<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number: 0-29668
HIGHLAND BANCORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4654552
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 SOUTH GLENOAKS BOULEVARD
BURBANK, CALIFORNIA 91502
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (818) 848-4265
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ----
At June 30, 1998, 2,329,427 shares of the Registrant's common stock were
outstanding.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HIGHLAND BANCORP, INC.
Consolidated Statements of Financial Condition
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,522 $ 26,420
Investment securities:
Securities, available for sale 72,198 49,635
Securities, held to maturity 13,774 15,419
Loans receivable, net 442,695 427,237
Real estate acquired through foreclosure 1,567 1,543
Accrued interest receivable:
Securities and cash equivalents 476 327
Loans receivable 3,877 3,462
Deferred income taxes, net 5,143 4,819
Federal Home Loan Bank stock - at cost 6,944 6,750
Premises and equipment, net 7,588 7,599
Other assets 7,628 6,427
-------- --------
Total Assets $573,412 $549,638
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $386,208 $363,678
Advances from the FHLB 123,500 135,000
Securities sold under agreements to repurchase 10,000 -
Accounts payable and other liabilities 8,601 6,961
Income taxes payable - 2,487
Total Liabilities 528,309 508,126
Stockholders' equity
Preferred stock - 1,000,000 shares authorized,
no shares issued - -
Common stock - authorized 8,000,000 shares of
$.01 par value; issued and outstanding, 2,329,427
and 2,318,437 shares in 1998 and 1997, respectively 23 23
Additional paid-in capital 16,341 16,144
Retained earnings 28,777 25,507
-------- --------
45,141 41,674
Accumulated other comprehensive income:
Net unrealized loss on securities available for sale (38) (162)
-------- --------
Total stockholders' equity 45,103 41,512
-------- --------
Total Liabilities and Stockholders' Equity $573,412 $549,638
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
HIGHLAND BANCORP, INC.
Consolidated Statements of Operations
(Dollar amount in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income
Loans $11,296 $ 9,768 $22,300 $19,273
Investments 479 245 1,006 667
Mortgage-backed securities 757 743 1,467 1,487
------- ------- ------- -------
Total interest income 12,532 10,756 24,773 21,427
Interest expense
Deposits 4,731 4,424 9,312 9,046
FHLB advances and other borrowings 1,940 1,354 3,887 2,373
------- ------- ------- -------
Total interest expense 6,671 5,778 13,199 11,419
------- ------- ------- -------
Net interest income 5,861 4,978 11,574 10,008
Provision for losses on loans 860 924 1,800 2,724
------- ------- ------- -------
Net interest income after provision
for losses on loans 5,001 4,054 9,774 7,284
Noninterest income
Gain on the sale of branches - - - 1,100
Gain on the sale of loans - - 276 -
Gain on the sale of mortgage related securities - 2 13 2
Other 483 423 973 888
------- ------- ------- -------
Total noninterest income 483 425 1,262 1,990
General & administrative expenses
Compensation and benefits 1,370 1,372 2,754 3,028
Occupancy and equipment 263 323 529 752
FDIC insurance premium 56 91 110 133
Service bureau and related equipment rental 164 156 294 324
Other 464 582 888 1,125
------- ------- ------- -------
Total general and administrative expenses 2,317 2,524 4,575 5,362
Net (income from) cost of operation of real
estate acquired through foreclosure (126) 33 (111) 134
------- ------- ------- -------
Total noninterest expense 2,191 2,557 4,464 5,496
------- ------- ------- -------
Earnings before income taxes 3,293 1,922 6,572 3,778
Income taxes 1,365 569 2,720 1,134
------- ------- ------- -------
NET EARNINGS $ 1,928 $ 1,353 $ 3,852 $ 2,644
======= ======= ======= =======
Basic earnings per share $ 0.83 $ 0.59 $ 1.66 $ 1.15
======= ======= ======= =======
Diluted earnings per share $ 0.79 $ 0.58 $ 1.58 $ 1.13
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HIGHLAND BANCORP, INC.
