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, 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 0-24947
................................................
UCBH Holdings, Inc.
................................................................................
(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) 928-0700
................................................................................
(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 ..X.. No ......
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 1, 1999, the Registrant had 9,333,333 shares
of common stock outstanding.
................................................................................
<PAGE>
UCBH HOLDINGS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements..............................1-3
Notes to Consolidated Financial Statements.....................4-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................6-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk......20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................21
Item 2. Changes in Securities and Use of Proceeds.......................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
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UCBH Holdings, Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
(unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 19,481 $ 15,109
Investment and mortgage-backed securities available for sale, at fair value 339,888 429,347
Investment and mortgage-backed securities, at cost (fair value $176,787 at
September 30,1999 and $153,072 at December 31, 1998) 188,148 158,210
Federal Home Loan Bank stock and equity securities 25,392 20,415
Loans 1,642,222 1,492,148
Allowance for loan losses (17,803) (14,922)
----------------- ------------------
Net loans 1,624,419 1,477,226
----------------- ------------------
Accrued interest receivable 14,081 13,542
Premises and equipment, net 21,696 23,462
Other assets 17,543 10,021
----------------- ------------------
Total assets $ 2,250,648 $ 2,147,332
================= ==================
Liabilities
Deposits $ 1,638,113 $ 1,633,895
Borrowings 459,405 368,000
Accrued interest payable 3,991 2,440
Other liabilities 11,672 9,359
Guaranteed preferred beneficial interests in junior subordinated debentures 30,000 30,000
----------------- ------------------
Total liabilities 2,143,181 2,043,694
----------------- ------------------
Stockholders' Equity
Common stock, $.01 par value, authorized 25,000,000 shares, 9,333,333 shares
issued and outstanding at September 30, 1999 and December 31, 1998 93 93
Additional paid-in capital 59,485 59,443
Accumulated other comprehensive income (10,807) (778)
Retained earnings-substantially restricted 58,696 44,880
----------------- ------------------
Total stockholders' equity 107,467 103,638
----------------- ------------------
Total liabilities and stockholders' equity $ 2,250,648 $ 2,147,332
================= ==================
</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>
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30, 1999 September 30, 1998
1999 1998
<S> <C> <C> <C> <C>
Interest income:
Loans $ 31,774 $ 25,903 $ 90,559 $ 73,857
Funds sold and securities purchased under
agreements to resell 8 12 20 483
Investment and mortgage-backed securities 8,630 9350 26,487 19,116
-------------- -------------- ----------------- -----------------
Total interest income 40,412 35,265 117,066 93,456
-------------- -------------- ----------------- -----------------
Interest expense:
Deposits 14,879 16,621 46,380 47,875
Short-term borrowings 3,145 1,392 7,399 1,458
Guaranteed preferred beneficial interests in
junior subordinated debentures 703 703 2,109 1,273
Long-term borrowings 3,229 3,104 9,582 4,374
Long-term debt to affiliates -- -- -- 599
-------------- -------------- ----------------- -----------------
Total interest expense 21,956 21,820 65,470 55,579
-------------- -------------- ----------------- -----------------
Net interest income 18,456 13,445 51,596 37,877
Provision for loan losses 1,475 782 3,478 2,183
-------------- -------------- ----------------- -----------------
Net interest income after provision for loan losses 16,981 12,663 48,118 35,694
-------------- -------------- ----------------- -----------------
Noninterest income:
Commercial banking fees 577 415 1,475 1,070
Service charges on deposit accounts 257 181 627 635
Gain on sale of loans, securities and servicing rights 54 119 734 426
Loan servicing fees 97 62 310 354
Miscellaneous 12 (23) 2 1
-------------- -------------- ----------------- -----------------
Total noninterest income 997 754 3,148 2,486
-------------- -------------- ----------------- -----------------
Noninterest expense:
Personnel 4,601 3,528 13,856 11,775
Occupancy 1,248 1,290 3,716 3,737
Data processing 549 421 1,508 1,601
Furniture and equipment 523 574 1,625 1,744
Professional fees and contracted services 537 525 1,669 677
Deposit insurance 233 220 705 307
Communication 115 106 332 1,427
Foreclosed assets 4 69 80 66
Miscellaneous 1,574 1,217 4,552 3,910
-------------- -------------- ----------------- -----------------
Total noninterest expense 9,384 7,950 28,043 25,244
-------------- -------------- ----------------- -----------------
Income before taxes 8,594 5,467 23,223 12,936
Income tax expense 3,506 2,339 9,407 5,409
