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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 September 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 0-24947
----------------------
UCBH Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 94-3072450
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
711 Van Ness Avenue, San Francisco, California 94102
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(415) 929-6026
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 No X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of November 23, 1998, the Registrant had 9,333,333 shares of common
stock outstanding.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION...............................................................................1-3
Item 1. Financial Statements...........................................................................1-3
Notes to Condensed Consolidated Financial Statements......................................4-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................7-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................20
PART II - OTHER INFORMATION...................................................................................20
Item 1. Legal Proceedings...............................................................................20
Item 2. Changes in Securities...........................................................................21
Item 3. Defaults upon Senior Securities.................................................................21
Item 4. Submission of Matters to a Vote of Security Holders.............................................21
Item 5. Other Information...............................................................................21
Item 6. Exhibits and Reports on Form 8-K................................................................21
SIGNATURES....................................................................................................22
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UCBH Holdings, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
At September 30, At December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets:
Cash and due from banks $ 5,366 $ 13,853
Federal funds sold - 21,000
Investment securities available for sale, at fair value 124,544 -
Investment securities, at cost (fair value $2,320 at September 30, 1998
and $3,998 at December 1997) 2,320 4,000
Mortgage-backed securities available for sale, at fair value 300,904 84,308
Mortgage-backed securities, at cost (fair value $161,488 at September 30,
1998 and $174,972 at December 31, 1997) 166,214 181,795
Federal Home Loan Bank Stock 16,467 13,914
Loans 1,391,196 1,214,237
Allowance for loan losses (13,912) (12,142)
----------- -----------
Net loans 1,377,284 1,202,095
----------- -----------
Accrued interest receivable 12,628 8,594
Premises and equipment, net 23,679 23,931
Other assets 10,676 8,160
----------- -----------
Total assets $ 2,040,082 $ 1,561,650
=========== ===========
Liabilities:
Deposits $ 1,562,652 $ 1,468,987
Federal funds purchased 4,100 -
Other borrowings 325,212 -
Long-term debt to affiliates - 20,060
Accrued interest payable 3,749 452
Guaranteed preferred beneficial interests in 30,000 -
junior subordinated debentures
Other liabilities 12,261 9,599
----------- -----------
Total liabilities 1,937,974 1,499,098
----------- -----------
Stockholders' Equity:
Common stock, $0.01 par value, authorized 25,000,000 shares. 9,333,333 shares
issued and outstanding at September 30, 1998; $0.00167 par value, 18,000,000
shares authorized, 6,000,000 shares issued and outstanding at December 31, 1997 93 10
Additional paid-in capital 59,755 30,278
Accumulated other comprehensive income 741 (1,728)
Retained earnings-substantially restricted 41,519 33,992
----------- -----------
Total stockholders' equity 102,108 62,552
----------- -----------
Total liabilities and stockholders' equity $ 2,040,082 $ 1,561,650
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
UCBH Holdings, Inc.
Consolidated Statements of Operations
(Unaudited: Dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 25,903 $ 21,829 $ 73,857 $ 63,026
Funds sold and securities purchased under
agreements to resell 12 1,012 483 2,093
Investment and mortgage-backed securities 9,350 4,616 19,116 14,444
----------- ---------- ---------- ----------
Total interest income 35,265 27,457 93,456 79,563
----------- ---------- ---------- ----------
Interest expense:
Deposits 16,621 16,272 47,875 45,271
Short-term borrowings 1,392 2 1,458 800
Guaranteed preferred beneficial interests in junior
subordinated debentures 703 - 1,273 -
Long-term borrowings 3,104 - 4,374 -
Long-term debt to affiliates - 465 599 1,358
----------- ---------- ---------- ----------
Total interest expense 21,820 16,739 55,579 47,429
----------- ---------- ---------- ----------
Net interest income 13,445 10,718 37,877 32,134
Provision for loan losses 782 603 2,183 735
----------- ---------- ---------- ----------
Net interest income after provision for loan losses 12,663 10,115 35,694 31,399
----------- ---------- ---------- ----------
Noninterest income:
Commercial banking fees 318 251 883 680
Service charges on deposit accounts 278 198 822 680
Gain on sale of loans, securities and servicing rights 119 610 426 80
Loan servicing fees 62 72 354 598
Miscellaneous (23) 79 1 337
----------- ---------- ---------- ----------
Total noninterest income 754 1,210 2,486 2,375
----------- ---------- ---------- ----------
Noninterest expense:
Personnel 3,528 3,326 11,775 10,495
Occupancy 1,290 1,242 3,737 3,548
Data processing 421 466 1,601 1,445
Furniture and equipment 574 512 1,744 1,364
Deposit insurance 220 319 677 1,461
Communication 106 81 307 253
Professional fees and contracted services 525 406 1,427 1,288
Foreclosed assets 69 62 66 455
Miscellaneous 1,217 1,074 3,910 3,124
----------- ---------- ---------- ----------
Total noninterest expense 7,950 7,488 25,244 23,433
----------- ---------- ---------- ----------
Income before taxes 5,467 3,837 12,936 10,341
Income tax expense 2,339 1,706 5,409 4,383
----------- ---------- ---------- ----------
Net income $ 3,128 $ 2,131 $ 7,527 $ 5,958
----------- ---------- ---------- ----------
Average common outstanding, basic
9,333,333 6,000,000 8,024,691 6,000,000
Average common and common equivalent shares
outstanding, diluted 9,333,333 7,974,000 8,799,669 7,974,000
Basic earnings per share $ 0.34 $ 0.36 $ 0.94 $ 0.99
Diluted earnings per share 0.34 0.30 0.89 0.85
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
unaudited
1998 1997
--------- ---------
<S> <C> <C>
Operating activities
Net income $ 7,527 $ 5,958
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of investment and mortgage-backed securities premium 20 122
Amortization of net deferred loan origination costs 571 (354)
Provision for loan losses 2,183 735
Increase in accrued interest receivable (4,034) (568)
Depreciation and amortization of premises and equipment 2,010 1,658
Amortization of servicing assets 189 341
(Increase) decrease in other assets (2,974) 873
Increase in accrued interest payable 3,297 1,814
Increase (decrease) in other liabilities 2,146 (1,216)
Gain on sale of servicing rights - (1,100)
Gain on sale of OREO (162) (279)
(Gain) loss on sale of loans (426) 205
Loss on sale of securities - 815
--------- ---------
Net cash provided by operating activities $ 10,347 $ 9,004
--------- ---------
Investing activities
Investments and mortgage-backed securities held to maturity:
Principal payments and maturities 19,182 23,357
Purchases (4,289) (200)
Investments and mortgage-backed securities, available for sale:
Principal payments and maturities 8,936 10,482
Purchases (346,096) -
Sale of securities - 20,945
Loans purchased (43,851) (43,557)
Loans originated net of principal collections (150,641) (99,708)
Proceeds from sale of loans 15,294 26,844
Purchases of premises and equipment (1,971) (1,532)
Proceeds from sale of premises and equipment 214 97
Proceeds from sale of servicing rights - 3,095
Proceeds from sale of OREO 911 3,192
--------- ---------
Net cash used in investing activities (502,311) (56,985)
--------- ---------
Financing activities
Net increase in NOW accounts, money market accounts and passbook accounts 27,560 4,858
Net increase in time deposits 66,105 91,816
Net increase in short-term borrowings 96,312 -
Net increase in long-term borrowings 233,000 -
Net (decrease) increase in long-term debt to affiliates (20,060) 1,500
Proceeds from issuance of common stock 29,560 -
Proceeds from issuance of guaranteed preferred beneficial interests in
subordinated debentures 30,000 -
--------- ---------
Net cash provided by financing activities 462,477 98,174
--------- ---------
(Decrease) increase in cash and cash equivalents (29,487) 50,193
Cash and cash equivalents at beginning of period 34,853 18,394
--------- ---------
Cash and cash equivalents at end of period $ 5,366 $ 68,587
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest 52,282 45,615
Cash paid during the period for income taxes 2,593 1,954
Supplemental schedule of noncash investing and financing activities
Receivable resulting from sale of servicing rights - 371
Real estate acquired through foreclosure 1,834 3,858
Conversion of affiliated party debt to common stock 20,600 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting and Reporting
Policies
Basis of Presentation
The Consolidated Balance Sheet as of September 30, 1998, the Consolidated
Statements of Operations for the three months and the nine months ended
September 30, 1998 and 1997, and the Consolidated Statements of Cash Flows for
the nine months ended September 30, 1998 and 1997 have been prepared by UCBH
Holdings, Inc. (the Company) and are not audited.
