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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 MARCH 31, 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 APRIL 30, 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 - March 31, 1999
and December 31, 1998......................................................................... 3
Consolidated Statements of Operations - Three months ended
March 31, 1999 and 1998....................................................................... 4
Consolidated Statements of Comprehensive Earnings - Three months ended
March 31, 1999 and 1998....................................................................... 5
Consolidated Statements of Cash Flows - Three months ended March 31, 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....................................... 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
MARCH 31, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1999 1998
------------- --------------
ASSETS
Cash and cash equivalents .......................................... $ 24,031 $ 22,401
Federal funds sold ................................................. 54,000 24,000
Securities purchased under agreements to resell .................... 78,000 --
Securities available-for-sale, at estimated market values .......... 967,131 1,004,937
Mortgage-backed securities held-to-maturity, market values $6,073 at
March 31, 1999 and $6,372 at December 31, 1998 ................... 6,006 6,282
Loans receivable, net .............................................. 2,103,645 2,148,857
Real estate and other repossessed assets held for sale, net ........ 4,905 2,723
Premises and equipment, net ........................................ 6,892 7,212
Federal Home Loan Bank stock, at cost .............................. 64,000 63,150
Accrued interest receivable ........................................ 17,212 17,607
Other assets ....................................................... 35,192 37,858
----------- -----------
Total assets .............................................. $ 3,361,014 $ 3,335,027
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ........................................................... $ 1,583,509 $ 1,542,162
Securities sold under agreements to repurchase ..................... 364,000 364,000
Advances from Federal Home Loan Bank ............................... 1,184,000 1,198,000
Accrued expenses and other liabilities ............................. 16,648 17,009
----------- -----------
Total liabilities ......................................... 3,148,157 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
Unrealized losses on securities available-for-sale .............. (14,786) (13,611)
Minimum pension liability, net of tax ........................... (414) (414)
Accumulated deficit ............................................. (50,159) (56,487)
----------- -----------
Total stockholders' equity ................................ 179,607 180,606
----------- -----------
Total liabilities and stockholders' equity ................ $ 3,361,014 $ 3,335,027
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
3
PBOC HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
------------- --------------
Interest, fees and dividend income:
Short term investments ................................. $ 274 $ 355
Securities purchased under agreements to resell ........ 11 --
Investment securities .................................. 6,364 2,148
Mortgage-backed securities ............................. 8,134 7,789
Loans receivable ....................................... 38,192 28,278
Federal Home Loan Bank stock ........................... 808 374
------------ ------------
Total interest, fees and dividend income .......... 53,783 38,944
------------ ------------
Interest expense:
Deposits ............................................... 17,956 16,128
Advances from the Federal Home Loan Bank ............... 15,897 7,631
Securities sold under agreements to repurchase ......... 5,101 4,658
Senior debt ............................................ -- 299
Hedging costs, net ..................................... 47 55
------------ ------------
Total interest expense ............................ 39,001 28,771
------------ ------------
Net interest income ....................................... 14,782 10,173
Provision for loan losses .............................. 1,050 450
------------ ------------
Net interest income after provision for loan losses 13,732 9,723
------------ ------------
Other income:
Loan service and loan related fees ..................... 6 5
Gain on mortgage-backed securities sales, net .......... 121 323
Gain on loan sales, net ................................ 49 --
Income (loss) from real estate operations, net ......... 60 (148)
Other income ........................................... 705 678
------------ ------------
Total other income ................................ 941 858
Operating expenses:
Personnel and benefits ................................. 3,926 2,907
Occupancy .............................................. 2,206 2,030
FDIC insurance ......................................... 334 1,116
Professional services .................................. 266 340
Office related expenses ................................ 1,127 1,013
Other .................................................. 617 274
------------ ------------
Total operating expenses .......................... 8,476 7,680
------------ ------------
Earnings before income taxes and minority interest ........ 6,197 2,901
Income tax (benefit) ...................................... (1,000) --
------------ ------------
Earnings before minority interest ......................... 7,197 2,901
Minority interest ......................................... 869 869
------------ ------------
Net earnings ...................................... 6,328 2,032
Dividends on preferred stock .............................. -- 1,451
------------ ------------
Net earnings available to common stockholders...... $ 6,328 $ 581
------------ ------------
------------ ------------
Earnings per share basic and diluted ...................... $ 0.30 $ 0.18
Weighted average shares outstanding ....................... 20,757,733 3,152,054
See accompanying notes to consolidated financial statements.
