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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 JUNE 30, 1999
COMMISSION FILE NUMBER: 000-24215
PBOC HOLDINGS, INC.
DELAWARE 33-0220233
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
5900 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
(323) 938-6300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest possible date:
Class Shares Outstanding at August 9, 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
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Statements of Financial Condition - June 30, 1999
and December 31, 1998.................................................................. 3
Consolidated Statements of Operations - Three and Six months ended
June 30, 1999 and 1998................................................................. 4
Consolidated Statements of Comprehensive Loss - Three and Six months ended
June 30, 1999 and 1998................................................................. 5
Consolidated Statements of Cash Flows - Six months ended June 30, 1999
and 1998............................................................................... 6
Notes to Consolidated Financial Statements............................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 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
JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents ......................................... $ 22,660 $ 22,401
Federal funds sold ................................................ -- 24,000
Securities available-for-sale, at estimated market values ......... 1,038,165 1,004,937
Mortgage-backed securities held-to-maturity, market values $5,204
at June 30, 1999 and $6,372 at December 31, 1998 .............. 5,214 6,282
Loans receivable, net ............................................. 2,325,241 2,148,857
Real estate and other repossessed assets held for sale, net ....... 4,051 2,723
Premises and equipment, net ....................................... 6,515 7,212
Federal Home Loan Bank stock, at cost ............................. 64,833 63,150
Accrued interest receivable ....................................... 17,760 17,607
Other assets ...................................................... 39,968 37,858
----------- -----------
Total assets ............................................... $ 3,524,407 $ 3,335,027
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .......................................................... $ 1,611,235 $ 1,542,162
Securities sold under agreements to repurchase .................... 434,947 364,000
Advances from Federal Home Loan Bank .............................. 1,259,000 1,198,000
Accrued expenses and other liabilities ............................ 17,175 17,009
----------- -----------
Total liabilities ............................................. 3,322,357 3,121,171
----------- -----------
Minority interest ................................................. 33,250 33,250
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 25,000,000 shares:
none issued and outstanding ................................ -- --
Common stock, par value $.01 per share. Authorized
75,000,000 shares; issued 21,876,205 shares; and
outstanding 20,423,705 and 21,041,205 shares ............... 219 219
Treasury stock, at cost (1,452,500 shares and 835,000 shares) . (14,460) (8,308)
Additional paid-in capital .................................... 259,207 259,207
Accumulated other comprehensive loss .......................... (32,953) (14,025)
Accumulated deficit ........................................... (43,213) (56,487)
----------- -----------
Total stockholders' equity ............................ 168,800 180,606
----------- -----------
Total liabilities and stockholders' equity ............ $ 3,524,407 $ 3,335,027
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
3
PBOC HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Interest, fees and dividend income:
Short term investments ................................... $ 385 $ 721 $ 659 $ 1,076
Securities purchased under agreements to resell .......... 385 519 396 519
Investment securities .................................... 5,466 3,077 11,830 5,225
Mortgage-backed securities ............................... 8,698 6,745 16,832 14,534
Loans receivable ......................................... 40,030 25,637 78,222 53,915
Federal Home Loan Bank stock ............................. 829 450 1,637 824
------------ ------------ ------------ ------------
Total interest, fees and dividend income .......... 55,793 37,149 109,576 76,093
------------ ------------ ------------ ------------
Interest expense:
Deposits ................................................. 17,722 17,508 35,678 33,636
Advances from the Federal Home Loan Bank ................. 16,540 8,756 32,437 16,387
Securities sold under agreements to repurchase ........... 5,474 4,322 10,575 8,980
Senior debt .............................................. -- 146 -- 445
Hedging costs, net ....................................... 34 55 81 110
------------ ------------ ------------ ------------
Total interest expense ............................ 39,770 30,787 78,771 59,558
------------ ------------ ------------ ------------
Net interest income ........................................... 16,023 6,362 30,805 16,535
Provision for loan losses ................................ 1,050 450 2,100 900
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 14,973 5,912 28,705 15,635
------------ ------------ ------------ ------------
Other income:
Loan service and loan related fees ....................... 61 20 67 25
Gain on mortgage-backed securities sales, net ............ 76 -- 197 323
Gain on loan sales, net .................................. -- -- 49 --
Income from real estate operations, net .................. 55 1,933 115 1,785
Other income ............................................. 515 458 1,220 1,136
------------ ------------ ------------ ------------
Total other income ................................ 707 2,411 1,648 3,269
Operating expenses:
Personnel and benefits ................................... 3,782 13,994 7,708 16,901
Occupancy ................................................ 2,346 2,001 4,552 4,031
FDIC insurance ........................................... 339 5,599 673 6,715
Professional services .................................... 418 153 684 493
Office related expenses .................................. 1,277 1,025 2,404 2,038
Other .................................................... 703 519 1,320 793
------------ ------------ ------------ ------------
Total operating expenses .......................... 8,865 23,291 17,341 30,971
------------ ------------ ------------ ------------
Earnings (loss) before income taxes and minority interest ..... 6,815 (14,968) 13,012 (12,067)
Income tax (benefit) .......................................... (1,000) (9,391) (2,000) (9,391)
------------ ------------ ------------ ------------
Earnings (loss) before minority interest ...................... 7,815 (5,577) 15,012 (2,676)
Minority interest ............................................. 869 869 1,738 1,738
------------ ------------ ------------ ------------
Net earnings ...................................... 6,946 (6,446) 13,274 (4,414)
Dividends on preferred stock .................................. -- 709 -- 2,160
------------ ------------ ------------ ------------
Net earnings (loss) available to common
stockholders ................................... $ 6,946 $ (7,155) $ 13,274 $ (6,574)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings (loss) per share basic and diluted ................... $ 0.34 $ (0.57) $ 0.64 $ (0.84)
Weighted average shares outstanding basic and diluted ......... 20,423,705 12,529,322 20,589,796 7,849,182
See accompanying notes to consolidated financial statements.
