The shares are held as treasury shares and reduce the weighted
average shares outstanding.
Earnings per share is calculated by taking the net earnings available to
the common stockholders and dividing by the weighted average number of shares of
common stock outstanding. The weighted average numbers of shares of common stock
for the three months ended September 30, 1998 and 1997 were 21,832,944 and
3,152,064, respectively, for both basic and diluted earnings per share. The
weighted average numbers of shares of common stock for the nine months ended
September 30, 1998 and 1997 were 12,641,791 and 3,152,064, respectively, for
both basic and diluted earnings per share. The weighted average number of shares
of common stock outstanding reflects the exchange of all of the Company's
outstanding classes of preferred stock into common stock and the subsequent 32
to 1 stock split referenced above on all then outstanding shares of common
stock, both of which actions took place immediately prior to the public offering
referenced in Note 5 hereto.
7
4. Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that selected information
about those operating segments be reported in interim financial statements. This
Statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segment of a Business Enterprise." SFAS 131 requires
that all public enterprises report financial and descriptive information about
its reportable operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This Statement is effective for
fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years should be restated. This
statement need not be applied to interim financial statements in the year of
application, but comparative information for interim periods in the initial year
of the application shall be reported in financial statements for interim periods
in the second year of application. Early application is encouraged. Management
believes that the adoption of SFAS 131 will not have a material impact on the
Company's disclosures.
In February 1998, the FASB issued Statement of the Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosures about Pension and Other
Post-retirement Benefits." SFAS 132 amends the disclosure requirements of SFAS
No. 87, "Employer's Accounting for Pensions, SFAS No. 88, "Employer's Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employer's Accounting for Retirement
Benefits Other than Pensions." SFAS 132 standardizes the disclosure requirements
of SFAS Nos. 87 and 106 to the extent practicable and recommends a parallel
format for presenting information about pensions and other retirement benefits.
SFAS 132 is effective for fiscal years beginning after December 15, 1997. SFAS
132 will result in disclosure changes only.
In June 1998, the FASB issued Statement of the Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 amends SFAS No. 52 "Foreign Currency Translation" to
permit special accounting for a hedge of a foreign currency forecasted
transaction with a derivative. It supersedes SFAS No. 80, "Accounting for Future
Contracts", SFAS No. 105, "Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk", and SFAS No. 119, "Disclosure about Derivative Financial
Instruments". It amends SFAS No.107, "Disclosure about Fair Value of Financial
Instruments, to include in Statement 107 disclosure provisions about
concentrations of credit risk from Statement 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 recognizes
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, 1999. Management is in the process of determining the
impact of SFAS 133 on the Company's financial position and results of
operations.
5. Initial Public Offering
On May 15, 1998, the Company completed its initial publicly underwritten
offering of its Common Stock. An aggregate of 12,666,667 shares of Common Stock
were sold to the public at an initial public offering price of $13.75 per share,
of which 8,866,667 shares were issued and sold by the Company and 3,800,000
shares were sold by the existing stockholders of the Company. In connection with
the underwriting agreement executed by the Company with the underwriters of the
public offering, the Company granted the underwriters an option to purchase up
to an additional 1,900,000 shares of Common Stock, on the same terms and
conditions as in the public offering, solely to cover over-allotments, if any.
Such over-allotment option was exercised in full, and on May 21, 1998, the
Company and the original stockholders sold an additional 1,330,000 shares and
570,000 shares, respectively. The Company did not receive any proceeds from the
sale of shares by the existing stockholders.
8
6. Stock Repurchase
On September 2, 1998 PBOC Holdings, Inc. announced a stock repurchase
program. The Company's Board of Directors authorized the repurchase of up to
1,000,000 shares, or approximately five percent, of the Company's outstanding
common stock, from time to time in open-market transactions. The repurchased
shares will be held as treasury stock and used for general corporate purposes.