-------------- -------------- ----------------- -----------------
Net income $ 5,088 $ 3,128 $ 13,816 $ 7,527
============== ============== ================= =================
Average common and common equivalent shares 9,333,333 9,333,333 9,333,333 8,024,691
outstanding, basic
Average common and common equivalent shares
outstanding, diluted 9,548,333 9,333,333 9,463,926 8,799,669
Basic earnings per share $ 0.55 $ 0.34 $ 1.48 $ 0.94
Diluted earnings per share 0.53 0.34 1.46 0.89
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
UCBH Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited: Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1999 1998
<S> <C> <C>
Operating activities
Net income $ 13,816 $ 7,527
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Provision for loan losses 3,478 2,183
Increase in accrued interest receivable (539) (4,034)
Depreciation and amortization of premises and equipment 1,979 2,010
Decrease (increase) in other assets 528 (2,974)
Increase in accrued interest payable 1,551 3,297
Gain on sale of loans, securities and other assets (734) (588)
Other, net 4,433 2,926
------------------- ---------------
Net cash provided by operating activities $ 24,512 $ 10,347
------------------- ---------------
Investing activities
Investments and mortgage-backed securities held to maturity:
Principal payments, maturities and securities called 13,832 19,182
Purchases (4,773) (4,289)
Investments and mortgage-backed securities, available for sale:
Principal payments and maturities 33,451 8,936
Purchases (6,012) (346,096)
Loans purchased (123) (43,851)
Loans originated net of principal collections (160,778) (150,641)
Proceeds from sale of loans 9,544 15,294
Purchases of premises and equipment (1,070) (1,971)
Proceeds from sale of other assets 166 1,125
------------------- ---------------
Net cash (used in) investing activities $ (115,763) $ (502,311)
------------------- ---------------
Financing activities
Net increase in demand deposits, NOW, money market and savings accounts 71,035 27,560
Net (decrease) increase in time deposits (66,817) 66,105
Net increase in borrowings 91,405 329,312
Net decrease in long-term debt to affiliates - (20,060)
Proceeds from issuance of common stock - 29,560
Proceeds from issuance of guaranteed preferred beneficial interest in
subordinated debentures - 30,000
------------------- ---------------
Net cash provided by financing activities $ 95,623 $ 462,477
------------------- ---------------
Increase (decrease) in cash and cash equivalents 4,372 (29,487)
Cash and cash equivalents at beginning of year 15,109 34,853
------------------- ---------------
Cash and cash equivalents at end of year $ 19,481 $ 5,366
=================== ===============
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 63,919 $ 52,282
Cash paid during the period for income taxes 6,928 2,593
Supplemental schedule of noncash investing and financing activities
Real estate acquired through foreclosure 115 1,834
Securities transferred to held to maturity 43,624 -
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, 1999, the Consolidated
Statements of Operations for the three and the nine months ended September 30,
1999 and 1998, and the Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 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,
1998. 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, 1999 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. 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
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended by FAS 137 will become effective for fiscal years
beginning after June 15, 2000. 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 assessed the impact of SFAS No. 133 and determined that
adoption will not have a material impact on the financial statements of the
Company based on the hedges currently in place.
4
<PAGE>
3. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share
(Dollars in thousands, except for per share data):
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 Three Months Ended September 30, 1998
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net Income $ 5,088 9,333,333 $ 0.55 $ 3,128 9,333,333 $ 0.34
Dilutive potential common shares - 215,000 - -
------------- ---------------- -------------- ---------------
Diluted:
Net income and assumed conversion $ 5,088 9,548,333 $ 0.53 $ 3,128 9,333,333 $ 0.34
============= ================ ============== ===============
<CAPTION>
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
------------------------------------ ------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income $ 13,816 9,333,333 $ 1.48 $ 7,527 8,024,691 $ 0.94
Dilutive potential common shares - 130,593 347 774,978
------------- ---------------- -------------- ---------------
Diluted: $ 13,816 9,463,926 $ 1.46 $ 7,874 8,799,669 $ 0.89
Net income and assumed conversion ============= ================ ============== ===============
</TABLE>
4. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," 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 three months ended
September 30, 1999, total comprehensive income was $1.7 million, a decrease of
$2.6 million, or 61%, compared to the three months ended September 30, 1998. Net
income for the three months ended September 30, 1999 was $5.1 million and
unrealized losses on available-for-sale securities increased by $3.4 million.