4
PBOC HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- ------- -------- -------
Net earnings (loss) ....................................... $ 6,946 $(6,446) $ 13,274 $(4,414)
Other comprehensive earnings (loss):
Unrealized gain (loss) on securities available-for-sale (17,829) 72 (19,125) (1,368)
Reclassification of realized gains included in earnings 76 -- 197 323
-------- ------- -------- -------
Other comprehensive earnings (loss) ................... (17,753) 72 (18,928) (1,045)
-------- ------- -------- -------
Comprehensive loss ........................................ $(10,807) $(6,374) $ (5,654) $(5,459)
-------- ------- -------- -------
-------- ------- -------- -------
See accompanying notes to consolidated financial statements.
5
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net earnings (loss) ......................................................... $ 13,274 $ (4,414)
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Provision for loan losses .............................................. 2,100 900
Depreciation ........................................................... 912 455
Decrease in valuation allowance ........................................ 2,250 9,512
Amortization/accretion of premiums, discounts and deferred fees ........ 6,858 6,244
Amortization of purchase accounting intangibles ........................ 92 90
Gain on sale of mortgage-backed securities available-for-sale .......... (197) (323)
Gain on sale of real estate owned ...................................... (142) (2,364)
FHLB stock dividend .................................................... (1,683) (403)
Increase in accrued interest receivable ............................... (153) (4,782)
Increase (decrease) in accrued interest payable ........................ (4) 1,998
Increase in other assets .............................................. (4,430) (25,410)
Amortization for discontinued lease operations ......................... 25 30
Increase in accrued expenses ........................................... 145 2,127
Gain on sale of loans .................................................. (49) --
Amortization of goodwill ............................................... 70 23
--------- ---------
Net cash (used in) provided by operating activities .................... 19,068 (16,317)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities available-for-sale ....... 119,626 156,569
Proceeds from sale of loans ................................................. 92,548 357
Investment and mortgage-backed securities principal repayments and maturities 88,465 84,095
Loan originations, net of repayments ........................................ (86,060) 121,056
Purchases of investments and mortgage-backed securities available-for-sale .. (262,069) (634,496)
Purchases of loans .......................................................... (192,843) (690,798)
Cost capitalized on real estate, net of insurance settlements ............... (2) (80)
Proceeds from the sale of real estate ....................................... 2,965 9,676
Purchases of premises and equipment ......................................... (307) (1,067)
Purchase of FHLB stock ...................................................... -- (21,963)
--------- ---------
Net cash used in investing activities ....................................... (237,677) (976,651)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock .......................................... -- 129,611
Redemption of preferred stock ............................................... -- (5)
Purchases of treasury stock ................................................. (6,152) --
Net increase in deposits ................................................... 69,073 125,089
Net increase in securities sold under agreements to repurchase .............. 70,947 317,621
Issuance of FHLB advances ................................................... 359,750 766,400
Repayments of FHLB advances ................................................. (298,750) (318,400)
Repayments of senior debt ................................................... -- (11,113)
Cash dividend paid on preferred stock ....................................... -- (19,440)
--------- ---------
Net cash provided by financing activities .................................. 194,868 989,763
--------- ---------
Net change in cash ................................................................ (23,741) (3,205)
Cash and cash equivalents at beginning of period .................................. 46,401 21,117
--------- ---------
Cash and cash equivalents at end of period ........................................ $ 22,660 $ 17,912
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest .................................................................. $ 78,693 $ 57,282
--------- ---------
--------- ---------
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate ...................................................... $ 4,149 $ 5,968
Loans originated in connection with sale of foreclosed real estate .......... $ -- $ 5,029
Transfer of loans held for investment to loans held for sale ................ $ 92,499 $ 156,246
--------- ---------
--------- ---------
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 six months ended June 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Actual results could differ significantly
from those estimates. Prior period's consolidated financial statements have been
reclassified to conform to the 1999 presentation.
3. EARNINGS PER SHARE
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 June 30, 1999, the
Company had repurchased 1,452,500 shares pursuant to these programs for a total
purchase price of $ 14.5 million. The shares are held as treasury shares and
reduce the weighted average number of shares outstanding.
Earnings per share is calculated by taking the net earnings (loss)
available to the common stockholders and dividing by the weighted average number
of shares of common stock outstanding. The weighted average number of shares of
common stock for the six months ended June 30, 1999 and 1998 were 20,589,796 and
7,849,182, respectively, for both basic and diluted earnings per share. The
weighted average number of shares of common stock for the three months ended
June 30, 1999 and 1998 were 20,423,705 and 12,529,322, respectively. The
weighted average number of shares of common stock outstanding reflects the
exchange of all of the Company's then outstanding classes of preferred stock
into common stock and the subsequent 32 to 1 stock split referenced above.
