<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 March 31, 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 March 31, 1998, 2,322,687 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 share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,406 $ 26,420
Investment securities:
Securities, available for sale 57,775 49,635
Securities, held to maturity 14,719 15,419
Loans receivable, net 432,873 427,237
Real estate acquired through foreclosure 1,717 1,543
Accrued interest receivable:
Securities and cash equivalents 397 327
Loans receivable 3,695 3,462
Deferred income taxes, net 5,181 4,819
Federal Home Loan Bank stock - at cost 6,845 6,750
Premises and equipment, net 7,609 7,599
Other assets 7,453 6,427
----------- ------------
Total Assets $555,670 $549,638
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $377,746 $363,678
Advances from the FHLB 125,000 135,000
Accounts payable and other liabilities 7,995 6,961
Income taxes payable 1,354 2,487
----------- ------------
Total Liabilities 512,095 508,126
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, 2,322,687
and 2,318,437 shares in 1998 and 1997, respectively 23 23
Additional paid-in capital 16,235 16,144
Retained earnings 27,432 25,507
----------- ------------
43,690 41,674
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Net unrealized loss on securities available for sale (115) (162)
------------ ------------
Total stockholders' equity 43,575 41,512
------------ ------------
Total Liabilities and Stockholders' Equity $555,670 $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
March 31,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Interest income
Loans $11,004 $ 9,505
Investments 527 422
Mortgage-backed securities 710 744
----------- ----------
Total interest income 12,241 10,671
Interest expense
Deposits 4,581 4,622
FHLB advances and other borrowings 1,947 1,019
----------- ----------
Total interest expense 6,528 5,641
----------- ----------
Net interest income 5,713 5,030
Provision for losses on loans 940 1,800
----------- ----------
Net interest income after provision
for losses on loans 4,773 3,230
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 13 -
Other 490 465
----------- ----------
Total noninterest income 779 1,565
General & Administrative expenses
Compensation and benefits 1,384 1,656
Occupancy and equipment 266 429
FDIC insurance premium 54 42
Service bureau and related equipment rental 130 168
Other 424 543
----------- ----------
Total general & administrative expenses 2,258 2,838
Net cost of operation of real estate
acquired through foreclosure 15 101
----------- ----------
Total noninterest expense 2,273 2,939
----------- ----------
Earnings before income taxes 3,279 1,856
Income taxes 1,355 565
----------- ----------
NET EARNINGS $ 1,924 $ 1,291
=========== ==========
Basic earnings per share $ 0.83 $ 0.56
=========== ==========
Diluted earnings per share $ 0.79 $ 0.55
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HIGHLAND BANCORP, INC.
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash flows from operating activities:
Net earnings $ 1,924 $ 1,291
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) -
Gain on sale of branches - (1,100)
Amortization of premiums on securities 60 87
Federal Home Loan Bank stock dividend (95) (49)
Increase in net deferred tax asset (362) (292)
Gain on sale of real estate acquired through foreclosure, net 34 -
Deferred direct loan origination fees and costs, net 356 (57)
Amortization of deferred compensation expense 32 -
Provision for losses on loans 940 1,800
Provision for losses on real estate acquired through foreclosure - 70
Increase in accrued interest receivable (303) (107)
Depreciation 170 155
Increase in other assets (1,026) (2,412)
Decrease in income taxes payable (1,133) (201)
Increase in accounts payable and other liabilities 1,034 468
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 1,342 (347)
Cash flows from investing activities:
Purchases of securities available-for-sale (21,142) (5,730)
Sales and maturities of securities available-for-sale 13,022 -
Principal payments on securities held-to-maturity 700 576
Increase in FHLB stock - (1,201)
Net increase in loans receivable (15,972) (9,345)
Net costs capitalized on real estate acquired through foreclosure (157) (32)
Proceeds from the sale of loans 8,268 -
Proceeds from the sale of real estate acquired through foreclosure 947 1,564
(Purchases) sales of premises and equipment, net (180) 168
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (14,514) (14,000)
Cash flows from financing activities:
Decrease in deposits from sale of branches - (58,365)
Net increase in deposits 14,068 23,526
Retirement of common stock - (185)
Common stock options exercised 90 -
Net (repayments) borrowings from the FHLB (10,000) 25,000
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 4,158 (10,024)
Decrease in cash and cash equivalents (9,014) (24,371)
Cash and cash equivalents at beginning of year 26,420 33,714
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31, $ 17,406 $ 9,343
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $ 6,807 $ 5,346
