<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, 1999
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 May 10, 1999, 2,195,068 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 POSITION
(Dollar amounts in thousands except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------- ---------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 24,321 28,776
Investment securities
Securities available for sale 52,611 53,374
Securities held to maturity 10,881 11,926
Loans receivable, net 502,946 483,694
Real estate acquired through foreclosure, net 327 630
Federal Home Loan Bank stock - at cost 7,645 7,545
Accrued interest receivable 4,019 4,205
Premises and equipment, net 2,221 2,300
Deferred income taxes, net 4,425 4,409
Other assets 7,889 7,944
-------------------- ---------------------
$ 617,285 604,803
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 398,585 388,047
FHLB Advances 149,900 150,900
Securities sold under agreements to repurchase 10,000 10,000
Accounts payable and other liabilities 13,296 10,416
Income taxes payable 1 2,001
-------------------- ---------------------
Total liabilities 571,782 561,364
-------------------- ---------------------
Shareholders' equity:
Preferred stock - 1,000,000 shares authorized,
no shares issued - -
Common stock - authorized 8,000,000 shares of $.01
stated value, issued 2,331,174 shares in 1999 and
in 1998 23 23
Additional paid-in capital 15,662 16,279
Retained earnings 35,128 32,952
Treasury shares - 136,865 shares in 1999 and
150,000 shares in 1998 (5,271) (5,800)
Accumulated other comprehensive loss-unrealized
losses on securities available-for-sale: (39) (15)
-------------------- ---------------------
Total shareholders' equity 45,503 43,439
-------------------- ---------------------
$ 617,285 604,803
==================== =====================
</TABLE>
2
<PAGE>
HIGHLAND BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
------------------- ------------------
<S> <C> C>
Interest income
Loans $ 12,457 11,004
Securities 1,136 1,237
------------------- ------------------
Total interest income 13,593 12,241
------------------- ------------------
Interest expense
Deposits 4,535 4,581
FHLB advances and other borrowings 2,147 1,947
------------------- ------------------
Total interest expense 6,682 6,528
------------------- ------------------
Net interest income 6,911 5,713
Provision for losses on loans 718 940
------------------- ------------------
Net interest income after provision for
losses on loans 6,193 4,773
Noninterest income
Gain on the sale of loans - 276
Gain on the sale of securities available for
sale - 13
Other 469 490
------------------- ------------------
Total noninterest income 469 779
Noninterest expense:
General & administrative expenses
Compensation and benefits 1,474 1,384
Occupancy and equipment 293 266
FDIC insurance premium 60 54
Service bureau and related equipment rental 161 130
Other 508 424
------------------- ------------------
Total general and administrative
expenses 2,496 2,258
(Income) cost of operation of real estate
acquired through foreclosure (3) 15
------------------- ------------------
Total noninterest expense 2,493 2,273
------------------- ------------------
Income before income taxes 4,169 3,279
Income taxes 1,721 1,355
------------------- ------------------
Net income 2,448 1,924
------------------- ------------------
Other comprehensive income:
Unrealized (losses) gains on securities
available-for-sale (40) 60
Reclassification adjustment for gains (loss)
included in income - 11
Income taxes on other comprehensive income 16 (24)
------------------- ------------------
Other comprehensive (loss) income, net
of tax (24) 47
------------------- ------------------
Comprehensive income $ 2,424 1,971
=================== ==================
Basic net earnings per share $1.12 $0.83
=================== ==================
Diluted net earnings per share $1.07 $0.79
=================== ==================
</TABLE>
3
<PAGE>
HIGHLAND BANCORP, INC.