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash flows from operating activities:
Net earnings $ 3,852 $ 2,644
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of loans (276) -
Gain on sale of securities available-for-sale (13) (2)
Gain on sale of branches - (1,100)
Amortization of premiums on securities 171 176
Federal Home Loan Bank stock dividend (194) (98)
Increase in net deferred tax asset (324) (1,086)
Gain on sale of real estate acquired through foreclosure, net (209) (138)
Deferred direct loan origination fees and costs, net (222) (134)
Amortization of deferred compensation expense 64 -
Provision for losses on loans 1,800 2,724
Provision for losses on real estate acquired through foreclosure - 120
Increase in accrued interest receivable (564) (183)
Depreciation 340 365
Increase in other assets (1,330) (435)
Decrease in income taxes payable (2,487) (201)
Increase in accounts payable and other liabilities 1,640 (406)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,248 2,246
Cash flows from investing activities:
Purchases of securities available-for-sale (39,464) (16,851)
Sales and maturities of securities available-for-sale 16,974 7,036
Principal payments on securities held-to-maturity 1,603 1,180
Increase in FHLB stock - (1,402)
Net increase in loans receivable (26,227) (24,873)
Net costs capitalized on real estate acquired through foreclosure (196) (57)
Proceeds from the sale of loans 8,544 -
Proceeds from the sale of real estate acquired through foreclosure 1,304 2,064
(Purchases) sales of premises and equipment, net (329) (41)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (37,791) (32,944)
Cash flows from financing activities:
Decrease in deposits from sale of branches - (59,465)
Net increase in deposits 22,530 43,201
Retirement of common stock - (185)
Common stock options exercised 197 -
Dividends paid on common stock (582) -
Net (repayments) borrowings from the FHLB (11,500) 30,000
Net increase in securities sold under agreement to repurchase 10,000 0
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 20,645 13,551
Decrease in cash and cash equivalents (14,898) (17,147)
Cash and cash equivalents at beginning of year 26,420 33,714
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30, $ 11,522 $ 16,567
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $ 13,706 $ 11,387
Income taxes paid $ 5,575 $ 2,417
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities:
Acquisition of real estate in settlement of loans $ 1,669 $ 4,931
Loans made in conjunction with real estate sales $ 746 $ 1,004
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HIGHLAND BANCORP, INC. & SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE A - BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been prepared
by Highland Bancorp, Inc. (the "Company" or "Highland"), without audit, pursuant
to the rules and regulations of the Securities Exchange Act of 1934, as amended.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the unaudited financial statements and notes thereto, reflect all adjustments,
including normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations and cash flows for the interim
periods presented. The financial position at June 30, 1998, and the results of
operations for the three and six months ended June 30, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 1998. These unaudited financial statements have been prepared in
accordance with generally accepted accounting principles on a basis consistent
with the Company's audited financial statements, and these interim financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
Highland Bancorp, Inc. is the holding corporation for Highland Federal Bank and
its wholly owned subsidiaries, H.F.S. Corporation and Hi-Fed Insurance Agency
(collectively referred to as the "Bank"). The accounting and reporting policies
of the Company and the Bank conform to the prevailing practices within the
savings and loan industry. All significant intercompany balances and
transactions have been eliminated in consolidation.
NOTE B - EARNINGS PER SHARE
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128), and has restated all
prior period earnings per share data.
SFAS No. 128 simplifies the standards for computing and presenting earnings per
share (EPS) as previously prescribed by Accounting Principles Board opinion
No. 15, "Earnings per Share." SFAS No. 128 replaces primary EPS with basic EPS
and fully diluted EPS with diluted EPS. Basic EPS 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 EPS 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
from issuance of common stock that then shared in earnings. The following table
reconciles the weighted average shares of common stock outstanding used in the
basic EPS calculation to that used in the diluted EPS computation. There is no
difference in the earnings used in the two computations.