Income taxes paid $ 2,750 $ 400
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities:
Acquisition of real estate in settlement of loans $ 1,369 $ 1,680
Loans made in conjunction with real estate sales $ 533 $ 891
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HIGHLAND BANCORP, INC. & SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1998, and the results of
operations for the three months ended March 31, 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 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>
For the Three Months Ended
--------------------------
March 31,
---------
1998 1997
--------- ---------
<S> <C> <C>
Basic EPS - weighted average number of shares 2,321,081 2,287,367
used in computation
Effect of dilutive securities - incremental shares
from outstanding common stock options 113,997 41,913
--------- ---------
Diluted EPS - weighted average number of
shares used in computation 2,435,078 2,329,280
========= =========
</TABLE>
At March 31, 1998 and 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
quarter ended March 31, 1998, net income totaled $1,924,000, other comprehensive
income totaled $60,000 and total comprehensive income totaled $1,984,000. For
the quarter ended March 31, 1997, net income totaled $1,291,000, other
comprehensive loss totaled $144,000 and total comprehensive income totaled
$1,147,000.
For the quarter ended March 31, 1998, other comprehensive income was comprised
of the change in unrealized losses on securities available for sale of $47,000
and the reclassification of realized gains on securities available for sale of
$13,000. For the quarter ended March 31, 1997, other comprehensive loss was
comprised of the change in unrealized losses on securities available for sale of
$144,000. The aforementioned amounts are presented net of income taxes.
NOTE D - SUBSEQUENT EVENTS
On March 23, 1998, the Board of Directors declared a 25 cent per share cash
dividend, payable to common stockholders of record as of April 30, 1998, to be
paid on May 15, 1998.
In May 1998, the Company announced a stock repurchase program under which the
Company may acquire up to 5 percent of its outstanding common stock. Under this
program, the Company may acquire, at its discretion, shares of its outstanding
common stock through purchases in the open market.
6
<PAGE>
HIGHLAND BANCORP, INC. & SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Highland reported net earnings for the three months ended March 31, 1998, of
$1.9 million, or $0.83 basic earnings per share and $0.79 diluted earnings per
share, compared to net earnings of $1.3 million, or $0.56 basic earnings per
share and $0.55 diluted earnings per share, for the three months ended March 31,
1997. Net earnings for the three months ended March 31, 1997, included a gain
of $1.1 million from the sales of three retail branches with deposits totaling
approximately $59.5 million.
The Company experienced a decrease in general and administrative expenses from
$2.8 million in the first quarter of 1997, to $2.3 million in the first quarter
of 1998. These savings are principally attributable to cost savings from the
four branches sold in 1997 and continuing cost control efforts. The net cost of
REO operations decreased to $15,000 for the three months ended March 31, 1998,
compared to $101,000 for the like period in 1997. The ratio of noninterest
expense to average assets decreased from 2.40% in the first quarter of 1997 to
1.65% in the first quarter of 1998.
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.
7
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
COMPARED TO THREE MONTHS
ENDED MARCH 31, 1997
INCREASE (DECREASE) DUE TO
--------------------------
(IN THOUSANDS)
--------------------------
VOLUME RATE NET
------- ---- -------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 1,404 $ 95 $ 1,499
Mortgage-related securities (39) 5 (34)
Investments 105 - 105
------- ---- -------
Total interest income on interest-
earning assets 1,470 100 1,570
------- ---- -------
INTEREST EXPENSE:
Deposits (102) 61 (41)
FHLB Advances and other borrowings 948 (20) 928
------- ---- -------
Total interest expense on
interest-bearing liabilities 846 41 887
------- ---- -------
Change in net interest income $ 624 $ 59 $ 683
======= ==== =======
</TABLE>
Net interest income for the three months ended March 31, 1998, was $5.7 million
compared with $5.0 million for the like period in 1997. This increase is
primarily attributable to an increase in the volume of loans, offset in part by
an increase in the volume of FHLB advances which were used to fund the sale of
four retail branches during 1997. Also contributing to the increase in net
interest income in the first quarter of 1998 were higher prepayment penalty
fees and recognition of deferred loan origination fees due to higher levels of
principal repayments due primarily to an increase in customers refinancing their
loans as market interest rates have generally declined in recent months and
there is greater availability of financing for the types of products emphasized
by the Company.