During the third quarter, the Company repurchased 295,000 shares with a total
purchase price of $3.1 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
The Company had consolidated total assets of $3.2 billion at September 30,
1998, an increase of $997.9 million or 45.1% from December 31, 1997, reflecting
the Company's growth strategy. The increase was primarily attributable to a
$510.2 million increase in loans receivable, net, due to loan originations of
$403.7 million and purchases of $753.0 million of one-year single-family
residential mortgage loans, which were partially offset by principal repayments
of $598.5 million and loan sales of $42.2 million. Securities-available-for-sale
also increased by $375.2 million mainly due to purchases. The increases in the
Company's loan and securities portfolios were primarily funded by FHLB advances
and deposits, which increased by $671.0 million, or 142.2%, and $210.5 million,
or 16.6%, respectively. The increase in deposits was primarily due to the
acquisitions of two branch offices and their related deposits and an expanded
business customer deposit base. The Company's stockholders' equity increased by
$95.7 million to $175.3 million at September 30, 1998, as a result of the
Company's initial public offering.
Results of Operations
The Company earned $4.9 million for the third quarter ended September 30,
1998, compared to net earnings of $1.3 million, before preferred dividends of
$1.5 million, for the third quarter ended September 30, 1997, The Company's
basic and diluted earnings (loss) per common share amounted to $0.22 and ($0.06)
during the quarters ended September 30, 1998 and 1997, respectively.
For the nine months ended September 30, 1998, the Company reported net
earnings of $438,000, before referred dividends of $2.2 million, compared to net
earnings of $7.6 million, before preferred dividends of $5.9 million, for the
nine months ended September 30, 1997. The 1998 results were impacted by one-time
expense of $11.1 million ($6.5 million net of applicable tax benefits) for
employment agreement benefits due to certain senior executive officers of the
Company in connection with the initial public offering of common stock. The
Company also paid a one-time special FDIC assessment, which it had deferred from
paying in prior years, of $4.5 million ($2.7 million net of applicable tax
benefits). Without giving effect to such one-time payments, the Company's basic
and diluted earnings per common share amounted to $0.76 and $0.53 during the
nine months ended September 30, 1998 and 1997, respectively, The Company's
return on average assets excluding one-time expenses amounted to 0.49% for the
nine months ended September 30, 1998, compared to 0.55% for the nine months
ended September 30, 1997.
Net Interest Income
Net interest income increased by $3.1 million or 37.9% during the quarter
ended September 30, 1998 over the comparable 1997 quarter. This increase was
primarily due to loan growth and the investment of the proceeds from the
Company's initial public offering. For the nine months ended September 30, 1998
net interest income increased by $3.4 compared to the nine months ended
September 30, 1997, which attributable to a $34.3 million increase in total
interest, fee and dividend income, which was partially offset by a $30.9 million
or 44.6% increase in total interest expense and accelerated premium amortization
of $5.1million. During the last quarter of 1997, the Company purchased $481
million of adjustable rate-single family residential loans. Due to higher than
anticipated prepayments the Company accelerated its premium amortization related
to these loans by $5.1 million for the nine months ended September 30, 1998.
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,
----------------------------------------------------------------------------------------
1998 1997
---------------------------------------------- -----------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------- ----------- ------------ ----------- ---------- ------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)...................... $2,094,033 $ 35,596 6.80% $1,124,920 $ 20,954 7.45%
Mortgage-backed securities (2)........... 559,604 8,368 5.98 563,712 9,445 6.70
Other interest-earning assets (3)........ 472,970 8,015 6.78 100,261 1,943 7.75
---------- --------- ---------- ---------
Total interest-earning assets............ 3,126,607 51,979 6.65 1,788,893 32,342 7.23%
--------- ---------
Non-interest-earning assets................ 101,840 69,888
Total assets......................... $3,228,447 $1,858,781
---------- ----------
---------- ----------
Interest-bearing liabilities:
Deposits:................................