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
Net cash flows from operating activities:
Net earnings $ 2,448 1,924
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)
Amortization of premiums on securities 79 60
Federal Home Loan Bank stock dividend (100) (95)
Increase in net deferred tax asset - (362)
Gain on sale of real estate acquired through
foreclosure, net (1) 34
Deferred direct loan origination fees and costs, net (325) 356
Amortization of deferred compensation expense - 32
Provision for losses on loans 718 940
Decrease (increase) in accrued interest receivable 186 (303)
Depreciation 108 170
Decrease (increase) in other assets 55 (1,026)
Decrease in income taxes payable (2,000) (1,133)
Increase in accounts payable and other liabilities 2,880 1,034
-------------------- --------------------
Net cash provided by operating activities 4,048 1,342
-------------------- --------------------
Cash flows from investing activities:
Purchases of securities available-for-sale (6,306) (21,142)
Sales and maturities of securities available-for- sale 6,974 13,022
Principal payments on securities held-to-maturity 1,021 700
Net increase in loans receivable (19,690) (15,972)
Net costs capitalized on real estate acquired through
foreclosure - (157)
Proceeds from the sale of loans - 8,268
Proceeds from the sale of real estate acquired through
foreclosure 349 947
Purchases of premises and equipment, net (29) (180)
-------------------- --------------------
Net cash used in investing activities (17,681) (14,514)
-------------------- --------------------
Cash flows from financing activities:
Net increase in deposits 10,538 14,068
Common stock options exercised 178 90
Dividends paid on common stock (272) -
Repurchase of treasury stock (266) -
Net repayments of FHLB advances (1,000) (10,000)
-------------------- --------------------
Net cash provided by financing activities 9,178 4,158
-------------------- --------------------
Increase (decrease) in cash and cash equivalents (4,455) (9,014)
Cash and cash equivalents at beginning of year 28,776 26,420
-------------------- --------------------
Cash and cash equivalents at end of period $ 24,321 17,406
==================== ====================
Supplemental disclosures of cash flow information:
Interest paid $ 7,848 6,807
Income taxes paid 3,000 2,750
==================== ====================
Supplemental disclosure of noncash investing and financing
activities:
Acquisition of real estate in settlement of loans $ 45 1,369
Loans made in conjunction with real estate sales - 533
==================== ====================
</TABLE>
4
<PAGE>
HIGHLAND BANCORP, INC. & SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1999
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 income and comprehensive income and cash flows for the
interim periods presented. The financial position at March 31, 1999, and income
and comprehensive income for the three months ended March 31, 1999 are not
necessarily indicative of income and comprehensive income that may be expected
for the year ending December 31, 1999. 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, 1998.
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
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.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
1999 1998
------------------------------------
<S> <C> <C>
Basic EPS - weighted average number
of shares used in computation 2,192,196 2,321,081
Effect of dilutive securities - incremental
shares from outstanding stock options 93,070 113,997
------------------------------------
Diluted EPS - weighted average number
of shares used in computation 2,285,266 2,435,078
====================================
Basic shares outstanding at end of
period 2,194,309 2,322,687
====================================
</TABLE>
5
<PAGE>
At March 31, 1999, there were 109,000 option shares that had an antidilutive
effect on earnings per share and were excluded from the diluted earnings per
share calculations. There were no option shares that had an antidilutive effect
on earnings at March 31, 1998.
NOTE C - SUBSEQUENT EVENTS
On April 19, 1999, the Board of Directors declared a 12.5 cent per share cash
dividend, payable to common stockholders of record as of April 30, 1999, to be
paid on or about May 12, 1999, and a 2 for 1 stock split, effected as a stock
dividend, payable to common stockholders of record as of May 3, 1999, to be paid
on or about May 14, 1999.
6
<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 months ended March 31, 1999, of
$2.4 million, or $1.12 basic earnings per share ($1.07 diluted earnings per
share), compared to net earnings of $1.9 million, or $0.83 basic earnings per
share ($0.79 diluted earnings per share), for the three months ended March 31,
1998. Net earnings for the three months ended March 31, 1998 included a gain of
$0.3 million from the sale of loans.
Net interest income for the three months ended March 31, 1999 totaled $6.9
million, compared to $5.7 million for the comparable 1998 period. The increase
in 1999 compared with 1998 was due primarily to volume variances.
The Company reported general and administrative expenses of $2.5 million for the
three months ended March 31, 1999, compared to $2.3 million in the first three
months in 1998. The ratio of general and administrative expenses to average
assets was 1.64% for both the 1999 and 1998 periods.