7
4. STOCK OPTION PLAN
On January 25, 1999, the Company adopted the 1999 Stock Option Plan
(the "Plan") which is designed to improve the growth and profitability of the
Company and its subsidiaries by providing employees with a proprietary interest
in the Company as an incentive to contribute to the success of the Company and
its subsidiaries. Options to acquire 1,018,000 shares of common stock were
awarded to officers and key employees of the Company and the Bank with an
exercise price of $13.75, which was in excess of the fair value of the common
stock on the date of grant. A total of 1,020,390 shares of common stock was
reserved for future issuance pursuant to the Plan. The Plan was approved by the
Company's shareholders on April 26, 1999. The shares granted under Company's
Plan were not considered in earnings per share calculations since these shares
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," as amended by SFAS No. 137. 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, 2000.
Management believes that adoption of SFAS 133 will not have a material impact on
the Company's financial position and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WHEN USED IN THIS FORM 10-Q OR FUTURE FILINGS BY THE COMPANY WITH
THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), IN THE COMPANY'S PRESS RELEASES
OR OTHER PUBLIC OR STOCKHOLDER COMMUNICATIONS, OR IN ORAL STATEMENTS MADE WITH
AN APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR PHRASES "WOULD BE",
"WILL ALLOW", "INTENDS TO", "WILL LIKELY RESULT", "ARE EXPECTED TO", "WILL
CONTINUE", "IS ANTICIPATED", "ESTIMATE", "PROJECT", OR SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE LITIGATION REFORM ACT OF 1995.
THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON
ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE, AND
TO ADVISE READERS THAT VARIOUS FACTORS, INCLUDING REGIONAL AND NATIONAL ECONOMIC
CONDITIONS, SUBSTANTIAL CHANGES IN LEVELS OF MARKET INTEREST RATES, CREDIT AND
OTHER RISK OF LENDING AND INVESTMENT ACTIVITIES AND COMPETITIVE AND REGULATORY
FACTORS, COULD AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE
COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM THOSE
ANTICIPATED OR PROJECTED. THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY
DISCLAIMS ANY OBLIGATION, TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT
OCCURRENCES OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH
STATEMENTS.
RECENT DEVELOPMENTS
On June 23,1999, the Company announced the execution of an agreement to
acquire The Bank of Hollywood ("BOH") a state chartered, commercial bank with
$138 million in assets. Under the terms of the agreement, BOH shareholders will
receive $19.00 in cash for each share of BOH common stock with an aggregated
estimated value of $28.6 million. The transaction will be accounted for as a
purchase, and is expected to close in the fourth quarter of 1999.
8
FINANCIAL CONDITION
The Company had consolidated total assets of $ 3.5 billion at June
30, 1999, compared to $3.3 billion in December 31, 1998. The increase of 5.7% in
total assets over the past six months was primarily due to loan originations of
$395.2 million and loan purchases of $192.8 million during the period. This
increase in loans receivable was partially offset by a loan sale of $92.5
million and loan repayments of $284.9 million. Securities available-for-sale
also increased by $33.2 million mainly due to new purchases.
The increase in earning assets during the first half 1999 was
funded by deposits, which increased by $69.1 million. Over the past 6 months
FHLB advances also increased by $61.0 million to $1.3 billion at June 30, 1999.
The Company's stockholders' equity decreased by $11.8 million to $168.8 million
at June 30, 1999 from December 31, 1998. This decrease was due to stock
repurchases of $6.2 million and change of $18.9 million in the unrealized loss
on the securities available-for sale portfolio in 1999.
RESULTS OF OPERATIONS
Net earnings amounted $6.9 million for the second quarter ended June
30, 1999, compared to a net loss of $6.4 million, before preferred dividends of
$709,000, for the second quarter ended June 30,1998. Net loss for the second
quarter ended June 30, 1998 were impacted by one-time expenses of $15.6 million
($9.2 million net of applicable tax benefits) in connection with the Company's
initial public offering of common stock and the FDIC/SAIF recapitalization
program. The Company's basic and diluted earnings (loss) per common share
amounted to $0.34 and $(0.57) during the quarters ended June 30, 1999 and 1998,
respectively. Without the effect of one-time expenses, second quarter 1998 net
earnings would have been $2.7 million, or $0.16 per diluted share. The Company's
preferred stock was redeemed in May 1998 in connection with the initial public
offering.
For the six months ended June 30, 1999, Company reported net
earnings of $13.3 million, or $0.64 per share on a basic and diluted basis,
compared to a net loss of $4.4 million, before preferred dividends of $2.2
million, or $(0.84) per share on a basic and diluted basis, for the six months
ended June 30, 1998. Excluding one-time expenses related to the initial public
offering, first half 1998 net earnings would have been $4.8 million, or $0.33
per share on a basic and diluted basis.
The Company's return on average equity amounted to 15.37% for the six
months ended June 30, 1999, compared to (8.53)% for the six months ended June
30, 1998.
NET INTEREST INCOME
Net interest income after provision for loan losses increased
significantly during the second quarter ended June 30, 1999 to $15.0 million
compared to $5.9 million for the second quarter ended June 30, 1998. For the six
months ended June 30, 1999 net interest income after provision for loan losses
increased 83.6% to $28.7 million from $15.6 million in the first half of 1998.