4
PBOC HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
------------ ------------
Net earnings ............................................. $ 6,328 $ 2,032
Other comprehensive earnings (loss):
Unrealized (loss) on securities available-for-sale .... (1,296) (1,440)
Reclassification of realized gains included in earnings 121 323
------- -------
Other comprehensive earnings (loss) ................... (1,175) (1,117)
------- -------
Comprehensive earnings ................................... $ 5,153 $ 915
------- -------
------- -------
See accompanying notes to consolidated financial statements.
5
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net earnings ................................................................ $ 6,328 $ 2,032
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses ............................................... 1,050 450
Depreciation ............................................................ 416 332
Decrease in valuation allowance ......................................... 1,000 --
Amortization/accretion of premiums, discounts and deferred fees ......... 4,383 1,681
Amortization of purchase accounting intangibles ......................... 45 45
Gain on sale of mortgage-backed securities available-for-sale ........... (121) (323)
Gain on sale of real estate owned ....................................... (107) (124)
FHLB stock dividend ..................................................... (850) --
Decrease in accrued interest receivable ................................. 395 136
Increase (decrease) in accrued interest payable ......................... (12) 785
Increase (decrease) in other assets ..................................... 1,640 (12,544)
Amortization for discontinued lease operations .......................... 13 17
Decrease in accrued expenses ............................................ (362) (68)
Gain on sale of loans ................................................... (49) --
Amortization of goodwill ................................................ 26 14
--------- ---------
Net cash (used in) provided by operating activities ..................... 13,795 (7,567)
--------- ---------
Cash flows from investing activities:
(Increase) in securities purchased under agreements to resell ............... (78,000) --
Proceeds from sales of mortgage-backed securities available-for-sale ....... 92,439 156,569
Proceeds from sale of loans ................................................. 92,546 357
Investment and mortgage-backed securities principal repayments and maturities 44,600 32,557
Loan originations, net of repayments ........................................ (27,427) 27,396
Purchases of investments and mortgage-backed securities available-for-sale .. (101,583) (144,402)
Purchases of loans .......................................................... (27,476) (117,215)
Cost capitalized on real estate, net of insurance settlements ............... 8 (68)
Proceeds from the sale of real estate ....................................... 1,674 959
Purchases of premises and equipment ......................................... (141) (831)
Purchase of FHLB stock ...................................................... -- (5,966)
--------- ---------
Net cash used in investing activities ....................................... (3,360) (50,644)
--------- ---------
Cash flows from financing activities:
Purchases of treasury stock ................................................. (6,152) --
Net increase in deposits ................................................... 41,347 17,771
Net decrease in securities sold under agreements to repurchase .............. -- (67,632)
Issuance of FHLB advances ................................................... 196,500 392,000
Repayments of FHLB advances ................................................. (210,500) (287,000)
Increase in other borrowings ................................................ -- 111
Decrease in minority interest ............................................... -- (439)
--------- ---------
Net cash provided by financing activities .................................. 21,195 54,811
--------- ---------
Net change in cash .............................................................. 31,630 (3,400)
Cash and cash equivalents at beginning of period ................................ 46,401 21,117
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 78,031 $ 17,717
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................................................. $ 39,013 $ 27,745
--------- ---------
--------- ---------
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate ...................................................... $ 3,757 $ 3,246
Loans originated in connection with sale of foreclosed real estate .......... $ -- $ 257
Transfer of loans held for investment to loans held for sale ................ $ 92,497 $ 357
--------- ---------
--------- ---------
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 three months ended March 31, 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 year's consolidated financial statements have been
reclassified to conform to the 1999 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 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 March 31, 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 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 three months ended March 31, 1999 and 1998 were 20,757,733 and
3,152,054, 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 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
are not dilutive.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of the Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." Among other things, 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 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, 1999.