For the nine months ended September 30, 1999, total comprehensive income was
$3.8 million compared to $10.0 million for the nine months ended September 30,
1998. Net income was $13.8 million and unrealized losses on available-for-sale
securities increased by $10.0 million for the nine months ended September 30,
1999. For the corresponding period of 1998, net income was $7.5 million and
unrealized gains and losses on available-for-sale securities increased by $2.5
million.
5. Segment Information
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information", on January 1, 1998. SFAS No. 131 supersedes
SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise"
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the consolidated financial position
as previously reported.
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disaggregates its
business into two reportable segments: Consumer Banking and Commercial Banking.
Both segments serve all of California's citizens. Historically, our customer
base has been
5
<PAGE>
primarily the ethnic Chinese communities located mainly in the San Francisco Bay
area, Sacramento/Stockton and metropolitan Los Angeles.
The financial results of the Company's operating segments are presented on
an accrual basis. There are no significant differences between the accounting
policies of the segments as compared to the Company's consolidated financial
statements. The Company evaluates the performance of its segments and allocates
resources to them based on interest income, interest expense and net interest
income. There are no material intersegment revenues.
The table below presents information about the Company's operating segments
for the three and the nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Reconciling
Consumer Commercial Items Total
-------- ---------- ----- -----
For the Three Months Ended, (Dollars in Thousands)
<S> <C> <C> <C>
September 30, 1999
Net interest income $ 12,441 $ 6,016 - $ 18,457
Segment profit 3,768 1,320 5,088
Segment assets 1,320,490 930,158 - 2,250,648
September 30, 1998
Net interest income $ 10,341 $ 3,104 - $ 13,445
Segment profit 2,586 542 - 3,128
Segment assets 1,437,478 602,604 - 2,040,082
Reconciling
Consumer Commercial Items Total
-------- ---------- ----- -----
For the Nine Months Ended, (Dollars in Thousands)
<S> <C> <C> <C>
September 30, 1999
Net interest income $ 35,184 $ 16,412 - $ 51,596
Segment profit 10,569 3,063 184(1) 13,816
Segment assets 1,320,490 930,158 - 2,250,648
September 30, 1998
Net interest income $ 29,700 $ 8,177 - $ 37,877
Segment profit 7,121 406 - 7,527
Segment assets 1,437,478 602,604 - 2,040,082
</TABLE>
(1) Reconciling item represents gain on sale of nonperforming asset.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 are 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 Company's wholly-owned subsidiary, United Commercial Bank's
(the "Bank") 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.
6
<PAGE>
Further description of the risks and uncertainties to the business are included
in detail in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 as filed with the Securities and Exchange Commission.
The following discussion and analysis is intended to provide details of the
results of operations of the Company for the three months and the nine months
ended September 30, 1999 and 1998 and financial condition at September 30, 1999
and at December 31, 1998. 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 three
months ended September 30, 1999 increased by $2.0 million, or 62.7%, to $5.1
million, compared to $3.1 million for the corresponding period of the prior
year. The increase resulted primarily from an increase in interest income on
loans due to growth in commercial loans. The annualized return on average equity
("ROE") and average assets ("ROA") ratios for the three months ended September
30, 1999 were 19.43% and 0.91%, respectively. This compares with annualized ROE
and ROA ratios of 12.97% and 0.63%, respectively, for the three months ended
September 30, 1998. The resulting efficiency ratios were 48.24% for the three
months ended September 30, 1999 and 55.99% for the corresponding period for the
prior year. Diluted earnings per share were $0.53 for the three months ended
September 30, 1999 compared with $0.34 for the comparable period of the
preceding year.