The Company's net interest margin (net interest income divided by average
interest-earning assets) was 4.36% for the first quarter of 1998, the same as
for the like quarter of 1997, while the ratio of average interest-earning assets
to average interest-bearing liabilities increased to 103.3% for the first
quarter of 1998, from 102.6% for the first quarter of 1997. This increase is
principally attributable to an increase in the balance of investment securities
in the first quarter of 1998 relative to the first quarter of 1997.
PROVISION FOR LOAN LOSSES
For the three months ended March 31, 1998, Highland's provision for loan losses
totaled $0.9 million compared to $1.8 million for the comparable period in 1997.
The decreased provision during the first quarter of 1998 is attributable to
generally improved loan portfolio credit quality during the first three months
of 1998 compared with the first three months of 1997. At March 31, 1998,
Highland's nonperforming assets, consisting of nonaccrual loans and REO, totaled
$6.2 million, compared to $6.0 million at December 31, 1997, and $9.2 million at
March 31, 1997. Highland's allowance for loan losses as a percentage of
nonaccrual loans was 201.3% at March 31, 1998, compared to 197.3% at December
31, 1997 and 116.8% at March 31, 1997.
8
<PAGE>
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 THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
3/31/98 3/31/97
------------- -------------
<S> <C> <C>
Balance at beginning of period $ 8,848 $ 7,676
Provision for loss 940 1,800
Chargeoffs:
Real estate loans:
One-to-four family 57 20
Multi-family 193 346
Commercial 414 173
Construction and land - -
Consumer - -
------------- -------------
Total 664 539
------------- -------------
Balance at end of period $ 9,124 $ 8,937
============= =============
</TABLE>
While management believes that the allowance for loan losses at March 31, 1998,
was adequate to absorb 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
3/31/98 12/31/97
------- --------
<S> <C> <C>
Nonaccrual loans:
Real Estate:
One-to-four family $ 928 $ 1,951
Multi-family 2,039 1,584
Commercial 1,528 913
Consumer 37 37
------- -------
Total 4,532 4,485
REO 1,717 1,543
------- -------
Total Nonperforming assets $ 6,249 $ 6,028
======= =======
Troubled debt restructurings $ 4,602 $ 4,642
======= =======
Allowance for loan losses as a percentage
of gross loans receivable 2.06% 2.02%
Allowance for loan
losses as a percentage
of total nonaccrual loans 201.32% 197.28%
Nonaccrual loans as a percentage of
gross loans receivable 1.02% 1.02%
Nonperforming assets as a percentage
of total assets 1.12% 1.10%
</TABLE>
9
<PAGE>
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1998, was $0.8 million,
including a $0.3 million loan sale gain, compared to $1.6 million for the like
period in 1997, which included a $1.1 million gain on sales of branches.
Excluding the effect of the nonrecurring loan sale gain in 1998 and the
nonrecurring branch sale gain in 1997, noninterest income for the two periods
was approximately equal.
NONINTEREST EXPENSE
Noninterest expense for the three months ended March 31, 1998, was $2.3 million
compared to $2.9 million for the like period in 1997. The ratio of noninterest
expense to average assets decreased to 1.65% for the three months ended March
31, 1998, from 2.40% for the same period in 1997. Included in the decrease in
noninterest expense was a reduction in the net cost of operation of REO which
declined to $15,000 for the three months ended March 31, 1998, compared to
$101,000 for the like period in 1997.
The ratio of general and administrative expense to average assets for the three
months ended March 31, 1998, was 1.64% compared with 2.32% for the like period
of 1997. The decrease in general and administrative expense for the three-month
period in 1998 was due primarily to decreases in office occupancy and
compensation expense largely related to the sold branches compared to the like
period in 1997.