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, 1999
Compared to Three Months
Ended March 31, 1998
Increase (Decrease) due to
-----------------------------------------------------------
(In thousands)
-----------------------------------------------------------
Volume Rate Net
--------------------------------------- -----------------
<S> <C> <C> <C>
Interest Income:
Loans $1,618 (165) 1,453
Mortgage-related securities 191 (1) 190
Investments (230) (61) (291)
------------------------------------------------------------
Total interest income on
interest-earning assets 1,579 (227) 1,352
------------------------------------------------------------
Interest Expense:
Deposits 308 (354) (46)
FHLB advances and other borrowings 371 (171) 200
------------------------------------------------------------
Total interest expense on
interest-bearing liabilities 679 (525) 154
------------------------------------------------------------
Change in net interest income $ 900 298 1,198
============================================================
</TABLE>
Net interest income for the three months ended March 31, 1999, was $6.9 million
compared to $5.7 million for the first quarter of 1998. The increase in net
interest income for the quarter ended March 31, 1999, is principally
attributable to increased amounts of net loans receivable outstanding in the
first quarter of 1999 compared with the 1998 first quarter, to increased levels
of deferred loan fee and discount amortization and loan prepayment fee
recognition related to increased levels of loan prepayments in the first quarter
of 1999 compared with the first quarter of 1998, and to decreases in the
Company's cost of funds during the first quarter of 1999 compared with the first
quarter of 1998. For the first three months of 1999, loan principal
amortization and payoffs were $27.9 million, compared to $19.9 million for the
1998 year to date period. This resulted in prepayment fee income of $235,000
for the three months ended March 31, 1999, compared to $151,000 for the same
1998 period. The increase in loan prepayments also resulted in accelerated
amortization of deferred loan fees for the 1999 first quarter when compared to
1998. Management anticipates that the yields earned on the Company's loan
portfolio will decrease if the levels of loan prepayments decline.
Additionally, for both 1999 and 1998, the Company has recognized interest income
related to the amortization of a deep discount of a small pool of real estate
loans purchased in late 1996. These loans will all mature in 1999. Without the
discount amortization on this pool of loans, the yield earned by the Company
would have been reduced by approximately 13 basis points for the three months
ended March 31, 1999. At March 31, 1999, the contractual yield on the Company's
interest earning assets was 8.95% excluding loan origination fee and discount
amortization and loan prepayment fee income, while the contractual cost of
interest bearing liabilities was 4.95%. At March 31, 1998, the contractual
yield on interest earning assets was 9.12%, while the cost of interest bearing
liabilities was 5.46%. The Company's net interest margin for the quarter ended
March 31, 1999, was 4.75%, compared with a net interest margin of 4.36% like
respective period of 1998. The increase in the net interest margin in the first
three months of 1999, compared with the net interest margin for the first three
months of 1998, is attributable principally to a 40 basis point decrease in the
cost of the Company's interest bearing liabilities between the first quarter of
1999 compared with the first quarter of 1998.
8
<PAGE>
The Company's ability to continue to increase the size of its loan portfolio,
which creates a positive volume variance in net interest income, is dependent on
both economic and Bank regulatory issues. The Bank's ability to make new
commercial real estate loans, which represented 64% of the new loan volume for
the three months ended March 31, 1999, is restricted by a regulatory limit on
the amount of total nonresidential real estate loans which cannot exceed a
maximum of 400% of the Bank's total regulatory capital. At March 31, 1999, the
Bank had $8 million of additional nonresidential real estate lending capacity
available under the 400% of capital test. The Bank is also subject to the
"Qualified Thrift Lender" ("QTL") test, which it must meet in order to retain
its ability to operate without restrictions as a savings institution, and which
places certain restrictions on the types of loans and investments that can be
held by the Bank. Under the QTL test, the Bank must maintain a minimum of 65%
of its assets in qualified thrift investments, which consist principally of
residential and small business loans and mortgage-backed securities. At March
31, 1999, the Bank held 66.0% of its assets in qualified thrift investments.