The consolidated net income of the Company during the nine months ended
September 30, 1999 increased by $6.3 million, or 83.6%, to $13.8 million,
compared to $7.5 million for the corresponding period of the prior year. The
increase resulted primarily from an increase in net interest income. The
annualized return on average equity ("ROE") and average assets ("ROA") ratios
for the nine months ended September 30, 1999 were 17.55% and 0.84%,
respectively. This compares with annualized ROE and ROA ratios of 12.07% and
0.58%, respectively, for the nine months ended September 30, 1998. The resulting
efficiency ratios were 51.23% for the nine months ended September 30, 1999 and
62.54% for the corresponding period of the prior year. Diluted earnings per
share were $1.46 for the nine months ended September 30, 1999 compared with
$0.89 for the comparable period of the preceding year.
The increase in net income for the nine months ended September 30, 1999
from the nine months ended September 30, 1998 was due primarily to the increase
in net interest income which resulted from: (1) an increase in the average loans
outstanding, (2) an increase in average securities portfolio, and (3) a
reduction in the cost of deposits. Partially offsetting the increases to net
income was a $2.8 million increase in noninterest expense, due primarily to
additional staffing required to support the growth of the Bank's commercial
banking business.
The provision for loan losses of $1.5 million for the three months ended
September 30, 1999 is an increase of $693,000 compared to a provision of
$782,000 for the third quarter of 1998. See "--Provision for Loan Losses."
Noninterest expense for the three months ended September 30, 1999 was $9.4
million, an increase of $1.4 million or 18.0%, compared with $8.0 million for
the corresponding period in the prior year. Personnel expenses increased to $4.6
million for the three months ended September 30, 1999 compared to $3.5 million
for the three months ended
7
<PAGE>
September 30, 1998 primarily due to the additional staffing required to support
growth of the Bank's commercial banking businesses.
The provision for loan losses increased from $2.2 million for the nine
months ended September 30, 1998 to $3.5 million for the corresponding period of
1999. As of September 30, 1999, the allowance for loan losses was $17.8 million.
Noninterest expense was $28.0 million for the nine months ended September 30,
1999, an increase of $2.8 million, or 11.1%, from the corresponding period of
the prior year. Personnel expenses increased to $13.9 million during the nine
months ended September 30, 1999 compared with $11.8 million, an increase of $2.1
million, or 17.7%, for the corresponding period of the previous year due to the
addition of commercial banking personnel.
Net Interest Income. Net interest income before provision for loan losses
of $18.5 million for the three months ended September 30, 1999 represented a
$5.0 million, or 37.3%, increase over net interest income of $13.4 million for
the three months ended September 30, 1998.
Net interest income of $51.6 million for the nine months ended September
30, 1999 represented a $13.7 million, or 36.2%, increase from the corresponding
period of the prior year. Average outstanding loans increased to $1.55 billion
for the nine months ended September 30, 1999 from $1.26 billion for the nine
months ended September 30, 1998, an increase of $285.7 million, or 22.7%.
Average securities increased to $582.3 million for the nine months ended
September 30, 1999 from $410.5 million for the nine months ended September 30,
1998, an increase of $171.8 million, or 41.8%. The cost of interest-bearing
deposits decreased to 3.95% for the first nine months of 1999 from 4.43% for the
first nine months of 1998. In addition, average noninterest-bearing deposits
increased to $52.7 million for the first nine months of 1999, from $38.6 million
for the corresponding period of the prior year.
Net Interest Margin. The net interest margin was 3.23% for the nine months
ended September 30, 1999 compared with 3.00% for the nine months ended September
30, 1998. The increase in the net interest margin resulted primarily from an
increase in average interest earning assets and a lower cost of deposits.
Following the Company's securities offering in April 1998, the Bank leveraged
the capital raised by purchasing securities which were funded with Federal Home
Loan Bank (FHLB) advances. While the leverage strategy reduces the net interest
margin, the strategy is accretive to net income and earnings per share.