The unaudited financial statement information presented was prepared on
the same basis as the audited financial statements for the year ended December
31, 1997. In the opinion of management such unaudited financial statements
reflect all adjustments necessary for a fair statement of the results of
operations and balances for the interim periods presented. Such adjustments are
of a normal recurring nature. The results of operations for the nine months
ended September 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
On April 17, 1998, the Company completed a 6,000-for-1 stock split.
Accordingly, the financial statements for all periods presented have been
restated to reflect the impact of the stock split. On April 17, 1998, the
Company's long-term debt to affiliates was converted to 1,974,000 shares of
common stock, as adjusted for the aforementioned stock split. Given the
occurrence of this conversion, management has considered this long-term debt to
affiliates as convertible debt for purposes of its calculation of diluted
earnings per share.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
2. Recent Accounting Pronouncements
The provisions of Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," that were deferred by SFAS No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125-An
Amendment of FASB Statement No. 125," became effective as to repurchase
agreements, dollar rolls, securities lending and certain other transactions
after December 31, 1997. Implementation of such provisions did not have a
significant effect on the Company's financial position, results of operations,
or capital.
As of December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share," which specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). Basic EPS is computed by dividing
net income by the weighted average number of shares outstanding during the
period. Diluted EPS considers the possible dilutive effect of instruments such
as convertible debt, convertible preferred stock, and stock options. Prior
period EPS has been restated to comply with the provisions of SFAS No. 128.
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes presentation
and disclosure requirements for comprehensive income; however, it does not
affect existing recognition or measurement standards. For the Company,
comprehensive income consists of net income and the change in unrealized gains
and losses on available-for-sale securities. For the nine months ended September
30, 1998 and 1997, total comprehensive income was $10.0 million and $6.5
million, respectively. Net income was $7.5 million and the change in unrealized
gains and losses on available-for-sale securities was $2.5 million for the nine
months ended September 30, 1998. For the corresponding period of 1997, net
income was $6.0 million and the change in unrealized gains and losses on
available-for-sale securities was $544,000.
4
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 does not affect
existing recognition or measurement standards. The provisions of SFAS No. 131
need not be applied to interim financial statements in the initial year of its
application. Accordingly, such disclosures have not been presented herein.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" will become effective for fiscal years beginning after June 15,
1999. SFAS No. 133 defines derivative instruments and requires that they be
recognized as assets or liabilities in the statement of financial position,
measured at fair value. It further specifies the nature of changes in the fair
value of the derivatives which are included in the current period results of
operations and those which are included in other comprehensive income.
Management has not yet quantified the impact that SFAS No. 133 will have on the
financial statements of the Company, if any.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
Securitization" will become effective for fiscal years beginning after December
15, 1998. SFAS No. 134 specifies the requirements for classification of
securities which are retained following the securitization of mortgages
previously held for resale. The Company does not have securitized mortgage
loans. Accordingly, management does not expect SFAS No. 134 to affect financial
statements of the Company.
2. Earnings Per Share
The following is a reconciliation of the numerators and
denominator of the basic and diluted earnings per share (Dollars in thousands,
except for per share data):
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic:
Net income............................................... $7,527 8,024,691 $0.94
Effect of long-term debt to affiliates...................... 347 774,978
------ ---------
Diluted:
Net income and assumed conversion........................ $7,874 8,799,699 $0.89
====== =========
Nine Months Ended September 30, 1997
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic:
Net income............................................... $5,958 6,000,000 $0.99
Effect of long-term debt to affiliates...................... 801 1,974,000
------ ---------
Diluted:
Net income and assumed conversion........................ $6,759 7,974,000 $0.85
====== =========
</TABLE>
5
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Derivative Financial Instruments and Financial Instruments with Off-Balance
Sheet Risk
Contract or notional amounts of derivative financial instruments and
financial instruments with off-balance-sheet risk as of September 30, 1998 and
December 31, 1997 are as follows (dollars in millions):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Consumer.......................................................... $ 79.4 $65.0
Commercial (excluding construction)............................... 49.9 10.8
Construction...................................................... 142.7 78.7
Commitments to purchase loans....................................... - 0.1
Letters of credit................................................... 6.1 1.9
Financial instruments whose notional or contract amounts exceed the
amount of credit risk:
Interest-rate swap and cap agreements............................... 200.0 -
Forward commitments to sell loans................................... - 3.5
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held generally includes residential or commercial real
estate, accounts receivable, or other assets.
Commitments to purchase loans are agreements to buy loans from a primary
broker/dealer as long as there are no violations of any condition established in
the contract. Commitments terminate on the final closing date mutually agreed
upon by the purchaser and seller as defined in the contract. The Company
evaluates each loan's worthiness on a loan-by-loan basis. Each loan is
collateralized by residential real estate.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. These letters of credit are usually
secured by inventories or by deposits held at the Company.
Interest rate swap transactions generally involve the exchange of fixed-
and floating-rate interest payment obligations without the exchange of the
underlying principal amounts. Interest-rate swaps are entered into to reduce the
Company's exposure to interest rate movements and are used as part of
asset/liability management. The Company typically becomes a principal in the
exchange of fixed- and floating-rate interest payment obligations with another
party and, therefore, is exposed to loss if the other party defaults. The
Company minimizes this risk by performing normal credit reviews on its swap
counterparties.
Interest rate caps are interest rate protection instruments that involve
the payment from the seller to the buyer of an interest differential. This
differential represents the difference between current interest rates and
agreed-upon rate applied to a notional principal amount. The Company is a
purchaser of interest rate caps.
Entering into interest-rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the
contracts, but also the interest-rate risk associated with unmatched positions.
Notional principal amounts often are used to express the volume of these
transactions, but the amounts potentially subject to credit risk are much
smaller.
Forward contracts are contracts for delayed delivery of securities or
loans in which the seller agrees to make delivery at a specified future date of
a specified instrument at a specified price or yield.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Form 10-Q may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in the Risk Factors of the Company's Prospectus dated October
13, 1998.
The following discussion and analysis is intended to provide details of the
results of operations of the Company for the three months and nine months ended
September 30, 1998 and 1997 and financial condition at September 30, 1998 and at
December 31, 1997. The following discussion should be read in conjunction with
the information set forth in the Company's Consolidated Financial Statements and
notes thereto and other financial data included.