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.
FINANCIAL CONDITION
The Company had consolidated total assets of $3.4 billion at March 31,
1999, an increase of $26.0 million from December 31, 1998. The increase was
primarily attributable to loan originations of $187.7 million and loan purchases
of $27.5 million. This increase was offset by a loan sale of $92.5 million and
loan repayments of $161.2 million during the March 31, 1999 quarter. Securities
available-for-sale also decreased by $37.8 million, primarily due to sales.
Federal funds sold and securities purchased under agreements to resell increased
$108.0 million due to excess funds at quarter end as a result of loan and
security sales. The increase in earning assets was funded by deposits, which
increased by $41.3 million, primarily as a result of an expanded business
customer
8
deposit base. The Company's stockholders' equity decreased by $999,000 to $179.6
million at March 31, 1999. This decrease was mainly due to stock repurchases of
$6.2 million during the first quarter of 1999.
RESULTS OF OPERATIONS
The Company earned $6.3 million for the first quarter ended March 31,
1999, compared to net earnings of $2.0 million, before preferred dividends of
$1.5 million, for the first quarter ended March 31,1998, The Company's basic and
diluted earnings per common share amounted to $0.30 and $0.18 during the
quarters ended March 31, 1999 and 1998, respectively. The Company's preferred
stock was redeemed in May 1998 in connection with the initial public offering.
The Company's return on equity amounted to 14.25% for the three months
ended March 31, 1999, compared to 10.40% for the three months ended
March 31, 1998.
NET INTEREST INCOME
Net interest income increased by $4.6 million or 45.3% during the
quarter ended March 31, 1999 over the comparable 1998 quarter. This increase was
primarily due to loan growth and the investment of the proceeds from the
Company's initial public offering in May 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 MARCH 31,
-------------------------------------------------------------------------------------------
1999 1998
------------------------------------------- --------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------------- ---------- ------------ -------------- ----------- -------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)........... $2,145,058 $ 38,192 7.12% $1,520,672 $ 28,278 7.44%
Mortgage-backed securities (2) 604,899 8,134 5.38 507,773 7,789 6.14
Other interest-earning assets (3) 506,823 7,457 5.89 176,634 2,877 6.53
-------------- ---------- --------------- ------------
Total interest-earning
assets................. 3,256,780 53,783 6.61% 2,205,079 38,944 7.07%
---------- -------- ------------ -------
-------- -------
Non-interest-earning assets..... 69,613 68,930
-------------- ---------------
Total assets............. $3,326,393 $2,274,009
-------------- ---------------
-------------- ---------------
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)..... $ 354,822 3,025 3.46% $ 345,620 3,100 3.64%
Term certificates of deposit 1,122,560 14,931 5.39 934,261 13,028 5.66
-------------- ---------- --------------- ------------
Total deposits........... 1,477,382 17,956 4.93 1,279,881 16,128 5.11
Senior debt................... -- -- -- 11,168 299 10.86
Other borrowings.............. 1,551,847 20,998 5.49 865,152 12,289 5.76
Hedging costs................. -- 47 -- 55
-------------- ---------- --------------- ------------
Total interest-bearing
liabilities............ 3,029,229 39,001 5.22% 2,156,201 28,771 5.41%
---------- -------- ------------ -------
-------- -------
Non-interest-bearing liabilities 117,107 38,553
-------------- ---------------
Total liabilities........ 3,146,336 2,194,754
Stockholders' equity............ 180,057 79,255
-------------- ---------------
Total liabilities and
stockholders' equity... $3,326,393 $2,274,009
-------------- ---------------
-------------- ---------------
Net interest-earning assets..... $ 227,551 $ 48,878
-------------- ---------------
-------------- ---------------
Net interest income/interest rate
spread..................... $ 14,782 1.39% $ 10,173 1.66%
---------- ----------- ------------ ------------
---------- ----------- ------------ ------------
Net interest margin............. 1.82% 1.85%
----------- ------------
----------- ------------
Ratio of average interest-earning
assets to average interest-
bearing liabilities........ 107.51% 102.27%
----------- ------------
----------- ------------
(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 1.39% for the first quarter of
1999, a decrease of 27 basis points compared to 1.66% for the same period in
1998. 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 1.82% for the first quarter of
1999, a decrease of 3 basis points compared to 1.85% for the same period in
1998. This decrease in net interest margin was mainly due to lower yields on
investment and mortgage backed securities.