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 For the Nine Months Ended For the Nine Months Ended
September 30, September 30, 1999 September 30, 1998
1999 ------------------------------------ --------------------------------
----
(Dollars in Thousands)
Interest Interest
Average Income Average Average Income Average
Yield/Rate Balance or Expense Yield/Rate Balance or Expense Yield/Rate
---------- ------- ---------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans 7.89% $ 1,545,791 $ 90,559 7.81% $ 1,260,115 $ 73,857 7.81%
Securities 6.27 582,252 26,487 6.07 410,501 19,116 6.21
Other - 537 20 4.90 11,508 483 5.59
----------- -------- --------- -------
Total interest-earning assets 7.48 2,128,580 117,066 7.33 1,682,124 93,456 7.41
Noninterest-earning assets - 55,676 - - 56,945 - -
----------- -------- --------- -------
Total assets 7.24 $ 2,184,256 $ 117,066 7.15 $ 1,739,069 $ 93,456 7.17
------- =========== ======== ----- ========= ======= -------
Interest-bearing liabilities
Deposits:
NOW, demand deposits and
money market accounts 1.82 $ 136,484 $ 1,887 1.84 103,149 1,163 1.50
Savings accounts 1.94 241,535 3,691 2.04 214,010 3,657 2.28
Time deposits 4.48 1,188,709 40,802 4.58 1,125,234 43,055 5.10
----------- -------- --------- -------
Total deposits 3.81 1,566,728 46,380 3.95 1,442,393 47,875 4.43
Borrowings 5.43 413,177 16,981 5.48 133,200 5,832 5.84
Guaranteed preferred beneficial interests in
junior subordinated debentures 9.38 30,000 2,109 9.38 18,107 1,273 9.38
Long-term debt to affiliates - - - 7,980 599 10.00
----------- -------- --------- -------
Total interest-bearing liabilities 4.25 2,009,905 65,470 4.34 1,601,680 55,579 4.63
------- ----------- -------- ----- --------- ------- -------
Noninterest-bearing deposits 52,656 38,623
Other noninterest-bearing liabilities 16,757 15,618
Stockholders' equity 104,938 83,148
----------- ---------
Total liabilities and stockholders' equity $ 2,184,256 1,739,069
=========== =========
Net interest income / interest rate spread 3.23% $ 51,596 2.99% $ 37,877 2.78%
======= ======== ======= =======
Net interest-earning assets / net interest margin 3.44% $ 118,675 3.23% $ 80,444 3.00%
======= =========== ===== ========= =======
Ratio of interest-earning assets to
interest-bearing liabilities 1.05x 1.06x 1.05x
======= =========== =========
</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 $3.5 million for the nine months ended
September 30, 1999 represented an increase of $1.3 million, as compared to a
provision of $2.2 million for the corresponding period of the prior year. At
September 30, 1999, the allowance for loan losses was $17.8 million. Net loan
charge-offs were $597,000 for the first nine months of 1999. Net charge-offs for
the corresponding period of 1998 were $413,000.
The Bank continued to experience an improvement in asset quality during the
nine months ended September 30, 1999. The nonaccrual loans at September 30, 1999
of $4.6 million were $1.5 million, or 25.5%, less than the $6.1 million at
December 31, 1998. For the nine months ended September 30, 1999 and 1998, the
provision for loan losses was 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 (one-to-four family) loans since
commercial loan products are generally considered to be higher risk than
residential mortgage (one-to-four family) loans.
9
<PAGE>
Noninterest Income. Noninterest income for the three months ended September
30, 1999 was $997,000 compared to $754,000 for the three months ended September
30, 1998, an increase of $243,000, or 32.2%. Commercial banking fees increased
39.0% to $577,000 for the three months as compared to $415,000 for the
corresponding period of 1998, as a result of increased commercial banking
activities.
Noninterest income of $3.1 million for the nine months ended September 30,
1999 increased $662,000, or 26.6% over noninterest income for the corresponding
period of 1998. Commercial banking fees increased to $1.5 million for the nine
months ended September 30, 1999 from $1.1 million, an increase of 37.9%, from
the corresponding period of the previous year.
Noninterest Expense. Noninterest expense of $9.4 million for the three
months ended September 30, 1999 represented growth of $1.4 million, or 18.0%,
compared with $8.0 million for the three months ended at September 30, 1998.