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic EPS - weighted average number of
shares used in computation 2,327,791 2,297,137 2,324,335 2,292,279
Effect of dilutive securities - incremental
shares from outstanding stock options 116,251 45,646 115,130 43,790
--------- --------- --------- ---------
Diluted EPS - weighted average number of
shares used in computation 2,440,042 2,342,783 2,439,465 2,336,069
========= ========= ========= =========
</TABLE>
At June 30, 1998, there were 28,000 option shares which had an antidilutive
effect on earnings per share and were excluded from the 1998 calculation. At
June 30, 1997, there were no shares which had an antidilutive effect on earnings
per share.
NOTE C - COMPREHENSIVE INCOME
The Company adopted, effective January 1, 1998, Statement of Financial
Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income."
Comprehensive income represents the change in equity of the Company during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during the period except those
resulting from investments by owners and distributions to owners. For the three
and six month periods ended June 30, 1998, net income totaled $1,928,000 and
$3,852,000, other comprehensive income totaled $77,000 and $137,000, and total
comprehensive income totaled $2,005,000 and $3,989,000, respectively. For the
three and six months ended June 30, 1997, net income totaled $1,353,000 and
$2,644,000, other comprehensive income (loss) totaled $135,000 and $(9,000), and
total comprehensive income totaled $1,488,000 and $2,635,000, respectively
For the three and six months ended June 30, 1998, other comprehensive income was
comprised of the change in unrealized losses on securities available for sale of
$124,000 and $77,000, respectively, and the reclassification of realized gains
on securities available for sale of $13,000 for the six month period. For the
three and six months ended June 30, 1997, other comprehensive income (loss) was
comprised of the change in unrealized losses on securities available for sale of
$122,000 and $(22,000), respectively, and the reclassification of realized gains
on securities available for sale of $13,000 for both periods. The aforementioned
amounts are presented net of income taxes.
6
<PAGE>
NOTE D - SUBSEQUENT EVENTS
On July 20, 1998, the Board of Directors declared a 12.5 cent per share cash
dividend, payable to common stockholders of record as of August 3, 1998, to be
paid on or before August 15, 1998.
On August 6, 1998, the Company sold its Burbank headquarters building, which had
a net carrying value of $5.6 million, to a real estate investment company for a
gross sales price of $9.8 million. This transaction included a five year
leaseback agreement between the buyer and the Bank. Under the applicable
sale/leaseback accounting rules, the Company deferred approximately $2.4 million
of the gain and will recognize $1.2 million as current income in the three
months ended September 30, 1998.
7
<PAGE>
HIGHLAND BANCORP, INC. & SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net earnings for the three and six months ended June 30,
1998, of $1.9 million, or $0.83 basic earnings per share ($0.79 diluted earnings
per share), and $3.9 million, or $1.66 basic earnings per share ($1.58 diluted
earnings per share), respectively, compared to net earnings of $1.4 million, or
$0.59 basic earnings per share ($0.58 diluted earnings per share), for the three
months ended June 30, 1997, and net earnings of $2.6 million, or $1.15 earnings
per share ($1.13 diluted earnings per share), for the six months ended June 30,
1997. Net earnings for the six months ended June 30, 1997 included a one-time
gain of $1.1 million from the sale of three retail branches with deposits
totaling approximately $59.5 million.
Net interest income for the three and six months ended June 30, 1998 totaled
$5.9 million and $11.6 million, respectively, compared to $5.0 million and $10.0
million for the comparable 1997 periods. For both the three and six month
periods, volume variance accounted for substantially all the increase.
The Company recorded decreases in general and administrative expenses from $2.5
million and $5.4 million for the three and six months ended June 30, 1997,
respectively, to $2.3 million and $4.6 million in the comparable periods in
1998. These savings are principally attributable to the sale of four retail
branches in 1997 and the Company's continuing cost control efforts.