INCOME TAXES
For the three months ended March 31, 1998, the Company recorded income taxes of
$1.4 million compared to income taxes of $0.6 million for the three months
ended March 31, 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 recognized in prior years.
FINANCIAL CONDITION
COMPARISON OF FINANCIAL CONDITION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
THE YEAR ENDED DECEMBER 31, 1997
Total assets at March 31, 1998, were $555.7 million, compared to $549.6 million
at December 31, 1997. The Company's investment securities increased to $72.5
million at March 31, 1998, from $65.1 million at December 31, 1997. Loans
receivable increased $5.6 million during the three months ended March 31, 1998,
as a result of $33.2 million of new loan originations which offset amortization
and prepayment of loans and the sale of $8.3 million in loans during the
quarter. Total liabilities at March 31, 1998, were $512.1 million compared to
$508.1 million at December 31, 1997. This increase was due primarily to a net
increase in deposits of $14.1 million, offset by an decrease in FHLB advances of
$10.0 million. Stockholders' equity in- creased for the three months ended
March 31, 1998, to $43.6 million, compared to $41.5 million at December 31,
1997.
10
<PAGE>
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 quarter ended March 31, 1998, the growth in the loan portfolio and the
investment portfolio was funded primarily by a $14.1 million increase in
deposits, proceeds from the sale of loans of $8.6 million and loan repayments
and prepayments of $19.9 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 quarters ended March 31, 1998 and 1997
was 14.43% and 11.48%, respectively.
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 $3.9 million at March 31, 1998, or 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
March 31, 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 March 31, 1998 and
December 31, 1997:
11
<PAGE>
<TABLE>
<CAPTION>
To Be "Well
Capitalized"
Under Prompt
Corrective
March 31, 1998 December 31, 1997 Action Provisions
-------------- ----------------- -----------------
<S> <C> <C> <C>
Tangible Capital 7.13% 6.85% 1.5%
Leverage Capital 7.13% 6.85% 5.0%
Risk-based Capital 11.04% 10.65% 10.0%
</TABLE>
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, and as such may involve risks
and uncertainties. The Company's actual results, performance and achievements
may differ materially from the results, performance and achievements expressed
or implied in such forward-looking statements. Factors that might cause actual
results to differ include, but are not limited to, economic conditions,
competition in the geographic and business areas in which the Company conducts
its operations, fluctuations in interest rates, credit quality, governmental
regulation 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.
During 1997 and the first quarter 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 March 31, 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
12
<PAGE>
Item 3. Not applicable
Item 4. (a) On April 22, 1998, the Company held its Annual Meeting of
Stockholders.
(b) Stockholders voted on the following matters:
(i) The election of Richard J. Cross as director for a term
to expire in 2001:
Votes For Against Abstain Broker non-vote
-----------------------------------------------------------
1,808,784 2,000 0 0
(ii) The election of William G. Dyess as director for a term
to expire in 2001:
Votes For Against Abstain Broker non-vote
-----------------------------------------------------------
1,815,570 2,000 0 0
Woodrow De Witt, Richard O. Oxford, George Piercy, Shirley E. Simmons and
Stephen N. Rippe continued their existing terms as Directors.
(iii) The approval of the Company's Amended and Restated 1994
Stock Option and Performance Share Award Plan:
Votes For Against Abstain Broker non-vote
-----------------------------------------------------------
1,519,425 285,420 0 12,650
(iiii) The ratification of KPMG Peat Marwick LLP as independent
public accountants for the Company for 1998:
Votes For Against Abstain Broker non-vote
-----------------------------------------------------------
1,770,293 23,652 0 23,550
Item 5. Not applicable
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.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HIGHLAND BANCORP, INC.
----------------------
(Registrant)
DATED: May 13, 1998 /S/ STEPHEN N. RIPPE
-------------------------------
Stephen N. Rippe, President and
Chief Executive Officer
DATED: May 13, 1998 /S/ ANTHONY L. FREY
-------------------------------
Anthony L. Frey,
Principal Financial Officer
14
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