RESULTS OF OPERATIONS
General. The Company's primary source of income is net interest income,
which is the difference between interest income from interest-earning assets and
interest paid on interest-bearing liabilities such as deposits and other
borrowings used to fund those assets. The Company's net interest income is
affected by changes in the volume of interest-earning assets and
interest-bearing liabilities as well as by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds. The Company also generates noninterest income, including
commercial banking fees and other transactional fees and seeks to generate
additional fees in connection with the shift in its business focus to commercial
banking. The Company's noninterest expenses consist primarily of personnel,
occupancy, and furniture and equipment expenses and other operating expenses.
The Company's results of operations are affected by its provision for loan
losses and may also be significantly affected by other factors including general
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory agencies.
Net Income. The consolidated net income of the Company during the quarter
ended September 30, 1998 increased by $1.0 million, or 46.8%, to $3.1 million,
compared to $2.1 million for the corresponding quarter of the prior year. The
increase resulted primarily from an increase in interest income on loans. The
annualized return on average equity ("ROE") and average assets ("ROA") ratios
for the quarter ended September 30, 1998 were 12.97% and 0.63%, respectively.
This compares with annualized ROE and ROA ratios of 14.36% and 0.54%,
respectively, for the quarter ended September 30, 1997. The resulting efficiency
ratios were 56.0% for the quarter ended September 30, 1998 and 62.8% for the
corresponding quarter of the prior year. Diluted earnings per share were $0.34
for the quarter ended September 30, 1998 compared with $0.30 for the comparable
quarter of the preceding year.
For the nine months ended September 30, 1998, net income was $7.5 million,
an increase of $1.6 million, or 26.3% from the nine months ended September 30,
1997. The increase in earnings during the nine months ended September 30, 1998
resulted primarily from the increased net interest income which resulted
primarily from a larger average loan portfolio combined with the improved loan
yield. Partially offsetting the improvement in net income was the increased
provision for loan losses which was made as a result of the growth in the loan
portfolio and the increase in personnel expenses primarily related to the
expansion of the commercial banking division and incentive accruals recorded
during the first nine months of 1998 and nonrecurring expenses related to the
computer system conversion. The Company's annualized return on average assets
was 0.58% for the nine months ended September 30,1998, compared with 0.52% for
the nine months ended September 30, 1997. The Company's annualized return on
average equity was 12.07% and 13.56% for the nine months ended September 30,
1998 and 1997, respectively. The efficiency ratio was 62.5% for the nine months
ended September 30, 1998 as compared with 67.9% for the corresponding period of
the preceding year.
The increase in net income for the three months ended September 30, 1998
from the three months ended September 30 1997 was due to the increase in the
average loans outstanding and an increase in the average yield on loans
resulting
7
<PAGE>
from the growth in the commercial loan portfolio and an increase in the average
investment and mortgage-backed securities outstanding due to the securities
purchased to leverage the capital raised during the second quarter of 1998.
Partially offsetting the increases to net interest income resulting from the
foregoing was an decrease in noninterest income and an increase in noninterest
expense. The noninterest income for the three months ended September 30, 1997
included a gain of $886,000 resulting from the disposition of the loan servicing
portfolio. The noninterest expense decreased partially resulting from the
increase in personnel expense resulting from the additional staffing of the
commercial banking division.
The increase in net income for the nine months ended September 30, 1998
from the nine months ended September 30, 1997 was due to the increase in net
interest income which resulted from an increase in the average loans
outstanding, an increase in the average yield on loans resulting from the growth
in the commercial loan portfolio, and an increase in the average securities
portfolio due to the securities purchased to leverage the capital raised during
the second quarter of 1998. Partially offsetting the increases to net income
resulting from the foregoing were increase in the provision for loan losses and
increases in noninterest expense.
The provision for loan losses increased from $735,000 in the nine months
ended September 30, 1997 to $2.2 million in the corresponding period of 1998.
The increased provision in 1998 related to the increased growth in the loan
portfolio during the nine months ended September 30, 1998 and the increase in
the commercial loan portfolio during this period. As of September 30, 1998, the
$13.9 million allowance for loan losses represented 1.00% of gross loans.
Noninterest expenses were $25.2 million for the nine months ended September 30,
1998, an increase of $1.8 million, or 7.7%, from the corresponding period of the
prior year. Personnel expenses increased to $11.8 million during the nine months
ended September 30, 1998 compared with $10.5 million for the corresponding
period of the previous year due to the addition of commercial banking personnel
and incentive accruals recorded during 1998.
Net Interest Income and Net Interest Margin. Net interest income of $13.4
million for the quarter ended September 30, 1998 represented a $2.7 million, or
25.4%, increase from the corresponding period of the prior year. This growth
resulted primarily from an increase in average outstanding loans which increased
from $1.13 billion for the quarter ended September 30, 1997 to $1.32 billion for
the corresponding period of 1998, an increase of $188.9 million, or 16.7%.
The net interest margin improved to 3.00% for the nine months ended
September 30, 1998 as compared to 2.89% for the nine months ended September 30,
1997. At September 30, 1998, the net interest margin was 2.85%, reflecting the
impact of the new assets acquired in conjunction with the leverage strategy.
While the leverage strategy reduces this ratio, the strategy is accretive to net
income and earnings per share. For the nine months ended September 30, 1998, net
interest income was $37.9 million, an increase of $5.7 million, or 17.9%, from
$32.1 million for the nine months ended September 30, 1997.
Net interest income increased in the nine months ended September 30, 1998
primarily as a result of (i) the increase in average loans outstanding to $1.26
billion from $1.09 billion, (ii) the increase in the average yield on loans to
7.81% in the first nine months of 1998 from 7.68% for the same period in the
preceding year, (iii) the reduction in the average balance of lower yielding
COFI securities to $257.1 million from $304.8 million and their replacement with
higher yielding loans, and (iv) the purchase of $346 million of securities in
conjunction with the leveraging strategy with an average yield of 6.68%.
8
<PAGE>
The following table presents condensed average balance sheet information
for the Company, together with interest rates earned and paid on the various
sources and uses of funds for each of the periods indicated.
<TABLE>
<CAPTION>
At
September 30, For the Nine Months Ended For the Nine Months Ended
1998 September 30, 1998 September 30, 1997
---- ------------------------- -------------------------
(Dollars in thousands)
Interest Interest
Yield/ Average Income Average Average Income Average
Rate Balance or Expense Yield/Rate Balance or Expense Yield/Rate
---- ------- ---------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans 7.86% $1,260,115 $ 73,857 7.81% $1,094,804 63,026 7.68%
Securities 6.18 410,501 19,116 6.21 337,467 14,444 5.71
Other - 11,508 483 5.59 49,658 2,093 5.62
---------- -------- ---------- -------
Total interest-earning assets 7.35 1,682,124 93,456 7.41 1,481,929 79,563 7.16
Noninterest-earning assets - 56,945 - - 49,611 - -
---------- -------- ---------- -------
Total assets 7.21 $1,739,069 $ 93,456 7.17 $1,531,540 79,563 6.93
========== -------- ========== -------
Interest-bearing liabilities
Deposits:
NOW and checking 1.09 $ 80,497 667 1.10 $ 77,567 636 1.09
Money market accounts 3.35 22,652 496 2.92 21,562 387 2.39
Passbook accounts 2.24 214,010 3,657 2.28 213,725 3,658 2.28
Time deposits 5.13 1,125,234 43,055 5.10 1,076,528 40,590 5.03
---------- -------- ---------- -------
Total deposits 4.46 1,442,393 47,875 4.43 1,389,382 45,271 4.34
---------- -------- ---------- -------
Borrowings 5.93 133,200 5,832 5.84 19,461 800 5.48
Guaranteed preferred beneficial interests
in junior subordinated debentures 9.38 18,107 1,273 9.38 - -
Long-term debt to affiliates - 7,980 599 10.00 18,111 1,358 10.00
---------- -------- ---------- -------
Total interest-bearing liabilities 4.80 1,601,680 55,579 4.63 1,426,954 47,429 4.43
-------- -------
Noninterest-bearing deposits 38,623 33,253
Other noninterest-bearing liabilities 15,618 12,746
Stockholders' equity 83,148 58,587
---------- ----------
Total liabilities and stockholder's equity $1,739,069 $1,531,540
========== ==========
Net interest income/interest rate
spread 2.55% $ 37,877 2.78% $32,134 2.73%
==== ======== ===== ======= ====
Net interest-earning assets/net
interest margin 2.85% $ 80,444 3.00% $ 54,975 2.89%
==== ========== ===== ========== ====
Ratio of interest-earning assets to interest- 1.07x 1.05x 1.04x
bearing liabilities ==== ========== ==========
</TABLE>
Provision For Loan Losses. The provision for loan losses reflects
management's judgment of the current period cost associated with credit risk
inherent in the Company's loan portfolio. Specifically, the provision for loan
losses represents the amount charged against current period earnings to achieve
an allowance for loan losses that in management's judgment is adequate to absorb
losses inherent in the Company's loan portfolio.