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
10
(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 MARCH 31, 1999
COMPARED TO MARCH 31, 1998
(IN THOUSANDS)
---------------------------------------------------------------------------
INCREASE (DECREASE) DUE TO
-----------------------------------------------------
TOTAL NET
RATE VOLUME RATE/VOLUME INCREASE/(DECREASE)
---- ------ ----------- -------------------
Interest-earning assets:
Loans receivable............................. $ (1,203) $ 11,611 $ (494) $ 9,914
Mortgage-backed securities................... (961) 1,490 (184) 345
Other interest-earning assets ............... (226) 4,338 468 4,580
---------------------------------------------------------------------------
Total net change in income on interest-
earning assets ............................ (2,390) 17,439 (210) 14,839
---------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Transaction accounts.................... (154) 83 (4) (75)
Term certificates of deposit........... (607) 2,627 (117) 1,903
---------------------------------------------------------------------------
Total deposits........................ (761) 2,710 (121) 1,828
Senior debt................................ -- (299) -- (299)
Other borrowings........................... (585) 9,756 (462) 8,709
Hedging costs.............................. -- -- (8) (8)
---------------------------------------------------------------------------
Total net change in expense on interest-
bearing liabilities........................ (1,346) 12,167 (591) 10,230
---------------------------------------------------------------------------
Change in net interest income.................. $ (1,044) $ 5,272 $ 381 $ 4,609
---------------------------------------------------------------------------
---------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses increased by $600,000 for the
quarter ended March 31, 1999, compared to the same period in 1998. This increase
was primarily due to loan portfolio growth and change in current portfolio mix
to a higher proportion of consumer and commercial loans. At March 31, 1999, the
Company's allowance for loan losses amounted to $18.8 million, or 0.88% of total
gross loans, and 250.78% of total non-performing loans.
OTHER INCOME
The Company's total other income increased by $83,000 during the
quarter ended March 31, 1999 compared to the same period in 1998, primarily due
to an increase of $208,000 in income from real estate operations and a gain on
loan sale of $49,000. This increase was partially offset by a $202,000 decrease
in gain on sales of mortgage backed securities.
OPERATING EXPENSES
The Company's total operating expenses increased by $796,000, or 10.4%,
during the March 31, 1999 quarter versus the comparable quarter in 1998. The
increase was primarily a result of a $1.0 million increase in personnel and
benefits cost, which reflects the Company's expansion of consumer and commercial
lending. This increase was partially offset by a $782,000 decrease in FDIC
insurance premiums reflecting a lower assessment rate currently in effect.
During the March 1999 quarter, the Company realized a $1.0 million
income tax benefit which resulted from an increase in its deferred tax assets
which the Company expects will be realizable in future periods.
11
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.