NET INTEREST INCOME
Net interest income varies based upon the difference (referred to as the
"interest rate spread") between (i) the yield on the Company's loan portfolio,
mortgage backed securities, investments, and other interest-earning assets and
(ii) the rate paid by the Company on its deposits, borrowings and other
interest-bearing liabilities, as well as the relative amounts or volumes of the
Company's interest-earning assets and interest-bearing liabilities.
The following table indicates the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Company's total interest income and expense during the periods
indicated. Information is provided for each major component of interest-earning
assets and interest-bearing liabilities with respect to: (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) changes attributable to rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributable to both volume and rate have
been allocated proportionately to the change due to volume and the change due to
rate.
8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
COMPARED TO THREE MONTHS COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997 ENDED JUNE 30, 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- -----------------------------
(IN THOUSANDS) (IN THOUSANDS)
----------------------------- -----------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $1,326 $202 $1,528 $2,732 $295 $3,027
Mortgage-related securities 32 (18) 14 (6) (14) (20)
Investments 288 (54) 234 395 (56) 339
------ ---- ------ ------ ---- ------
Total interest income on
interest-earning
assets 1,646 130 1,776 3,121 225 3,346
------ ---- ------ ------ ---- ------
INTEREST EXPENSE:
Deposits 253 54 307 58 208 266
FHLB Advances and other borrowings 562 24 586 1,509 5 1,514
------ ---- ------ ------ ---- ------
Total interest expense on
interest-bearing
liabilities 815 78 893 1,567 213 1,780
------ ---- ------ ------ ---- ------
Change in net interest income $ 831 $ 52 $ 883 $1,554 $ 12 $1,566
====== ==== ====== ====== ==== ======
</TABLE>
Net interest income for the three months ended June 30, 1998, was $5.9 million
compared to $5.0 million for the like period in 1997. For the first six months
of 1998 net interest income was $11.6 million, compared with $10.0 million for
the like period of 1997. The Company's net interest margins for the quarter and
six months ended June 30, 1998, were 4.46% and 4.41%, respectively, compared
with net interest margins of 4.38% and 4.37% for the like respective periods of
1997. The increase in the net interest margin in the first six months of 1998,
compared with the margin for the first six months of 1997, is attributable
principally to increased levels of interest income related to loan prepayments
in 1998 compared with 1997. For the first six months of 1998, loan principal
amortization and payoffs were 121% higher than for the like period of 1997,
which resulted in prepayment fee income of $174,000 and $325,000 for the three
and six months ended June 30, 1998, respectively, compared to $67,000 and
$110,000 for the same 1997 periods. Likewise, amortization of deferred loan
fees, totaled $162,000 and $293,000 for the three and six months ended June 30,
1998, respectively, compared to $11,000 and $54,000 for the same 1997 periods.
Management anticipates that the yields earned on the Company's loan portfolio
will decrease if the levels of loan prepayments decline. The following table
reflects activity in the Company's loan portfolio:
9
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
Net loans at beginning of period $427,237 $373,545
Loans originated:
Real estate loans:
One-to-four family 600 -
Multi-family 35,727 22,888
Commercial 25,955 19.673
Construction and land 11,547 3,383
Consumer 8 419
-------- --------
Total loans originated 73,837 46,363
Loans purchased - 396
-------- --------
Total 73,837 46,759
Less:
Principal payments (including payoffs) 45,565 20,643
Loan sales 8,266 -
Other, net 4,548 6,419
-------- --------
Loans receivable, net $442,695 $393,242
======== ========
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
For the three and six months ended June 30, 1998, Highland's provision for loan
losses totaled $0.9 million and $1.8 million, respectively, compared to $0.9
million and $2.7 million for the comparable periods in 1997. The Company's
decreased provisions for 1998 compared with 1997 reflect the decreases in
nonperforming loans and reduced levels of loan chargeoffs during 1998, as well
as Management's assessment of risks associated with trends in economic and
business conditions in the Company's market. At June 30, 1998, Highland's
nonperforming assets, consisting of nonaccrual loans and REO, totaled $6.1
million, compared to $10.6 million at June 30, 1997 and $6.0 million at
December 31, 1997. Highland's allowance for loan losses as a percentage of
nonaccrual loans was 205.5% at June 30, 1998, compared to 100.0% at June 30,
1997.