The provision for loan losses of $782,000 in the third quarter of 1998
represented an increase of $179,000, as compared to a provision of $603,000 in
the corresponding period of the prior year. At September 30, 1998, the allowance
for loan losses was 1.00% of total loans. No loans were charged off in the
quarter ended September 30, 1998.
For the nine months ended September 30, 1998, the provision for loan losses
was $2.2 million, an increase of $1.4 million from the $735,000 provision for
the nine months ended September 30, 1997. The allowance for loan losses as a
percentage of total gross loan as of September 30, 1998 was 1.00%, consistent
with December 31, 1997. The allowance for loan losses as a percentage of
non-performing loans as of September 30, 1998 was 185.25%, compared with 123.22%
as of December 31, 1997.
The Bank experienced a significant improvement in asset quality during 1997
as improvements in the California economy occurred. For example, the Bank
experienced a 50% reduction in nonaccrual loans in 1997. As management monitors
the Bank's loan portfolio on a continuous basis, the provisions for loan losses
in the 1997 periods reflected this portfolio improvement as it occurred and was
identified. In 1998, provisions for loan losses were increased to keep pace with
the growth in the Bank's loan portfolio, and in particular, growth in commercial
loan products. The Bank's allowance methodology provides higher loss factors for
commercial loan products than for residential mortgage (1-4 family) loans. Total
loan charge-offs for the nine months ended September 30, 1998 were $458,000, as
compared with $989,000 for the nine months ended September 30, 1997.
9
<PAGE>
Noninterest Income. Noninterest income of $754,000 for the quarter ended
September 30, 1998 was $456,000, or 37.7% less than noninterest income for the
corresponding period of 1997. Increases were made in commercial banking fees and
service charges on deposit accounts. Commercial banking fees increased to
$318,000 for the quarter ended September 30, 1998 from $251,000, or 26.7%, from
the corresponding period of the previous year. Service charges on deposit
accounts increased to $278,000, or 40.4%, from the corresponding period of the
previous year due to an increased volume of commercial accounts. Gain on sale of
loans, securities and servicing rights decreased $491,000, or 80.5%, to $119,000
from $610,000 for the quarter ended September 30, 1997. The 1997 period included
the gain on sale of a mortgage servicing portfolio which was sold in conjunction
with the Bank's transition from a mortgage banking thrift to a commercial bank.
For the nine months ended September 30, 1998, noninterest income was $2.5
million, an increase of $111,000, or 4.7% from $2.4 million for the
corresponding period of the preceding year. The increase in noninterest income
for the first nine months of 1998 partially resulted from the growth in
commercial banking fees and deposit account service charges. For the nine months
ended September 30, 1998, commercial banking fees were $883,000, an increase of
$203,000, or 29.9%, from $680,000 for the corresponding period of the preceding
year. Deposit account fees for the first nine months of 1998 totaled $822,000,
an increase of $142,000, or 20.9%, from the corresponding period of the
preceding year.
Noninterest Expense. Noninterest expenses of $8.0 million for the quarter
ended September 30, 1998 were 6.2% greater than the $7.5 million of noninterest
expenses for the same period of the preceding year. Personnel expenses increased
to $3.5 million in the quarter ended September 30, 1998 from $3.3 million in the
corresponding quarter of the preceding year, due to additional staffing of the
commercial banking division and the accrual of incentive compensation. The
increase in personnel expenses was partially offset by savings on deposit
insurance premiums, which decreased to $220,000 in the quarter ended September
30, 1998 from $319,000 in the quarter ended September 30, 1997, due to an
assessment rate reduction.
Noninterest expense increased by $1.8 million, or 7.7%, to $25.2 million
for the nine months ended September 30, 1998 from $23.4 million for the nine
months ended September 30, 1997, primarily as a result of increases in the
Commercial Banking Division staffing level, incentive compensation accruals, and
the expenses associated with the computer conversion and the name change of the
Bank. Personnel expenses of $11.8 million for the first nine months of 1998 are
$1.3 million, or 12.2% higher than the $10.5 million of personnel expenses for
the first nine months of 1997. This increase resulted primarily from the
additional staff which was hired to execute the commercial banking business plan
and incentive compensation accruals.
During the first half of 1998, the Bank successfully completed a core
computer conversion to a system which was implemented to support the Company's
commercial banking activities. Total nonrecurring conversion expenses for the
nine months ended September 30, 1998 were $336,000.
Provision for Income Taxes. The provision for income taxes of $2.3 million
and $1.7 million on the income before taxes of $5.5 million and $3.8 million for
the three months ended September 30, 1988 and 1997, respectively, represents
effective tax rates of 42.8% and 44.5%, respectively. The provision for income
taxes of $5.4 million and $4.4 million on the income before taxes of $12.9
million and $10.3 million for the nine months ended September 30, 1998 and 1997,
respectively, represents an effective tax rates of 41.8% and 42.4%,
respectively.
FINANCIAL CONDITION
The Company experienced significant asset growth during the nine months
ended September 30, 1998. Total assets increased by $478.4 million, or 30.6%, to
$2.04 billion at September 30, 1998. The growth related primarily to new
securities purchases made in accordance with the leverage strategy adopted in
conjunction with the new capital raised in the private placement in the early
part of the second quarter. Securities increased by $323.9 million during this
period.
During the nine months ended September 30, 1998, loans increased by $177.0
million, or 14.6%, to $1.39 billion. The increase in gross loans was the result
of increases in residential (1-4 family) loan production for portfolio retention
and commercial business loan generation resulting from the creation of the
Bank's commercial banking division in 1996. The Company originated $482.2
million of loans during the nine months ended September 30, 1998. Included in
these
10
<PAGE>
originations were $125.1 million of commercial business loans and commercial
real estate loans, and $218.1 million of residential 1-4 family loans.
Additionally, the Company originated $96.2 million of new construction
commitments. Loan runoff was high during the nine months ended September 30,
1998 in the residential 1-4 family loan portfolio. The annualized runoff rate of
31.0% reflected the low market interest rates and increased property values. The
Company has responded to this runoff by increasing loan production and by
purchasing loans.