Transaction accounts(4)................ $ 399,545 3,247 3.22% 447,232 2,942 2.61%
Term certificates of deposit........... 1,035,354 15,026 5.76 846,521 13,908 6.52
---------- --------- ---------- ---------
Total deposits..................... 1,434,899 18,273 5.05 1,293,753 16,850 5.17
Senior debt.............................. -- -- -- 11,486 349 12.05
Other borrowings......................... 1,556,862 22,322 5.69 465,424 6,866 5.85
Hedging costs............................ -- 52 -- 59
---------- --------- ---------- ---------
Total interest-bearing
liabilities ...................... 2,991,761 40,647 5.39% 1,770,663 24,124 5.41%
--------- ---------
Non-interest-bearing liabilities........... 64,283 20,716
----------
Total liabilities................... 3,056,044 1,791,379
Stockholders' equity....................... 172,402 67,402
---------- ----------
Total liabilities and
stockholders' equity ............. $3,228,447 $1,858,781
---------- ----------
---------- ----------
Net interest-earning assets................ $ 134,846 $ 18,230
---------- ----------
---------- ----------
Net interest income/interest rate
spread ................................. $ 11,332 1.26% $ 8,218 1.82%
--------- ------ ---------- -------
--------- ------ ---------- -------
Net interest margin........................ 1.45% 1.84%
------ -------
------ -------
Ratio of average interest-earning
assets to average interest-
bearing liabilities...................... 104.51% 101.03%
------ -------
------ -------
(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, investment securities and FHLB stock.
(4) Includes passbook, NOW and money market accounts.
10
Nine months ended September 30,
------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------- ------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------- ----------- ------------ --------------- ------------ ------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)............ $1,731,388 $ 89,511 6.89% $1,129,476 $ 62,307 7.36%
Mortgage-backed securities(2).. 514,817 22,902 5.93 517,423 25,642 6.61
Other interest-earning
assets (3)................... 322,873 15,659 6.47 125,258 5,811 6.19
--------------- ----------- --------------- ------------
Total interest-earning
assets....................... 2,569,078 128,072 6.65 1,772,157 93,760 7.05%
----------- ------------
Non-interest-earning assets...... 85,079 55,528
--------------- ---------------
Total assets............... $2,654,157 $1,827,685
--------------- ---------------
--------------- ---------------
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)...... 358,538 9,413 3.51 351,407 9,545 3.63%
Term certificates of
deposit...................... 995,050 42,496 5.71 977,243 41,262 5.65
--------------- ----------- --------------- ------------
Total deposits........... 1,353,588 51,909 5.13 1,328,650 50,807 5.11
Senior debt.................... 5,972 445 9.96 11,402 966 11.33
Other borrowings............... 1,116,177 47,689 5.71 399,703 17,337 5.80
Hedging costs.................. -- 162 -- 209
--------------- ----------- --------------- ------------
Total
interest-bearing
liabilities............. 2,475,737 100,205 5.41 1,739,755 69,319 5.33%
----------- ------------
Non-interest-bearing
liabilities...................... 51,418 19,407
--------------- ---------------
Total liabilities......... 2,527,155 1,759,162
Stockholders' equity............. 127,002 68,523
--------------- ---------------
Total liabilities and
stockholders' equity.... $2,654,157 $1,827,685
--------------- ---------------
--------------- ---------------
Net interest-earning assets...... $ 93,341 $ 32,402
--------------- ---------------
--------------- ---------------
Net interest income/interest
rate spread.................... $ 27,867 1.24% $ 24,441 1.72%
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
Net interest margin.............. 1.45% 1.84%
---------- ------------
---------- ------------
Ratio of average interest-earning
assets to average interest-
bearing liabilities............ 103.77% 101.86%
---------- ------------
---------- ------------
(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, investment securities and FHLB stock.
(4) Includes passbook, NOW and money market accounts.
The Company's interest rate spread was 1.26% for the third quarter of 1998,
a decrease of 56 basis points compared to 1.82% for the same period in 1997. For
the nine months ended September 30, 1998, the interest rate spread was 1.24%, a
decrease of 48 basis points compared to 1.72% for the same period in 1997. The
decrease in interest rate spread is mainly due to a decrease in the Bank's yield
on mortgage-backed securities and loans receivable, which was caused by a
decline in mortgage rates and an increase in refinancing activities.