Personnel expenses increased to $4.6 million for the three months ended
September 30, 1999, from $3.5 million for the corresponding period of 1998, an
increase of $1.1 million, or 30.4%, primarily due to the additional staffing
required to support growth of the Bank's commercial banking business.
Noninterest expense of $28.0 million for the nine months ended September
30, 1999 was $2.8 million greater than the $25.2 million of noninterest expense
for the same period of the preceding year. Personnel expenses increased to $13.9
million for the nine months ended September 30, 1999 from $11.8 million for the
corresponding period of the preceding year, primarily due to additional staffing
of the commercial banking division.
In the first quarter 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. Data processing expenses
decreased to $1.5 million in the first nine months of 1999 from $1.6 million in
the corresponding period of 1998, a decrease of $93,000, or 5.8%, reflecting
system conversion costs incurred in the nine months ended September 30, 1998.
Provision for Income Taxes. The provision for income taxes of $3.5 million
and $2.3 million on the income before taxes of $8.6 million and $5.5 million for
the three months ended September 30, 1999 and 1998, respectively, represents
effective tax rates of 40.8% and 42.8%, respectively.
The provision for income taxes of $9.4 million and $5.4 million on the
income before taxes of $23.2 million and $12.9 million for the nine months ended
September 30, 1999 and 1998, respectively, represents effective tax rates of
40.5% and 41.8%, respectively.
FINANCIAL CONDITION
The Company experienced continued asset growth during the nine months ended
September 30, 1999. Total assets increased by $103.3 million, or 4.8%, to $2.25
billion at September 30, 1999. The growth resulted primarily from an increase in
the loan portfolio, partially offset by a decrease in the securities portfolio.
During the nine months ended September 30, 1999, loans increased by $150.1
million, or 10.1%, to $1.64 billion. This growth was led by an increase in
commercial loans due to the Bank's continuing focus on originating such loans.
The Bank originated $494.3 million of commercial loans during the nine months
ended September 30, 1999 as compared with $257.4 million of commercial loan
originations in the corresponding period of the preceding year. Loan runoff was
high during the nine months ended September 30, 1999 in the residential
one-to-four family loan portfolio. The annualized runoff rate of 26.6% reflected
the low market interest rates and increased property values. The runoff on the
commercial real estate loan portfolio was lower during the nine months ended
September 30, 1999, with an annualized prepayment rate of 19.2%.
The quality of loans continued to be strong. Total past due loans were
0.85% of total loans at September 30, 1999, and 0.78% at December 31, 1998.
Nonperforming assets of $5.3 million, or 0.23% of total assets at September 30,
1999, reflected a reduction from the $6.9 million level at December 31, 1998.
10
<PAGE>
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,
1999 1998
---- ----
Amount % Amount %
------ --- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Consumer
Residential mortgage
(one-to-four family) $ 689,640 41.97% $ 790,789 53.01%
Home equity 12,389 0.75 14,450 0.97
Other 1,739 0.11 2,261 0.15
--------------- --------------- ------------- ------------
703,768 42.83 807,500 54.13
--------------- --------------- ------------- ------------
Commercial
Secured by real estate-multifamily 407,779 24.82 346,967 23.25
Secured by real estate-nonresidential 398,322 24.24 229,693 15.40
Construction 79,287 4.82 61,486 4.12
Commercial business 54,117 3.29 46,240 3.10
--------------- --------------- ------------- ------------
939,505 57.17 684,386 45.87
--------------- --------------- ------------- ------------
Total gross loans 1,643,273 100.00% 1,491,886 100.00%
=============== ============
Net deferred loan origination fee (costs) (1,051) 262
Allowance for loan losses (17,803) (14,922)
--------------- -------------
Net loans $ 1,624,419 $ 1,477,226
=============== =============
</TABLE>
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 of which
adjust annually thereafter ("intermediate fixed-rate loans"). As a result of
this initiative, the Bank's COFI-based loans declined to $369.5 million at
September 30, 1999 from $455.2 million at December 31, 1998.