The quality of loans continued to be strong, with total delinquent loans
decreasing to 0.88% of total loans at September 30, 1998. This marked a
significant decrease from the 1.42% delinquency level at December 31, 1997.
Nonperforming assets of $8.9 million, or 0.44% of total assets at September 30,
1998, also reflected a reduction from the $10.3 million level at December 31,
1997.
The following table shows the composition of the Bank's loan portfolio by
amount and percentage of gross loans in each major loan category at the dates
indicated:
<TABLE>
<CAPTION>
At September 30, At December 31,
1998 1997
Amount % Amount %
---------------- ------- --------------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Consumer
Residential mortgage (1 - 4 family) $ 762,874 54.86% $ 691,167 56.98%
Home equity 15,050 1.08% 16,743 1.38%
Other 2,498 0.18% 2,732 0.23%
---------- ------ ---------- ------
780,422 56.12% 710,642 58.59%
---------- ------ ---------- ------
Commercial
Secured by real estate - multifamily 337,542 24.27% 339,257 27.97%
Secured by real estate - nonresidential 186,642 13.42% 115,366 9.51%
Construction 47,402 3.41% 26,603 2.19%
Commercial business 38,535 2.77% 21,146 1.74%
---------- ------ ---------- ------
610,121 43.88% 502,372 41.41%
---------- ------ ---------- ------
Total gross loans 1,390,543 100.00% 1,213,014 100.00%
====== ======
Net deferred loan origination costs 653 1,223
Allowance for loan losses (13,912) (12,142)
---------- ----------
Net Loans $1,377,284 $1,202,095
========== ==========
</TABLE>
11
<PAGE>
The following table shows the Bank's loan originations during the periods
indicated.
For the Nine Months Ended
September 30,
1998 1997
-------- --------
(Dollars in thousands)
Consumer
Residential mortgage (1 - 4 family)
For resale:
GNMA $ - $ 759
FHLMC and FNMA 7,704 15,511
For portfolio:
Fully documented loans 17,562 6,048
Limited documentation loans 192,792 147,893
Home equity 4,151 11,739
Other 2,598 -
-------- --------
Total consumer $224,807 $181,950
======== ========
Commercial
Secured by real estate - multifamily $ 36,082 $ 6,902
Secured by real estate - nonresidential 82,291 17,626
Construction 96,234 44,378
Commercial business 42,796 22,645
--------- --------
Total commercial 257,403 91,551
Total loan originations $482,210 $273,501
======== ========
During the nine months ended September 30, 1998, loan prepayments totaled
$313.1 million, representing a 34.4% annualized prepayment rate. This compares
with loan prepayments of $174.4 million, representing a 21.8% annualized
prepayment rate for the corresponding period of the preceding year. During the
first nine months of 1998, loan prepayments accelerated significantly as a
result of the low market interest rate environment. In response to the increased
prepayments, especially in the Residential mortgage (1-4 family) portfolio, the
Bank increased its loan origination goals, and purchased whole loans and
participations. These participation loans conform with the bank's internal
origination guidelines.
In 1996, management made a strategic decision to reduce its concentration
of assets with interest rates based on the Eleventh District Cost of Funds Index
(COFI). COFI generally lags market interest rate changes and assets tied to COFI
can suppress net interest margins during periods of rapidly escalating interest
rates. In addition, the Bank began to reduce its COFI-based loan portfolio
through amortization and sales and replace it with current-index products
including adjustable-rate mortgage loans and loans with an initial rate of
interest for a fixed term (generally 3 to 5 years), the interest rates on which
adjust annually thereafter ('intermediate fixed-rate loans'). As a result of
this initiative, the Bank's COFI-based loans declined to $476.6 million at
September 30, 1998 from $554.4 million at December 31, 1997.
At September 30, 1998, total gross loans included $306.7 million of
intermediate fixed-rate loans compared with $291.5 million at December 31, 1997,
an increase of $15.2 million or 5.2% which was the result of the Bank continuing
to emphasize the origination of intermediate fixed-rate mortgages (1-4 family).
Fixed-rate loans at September 30, 1998 were $393.1 million compared with $241.5
million at December 31, 1997, an increase of $151.6 million, or 62.8%, which
resulted from the origination of 15-year and 30-year fixed-rate mortgages.
Non-Performing Assets and OREO. Management generally places loans on
non-accrual status when they become 90 days past due, unless they are both well
secured and in the process of collection. When a loan is placed on non-accrual
status, any interest previously accrued but not collected is reversed from
income. Other real estate owned (OREO) consists of real property acquired
through foreclosure on the collateral underlying defaulted loans.
12
<PAGE>
The following table sets forth information regarding non-performing assets
at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans
Consumer
Residential mortgage (1- 4 family) $ 4,367 $ 6,131
Home equity - 15
Other - -
---------- ----------
Total consumer 4,367 6,146
========== ==========
Commercial
Secured by real estate - multifamily 164 904
Secured by real estate - nonresidential 2,875 2,804
Construction loans 104 -
Commercial business - -
---------- ----------
Total commercial 3,143 3,708
========== ==========
Total non-accrual loans $ 7,510 $ 9,854
OREO 1,369 412
---------- ----------
Total non-performing assets $ 8,879 $ 10,266
========== ==========
Non-performing assets to total assets 0.44% 0.66%
Non-accrual loans to total loans 0.54% 0.81%
Non-performing assets to total loans and OREO 0.64% 0.85%
Total gross loans $1,390,543 $1,213,014
========== ==========
Gross income not recognized on non-accrual loans for the nine months ended
September 30, 1998 and the year ended December 31, 1997 $ 77 $ 65
Accruing loans contractually past due 90 days or more - -
Troubled debt restructurings not included above $ 1,251 $ 1,251
========== ==========
</TABLE>
The Bank records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings with a provision for
losses on foreclosed property in the period in which they are identified.
During the nine months ended September 30, 1998, the Bank reduced total
non-performing assets to $8.9 million from $10.3 million at December 31, 1997, a
decrease of $1.4 million or 13.6%. The reduction was the result of the sale of
non-performing loans and the reclassification of other loans which became
current and were reclassified to performing status. During the nine months ended
September 30, 1998, the Bank increased OREO from $412,000 to $1.4 million.
Foreclosures are a normal part of the credit process. At September 30, 1998,
OREO consisted of six properties acquired through foreclosure with a carrying
value of $1.4 million.
The policy of the Bank is to review each loan in the portfolio to identify
problem credits. There are four classifications for problem loans 'special
mention,' 'substandard,' 'doubtful' and 'loss.' Special mention loans do not yet
warrant adverse classification, but possess credit deficiencies or potential
weaknesses requiring the Bank's attention. Substandard loans have one or more
well-defined weaknesses and are characterized by the distinct possibility that
the Bank will sustain some loss if the deficiencies are not corrected. Doubtful
loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. A loan classified as 'loss' is considered
uncollectible and its continuance as an asset is not warranted.
13
<PAGE>
The following table sets forth criticized loans at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
1998 1997
---------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Special mention loans $ 7,718 $ 7,182
Substandard and doubtful loans 13,108 16,822
------- -------
Total criticized loans $20,826 $24,004
======= =======
Total allowance for loan losses $13,912 $12,142
======= =======
Special mention loans to total loans 0.55% 0.59%
Substandard and doubtful loans to total loans 0.94 1.39
Criticized loans to total loans 1.50 1.98
Allowance for loan losses to substandard and doubtful loans 106.13 72.18
Allowance for loan losses to criticized loans 66.80 50.58
</TABLE>
With the exception of the criticized loans described above, management is
not aware of any other loans as of September 30, 1998 where the known credit
problems of the borrower would cause management to doubt such borrower's ability
to comply with their present loan repayment terms or that would result in such
loans being included in the non-performing asset table above at some future
date.