The Company's net interest margin was 1.45% for the third quarter of 1998,
a decrease of 39 basis points compared to 1.84% for the same period in 1997. For
the nine months ended September 30, 1998, the net interest margin was 1.45%, a
decrease of 39 basis points compared to 1.84% for the same period in 1997. This
decrease was primarily due to growth of the balance sheet during the latter part
of 1997 and third quarter of 1998 at a lower marginal spread and the accelerated
premium amortization noted previously.
11
The following table sets 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, 1998
compared to September 30, 1997
(In thousands)
---------------------------------------------------------------------------
Increase (decrease) due to
-----------------------------------------------------
Total Net
Rate Volume Rate/Volume Increase/(Decrease)
---- ------ ----------- -------------------
Interest-earning assets:
Loans receivable............................. $ (1,832) $ 18,052 $ (1,578) $ 14,642
Mortgage-backed securities................... (1,016) (69) 8 (1,077)
Other interest-earning assets ............... (244) 7,223 (907) 6,072
---------------------------------------------------------------------------
Total net change in income on interest-
earning assets ............... (3,092) 25,206 (2,477) 19,637
---------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Transaction accounts.................... 693 (314) (74) 305
Term certificates of deposit........... (1,623) 3,103 (362) 1,118
---------------------------------------------------------------------------
Total deposits........................ (930) 2,789 (436) 1,423
Senior debt................................ (349) (349) 349 (349)
Other borrowings........................... (193) 16,101 (452) 15,456
Hedging costs.............................. -- -- (7) (7)
---------------------------------------------------------------------------
Total net change in expense on interest-
bearing liabilities........................ (1,472) 18,541 (546) 16,523
---------------------------------------------------------------------------
Change in net interest income.................. $ (1,620) $ 6,665 $ (1,931) $ 3,114
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Nine months ended September 30, 1998
compared to September 30, 1997
(In thousands)
---------------------------------------------------------------------------
Increase (decrease) due to
-----------------------------------------------------
Total Net
Rate Volume Rate/Volume Increase/(Decrease)
---- ------ ----------- ------------------
Interest-earning assets:
Loans receivable............................. $ (3,914) $ 33,204 $ (2,086) $ 27,204
Mortgage-backed securities................... (2,624) (129) 13 (2,740)
Other interest-earning assets ............... 259 9,170 419 9,848
---------------------------------------------------------------------------
Total net change in income on interest-
earning assets ............... (6,279) 42,245 (1,654) 34,312
---------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Transaction accounts.................... (319) 194 (7) (132)
Term certificates of deposit........... 473 752 9 1,234
---------------------------------------------------------------------------
Total deposits........................ 154 946 2 1,102
Senior debt................................ (116) (460) 55 (521)
Other borrowings........................... (260) 31,077 (465) 30,352
Hedging costs.............................. -- -- (47) (47)
---------------------------------------------------------------------------
Total net change in expense on interest-
bearing liabilities........................ (222) 31,563 (455) 30,886
---------------------------------------------------------------------------
Change in net interest income.................. $ (6,057) $ 10,682 $ (1,199) $ 3,426
---------------------------------------------------------------------------
---------------------------------------------------------------------------
12
Provision for Loan Losses
The Company's provision for loan losses remained unchanged at $450,000 for
the quarter ended September 30, 1998, compared to the same period in 1997.
During the nine months ended September 30, 1998, the Company's provision for
loan losses amounted to $1.4 million, as compared to $1.1 million during the
comparable period in the prior year. At September 30, 1998, the Company's
allowance for loan losses amounted to $18.5 million, or 0.91% of total loans,
and 183.11% of total non-performing loans.
Other Income
The Company's total other income increased by $1.0 million, or 135.9%
during the quarter ended September 30, 1998 compared to the same period in 1997,
primarily due to increases of $468,00 in gain on sale of mortgage backed
securities and gain on loan sales of $575,000. The Company's other income
decreased by $495,000 during the nine months ended September 30, 1998 versus the
1997 period, primarily due to the absence of the 1997 gain on sale of servicing
which totaled $3.4 million. The decrease during the nine month period in 1998
was partially offset by a $669,000 increase in gain on mortgage-backed
securities sales, net and by a $1.5 million increase in income from real estate
operations.