Fixed-rate loans at September 30, 1999 were $614.3 million compared with
$491.8 million at December 31, 1998, an increase of $122.5 million, or 24.9%,
which resulted primarily from the origination of real estate loans for which the
rate was fixed for periods ranging from five to fifteen years. At September 30,
1999, total gross loans included $295.7 million of intermediate fixed-rate loans
compared with $301.0 million at December 31, 1998, a decrease of $5.3 million,
or 1.7%, as a result of runoff of this portfolio.
11
<PAGE>
The following table shows the Bank's loan originations during the periods
indicated.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
Consumer
Residential mortgage (one-to-four family) $ 56,351 $ 218,058
Home equity and other 7,305 6,749
---------------- ----------------
Total consumer loans 63,656 224,807
---------------- ----------------
Commercial
Secured by real estate-multifamily 108,948 36,082
Secured by real estate-nonresidential 201,525 82,291
Construction (commitments) 124,111 96,234
Commercial business 46,171 36,564
Small Business Administration 13,582 6,232
---------------- ----------------
Total commercial loans 494,337 257,403
---------------- ----------------
Total loan originations $ 557,993 $ 482,210
================ ================
</TABLE>
The Bank originates loans primarily for portfolio retention. Substantially
all of the residential mortgage (one-to-four family) loans are originated with
limited documentation requirements. The Bank has had substantially no net
charge-offs on such limited documentation loans since the inception of this
program in 1993.
Nonperforming Assets and OREO. Management generally places loans on
nonaccrual 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 nonaccrual
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 nonperforming assets
at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
Nonaccrual loans:
Consumer
Residential mortgage (one-to-four family) $ 2,308 $ 3,341
--------------------- -------------------
Total Consumer 2,308 3,341
--------------------- -------------------
Commercial
Secured by real estate-multifamily 726 -
Secured by real estate-nonresidential 879 2,663
Construction loans 104 104
Commercial business 534 -
--------------------- -------------------
Total Commercial 2,243 2,767
--------------------- -------------------
Total nonaccrual loans $ 4,551 $ 6,108
Other real estate owned (OREO) 722 772
--------------------- -------------------
Total nonperforming assets $ 5,273 $ 6,880
===================== ===================
Nonperforming assets to total assets 0.23% 0.32%
Nonaccrual loans to total loans 0.28% 0.41%
Nonperforming assets to total loans and OREO 0.32% 0.46%
Total gross loans $ 1,643,273 $ 1,491,886
===================== ===================
Gross income not recognized on nonaccrual loans $ 139 $ 135
Accruing loans contractually past due 90 days or more - -
Troubled debt restructured 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, 1999, the Bank reduced total
nonperforming assets to $5.3 million from $6.9 million at December 31, 1998, a
decrease of $1.6 million or 23.4%. The reduction was the result of the sale of
nonperforming loans and the reclassification of other loans which became current
and were reclassified to performing status. Foreclosures are a normal part of
the credit process. At September 30, 1999, OREO consisted of one property
acquired through foreclosure with a carrying value of $722,000, compared to
$772,000 at December 31, 1998.
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." 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
questionable on the basis of currently existing facts, conditions and values,
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,
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
Special mention loans $ 1,183 $ 8,084
Substandard and doubtful loans 11,936 9,638
-------------------- --------------------
Total criticized loans $ 13,119 $ 17,722
==================== ====================
Total allowance for loan losses $ 17,803 $ 14,922
==================== ====================
Special mention loans to total loans 0.07% 0.54%
Substandard and doubtful loans to total loans 0.73 0.65
Criticized loans to total loans 0.80 1.19
Allowance for loan losses to substandard and doubtful loans 149.15 154.82
Allowance for loan losses to criticized loans 135.70 84.20
</TABLE>
With the exception of the criticized loans described above, management is
not aware of any other loans as of September 30, 1999 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 nonperforming 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 nonaccrual status or
become impaired or restructured loans or OREO in the future.
At both September 30, 1999 and September 30, 1998, the Company's level of
delinquent loans was low in relation to previous years. Management attributes
this to good economic conditions and continued efforts to maintain delinquent
loans at this level. During the nine months ended September 30, 1999,
residential mortgages (one-to-four family) delinquent two or more payments
increased to $2.2 million, or 0.31%, of gross residential mortgages (one-to-four
family) from $2.1 million or 0.26% of gross residential mortgages (one-to-four
family) at December 31, 1998. Mortgage loans secured by nonresidential real
estate delinquent 60 days or more were $3.9 million at September 30, 1999, an
increase of $1.2 million, or 45.0%, from the $2.7 million of such loans
delinquent at December 31, 1998.