The following table reflects activity in the Company's loan portfolio:
<TABLE>
<CAPTION>
For the three months ended March 31,
-----------------------------------------
(In thousands) 1999 1998
-----------------------------------------
<S> <C> <C>
Net loans at beginning of period $483,694 $427,237
Loans originated:
Real estate loans:
Multi-family 16,702 19,867
Commercial 30,100 11,320
Construction and land 88 2,022
------------------ --------------------
Total loans originated 46,890 33,209
Less:
Principal payments (including payoffs) 27,863 19,948
Loan sales - 8,268
Other, net (225) (643)
------------------ --------------------
Loans receivable, net $502,946 $432,873
================== ====================
</TABLE>
Provision and Allowance for Loan Losses
For the three months ended March 31, 1999, the Company's provision for loan
losses totaled $0.7 million, compared to $0.9 million for the comparable period
in 1998. The Company's decreased provision for 1999 compared with 1998 reflects
the decreases in nonaccrual loans and reduced levels of loan chargeoffs during
1999, as well as Management's assessment of risks associated with trends in
economic and business conditions in the Company's market. At March 31, 1999,
the Company's nonperforming assets, consisting of nonaccrual loans and REO,
totaled $2.5 million, compared to $6.2 million at March 31, 1998 and $3.0
million at December 31, 1998. The Company's allowance for loan losses as a
percentage of gross loans receivable was 2.02% at March 31, 1999, compared to
2.06% at March 31, 1998.
9
<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 Year
Months Ended Ended
March 31, 1999 December 31, 1998
---------------------- -----------------------
<S> <C> <C>
Balance at beginning of period $ 9,909 $8,848
Provision for loss 718 3,315
Chargeoffs:
Real estate loans:
One-to-four family 25 91
Multi-family 188 1,144
Commercial 30 968
Construction and land - 47
Consumer - 4
---------------------- -----------------------
Total 243 2,254
---------------------- -----------------------
Balance at end of period $10,384 $9,909
====================== =======================
</TABLE>
While management believes that the allowance for loan losses at March 31, 1999,
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):
10
<PAGE>
<TABLE>
<CAPTION>
As of As of
March 31, 1999 December 31, 1998
----------------- --------------------
<S> <C> <C>
Nonaccrual loans:
Real Estate:
One-to-four family $ 575 $ 526
Multi-family 1,062 1,379
Commercial 538 423
Consumer 37 37
----------------- --------------------
Total 2,212 2,365
REO 327 630
----------------- --------------------
Total nonperforming assets $2,539 $2,995
================= ====================
Troubled debt restructurings $2,982 $3,017
================= ====================
Allowance for loan losses as a percentage
of gross loans receivable 2.02% 2.01%
Nonaccrual loans as a percentage of
gross loans receivable 0.43% 0.48%
Nonperforming assets as a percentage
of total assets 0.41% 0.50%
</TABLE>
Noninterest Income
Noninterest income for the three months ended March 31, 1999, was $0.5 million
compared to $0.8 million for the like quarter of 1998. The 1998 three month
period includes $0.3 million gain on sale of loans, while the comparable 1999
periods includes no non recurring items.
Noninterest Expense
Noninterest expense for the three months ended March 31, 1999, was $2.5 million,
compared to $2.3 million for the like respective period in 1998. The ratio of
noninterest expense to average assets decreased to 1.63% for the three months
ended March 31, 1999, from 1.65% for the same period in 1998.
The ratio of general and administrative expense to average assets for the three
months ended March 31, 1999, was 1.64%, which was unchanged from the like period
of 1998. The increase in general and administrative expense for the three month
period in 1999 was due primarily to increases in compensation, data processing
and related depreciation on new equipment related to the Company's fourth
quarter 1998 conversion to a new computer service bureau, and miscellaneous
other charges.
Income Taxes
For the three months ended March 31, 1999, the Company recorded income taxes of
$1.7 million, compared to income taxes of $1.4 million for the like period in
1998. Changes in the levels of recorded income taxes are related to changes in
the levels of the Company's earnings before income taxes.
11
<PAGE>
FINANCIAL CONDITION
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
Total assets at March 31, 1999, were $617.3 million, compared to $604.8 million
at December 31, 1998. The Company's cash and investment securities decreased to
$87.8 million at March 31, 1999, from $94.1 million at December 31, 1998. Loans
receivable increased $19.3 million during the three months ended March 31, 1999
as a result of $46.9 million of new loan originations, which offset $27.9
million amortization and prepayment of loans. Total liabilities at March 31,
1999 were $571.8 million compared to $561.4 million at December 31, 1998. This
increase was due to a net increase in deposits of $10.5 million. Shareholders'
equity increased slightly during the three months ended March 31, 1999, to $45.5
million, compared to $43.4 million at December 31, 1998, reflecting $2.4 million
of earnings for the period, offset by the $0.1 million treasury stock repurchase
net of new option shares issued in the quarter and $0.3 million dividends paid
to the Company's common shareholders.