Operating Expenses
The Company's total operating expenses decreased by $253,000, or 3.5%,
during the September 30, 1998 quarter versus the comparable quarter in 1997. The
decrease was primarily a result of a $920,000 decrease in FDIC insurance
premiums as a result of the reduction in the Company's assessment rate from 29
to 3 basis points per annum. This decrease was partially offset by a $373,000
increase in occupancy expense and a $96,000 increase in office related expenses,
attributable to an expanded ATM network and branch acquisitions in 1998. The
Company's total operating expenses were $38.0 million in the nine months ended
September 30, 1998, an increase of $16.5 million compared to $21.4 million for
the same period last year. This increase was primarily a result of one time
payments of $15.6 million. ($9.2 million net of applicable tax benefits) which
were incurred in connection with the Company's initial public offering of common
stock.
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 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. 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.
13
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
September 30, 1998, 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 loans:
Fixed.............................. $ 26,497 $ 121,321 $ 217,786 $ 143,933 $ 248,093 $ 757,630
Adjustable ........................ 269,243 235,613 87,833 54,713 26,870 674,452
Multi-family residential:
Fixed.............................. 1,608 4,671 8,735 10,388 14,994 40,396
Adjustable ........................ 342,857 -- -- -- -- 342,857
Commercial, industrial and land:
Fixed.............................. 2,169 10,047 19,931 17,973 40,347 90,467
Adjustable ........................ 90,857 382 -- -- -- 91,239
Other loans(3) : ..................... 23,310 11,243 13,094 6,747 1,989 56,383
Mortgage-backed and other securities (4). 358,177 115,058 14,987 20,883 457,935 967,040
Other interest-earning assets (5)........ 30,000 -- -- -- 60,650 90,650
-----------------------------------------------------------------------------------------
Total......................... $1,144,898 $ 498,335 $ 362,366 $ 254,637 $ 850,878 $3,111,114
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW accounts......................... 154,116 -- -- -- -- 154,116
Passbook accounts.................... 141,364 -- -- -- -- 141,364
Money market accounts................ 110,506 -- -- -- -- 110,506
Term certificates of deposit......... 186,031 780,862 90,092 14,069 55 1,071,109
Senior debt.............................. -- -- -- -- -- --
Other borrowings......................... 253,000 -- 339,000 505,000 410,000 1,507,000
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Total......................... $ 845,017 $ 780,862 $ 429,092 $ 519,069 $ 410,055 $2,984,095
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Excess (deficiency) of interest earning
assets over interest-bearing
liabilities............................ 299,881 (282,527) (66,726) (264,432) 440,823 127,019
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities as a percent of total
assets................................. 9.34% (8.80%) (2.08%) (8.24%) 13.73% 3.96%
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities................... 299,881 17,354 (49,372) (313,804) 127,019
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percentage of
total assets........................... 9.34% 0.54% 1.54% (9.77%) 3.96%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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 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 $10.5
million at September 30, 1998.
(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
$13.8 million.
(5) Comprised of short-term investments, securities purchased under agreements
to resell, investment securities and FHLB stock.
14
Liquidity and Capital Resources
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 pay to 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 FHLB of San Francisco and other short and long-term borrowings.
At September 30, 1998, the Bank had $1.6 billion in borrowing capacity
under a collateralized line of credit with the FHLB of San Francisco. At
September 30, 1998, the Bank had total FHLB advances of $1.1 billion with a
weighted average interest rate of 5.59 %, $253 million of which matures in 1998
and the remaining $890 million of which matures between 2000 and 2008.
Additionally, at September 30, 1998, the Bank had securities sold under
agreements to repurchase totaling $364 million with a weighted average interest
rate of 5.61%, which mature between 2000 and 2008.