The following table sets forth information regarding the Company's allowance for
loan losses at the dates and the periods indicated (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Balance at beginning of period $8,848 $7,676
Provision for loss 1,800 5,164
Chargeoffs:
Real estate loans:
One-to-four family 57 432
Multi-family 613 2,650
Commercial 616 895
Construction and land 47 13
Consumer 2 2
------ ------
Total 1,335 3,992
Recoveries - -
------ ------
Balance at end of period $9,313 $8.848
====== ======
</TABLE>
10
<PAGE>
While management believes that the allowance for loan losses at June 30, 1998,
was adequate to absorb the known and inherent risks in the loan portfolio, no
assurances can be given that future economic conditions which may adversely
affect the Company's market areas or other circumstances will not result in
increases in problem loans and future loan losses, which may not be covered
completely by the current allowance or may require provisions for loan losses in
excess of past provisions, which would have an adverse effect on the Company's
financial condition and results of operations.
The following table sets forth information regarding nonperforming assets and
certain ratios at the dates indicated (in thousands):
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Nonaccrual loans:
Real Estate:
One-to-four family $1,329 $1,951
Multi-family 2,316 1,584
Commercial 851 913
Consumer 37 37
------ ------
Total 4,533 4,485
REO 1,567 1,543
------ ------
Total Nonperforming assets $6,100 $6,028
====== ======
Troubled debt restructurings $4,437 $4,642
====== ======
Allowance for loan losses as a percentage
of gross loans receivable 2.05% 2.02%
Allowance for loan losses as a percentage
of total nonaccrual loans 205.45% 197.28%
Nonaccrual loans as a percentage of
gross loans receivable 1.00% 1.02%
Nonperforming assets as a percentage
of total assets 1.06% 1.10%
</TABLE>
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 1998, was $0.5 million
compared to $0.4 million for the like quarter of 1997. Noninterest income for
the six months ended June 30, 1998, was $1.3 million compared to $2.0 million
for the same period in 1997. The 1998 six month period includes $276,000 gain
on sale of loans, while the comparable 1997 period includes $1.1 million gain on
sale of branches.
NONINTEREST EXPENSE
Noninterest expense for the three and six months ended June 30, 1998, was $2.2
million and $4.5 million, respectively, compared to $2.6 million and $5.5
million for the like respective periods in 1997. The ratio of noninterest
expense to average assets decreased to 1.60% for the six months ended June 30,
1998, from 2.24% for the same period in 1997.
The ratio of general and administrative expense to average assets for the three
and six months ended June 30, 1998, was 1.65% and 1.64%, respectively, compared
with 2.06% and 2.18% for the
11
<PAGE>
like respective periods of 1997. The decreases in general and administrative
expense for the three and six month period in 1998 were due primarily to
decreases in branch office occupancy as a result of the sale of four branches in
1997.
INCOME TAXES
For the three and six months ended June 30, 1998, the Company recorded income
taxes of $1.4 million and $2.7 million, respectively, compared to income taxes
of $0.6 million and $1.1 million for the like periods in 1997. Changes in the
levels of recorded income taxes are related to changes in the levels of the
Company's earnings before income taxes and to the reduction in valuation
allowances related to deferred state income tax benefits not recognized in prior
years.
FINANCIAL CONDITION
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Total assets at June 30, 1998, were $573.4 million, compared to $549.6 million
at December 31, 1997. The Company's cash and investment securities increased to
$97.5 million at June 30, 1998, from $91.5 million at December 31, 1997. Loans
receivable increased $15.5 million during the six months ended June 30, 1998 as
a result of $73.8 million of new loan originations which offset amortization and
prepayment of loans. Total liabilities at June 30, 1998 were $528.3 million
compared to $508.1 million at December 31, 1997. This increase was due to a net
increase in deposits of $22.5 million. Shareholders' equity increased for the
six months ended June 30, 1998, to $45.1 million, compared to $41.5 million at
December 31, 1997, which reflects earnings for the period, offset by a dividend
paid to the Company's common shareholders, recorded in the second quarter of
1998.