12
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
March 31, 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 loans:
Fixed.............................. $ 31,554 $ 145,098 $ 271,163 $ 189,937 $ 376,477 $1,014,229
Adjustable ........................ 198,443 118,361 32,013 17,078 -- 365,895
Multi-family residential:
Fixed.............................. 894 4,197 10,450 8,287 13,345 37,173
Adjustable ........................ 303,624 4,983 13,727 -- -- 322,334
Commercial, industrial and land:
Fixed.............................. 3,606 16,909 35,630 27,931 68,790 152,866
Adjustable ........................ 64,825 8,340 191 553 -- 73,909
Other loans(3)........................ 68,723 16,642 36,329 43,337 9,078 174,109
Mortgage-backed and other securities (4). 115,131 38,477 11,133 65,288 389,080 619,109
Other interest-earning assets (5)........ 447,345 14,446 -- -- 103,023 564,814
-----------------------------------------------------------------------------------------
Total......................... $1,234,145 $ 367,453 $ 410,636 $ 352,411 $ 959,793 $3,324,438
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW accounts......................... 175,537 -- -- -- -- 175,537
Passbook accounts.................... 133,678 -- -- -- -- 133,678
Money market accounts................ 130,368 -- -- -- -- 130,368
Term certificates of deposit......... 269,668 730,552 129,184 14,367 155 1,143,926
Other borrowings......................... -- 75,000 264,000 849,000 360,000 1,548,000
-----------------------------------------------------------------------------------------
Total......................... $ 709,251 $ 805,552 $ 393,184 $ 863,367 $ 360,155 $3,131,509
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Excess (deficiency) of interest earning
assets over interest-bearing
liabilities............................ 524,894 (438,099) (17,452) (510,956) 599,638 192,929
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities as a percent of
total assets........................... 15.62% (13.03)% 0.52% (15.20%) 17.84% 5.74%
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities........... 524,894 86,795 104,247 (406,709) 192,929
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as
a percentage of total assets........... 15.62% 2.58% 3.10% (12.10%) 5.74%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(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 $7.5
million at March 31, 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
$14.8 million.
(5) Comprised of short-term investments, securities purchased under agreements
to resell, investment securities and FHLB stock
13
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 March 31, 1999, the Bank had $1.7 billion in borrowing capacity
under a collateralized line of credit with the FHLB of San Francisco. At March
31, 1999, the Bank had total FHLB advances of $1.2 billion with a weighted
average interest rate of 5.36%, which mature between 2000 and 2008.
Additionally, at March 31, 1999, 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 March 31, 1999, the Bank had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and non-mortgage
loans of $129.3 million. Certificates of deposit which are scheduled to mature
within one year totaled $1.1 billion at March 31, 1999, and borrowings that are
scheduled to mature within the same period amounted to $75 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 March 31, 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 March 31, 1999:
WELL CAPITALIZED
MINIMUM REQUIREMENT ACTUAL EXCESS
-------------------- ------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Tangible capital...................... $ 67,198 2.00% $211,505 6.29% $144,307 4.29%
Tier 1 leverage capital .............. 167,995 5.00 211,505 6.29 43,510 1.29
Tier 1 risk-based capital ............ 109,580 6.00 211,505 11.58 101,925 5.58
Risk-based capital ................... 182,634 10.00 227,766 12.47 45,132 2.47
14
LOAN PORTFOLIO COMPOSITION
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated:
MARCH 31, 1999 DECEMBER 31, 1998
------------------------------------- --------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family residential.................. $1,384,233 64% $1,494,756 68%
Multi-family residential................... 361,697 17 366,625 17
Commercial................................. 226,805 11 206,402 9
Land and other ............................ 870 -- 880 --
---------------- ---------------- ---------------- ----------------
Total mortgage loans ................... 1,973,605 92 2,068,663 94
---------------- ---------------- ---------------- ----------------
Other loans:
Commercial business........................ 66,961 3 62,665 3
Consumer................................... 104,037 5 53,826 3
Secured by deposits........................ 3,397 -- 3,537 --
---------------- ---------------- ---------------- ----------------
Total loans receivable.................. 2,148,000 100% 2,188,691 100%
---------------- ---------------- ---------------- ----------------
---------------- ----------------
Less:
Undisbursed loan proceeds ................ 18,988 17,152
Unamortized net loan discounts and
deferred originations fees.............. 3,856 814
Deferred gain on servicing sold............ 2,740 2,971
Allowance for loan losses ................. 18,771 18,897
---------------- ----------------
Loans receivable, net.......................... $2,103,645 $2,148,857
---------------- ----------------
---------------- ----------------
15
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:
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(DOLLARS IN THOUSANDS)
---------------------------------
Non-performing loans, net:
Mortgage loans:
Single-family residential loans ........... $ 4,109 $ 3,959
Multi-family residential loans ............ 2,190 428