Management cannot predict the extent to which economic conditions in the
Bank's market area may worsen or the full impact such conditions may have on the
Bank's loan portfolio. Accordingly, there can be no assurance that other loans
will not become 90 days or more past due, be placed on non-accrual status or
become impaired or restructured loans or OREO in the future.
During the nine months ended September 30, 1998, delinquent residential
mortgages (1-4 family) decreased to $1.2 million or 0.16% of gross residential
mortgages (1-4 family) from $4.3 million or 0.62% of gross residential mortgages
(1-4 family) at December 31, 1997. Management attributes the reduction in
delinquent loans to good economic conditions in the Bank's market and continued
focus by management on the reduction of delinquent loans.
Delinquent mortgage loans secured by nonresidential real estate were $3.4
million at September 30, 1998, an increase of $1.0 million, or 41.7%, from the
$2.4 million delinquent at December 31, 1997. The increase in the delinquent
nonresidential real estate mortgage loans results primarily from one recent
nonresidential delinquency which for which the Bank is in the process of placing
a receiver and for which management anticipates no losses on the disposition of
this property, should foreclosure actions ultimately result.
Allowance For Loan Losses. The Bank has established a formalized process
for determining an adequate allowance for loan losses. This process results in
an allowance that consists of two components, allocated and unallocated. The
allocated component includes allowance estimates that result from analyzing
certain individual loans (including impaired loans), and includes the results of
analyzing loans on a pool basis. For loans that are analyzed individually, third
party information such as appraisals may be used to supplement management's
analysis. For loans that are analyzed on a pool basis, such as residential
mortgage loans (1-4 family), management's analysis consists of reviewing
delinquency trends, charge-off experience, economic conditions, current
composition of the loan portfolio, regional collateral value trends, and other
factors. The unallocated component of the allowance for loan losses is intended
to compensate for the subjective nature of estimating an adequate allowance for
loan losses, economic uncertainties, and other factors. In addition to the
assessment performed by management, the Bank's loan portfolio is subject to an
internal asset review function and is examined by its regulators. The results of
these examinations are incorporated into management's assessment of the
allowance for loan losses.
The allowance for loan losses is increased by provisions for loan losses
and reduced by charge-offs, net of recoveries. Loans are charged off to the
extent they are classified as loss either internally or by the Bank's
regulators. For any loan that is past due for more than 90 days, management will
generally charge off the amount by which the recorded loan amount exceeds the
value of the underlying collateral, unless the loan is both well-secured and in
the process of
14
<PAGE>
collection. Recoveries of amounts that have previously been charged off are
generally recorded only to the extent that cash is received.
While management uses available evidence in assessing the adequacy of the
allowance for loan losses, future additions to the allowance for loan losses
will be subject to continuing evaluations of the inherent risk in the portfolio.
If the economy declines or asset quality deteriorates, additional provisions for
loan losses could be required. Additionally, the Bank's regulators review the
adequacy of the allowance for loan losses as part of their examination process
and may require the Bank to record additional provisions for loan losses based
on their judgment or information available to them at the time of their
examinations. Management believes that the allowance for loan losses is adequate
to provide for estimated losses inherent in the Bank's loan portfolio.
The following table sets forth information concerning the Bank's allowance
for loan losses for the dates indicated:
For the Nine Months Ended September 30,
---------------------------------------
(Dollars in thousands)
1998 1997
------- -------
Allowance for loan losses:
Balance beginning of period $12,142 $11,682
Provision for loan losses 2,183 735
Charge-offs (458) (989)
Recoveries 45 363
------- -------
Balance at end of period $13,912 $11,791
======= =======
Allowance for loan losses to loans 1.00% 1.00%
Net charge-offs to average loans 0.03% 0.06%
Securities. Securities (including available-for-sale and held-to-maturity)
increased by $323.9 million, or 120.0%, to $594.0 million at September 30, 1998,
reflecting the Company's substantial completion of the leverage strategy for the
capital raised in the private placement. All of the new securities purchased
were classified as available-for-sale. The Bank historically maintained a
securities portfolio comprised primarily of COFI-based FHLMC and FNMA securities
which reprice on a monthly basis. As a result of the proceeds the Company
received and made available to the Bank from the capital raised, the Bank
purchased U.S. Government agency mortgage-backed securities, investment grade
securities, investment grade municipal bonds, and investment grade residential
1-4 family mortgage-backed securities.
15
<PAGE>
The following table sets forth the Bank's securities portfolio on the date
indicated.
<TABLE>
<CAPTION>
At September 30, 1998 At December 31, 1997
------------------------------ ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities held to maturity
FHLB Note $ - $ - $ 2,000 $ 1,998
FNMA Note - - 2,000 2,000
Other 2,320 2,320 - -
--------- -------- -------- --------
Total $ 2,320 $ 2,320 $ 4,000 $ 3,998
========= ======== ======== ========
Investment securities available for sale
Municipals $ 43,614 $ 45,263 $ - $ -
Trust Preferred Securities 82,139 79,281 - -
--------- -------- -------- --------
Total $ 125,753 $124,544 $ - $ -
========= ======== ======== ========
Mortgage-backed securities held to maturity
FHLMC $ 45,585 $ 44,090 $ 48,536 $ 46,618
FNMA 110,060 107,086 117,184 112,788
Other 10,569 10,312 16,075 15,566
--------- -------- -------- --------
Total $ 166,214 $161,488 $181,795 $174,972
========= ======== ======== ========
Mortgage-backed securities available for sale
FNMA $ 82,287 $ 80,446 $ 87,237 $ 84,308
GNMA 118,992 122,211 - -
Other 97,162 98,247 - -
--------- -------- -------- --------
Total $ 298,441 $300,904 $ 87,237 $ 84,308
========= ======== ======== ========
</TABLE>
As of September 30, 1998, the aggregate amortized cost of the securities
was $592.7 million and the fair value was $589.3 million. Of the total $3.5
million unrealized loss on these securities, $4.7 million of unrealized losses
relate to securities which are held to maturity, and $1.3 million of unrealized
gain relate to securities which are held as available for sale. Such unrealized
gains, net of the related tax benefit of $515,000, is reflected as an increase
of stockholders' equity. The $4.7 million unrealized loss relating to the $168.5
million of securities held to maturity has not been recognized in the financial
statements.
Deposits. Deposit balances were $1.56 billion at September 30, 1998, which
represented an increase of $93.7 million, or 6.38% from December 31, 1997. The
core deposit balances increased by $27.6 million during this period, and time
deposits increased by $66.1 million. Through careful management of interest rate
negotiations by the retail branch managers, the Company was able to reduce the
higher cost time deposits and thereby reduced its overall cost of deposits from
4.38% at December 31, 1997 to 4.33% at September 30, 1998. Deposits are the
Bank's primary source of funding. At September 30,1998, the Bank had a deposit
mix of 76.2% in time deposits, 1.6% in money market accounts, 14.0% in passbook
accounts and 8.2% in NOW and checking accounts. This compares with a deposit mix
of 76.5%, 1.4%, 14.4% and 7.7% at December 31, 1997, respectively.