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 three months ended March 31, 1999, the growth in the loan portfolio was
funded primarily by a $9.5 million net increase in deposits and borrowings.
The Bank must, by regulation, maintain minimum levels of liquidity as a
percentage of deposits and short-term borrowings. Effective November 24, 1998,
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 ratios for the three months ended March 31, 1999 and
1998 were 11.04% and 13.44%, 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 obtain borrowings. Without dividends
from Highland Federal Bank, Highland Bancorp, Inc. must rely solely on existing
cash and cash equivalents, which total $1.6 million at March 31, 1999, or on the
ability to obtain borrowings to pay existing current liabilities and future
operating expenses. The parent company's liquidity requirements are currently
limited to shareholder dividends when declared, and certain incidental
expenditures related to corporate obligations. The parent company currently has
no separate operations from the subsidiary Bank.
12
<PAGE>
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, 1999, 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, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
Minimum to Be "Well
Actual as of Mminimum for Capitalized" Under
Actual as of December 31, capital adequacy Prompt Corrective
March 31, 1999 1998 purposes Action Provisions
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tangible capital 7.12% 7.01% 1.50% N/A
Leverage Capital 7.12% 7.01% 4.00% 5.00%
Risk-based Capital 10.31% 10.38% 8.00% 10.00%
</TABLE>
Year 2000 Issues (THIS CONSTITUTES A "YEAR 2000 READINESS DISCLOSURE" UNDER THE
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT)
The Year 2000 Issue concerns the potential impact of historic computer software
code that only utilizes two digits to represent the calendar year (e.g. "99" for
1999"). Software so developed, and not corrected, could produce inaccurate or
unpredictable results commencing upon January 1, 2000, when current and future
dates present a lower two digit year number than dates in the prior century.
Highland, similar to most financial services providers, is significantly subject
to the potential impact of the Year 2000 Issue due to the nature of financial
information. Potential impacts to Highland may arise from software, computer
hardware, and other equipment both within Highland's direct control and outside
of Highland's ownership, yet with which Highland electronically or operationally
interfaces. Financial institution regulators have intensively focused upon Year
2000 exposures, issuing guidance concerning the responsibilities of senior
management and directors. Year 2000 testing and certification is being addressed
as a key safety and soundness issue in conjunction with regulatory examinations.
In order to address the Year 2000 Issue, Highland has developed and implemented
a five phase plan divided into the following major components:
. awareness
. assessment
. renovation
. validation
. implementation
13
<PAGE>
Highland has completed the first three phases of the plan and is currently
working internally and with external vendors on the final two phases. Because
Highland outsources its data processing and item processing operations, a
significant component of the Year 2000 plan is to work with external vendors to
test and certify their systems as Year 2000 compliant. Other important segments
of the Year 2000 plan are to identify those loan customers whose possible lack
of Year 2000 preparedness might expose the Bank to loss, and to highlight any
servicers of purchased loans or securities which might present Year 2000
operating problems.
Where Highland's systems were identified as Year 2000 compliant and available
for testing before by September 30, 1998, Highland completed its validation of
such systems by December 31, 1998. This testing included the Company's loan
servicing computer system and wire transfer system, which were identified as
critical systems. However, because Highland converted to a new service bureau
for its deposits and general ledger, it is unable to perform its Year 2000
testing (validation) on these systems and the functionally related ATM
transactions software until the second quarter of 1999. Although these vendors
have advised Highland that their software is already Year 2000 compliant, the
Company has assumed additional business and regulatory risk by not being able to
test these systems relative to the Company's own systems and data until 1999.
Because all Highland's critical computer systems are written and maintained by
outside vendors, the direct costs incurred by Highland for Year 2000 issues have
been less than if Highland had to utilize its own personnel to modify or rewrite
computer software. Highland spent approximately $25,000 in the first quarter of
1999 and $75,000 in the year ended December 31, 1998, primarily indirect labor
to oversee planning and testing for Year 2000. Highland expects to spend a total
of $100,000 in 1999 to complete its Year 2000 program. These costs will be
funded from the operations of the Bank. Highland has determined that it has
little or no exposure to contingencies related to the Year 2000 Issue for
products it has sold.