LIQUIDITY
Liquidity refers to the Company's ability to maintain cash flow adequate to fund
operations and meet obligations and other commitments on a timely basis,
including the payment of maturing deposits and the origination or purchase of
new loan receivables. Deposits, loan repayments and prepayments, proceeds from
the sale of loans, cash flows generated from operations and Federal Home Loan
Bank advances are the primary sources of Highland's funds for use in lending,
investing and for other general purposes.
For the six months ended June 30, 1998, the growth in the loan portfolio and the
investment portfolio was funded primarily by a $22.5 million increase in
deposits, proceeds from the sale of loans of $8.5 million and loan repayments
and prepayments of $45.6 million.
The Bank must, by regulation, maintain minimum levels of liquidity as a
percentage of deposits and short-term borrowings. Effective November 24, 1997,
the Office of Thrift Supervision (OTS) reduced this requirement from 5% to 4%.
The OTS also excluded deposits with maturities exceeding one year from the
liquidity base, while expanding the types of investments considered to be liquid
assets. The new rule includes a separate requirement that each institution must
maintain sufficient liquidity to ensure its safe and sound operation. The
Bank's average liquidity ratio for the six months ended June 30, 1998 and 1997
was 12.74% and 7.67%, respectively.
12
<PAGE>
The liquidity of the parent company, Highland Bancorp, Inc., is dependent on
several factors, including the payment of cash dividends by its subsidiary,
Highland Federal Bank, or the ability to secure borrowings. Without dividends
from Highland Federal Bank, Highland Bancorp, Inc. must rely solely on existing
cash and cash equivalents, which total $4.4 million at June 30, 1998, or on the
ability to secure borrowings to pay existing current liabilities and future
operating expenses.
REGULATORY CAPITAL
The OTS capital regulations require certain minimum levels of regulatory capital
for savings institutions subject to OTS supervision. First, the tangible
capital requirement mandates that the Bank's stockholders' equity less
intangible assets be at least 1.50% of adjusted total assets as defined in the
capital regulations. Second, the leverage (core) capital requirement currently
mandates core capital (tangible capital plus qualifying supervisory goodwill) be
at least 4.00% of adjusted total assets as defined in the capital regulations.
Third, the risk-based capital requirement presently mandates that core capital
plus supplemental capital as defined by the OTS be at least 8.00% of risk-
weighted assets as prescribed in the capital regulations. The capital
regulations assign specific risk weightings to all assets and off-balance sheet
items. The Bank was in compliance with all capital requirements in effect at
June 30, 1998, and meets all standards necessary to be considered "well-
capitalized" for regulatory capital purposes. The following table sets forth
the Bank's required and actual regulatory capital ratios at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
To Be "Well
Capitalized" Under
Prompt Corrective
June 30, 1998 December 31, 1997 Action Provisions
------------- ----------------- ------------------
<S> <C> <C> <C>
Tangible Capital 7.08% 6.85% 1.5%
Leverage Capital 7.08% 6.85% 5.0%
Risk-based Capital 10.91% 10.65% 10.0%
</TABLE>
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 relating to, among other
things, expectations regarding future general and administrative expense
savings, future levels of nonperforming assets, and the timing of dispositions
of nonperforming assets which are subject to risks and uncertainties that could
cause actual results, performance, or achievements to differ materially.
Factors that could cause actual results to differ include the timing of general
and administrative expense savings and future expenditures, levels of sales of
real estate owned and of new nonaccrual loans, and other factors as set forth in
the Company's Annual Report on Form 10-K.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE OF MARKET RISK
The principal objectives of Highland's interest rate risk management function
are to evaluate the interest rate risk included in certain balance sheet
accounts and in the balance sheet as a whole, determine the level of risk
appropriate given Highland's business focus, operating environment, capital and
liquidity requirements and performance objectives, and manage such risk
consistent with Board of Director approved guidelines. Through such management,
the Company seeks to reduce the vulnerability of its operations to changes in
interest rates.