At September 30, 1998, the Bank had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and non-mortgage
loans of $66.7 million. Certificates of deposit which are scheduled to mature
within one year totaled $862.8 million at September 30, 1998, and borrowings
that are scheduled to mature within the same period amounted to $253 million.
Management anticipates that it will have sufficient funds available to meet its
current loan commitments.
Capital Resources
The Office of Thrift Supervision ("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, 1998 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, 1998:
Minimum Required Actual Excess
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Tangible capital...................... 48,158 1.50% $205,559 6.40% $157,401 4.90%
Tier 1 leverage capital .............. 128,421 4.00% 205,559 6.40% 77,138 2.40%
Tier 1 risk-based capital ............ 72,451 4.00% 205,559 11.35% 133,108 7.35%
Risk-based capital ................... 144,907 8.00% 221,088 12.21% 76,186 4.21%
15
Loan Portfolio Composition
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated:
September 30, 1998 December 31, 1997
-------------------------------------- --------------------------------------
Percent of Percent of
Amount Total Amount Total
----------------- ---------------- ---------------- -----------------
(Dollars in thousands)
Mortgage loans:
Single-family residential................ $ 1,436,559 69% $ 953,701 62%
Multi-family residential................. 387,252 19 426,254 27
Commercial............................... 182,454 9 135,407 9
Land and other .......................... 886 -- 5,896 --
----------------- ---------------- ---------------- -----------------
Total mortgage loans ................. 2,007,151 97 1,521,258 98
----------------- ---------------- ---------------- -----------------
Other loans:
Commercial business...................... 54,599 3 22,484 1
Consumer................................. 9,563 -- 8,485 1
Secured by deposits...................... 5,113 -- 2,287 --
----------------- ---------------- ---------------- -----------------
Total loans receivable................ 2,076,426 100% 1,554,514 100%
----------------- ---------------- ---------------- -----------------
---------------- -----------------
Less:
Undistributed loan proceeds ............. 12,557 6,206
Unamortized net loan discounts and
deferred originations fees............ (1,199) (6,859)
Deferred gain on servicing sold.......... 3,095 4,131
Allowance for loan losses ............... 18,531 17,824
----------------- ----------------
Loans receivable, net........................ $2,043,442 $1,533,212
----------------- ----------------
----------------- ----------------
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, 1998 December 31, 1997
------------------ -----------------
(Dollars in thousands)
-------------------------------------------------------
Non-performing loans, net:
Mortgage loans:
Single-family residential loans................... $ 5,196 $ 8,435
Multi-family residential loans.................... 3,277 405
Commercial real estate loans...................... 976 1,064
Commercial business loans............................. 671 --
Consumer loans........................................ 325 --
---------------------- -----------------------
Total non-performing loans, net....................... 10,445 9,904
---------------------- -----------------------
Real estate owned, net:
Single-family residential......................... 3,385 678
Multi-family residential.......................... 1,263 6,482
Commercial........................................ -- 5,921
Land.............................................. 202 202
---------------------- -----------------------
Total real estate owned, net.......................... 4,850 13,283
---------------------- -----------------------
Total non-performing assets........................... $ 15,295 $ 23,187
---------------------- -----------------------
---------------------- -----------------------
Troubled debt restructurings.......................... $ 5,018 $ 9,936
---------------------- -----------------------
---------------------- -----------------------
Total non-performing assets and troubled debt
restructurings.................................... $ 20,313 $ 33,123
---------------------- -----------------------
---------------------- -----------------------
Non-performing loans to total loans, net.............. 0.51% 0.65%
Non-performing loans to total assets.................. 0.33 0.45
Non-performing assets to total assets................. 0.48 1.05
Total non-performing assets and troubled debt
restructurings to total assets.................... 0.63 1.50
17
Non-performing assets as of September 30, 1998 and December 31, 1997
were $15.3 million and $23.2 million, respectively. The decrease in
non-performing assets was due primarily to a decrease in real estate owned
properties. 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,
---------------------------------------
1998 1997
------------------- -------------------
(Dollars in thousands)
---------------------------------------
Beginning balance....................................................... $ 17,824 $ 23,280
------------------- -------------------
Provision for loan losses............................................... 1,350 1,105