These increases were mainly due to loan and investment securities income growth
generated by substantially higher average outstanding balances.
9
The following tables set forth, for the periods indicated,
information regarding (a) the total dollar amount of interest income of the
Company from interest-earning assets and the resultant average yields; (b) the
total dollar amount of interest expense on interest-bearing liabilities and
resultant average rates; (c) net interest income; (d) interest rate spread; and
(e) net interest margin. Information is based on average daily balances during
the indicated periods.
Three months ended June 30,
---------------------------------------------------------------------------------
1999 1998
---------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- --------- ----------- ---------- --------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)....................... $2,233,832 $ 40,030 7.17% $1,550,526 $ 25,637 6.61%
Mortgage-backed securities (2) 633,772 8,698 5.49 540,408 6,745 4.99
Other interest-earning assets (3)......... 497,059 7,065 5.69 178,419 4,767 10.69
---------- -------- ---------- --------
Total interest-earning assets............. 3,364,663 55,793 6.63 2,269,353 37,149 6.55
-------- ------ -------- -----
Non-interest-earning assets................. 64,079 70,996
---------- ----------
Total assets.......................... 3,428,742 2,340,349
---------- ----------
---------- ----------
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)................. $ 447,012 $ 3,063 2.75 $ 348,929 $ 3,066 3.52
Term certificates of deposit............ 1,130,442 14,659 5.20 957,661 14,442 6.05
---------- -------- ---------- --------
Total deposits...................... 1,577,454 17,722 4.51 1,306,590 17,508 5.37
Senior debt............................... -- -- -- 8,687 146 6.74
Other borrowings.......................... 1,615,776 22,014 5.46 883,154 13,078 5.94
Hedging costs............................. -- 34 -- 55
---------- -------- ---------- --------
Total interest-bearing
liabilities..................... 3,193,230 39,770 5.00 2,198,431 30,787 5.62
-------- ------ -------- -----
Non-interest-bearing liabilities............ 55,910 45,937
---------- ----------
Total liabilities.................... 3,249,140 2,244,368
Stockholders' equity........................ 179,602 95,981
---------- ----------
Total liabilities and
stockholders' equity............ $3,428,742 $2,340,349
---------- ----------
---------- ----------
Net interest-earning assets................. $ 171,433 $ 70,922
---------- ----------
---------- ----------
Net interest income/interest rate
spread............................... $ 16,023 1.63% $ 6,362 0.93%
-------- ------ -------- ------
-------- ------ -------- ------
Net interest margin......................... 1.90% 1.12%
------ ------
------ ------
Ratio of average interest-earning
assets to average interest-
bearing liabilities.................. 105.37% 103.23%
------ ------
------ ------
10
Six months ended June 30,
-----------------------------------------------------------------------------
1999 1998
-------------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- ---------- ------------ --------- --------- ------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)....................... $2,189,445 $ 78,222 7.15% $1,565,453 $53,915 6.89%
Mortgage-backed securities (2) 619,336 16,832 5.44 556,725 14,534 5.22
Other interest-earning assets (3)......... 501,941 14,522 5.79 179,311 7,644 8.53
---------- -------- ---------- -------
Total interest-earning assets............. 3,310,722 109,576 6.62 2,301,489 76,093 6.61
-------- ------ ------- ------
Non-interest-earning assets................. 65,762 72,030
---------- ----------
Total assets.......................... $3,376,484 $2,373,519
---------- ----------
---------- ----------
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)................. $ 362,707 $ 6,088 3.38 $ 350,584 $ 6,166 3.55%
Term certificates of deposit............ 1,126,361 29,590 5.30 969,361 27,470 5.71
---------- -------- ---------- -------
Total deposits...................... 1,489,068 35,678 4.83 1,319,945 33,636 5.14
Senior debt............................... -- -- -- 7,446 445 12.05
Other borrowings.......................... 1,583,812 43,012 5.48 892,155 25,367 5.73
Hedging costs............................. -- 81 -- 110 --
---------- -------- ---------- -------
Total interest-bearing
liabilities..................... 3,072,880 78,771 5.17 2,219,546 59,558 5.41
-------- ------ ------- ------
Non-interest-bearing liabilities............ 129,474 49,629
---------- ----------
Total liabilities.................... 3,202,354 2,269,175
Stockholders' equity........................ 174,130 104,344
---------- ----------
Total liabilities and
stockholders' equity............ $3,376,484 $2,373,519
---------- ----------
---------- ----------
Net interest-earning assets................. $ 237,842 $ 81,943
---------- ----------
---------- ----------
Net interest income/interest rate
spread............................... $ 30,805 1.45% $16,535 1.20%
-------- ------ ------- ------
-------- ------ ------- ------
Net interest margin......................... 1.86% 1.44%
------ ------
------ ------
Ratio of average interest-earning
assets to average interest-
bearing liabilities.................. 107.74% 103.69%
------ ------
------ ------
(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, checking and money market accounts.
The Company's interest rate spread was 1.63% for the second quarter
of 1999, an increase of 70 basis points compared to 0.93% for the same period in
1998. The increase in interest rate spread is mainly due to a increase in the
Bank's yield on loans receivable, which was caused by higher yields earned on
the loan portfolio. For the six months ended June 30, 1999, the interest spread
was 1.45%, an increase of 25 basis points as compared to 1.20% for the same
period in 1998.