The risks to Highland posed by Year 2000 issues are considerable. Most of
Highland's business involves calculations of interest, which are recognized over
periods of time. The inability of a critical system to identify the time that
has elapsed for an interest calculation would result in a sharp decrease in
Highland's ability to make these calculations on a timely basis. Highland also
processes significant volumes of customer deposit, withdrawal and payment
transactions using computer systems. The failure of a critical system, which
would include deposit servicing or loan servicing, would require considerable
additional personnel costs to make interest calculations, to process customer
transactions, and to convert to a Year 2000 compliant system. Furthermore, some
services, such as ATM cards and certain transaction type deposit accounts, might
have to be curtailed until new systems were purchased and installed. There would
be considerable potential for lost customers and revenue.
Year 2000 risks not directly related to Highland's computer software and systems
include the risk of large withdrawals by deposit customers as a response to
perceived Year 2000 problems and the risk of adverse business impacts on the
Bank's loan customers. Highland has made an assessment of the potential impact
of Year 2000 issues on its customers, and does not believe this poses a
significant risk to Highland. Despite Highland's activities with regard to the
Year 2000 issue, there can be no assurance that partial or total systems
interruptions, or the costs necessary to maintain system availability, will not
have a material adverse impact on Highland's business, financial condition or
results of operations.
14
<PAGE>
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 1998 and the first three months of 1999, 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 and other borrowings.
Highland's interest rate sensitivity "gap" and its net portfolio value have not
materially changed since December 31, 1998. For more detailed information
regarding the definition and measurement of these items, refer to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
At March 31, 1999 and 1998, the Company did not hold any derivative financial
instruments.
This discussion and analysis contains certain statements which constitute
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995, relating to, among other things, future cash dividends, and future
earnings levels, which are subject to risks and uncertainties that could cause
actual results, performance, or achievements to differ materially. These risks
and uncertainties include economic conditions, interest rates, changes in
government regulation and monetary policy, competition in the geographic and
business areas in which Highland conducts its operations, fluctuations in
interest rates, credit quality and government regulation. For additional
information concerning these factors, see "Item 1. Business-Factors That May
Affect Future Results." in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
PART II. OTHER INFORMATION
ITEMS 1-5.
Item 1. Not applicable
Item 2. Not applicable
Item 3. Not applicable
Item 4. (a) On April 22, 1999, the Company held its Annual Meeting of
Stockholders.
15
<PAGE>
(b) Stockholders voted on the following matters:
(i) The election of Stephen N. Rippe as a director for a term to
expire in 2002:
Votes For Against Abstain Broker non-vote
1,966,383 0 4,900 0
(ii) The election of George Piercy as a director for a term to expire
in 2002:
Votes For Against Abstain Broker non-vote
1,966,383 0 4,900 0
Richard Cross, William Dyess, Richard O. Oxford, Shirley E. Simmons and Woodrow
De Witt continued their existing terms as directors.
(iii) The ratification of KPMG LLP as independent public accountants for
1999:
Votes For Against Abstain Broker non-vote
1,970,783 500 0 0
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.
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: May 14, 1999 /S/ ANTHONY L. FREY
-------------------
Anthony L. Frey,
Principal Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,515
<INT-BEARING-DEPOSITS> 2,205
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,611
<INVESTMENTS-CARRYING> 10,881
<INVESTMENTS-MARKET> 10,818
<LOANS> 513,330
<ALLOWANCE> 10,384
<TOTAL-ASSETS> 617,285
<DEPOSITS> 398,585
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,297
<LONG-TERM> 159,900
0
0
<COMMON> 23
<OTHER-SE> 45,480
<TOTAL-LIABILITIES-AND-EQUITY> 617,285
<INTEREST-LOAN> 12,457
<INTEREST-INVEST> 1,136
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,593
<INTEREST-DEPOSIT> 4,535
<INTEREST-EXPENSE> 6,682
<INTEREST-INCOME-NET> 6,911
<LOAN-LOSSES> 718
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,493
<INCOME-PRETAX> 4,169
<INCOME-PRE-EXTRAORDINARY> 2,448
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,448
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 4.75
<LOANS-NON> 2,212
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,982
<LOANS-PROBLEM> 4,771
<ALLOWANCE-OPEN> 9,909
<CHARGE-OFFS> 243
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 10,384
<ALLOWANCE-DOMESTIC> 10,384
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,288
</TABLE>