13
<PAGE>
During 1997 and the first six months of 1998, the Company utilized the following
strategies to manage interest rate risk: (a) originating primarily adjustable-
rate new loans for the portfolio, (b) purchasing principally adjustable-rate
mortgage-backed securities and short-term investment securities and (c)
attempting to reduce the overall interest rate sensitivity of liabilities by
emphasizing core and longer-term deposits, in addition to lengthening the
maturity of Highland's FHLB advances.
Highland's interest rate sensitivity "gap" and its net portfolio value have not
materially changed since December 31, 1997. For more detailed information
regarding the definition and measurement of these items, refer to the Company's
Annual Report on Form 10-K.
At June 30, 1998 and 1997, Highland did not hold any derivative financial
instruments.
PART II. OTHER INFORMATION
ITEMS 1-5.
Item 1. Not applicable
Item 2. Not applicable
Item 3. Not applicable
Item 4. Not applicable
Item 5. Other Information
The proxy materials for the 1998 Annual Meeting of Stockholders held on April
23, 1998 was mailed to stockholders of the Company on March 31, 1998.
Stockholder proposals to be presented at the 1999 Annual Meeting of Stockholders
must be received at the Company's executive offices at 601 South Glenoaks
Boulevard, Suite 200, Burbank, California 91502 addressed to the attention of
the Secretary by December 1, 1998 in order to be considered for inclusion in the
proxy materials relating to such meeting. In addition, in the event a
stockholder proposal is not submitted to the Company at its executive offices
prior to February 14, 1999, the proxy to be solicited by the Board of Directors
for the 1999 Annual Meeting of Stockholders will confer discretionary authority
on the holders of the proxy to vote the shares in accordance with their best
judgment and discretion if the proposal is presented at the 1999 Annual Meeting
of Stockholders without any discussion of the proposal in the proxy statement
for such meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed by the registrant during the quarter
for which this report is filed.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and Part
563d of the Rules and Regulations of the Office of Thrift Supervision, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HIGHLAND BANCORP, INC.
----------------------
(Registrant)
DATED: August 11, 1998 /S/ STEPHEN N. RIPPE
--------------------
Stephen N. Rippe, President and
Chief Executive Officer
DATED: August 11, 1997 /S/ ANTHONY L. FREY
-------------------
Anthony L. Frey,
Principal Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,522
<INT-BEARING-DEPOSITS> 4,950
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,198
<INVESTMENTS-CARRYING> 13,774
<INVESTMENTS-MARKET> 13,654
<LOANS> 442,695
<ALLOWANCE> 9,313
<TOTAL-ASSETS> 573,412
<DEPOSITS> 386,208
<SHORT-TERM> 38,000
<LIABILITIES-OTHER> 8,601
<LONG-TERM> 95,500
0
0
<COMMON> 23
<OTHER-SE> 45,080
<TOTAL-LIABILITIES-AND-EQUITY> 573,412
<INTEREST-LOAN> 22,300
<INTEREST-INVEST> 2,473
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,773
<INTEREST-DEPOSIT> 9,312
<INTEREST-EXPENSE> 13,199
<INTEREST-INCOME-NET> 11,574
<LOAN-LOSSES> 1,800
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 4,464
<INCOME-PRETAX> 6,572
<INCOME-PRE-EXTRAORDINARY> 6,572
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,852
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.58
<YIELD-ACTUAL> 9.53
<LOANS-NON> 4,533
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,437
<LOANS-PROBLEM> 6,678
<ALLOWANCE-OPEN> 8,848
<CHARGE-OFFS> 1,335
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 9,313
<ALLOWANCE-DOMESTIC> 9,313
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,777
</TABLE>