The Company's net interest margin was 1.90% for the three months
ended June 30, 1999, an increase of 78 basis points compared to 1.12% for the
same period in 1998. Net interest margin was 1.86% for the six months ended June
30, 1999, an increase of 42 basis points compared to 1.44% for the same period
in 1998. This increase in net interest margin was mainly due to higher yields on
loan portfolio and mortgage backed securities as well as lower cost of funds.
11
The following tables set forth the effects of changing rates and
volumes on net interest income of the Company. Information is provided with
respect to (a) effects on interest income attributable to changes in rate
(changes in rate multiplied by prior volume); (b) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate);
and (c) changes in rate/volume (change in rate multiplied by change in volume).
THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO JUNE 30, 1998
(IN THOUSANDS)
---------------------------------------------------------------------
INCREASE (DECREASE) DUE TO
---------------------------------------------- TOTAL NET
RATE VOLUME RATE/VOLUME INCREASE/(DECREASE)
------- -------- ----------- -------------------
Interest-earning assets:
Loans receivable .................... $ 2,148 $ 11,298 $ 947 $ 14,393
Mortgage-backed securities .......... 672 1,165 116 1,953
Other interest-earning assets ....... (2,231) 8,514 (3,985) 2,298
------- -------- ------- --------
Total net change in income on interest-
earning assets ..................... 589 20,977 (2,922) 18,644
------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts ............ (675) 862 (190) (3)
Term certificates of deposit .... (2,023) 2,605 (365) 217
------- -------- ------- --------
Total deposits ............... (2,698) 3,467 (555) 214
Senior debt ........................ -- (146) -- (146)
Other borrowings ................... (1,046) 10,849 (867) 8,936
Hedging costs ...................... -- -- (21) (21)
------- -------- ------- --------
Total net change in expense on interest-
bearing liabilities ................ (3,744) 14,170 (1,443) 8,983
------- -------- ------- --------
Change in net interest income .......... $ 4,333 $ 6,807 $(1,479) $ 9,661
------- -------- ------- --------
------- -------- ------- --------
SIX MONTHS ENDED JUNE 30, 1999
COMPARED TO JUNE 30, 1998
(IN THOUSANDS)
---------------------------------------------------------------------
INCREASE (DECREASE) DUE TO
---------------------------------------------- TOTAL NET
RATE VOLUME RATE/VOLUME INCREASE/(DECREASE)
------- -------- ----------- -------------------
Interest-earning assets:
Loans receivable .................... $ 2,014 $ 21,490 $ 803 $ 24,307
Mortgage-backed securities .......... 597 1,634 67 2,298
Other interest-earning assets ....... (2,456) 13,753 (4,419) 6,878
------- -------- ------- --------
Total net change in income on interest-
earning assets ..................... 155 36,877 (3,549) 33,483
------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts ............ (281) 213 (10) (78)
Term certificates of deposit .... (2,004) 4,449 (325) 2,120
------- -------- ------- --------
Total deposits ............... (2,285) 4,662 (335) 2,042
Senior debt ........................ -- (445) -- (445)
Other borrowings ................... (1,139) 19,667 (883) 17,645
Hedging costs ...................... -- -- (29) (29)
------- -------- ------- --------
Total net change in expense on interest-
bearing liabilities ................ (3,424) 23,884 (1,247) 19,213
------- -------- ------- --------
Change in net interest income .......... $ 3,579 $ 12,993 $(2,302) $ 14,270
------- -------- ------- --------
------- -------- ------- --------
12
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses increased by $600,000 and
$1.2 million for the three and six months ended June 30, 1999, respectively,
compared to the same periods in 1998. These increases were primarily due to loan
portfolio growth and the change in current portfolio mix to a higher proportion
of consumer and commercial loans. The provision for loan losses was $2.1 million
for the six months ended June 30, 1999 compared to $900,000 for the six months
ended June 30, 1998. At June 30, 1999, the Company's allowance for loan losses
amounted to $19.4 million, or 0.81% of total gross loans, and 304.48% of total
non-performing loans.
OTHER INCOME
The Company's total other income decreased by $1.7 million during
the quarter ended June 30, 1999 compared to the same period in 1998, primarily
due to a decrease of $1.9 million in income from real estate operations. Other
income for the six months ended June 30, 1999 also decreased by $1.6 million
compared to six months ended June 30, 1998 due to decreased income from real
estate operations. This decrease was mainly due to decrease gain on sale of real
estate owned and real estate held for investment. During the six months ended
June 30, 1999 and 1998, gains on sales of real estate owned and real estate held
for investment amounted to $142,000 and $2.4 million, respectively.
OPERATING EXPENSES
Total operating expenses decreased by $14.4 million for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998. The
Company's total operating expenses were $8.9 million for the three months ended
June 30, 1999 compared to $23.3 million for the same period last year. Operating
expenses, excluding one-time IPO-related costs, increased 15.3%, with
compensation and benefits growing $888,000 and occupancy and office related
expenses up $597,000 in the second quarter compared to the second quarter a year
ago. One-time IPO-related costs included $11.1 million in compensation and
benefits and $4.5 million charge related to the industry-wide SAIF assessment
levied in 1996. Excluding such one-time IPO costs, the increase in compensation
and occupancy expense was mainly due to two branch acquisitions and additional
personnel hired for the commercial and consumer lending areas. In the first half
of 1999, operating expenses amounted to $17.3 million compared to $31.0 million
for the six months ended June 30, 1998. Operating expenses excluding one-time
IPO-related costs increased 12.8% versus the first half of 1998.