The Bank obtains deposits primarily from the communities it serves. No
material portion of its deposits have been obtained from or are dependent on
anyone person or industry. At September 30, 1998, less than 2% of the Bank's
deposits were held by customers with addresses located outside the United
States. In addition, as of such date, the 100 depositors with the largest
aggregate average deposit balances comprised less than 10% of the Bank's total
deposits. The Bank's business is not seasonal in nature. The Bank accepts
deposits in excess of $100,000 from customers. Included in time
16
<PAGE>
deposits as of September 30, 1998, is $315.2 million, or 20.2% of total
deposits, of deposits of $100,000 or greater. At September 30, 1998, the Bank
had no brokered deposits. Substantially all of the time deposits as of September
30, 1998 matured in one year or less.
The following table sets forth the balances and rates paid for the major
categories of deposits at the dates indicated:
<TABLE>
<CAPTION>
At September 30, At December 31,
1998 1997
---------------------------- -------------------------------
Amount Interest Rate Amount Interest Rate
----------- ------------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
NOW and checking accounts $ 128,175 0.70% $ 111,984 0.80%
Money market accounts 25,643 3.35% 20,986 2.48%
Passbook accounts 218,725 2.24% 212,013 2.11%
Time deposits 1,190,109 5.13% 1,124,004 5.20%
---------- ----------
Total $1,562,652 4.33% $1,468,987 4.38%
========== ==========
</TABLE>
The average cost of deposits during the nine months ended September 30,
1998 was 4.43% as compared to 4.34% for the same period in the previous year. At
September 30, 1998, the Bank's average rate paid on deposits was 55 basis points
lower than the COFI index.
Other Borrowings. Borrowings increased by $329.3 million during the nine
months ended September 30, 1998, as the Company substantially completed the
strategy adopted to leverage the new capital raised in the private placement. At
September 30, 1998, the Bank had $324 million of advances outstanding. At
December 31, 1997, there were no advances outstanding. At September 30, 1998,
credit availability under this facility was approximately $292.2 million.
Although the Bank eliminated its outside borrowings in 1996, the Bank has
utilized borrowings as a funding source in conjunction with its strategy of
leveraging the proceeds from the capital raised, consistent with its asset and
liability objectives and the maintenance of its status as a 'well capitalized'
institution for regulatory capital purposes. As of September 30, 1998, the Bank
had borrowed $324 million from the FHLB in conjunction with the leverage
strategy, of which $233 million were long-term and $91 million were overnight
borrowings. Included in the long-term advances of $233 million were $17 million
which were fixed-rate for ten years and $216 million which were for ten years
but contained provisions that the FHLB could, at their option, terminate the
advances at quarterly intervals at specified periods ranging from three to five
years beyond the advance dates. Affiliated-party debt of $20.1 million at
December 31, 1997 was converted to common stock, which was ultimately retired in
conjunction with the private placement that closed in April 1998.
17
<PAGE>
The following table sets forth certain information regarding the short-term
borrowings of the Bank at or for the dates indicated.
<TABLE>
<CAPTION>
At or For the Nine Months Ended At or For the Year Ended
September 30, 1998 December 31, 1997
------------------------------- ------------------------
(Dollars in Thousands)
<S> <C> <C>
FHLB of SF advances
Average balance outstanding $133,067 $11,176
Maximum amount outstanding at any month end 324,000 24,000
Balance outstanding at end of period 324,000 -
Weighted average interest rate during the period 5.57% 5.55%
Weighted average interest rate at end of period 5.49% -
Weighted average remaining term to maturity at end of period 7 years -
Other short term borrowings
Average balance outstanding $ 133 $ 5,375
Maximum amount outstanding at any month end 4,100 -
Balance outstanding at end of period 4,100 -
Weighted average interest rate during the period 8.44% 5.47%
Weighted average interest rate at end of period 6.59% -
Weighted average remaining term to maturity at end of period - -
</TABLE>
The Bank maintains a secured credit facility with the FHLB of San Francisco
against which advances may be made. The terms of this credit facility require
the Bank to maintain in safekeeping with the FHLB of San Francisco eligible
collateral of at least 100% of outstanding advances.
Regulatory capital. The total risk-based capital ratio of the Bank at
September 30, 1998 was 12.7%, as compared with 11.2% at December 31, 1997. The
ratio of Tier 1 capital to total assets of the Bank at September 30, 1998 was
6.3%, as compared with 5.4% at December 31, 1997. The Bank's capital ratios
exceeded the regulatory requirements, and the Bank continues to be categorized
as "Well Capitalized." The Company's capital ratios are approximately those of
the Bank, and similarly the Company is categorized as "Well Capitalized."
YEAR 2000 COMPLIANCE
Introduction. Similar to other financial institutions, the operations of
the Bank are particularly sensitive to potential problems arising from the
inability of many existing computer hardware and software systems and associated
applications to process accurately information relating to any two-digit 'date
field' entries referring to the year 2000 and beyond. Many existing systems are
constructed to read such entries as referring to dates beginning with '19,'
rather than '20.' This set of issues is generally referred to as the 'Year 2000'
problem. The Federal Financial Institutions Examination Council (the 'FFIEC'),
through the bank regulatory agencies, has issued compliance guidelines requiring
financial institutions to develop and implement plans for addressing Year 2000
issues relevant to their operations.
State of Readiness. The Bank has implemented a detailed Year 2000 plan, as
required by the FFIEC guidelines, to evaluate Year 2000 compliance of its
computer systems and the equipment which supports the operations of the Bank.
Also included in this Year 2000 plan is a detailed review of the readiness of
the Bank's service providers, vendors, major fund providers, major borrowers and
companies with which the Bank has material investments. As of September 13,
1998, the Bank has met all current target objectives of the Year 2000 plan, and
management believes that it will continue to meet all future target objectives
in accordance with the terms of the plan.
Like many financial institutions, the Bank relies upon computers for the
daily conduct of its business and for data processing generally. In conjunction
with its conversion to a commercial banking charter, the Bank installed a new
core computer system which was compatible with the Bank's commercial banking
business needs. This commercial banking data processing system is run in a
service bureau environment by one of the leading national vendors of data
processing
18
<PAGE>
services for banks. The vendor of the new core system is executing its Year 2000
readiness plan in cooperation with the Bank. Management expects the new core
banking system to be Year 2000 compliant.
In addition to its core computer system, the Bank is reliant on financial
accounting and mortgage loan origination systems that are computer-based, and
thus vulnerable to the Year 2000 issues. The Bank has installed a new financial
accounting system and is in the process of installing a new mortgage loan
origination system which are Year 2000 compliant. The Bank's mortgage loan
servicing system is run in a service bureau environment by a large national
vendor of data processing services. The Bank has renewed its contract with the
vendor. The renewal contract obligates the vendor to have its system Year 2000
compliant by the end of 1998.
As a result of the new core computer system and the new financial
accounting and mortgage loan origination systems, management believes that it
has resolved the Year 2000 issues with respect to the most critical computer
systems and applications. Management is in the testing or remediation phase with
respect to equipment that is Year 2000 sensitive, which includes equipment
containing embedded microprocessors or other technology related to the
recognition of dates. The Bank expects to complete its Year 2000 conversion by
June 30, 1999.
Because of the substantial progress made by the Bank towards its Year 2000
conversion, the Bank does not anticipate that any additional significant changes
will be required or that the Year 2000 issue will pose significant operational
problems for the Bank. However, if the necessary changes are not made or
completed in a timely fashion or unanticipated problems arise, the Year 2000
issue may take longer for the Bank to address and may have a material impact on
the Bank's financial condition and results of operations.