Commercial real estate loans .............. 900 3,613
Commercial business loans ..................... 49 99
Consumer loans ................................ 237 408
------------ --------------
Total non-performing loans, net ............... 7,485 8,507
------------ --------------
Real estate owned, net:
Single-family residential ................. 2,277 2,723
Multi-family residential .................. -- --
Commercial real estate .................... 2,531 --
Land ...................................... -- --
------------ --------------
Total real estate owned, net .................. 4,808 2,723
Other repossessed assets ...................... 97 --
------------ --------------
Total real estate and other repossessed assets,
net ...................................... 4,905 2,723
------------ --------------
Total non-performing assets ................... $12,390 $11,230
------------ --------------
------------ --------------
Troubled debt restructurings .................. $ 4,985 $ 3,576
------------ --------------
------------ --------------
Total non-performing assets and troubled debt
restructurings ............................ $17,375 $14,806
------------ --------------
------------ --------------
Non-performing loans to total loans, net ...... 0.36% 0.40%
Non-performing loans to total assets .......... 0.22 0.26
Non-performing assets to total assets ......... 0.37 0.34
Total non-performing assets and troubled debt
restructurings to total assets ............ 0.51 0.44
16
Non-performing assets as of March 31, 1999 and December 31, 1998 were
$12.3 million and $11.2 million, respectively. The increase in non-performing
assets was due primarily to a net increase in multi-family 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 THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
-------------------------------
BEGINNING BALANCE ...................................................... $ 18,897 $ 17,824
-------------- --------------
Provision for loan losses .............................................. 1,050 450
-------------- --------------
CHARGE-OFFS:
Single-family residential loans ........................................ (402) (244)
Multi-family residential loans ......................................... -- (43)
Commercial real estate loans ........................................... (39) --
Commercial loans ....................................................... (703) (16)
Consumer loans ......................................................... (37) --
-------------- --------------
Total charge-offs ................................................... (1,181) (303)
-------------- --------------
RECOVERIES:
Single-family residential loans ........................................ 1 1
Commercial loans ....................................................... 4 --
-------------- --------------
Total recoveries .................................................... 5 1
-------------- --------------
Net charge-offs ........................................................ (1,176) (302)
-------------- --------------
ENDING BALANCE AS OF MARCH 31, 1999 AND 1998 ........................... $ 18,771 $ 17,972
-------------- --------------
-------------- --------------
Allowance for loan losses to total non performing loans at end of
period .............................................................. 250.78% 146.93%
Allowance for loan losses to total non performing loans and
troubled debt restructurings at the end of period ................. 150.53% 81.22%
Allowance for loan losses to total gross loans, at the end of period.... 0.88% 1.11%
Net loan charge-offs were $1.2 million for the three months ended March
31, 1999, an increase of $874,000 compared to $302,000 for three months ended
March 31, 1998. The increase in charge-offs was primarily due to charge-offs in
the indirect auto and SBA loan portfolios. Total non-performing assets were
$12.3 million at March 31, 1999, compared to $27.7 million at March 31, 1998. As
a result, the ratio of non-performing assets to total assets declined to 0.37%
at March 31, 1999 from 1.22% at March 31, 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.
17
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 continues to review its loan servicers and investment
securities issuers 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 is currently in 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. As of March 31,1999
the Bank successfully tested dates up through and including January 2, 2001. The
results are reviewed to ensure the system is functioning properly. Testing with
Fiserv CBS will continue through May 1999. The Bank is also in the process of
testing with other critical vendors such as the Federal Reserve Bank.
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 $850,000. 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 March 31, 1999, the Bank estimates that it has
incurred approximately $145,000 in total costs in connection with its Y2K
project plan.
The Bank is currently developing a contingency plan that will be
completed June 30, 1999 to address a plan of action in the unlikely event that
the Bank or its vendors and/or business partners are not ready 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. Even though operating in this
18
manner would severely tax resources, the Bank will be able to continue business
while Fiserv CBS corrects the problem. The contingency plan will address any
required Bank service provider changes or need to outsource to Y2K compliant
entities.
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."
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.
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 March 31,
1999.
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: May 10, 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
21