INCOME TAXES
During the June 1999 quarter, the Company reported a $1.0 million
income tax benefit compared to $9.4 million for the same period last year,
resulting from an increase in its deferred tax assets which the Company expects
will be realizable in future periods. The Company reported a $2.0 million income
tax benefit during the first half of 1999 and a $9.4 million income tax benefit
for the first half of 1998. On a fully-taxed basis, net earnings would have been
$3.2 million for the second quarter and $6.1 million for the first half of 1999.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control 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
13
considered negative when the amount of interest-rate sensitive liabilities
exceeds interest-rate sensitive assets. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
The following table summarizes the anticipated maturities or
repricing of the Company's interest-earning assets and interest-bearing
liabilities as of June 30, 1999, based on the information and assumptions set
forth in notes below.
MORE THAN MORE THAN
THREE TO ONE YEAR THREE YEARS
WITHIN THREE TWELVE TO TO FIVE OVER FIVE
MONTHS MONTHS THREE YEARS YEARS YEARS TOTAL
-------- ----------- ----------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets: (1)
Loans receivable(2)
Single-family residential loans:
Fixed ............................... $ 41,673 $ 185,357 $320,887 $ 204,659 $ 353,446 $1,106,022
Adjustable .......................... 176,777 153,697 60,681 23,117 -- 414,272
Multi-family residential:
Fixed ............................... 1,340 3,221 8,798 4,840 12,974 31,173
Adjustable .......................... 314,580 3816 1,549 -- -- 319,945
Commercial, industrial and land:
Fixed ............................... 4,050 19,126 40,729 39,617 82,062 185,584
Adjustable .......................... 66,192 15,770 1,516 2,535 2,199 88,212
Other loans(3) .......................... 66,104 70,073 55,537 42,739 7,591 242,044
Mortgage-backed and other securities (4) .. 87,579 65,743 -- 86,534 438,077 677,933
Other interest-earning assets (5) ......... 166,335 98,720 30,000 -- 167,763 462,818
-------- ----------- -------- --------- ---------- ----------
Total ........................... 924,630 615,523 519,697 404,041 1,064,112 3,528,003
-------- ----------- -------- --------- ---------- ----------
-------- ----------- -------- --------- ---------- ----------
Interest-bearing liabilities:
Deposits:
Checking accounts ..................... 92,160 -- -- -- -- 92,160
Passbook accounts ..................... 136,106 -- -- -- -- 136,106
Money market accounts ................. 141,612 -- -- -- -- 141,612
Term certificates of deposit .......... 110,426 900,880 103,594 11,995 288 1,127,183
Other borrowings .......................... 145,947 314,000 85,000 789,000 360,000 1,693,947
-------- ----------- -------- --------- ---------- ----------
Total ........................... $626,251 $ 1,214,880 $188,594 $ 800,995 $ 360,288 $3,191,008
-------- ----------- -------- --------- ---------- ----------
-------- ----------- -------- --------- ---------- ----------
Excess (deficiency) of interest earning
assets over interest-bearing liabilities $298,379 $ (599,357) $331,103 $(396,954) $ 703,824 $ 336,995
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets ........... 8.47% (17.01)% 9.39% (11.26%) 19.97% 9.56%
-------- ----------- -------- --------- ---------- ----------
-------- ----------- -------- --------- ---------- ----------
Cumulative excess (deficiency) of
interest-earning assets over interest
-bearing liabilities ................... $298,379 $ (300,978) $ 30,125 $(366,829) $ 336,995
-------- ----------- -------- --------- ----------
-------- ----------- -------- --------- ----------
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percentage of
total assets ........................... 8.47% (8.54%) 0.85% (10.41%) 9.56%
-------- ----------- -------- --------- ----------
-------- ----------- -------- --------- ----------
- --------------------------------------------------------------------------------
(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 $
6.4 million at June 30,1999.
(3) Comprised of commercial and consumer loans and loans secured by deposits.
(4) Does not include an unrealized loss on securities available for sale of
$32.5 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 June 30, 1999, the Bank had $1.4 billion in borrowing capacity
under a collateralized line of credit with the FHLB of San Francisco. At June
30, 1999, the Bank had total FHLB advances of $1.3 billion with a weighted
average interest rate of 5.36%, which mature between 1999 and 2008.
Additionally, at June 30, 1999, the Bank had securities sold under agreements to
repurchase totaling $434.9 million with a weighted average interest rate of
5.52%, which mature between 1999 and 2008.