In addition to its extensive interaction with major service providers, the
Bank has had initial communications with other vendors, major fund providers,
major borrowers and companies with which the Bank has material investments, to
evaluate their Year 2000 compliance plans and state of readiness and to
determine the extent to which the Bank's systems may be affected by the failure
of others to remediate their own Year 2000 issues. To date, however, the Bank
has received only preliminary feedback from such parties and has not
independently confirmed any information received from other parties with respect
to Year 2000 issues. As such, there can be no assurance that such other parties
will complete their Year 2000 conversion in a timely fashion or will not suffer
a Year 2000 business disruption that may adversely affect the Bank's financial
condition and results of operations.
Costs to Address the Year 2000 Issue. The Bank implemented its new core
banking system because of the change in its business focus to commercial
banking. The commercial banking products offered by the Bank were not supported
by the software applications offered as part of the Bank's prior data processing
platform. Additionally, the vendor that ran the Bank's prior data processing
platform indicated that it would not support that data processing platform
beyond 1998, and in fact service quality had begun to deteriorate in 1997. The
new financial accounting system was installed as a result of the vendor for the
former system notifying the Bank of its intention to cease supporting the
software beyond 1998. The new mortgage loan origination system was purchased to
replace the existing system with a lower cost software solution.
The implementation of these new systems is consistent with the closure of
the Bank's mortgage banking division, its emphasis on portfolio lending within
its niche market, and its commercial banking focus. In each case, the system
conversions were being made for business reasons that were unrelated to the Year
2000 issues and did not contribute to the direct cost of Year 2000 compliance.
Nevertheless, these system replacements are all Year 2000 compliant and
therefore automatically address that issue. The additional costs to achieve Year
2000 compliance are currently estimated to be $500,000, and are not expected to
have a material financial impact on the Bank. The Bank intends to fund such
costs from its operations. However, as the Bank progresses with its Year 2000
conversion and implements the necessary changes to its systems, certain
additional costs may be identified. There can be no assurance that such
additional costs will not have a material adverse effect on the Bank's financial
condition and results of operations.
Risks of Year 2000 Issues. To date, the Bank has not identified any system
which presents a material risk of not being Year 2000 ready in a timely fashion
or for which a suitable alternative cannot be implemented. However, as the Bank
progresses with its Year 2000 conversion, the Bank may identify systems which do
present a material risk of Year 2000 disruption. Such disruption may include,
among other things, the inability to process and underwrite loan applications,
to credit deposits and withdrawals from customer accounts, to credit loan
payments or track delinquencies, to properly
19
<PAGE>
reconcile and record daily activity or to engage in similar normal banking
activities. Additionally, if the Bank's commercial customers are not Year 2000
compliant and suffer adverse effects on their operations, their ability to meet
their obligations to the Bank could be adversely affected. The failure of the
Bank to identify systems which require Year 2000 conversion that are critical to
the Bank's operations or the failure of the Bank or others with which the Bank
does business to become Year 2000 ready in a timely manner could have a material
adverse impact on the Bank's financial condition and results of operations.
Moreover, to the extent that the risks posed by the Year 2000 problem are
pervasive in data processing and transmission and communications services
worldwide, the Bank cannot predict with any certainty that its operations will
remain materially unaffected after January 1, 2000 or on dates preceding this
date at which time post-January 1, 2000 dates become significant within the
Bank's systems.
Contingency Plans. The Bank has two types of contingency plans: Remediation
and Business Interruption. Remediation Plans are designed to mitigate the risks
associated with the failure to successfully complete renovation, validation and
implementation of mission-critical systems. Business Interruption Plans are
plans of action to ensure the ability of the Bank to continue functioning as a
business entity in the event of unanticipated systems failures at critical dates
prior to, on, and after the Year 2000.
Remediation Plan. The Bank's Year 2000 conversion is expected to be
completed prior to any potential disruption to the Bank's business. However, the
Bank is developing Year 2000 remediation contingency plans for mission-critical
systems. These plans would be invoked in the event of anticipated failures of
particular Year 2000 projects or sub-projects. Such plans may involve the
designation of alternate vendors and would essentially constitute replacement of
the current Year 2000 remediation path with an alternate one. Remediation plans
will be built in succeeding stages of detail and this process may, if management
deems appropriate, be halted at any point where the success of the base project
is clearly predictable. If the results of testing of the Bank's systems are not
satisfactory, remediation contingency plans will be invoked for mission-critical
systems, no later than the conclusion of testing, which is expected to be April
9, 1999.
Business Interruption Plan. These plans would be invoked if unanticipated
Year 2000 problems occur in production, similar to scenarios in Disaster
Recovery Plans. 'Swat Teams' will be established for mobilization in case of
emergencies that threaten the viability of the Bank, and require that certain
resources be available immediately for utilization. The Bank has begun
preparation of these plans, will continue to fine-tune them, train staff to
carry them out, and test them.
The discussion above contains certain forward-looking statements. The costs
of the Year 2000 conversion, the date which the Bank has set to complete such
conversion and the possible risks associated with the Year 2000 issue are based
on the Bank's current estimates and are subject to various uncertainties that
could cause the actual results to differ materially from the Bank's
expectations. Such uncertainties include, among others, the success of the Bank
in identifying systems that are not Year 2000 compliant, the nature and amount
of programming required to upgrade or replace each of the affected systems, the
availability of qualified personnel, consultants and other resources, and the
success of the Year 2000 conversion efforts of others.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's exposure to market risk
since the information disclosed in the Company's Prospectus dated October 13,
1998 on file with the Securities and Exchange Commission (SEC File No.
333-58325).
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company's wholly-owned subsidiary, United Commercial Bank, has been a
party to ordinary routine litigation incidental to various aspects of its
operations.
20
<PAGE>
Management is not currently aware of any litigation that will have a material
adverse impact on the Company's consolidated financial condition, or the results
of operations.
Item 2. Change in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of the Stockholders was held on July 30, 1998. At the
meeting, the stockholders approved the Company's 1998 Stock Option Plan.
The number of votes cast for or withheld
For 6,631,299 votes
Against 711,668 votes
Abstain 44,334 votes
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits (File herewith unless otherwise noted)
3.1 Amended and Restated Certificate of Incorporation of UCBH Holdings, Inc.*
3.2 Bylaws of UCBH Holdings, Inc.*
4.0 Form of Stock Certificate of UCBH Holdings, Inc.*
10.1 Employment Agreement between United Commercial Bank and Thomas S. Wu*
10.2 Employment Agreement between UCBH Holdings, Inc. and Thomas S. Wu*
10.3 Form of Termination and Change in Control Agreement between United
Commercial Bank and certain executive officers*
10.4 Form of Termination and Change in Control Agreement between UCBH Holdings,
Inc. and certain executive officers*
10.5 UCBH Holdings, Inc. 1998 Stock Option Plan*
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None.
- ----------------------
* Incorporated by reference to the exhibit of the same number from the Company's
Registration Statement on Form S-1, filed with the Securities and Exchange
Commission on July 1, 1998 (SEC No. 333-58325).
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UCBH HOLDINGS, INC.
/s/ Thomas S. Wu
Date: November 23, 1998 -------------------------------------
Thomas S. Wu
President and Chief Executive Officer
(principal executive officer)
/s/ Jonathan H. Downing
Date: November 23, 1998 -------------------------------------
Jonathan H. Downing
Senior Vice President and
Chief Financial Officer
(principal financial officer)
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0001061580
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