------------------- -------------------
Charge-offs:
Single-family residential loans......................................... (505) (1,675)
Multi-family residential loans.......................................... (163) (5,544)
Commercial real estate loans............................................ -- (375)
Commercial loans........................................................ (16) --
Consumer loans.......................................................... (44) --
------------------- -------------------
Total charge-offs.................................................... (728) (7,594)
------------------- -------------------
Recoveries:
Single-family residential loans......................................... 85 125
------------------- -------------------
Total recoveries..................................................... 85 125
------------------- -------------------
Net charge-offs......................................................... (643) (7,469)
------------------- -------------------
Ending balance as of September 30, 1998 and 1997........................ $ 18,531 $ 16,916
------------------- -------------------
------------------- -------------------
Allowance for loan losses to total non performing loans at end of
period............................................................... 177.42% 190.28%
Allowance for loan losses to total non performing loans and
troubled debt restructurings at the end of period.................. 119.84% 93.95%
Allowance for loan losses to total loans, net at the end of period.. 0.91% 1.49%
Net loan charge-offs were $643,000 for the nine months ended September
30, 1998, a decrease of $6.8 million compared to $7.5 million for nine months
ended September 30, 1997. The decrease in charge-offs was mainly due to
improving real estate values in California. As a result of loan portfolio
growth, the allowance for loan losses to total non-performing loans decreased to
177.42% at September 30, 1998 compared to 190.28% at September 30, 1997. The
allowance for loan losses to total loans was 0.91% at September 30, 1998, a
decrease of 58 basis points, compared to 1.49% for September 30, 1997, which is
mainly due to loan portfolio growth through purchases of single family
residential fixed rate loans, for which the Company maintains lower allowance
amounts.
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
The Company has adopted a plan to address Year 2000 data processing issues.
The plan includes the assessment of all internal systems, programs and data
processing applications as well as those provided to the Bank by third-party
vendors. A significant portion of the Company's data processing and loan
servicing is performed by third-party vendors from whom the Company has received
confirmation that they expect to be compliant with Year 2000 issues. The Company
has not incurred significant expense to date, but expects to incur total
expenses of $225,000 through 1999 to address Year 2000 issues.
The Company is currently in the process of testing third party vendors'
data processing applications for Year 2000 compliance. The Company has
established a plan and task force to complete Year 2000 testing. The first step
in the Company's Year 2000 plan was initial awareness, which included defining
the Year 2000 program, impact to the business, defining critical applications,
establishing executive support, determining project responsibilities and
developing strategies. In the initial awareness phase, the Company also
established a budget for resources required and target test completion dates for
all systems and software for Year 2000 compliance.
The Company is currently in the validation phase of its Year 2000
compliance plan, which includes developing test scripts, establishing testing
controls, setting target dates, testing data exchange partners, and testing
hardware and software. The final phase in the Company's 2000 compliance plan is
the implementation phase which is scheduled to be completed in June 1999. The
implementation phase task list includes certification of Year 2000 compliance,
implementation contingency a plan for non-compliant products and compliance
assurance of any new systems or programs acquired.
No assurance can be made that such third party vendors' efforts will be
successful or that the Company's cost associated therewith will be as estimated.
However, the Company does not believe any Year 2000 issues will materially
affect the Company's products, services or competitive conditions. In addition,
the Company does not believe that the cost of addressing the Year 2000 issues or
the costs or the consequences of incomplete or untimely resolution of its Year
2000 issues does not represent a known material event or uncertainty that is
reasonably likely to affect its future financial results, or cause its reported
financial information not to be necessarily indicative of future operating
results or future financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
19
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.
(a) The following exhibit is included herein:
(27) Financial Data Schedule
(b) Reports on form 8-K:
No reports on form 8-K have been filed during the quarter
ended September 30, 1998.
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PBOC Holdings, Inc.
Date: November 5, 1998 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
21