At June 30, 1999, the Bank had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and non-mortgage
loans of $94.6 million. Certificates of deposit which are scheduled to mature
within one year totaled $1.0 billion at June 30, 1999, and borrowings that are
scheduled to mature within the same period amounted to $459.9 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 June 30, 1999 the Bank was deemed to be "well capitalized"
under applicable requirements. To be categorized as "well capitalized", the Bank
must maintain minimum tier 1 leverage capital, tier 1 risk-based capital and
risk-based capital ratios as set forth in the table below. The following table
reflects the Bank's actual levels of regulatory capital and applicable
regulatory capital requirements at June 30, 1999:
WELL CAPITALIZED
MINIMUM REQUIREMENT ACTUAL EXCESS
------------------- ------ ------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Tangible capital................................... $ 70,895 2.00% $217,968 6.15% $147,073 4.15%
Tier 1 leverage capital ........................... 177,235 5.00 217,968 6.15 40,733 1.15
Tier 1 risk-based capital ......................... 117,645 6.00 217,968 11.12 100,323 5.12
Risk-based capital ................................ 196,075 10.00 234,897 11.98 38,822 1.98
15
LOAN PORTFOLIO COMPOSITION
The following table sets forth the composition of the Bank's loan
portfolio at the dates indicated:
JUNE 30, 1999 DECEMBER 31, 1998
-------------------------- ----------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family residential ........ $1,523,814 64% $1,494,756 68%
Multi-family residential ......... 352,927 15 366,625 17
Commercial ....................... 273,856 11 206,402 9
Land and other ................... 859 -- 880 --
---------- ------ ---------- ------
Total mortgage loans ......... 2,151,456 90 2,068,663 94
---------- ------ ---------- ------
Other loans:
Commercial business .............. 100,664 4 62,665 3
Consumer ......................... 139,010 6 53,826 3
Secured by deposits .............. 2,485 -- 3,537 --
---------- ------ ---------- ------
Total loans receivable ....... 2,393,615 100% 2,188,691 100%
---------- ------ ---------- ------
---------- ------ ---------- ------
Less:
Undisbursed loan proceeds ........ 41,443 17,152
Unamortized net loan discounts and
deferred originations fees ... 5,040 814
Deferred gain on servicing sold .. 2,517 2,971
Allowance for loan losses ........ 19,374 18,897
---------- ----------
Loans receivable, net ................. $2,325,241 $2,148,857
---------- ----------
---------- ----------
16
The following table sets forth information with respect to
non-performing assets identified by the Bank, including non-accrual loans, real
estate owned and troubled debt restructurings at the dates indicated:
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(DOLLARS IN THOUSANDS)
-----------------------
Non-performing loans, net:
Mortgage loans:
Single-family residential loans ......... $ 3,520 $ 3,959
Multi-family residential loans .......... 1,810 428
Commercial real estate loans ............ 918 3,613
Commercial business loans ................... 115 99
Consumer loans .............................. -- 408
------- -------
Total non-performing loans, net ............. 6,363 8,507
------- -------
Real estate owned, net:
Single-family residential ............... 1,523 2,723
Commercial real estate .................. 2,528 --
------- -------
Total real estate owned, net ................ 4,051 2,723
------- -------
Total non-performing assets ................. $10,414 $11,230
------- -------
------- -------
Troubled debt restructurings ................ $ 4,945 $ 3,576
------- -------
------- -------
Total non-performing assets and troubled debt
restructurings .......................... $15,359 $14,806
------- -------
------- -------
Non-performing loans to total loans, net .... 0.27% 0.40%
Non-performing loans to total assets ........ 0.18 0.26
Non-performing assets to total assets ....... 0.30 0.34
Total non-performing assets and troubled debt
restructurings to total assets .......... 0.44 0.44
17
Non-performing assets as of June 30, 1999 and December 31, 1998 were
$10.4 million and $11.2 million, respectively. The decrease in non-performing
assets was due primarily to a net decrease in commercial real estate loans. The
following table sets forth the activity in the Bank's allowance for loan losses
during the periods indicated:
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
----------------------------
BEGINNING BALANCE ................................................... $ 18,897 $ 17,824
-------- --------
Provision for loan losses ........................................... 2,100 900
-------- --------
CHARGE-OFFS:
Single-family residential loans ..................................... (439) (355)
Multi-family residential loans ...................................... -- (43)
Commercial real estate loans ........................................ (39) --
Commercial business loans ........................................... (703) (16)
Consumer loans ...................................................... (562) --
-------- --------
Total charge-offs ................................................ (1,743) (414)
-------- --------
RECOVERIES:
Single-family residential loans ..................................... 32 83
Commercial business ................................................. 9 --
Consumer ............................................................ 79 --
-------- --------
Total recoveries .................................................... 120 83
-------- --------
Net charge-offs ..................................................... (1,623) (331)
-------- --------
ENDING BALANCE AS OF JUNE 30, 1999 AND 1998 ......................... $ 19,374 $ 18,393
-------- --------
-------- --------
Allowance for loan losses to total non-performing loans at end of
period ........................................................... 304.48% 175.12%
Allowance for loan losses to total non-performing loans and
troubled debt restructurings at the end of period ................ 171.33 93.27
Allowance for loan losses to total gross loans, at the end of period 0.81 0.86
Net loan charge-offs were $1.6 million for the six months ended June
30, 1999, an increase of $1.3 million compared to $331,000 for six months ended
June 30, 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 $
10.4 million at June 30, 1999, compared to $19.4 million at June 30, 1998. As a
result, the ratio of non-performing assets to total assets declined to 0.30% at
June 30, 1999 from 0.61% at June 30, 1998.
On an ongoing basis, management monitors the loan portfolio and
evaluates the adequacy of the allowance for loan losses. In determining the
adequacy of the allowance for loan losses, management considers such factors as
historical loan loss experience, underlying collateral values, evaluations made
by bank regulatory authorities, assessment of economic conditions and other
appropriate data to identify the risks in the loan portfolio.
Loans deemed by management to be uncollectible are charged to the
allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense and
credited to the allowance in amounts deemed appropriate by management based upon
its evaluation of the known and inherent risks in the loan portfolio.
18
YEAR 2000 COMPLIANCE ISSUES
During 1997, the Bank finalized its plan to address issues related
to the Year 2000 ("Y2K") problem. The Y2K issue is primarily a result of
computer software recognizing a two-digit date field rather than the full four
digits, which identify the appropriate year. Date-sensitive computer programs,
hardware or equipment controlled by microprocessor chips may not appropriately
deal with the year "00".
The Bank's objective was to manage the process by determining the
scope of the problem and to focus its efforts and attention on solving it. The
Bank's plan followed the Federal Financial Institution's Examination Council
("FFIEC") guideline that manages the process in five phases: 1) Awareness 2)
Assessment 3) Renovation 4) Validation and 5) Implementation. To help manage the
process the Bank developed a detailed project plan that identifies various
milestones and deadlines. The Bank also established budgets for manpower
resources and financial expenditures.
The Bank utilizes Fiserv CBS, a third party vendor, to process
substantially all of its data processing functions. Also, a significant portion
of the single-family residential loan portfolio is serviced by other
institutions. The Bank has contacted its critical vendors and has received
confirmation that they will be Y2K compliant. The Bank is working with Fiserv
CBS and other critical vendors to ensure that their operational and financial
systems will not be adversely effected by the Y2K problem.
The Bank has analyzed its loan and deposit customers that may
present some exposure to Y2K compliance. Non-compliant commercial loan customers
may be at risk of default and large depositors may cause liquidity problems if
the funds are withdrawn. In an effort to educate borrowers and to gather
information for the risk assessments, questionnaires were sent to the commercial
loan customers. The initial assessment of commercial loan and deposit customers
indicates that there would be minimal impact on the Bank's statement of
operations. The Bank will continue to monitor and evaluate the risks on a
quarterly basis.
The Bank reviews its loan servicers and investment securities
issuers quarterly to determine the liquidity and credit risks associated with
their failure to remit payments in a timely manner due to Y2K problems.
The Bank has also implemented a customer awareness program to keep
customers informed of the progress of the Y2K project. The Bank's quarterly
customer newsletter contains Y2K articles and statement stuffers are also
utilized to keep the customers aware of the Bank's efforts. Customers with
questions are encouraged to call the Y2K office.
The Bank has completed the validation or testing phase of the Y2K
compliance plan. The Bank developed a test plan that contains test requirements
and criteria, manpower assignments and target dates. A dedicated Y2K local area
network testing was established to communicate with the Fiserv CBS test system.
Detailed test scripts designed to test date-related functions are processed on
the system for the FFIEC's recommended critical test dates. The results were
reviewed to ensure the system was functioning properly. The Bank successfully
tested dates up through and including December 31, 2001. The Bank has also
successfully completed testing with other critical vendors such as the Federal
Reserve Bank. Various non-critical stand-alone applications were also
successfully tested on the Y2K local area network.
The Bank's costs associated with the Y2K project include:1) an
additional assessment from Fiserv CBS for the test system 2) lease expense for
the test local area network equipment 3) various hard costs for the upgrading of
the operating network for the corporate office and retail branch system and 4)
replacing hardware in branches. Excluding the "soft" costs of Bank management
and personnel time, the Bank estimates that the total Y2K project costs will not
exceed $800,000. Approximately $500,000 of the costs is attributable to a
planned 1999 purchase of new hardware for the branches that will be amortized
over a five-year period. As of June 30, 1999, the Bank estimates that it has
incurred approximately $714,000 in total costs in connection with its Y2K
project plan.
The Bank has developed a contingency plan to address a plan of
action in the unlikely event that the Bank or its vendors and/or business
partners are not ready for Y2K. If Fiserv CBS experiences some unforeseen Y2K
problem after the turn of the century, the contingency plan will include
off-line, manual postings of transactions to ledger cards or a database. The
plan will be thoroughly tested during the upcoming months to ensure an orderly
19
continuation of key operations in the event a problem occurs. Even though
operating in this manner would severely tax resources, the Bank will be able to
continue business while Fiserv CBS corrects the problem.
The Bank's Y2K efforts are being closely monitored by the OTS, its
primary regulator, which conducts periodic Y2K examinations of the Bank's Y2K
project progress.
The Bank's plans to complete Y2K compliance are based on
management's and the Board's best estimates. There can be no guarantee that
these estimates will be achieved, and the ending results could be significantly
different due to unforeseen circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
LIST OF EXHIBITS (FILED HEREWITH UNLESS INDICATED)
No. Description
- --------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of PBOC Holdings,
Inc.(1)
3.2 Bylaws of PBOC Holdings, Inc. (1)
4 Stock Certificate of PBOC Holdings, Inc. (2)
10.1 Employment Agreement between PBOC Holdings, Inc., People's Bank of
California and Rudolf P. Guenzel (1)
10.2 Employment Agreement between PBOC Holdings, Inc., People's Bank of
California and J. Michael Holmes (1)
10.3 Employment Agreement between PBOC Holdings, Inc., People's Bank of
California and William W. Flader (1)
10.4 Employment Agreement between the People's Bank of California and Doreen
J. Blauschild (1)
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 June 30, 1999.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PBOC HOLDINGS, INC.
Date: August 12, 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
12