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 (one-to-four 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
14
<PAGE>
process of 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:
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
(Dollars in Tousands)
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 14,922 $ 12,142
Provision for loan losses 3,478 2,183
Loans charged off (613) (458)
Recoveries of loans previously charged off 16 45
---------------- ---------------
Balance at end of period $ 17,803 $ 13,912
================ ===============
Allowance for loan losses to loans 1.08% 1.00%
Net charge-offs to average loans (1) 0.05% 0.03%
</TABLE>
(1) annualized
Securities. Securities (including available-for-sale and held-to-maturity)
decreased during the first nine months of 1999 by $59.5 million, or 10.1%, to
$528.0 million at September 30, 1999. The decrease in the securities balances
resulted primarily from the amortization and prepayment of residential loans
underlying the mortgage-backed securities portfolio. This asset runoff was
replaced with new loan originations.
15
<PAGE>
The following table sets forth the Bank's securities portfolio on the dates
indicated.
<TABLE>
<CAPTION>
At September 30, 1999 At December 31, 1998
--------------------- --------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities available for sale
Municipals $ - $ - $ 43,617 $ 44,464
Trust Preferred Securities 103,570 94,234 99,436 97,711
Other - - 1,500 1,500
-------------- ------------ ------------- --------------
Total $ 103,570 $ 94,234 $ 144,553 $ 143,675
============== ============ ============= ==============
Mortgage-backed securities available for sale
FNMA $ 74,141 $ 70,378 $ 80,660 $ 78,370
GNMA 104,666 101,138 114,403 115,555
Other 76,146 74,138 91,071 91,747
-------------- ------------ ------------- --------------
Total $ 254,953 $ 245,654 $ 286,134 $ 285,672
============== ============ ============= ==============
Investment securities held to maturity
Municipals $ 43,629 $ 40,301 $ - $ -
============== ============ ============= ==============
Mortgage-backed securities held to maturity
FHLMC $ 42,598 $ 40,135 $ 44,218 $ 42,714
FNMA 94,771 89,533 103,961 100,645
Other 7,150 6,818 10,031 9,713
-------------- ------------ ------------- --------------
Total $ 144,519 $ 136,486 $ 158,210 $ 153,072
============== ============ ============= ==============
</TABLE>
As of September 30, 1999, the aggregate amortized cost of the securities
was $546.7 million and the fair value was $516.7 million. Of the total $30.0
million unrealized loss on these securities, $11.4 million of unrealized losses
relate to securities which are held to maturity, and $18.6 million of unrealized
losses relate to securities which are held as available for sale. Such
unrealized losses, net of the related tax benefit of $7.8 million, are reflected
as a decrease of stockholders' equity. The $11.4 million unrealized loss
relating to the $188.1 million of securities held to maturity has not been
recognized in the financial statements.
Deposits. Deposit balances were $1.64 billion at September 30, 1999, which
represented an increase of $4.2 million, or 0.26%, from December 31, 1998. The
core deposit balances increased by $71.0 million, or 17.9%, during this period,
and time deposits decreased by $66.8 million. Core deposits include NOW, demand
deposit, money market and savings accounts. The Company reduced its overall cost
of deposits from 4.17% at December 31, 1998 to 3.67% at September 30, 1999 as a
result of a decrease in market interest rates and a higher concentration in core
deposits. Deposits are the Bank's primary source of funding. At September 30,
1999, the Bank had a deposit mix of 71.4% in time deposits, 16.5% in savings
accounts and 12.1% in NOW, demand deposit, and money market accounts. This
compares with a deposit mix of 75.7%, 14.2% and 10.1% at December 31, 1998,
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 any
one person or industry. At September 30, 1999, less than 2.0% 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 10.0% of the Bank's total
16
<PAGE>
deposits. The Bank's business is not seasonal in nature. The Bank accepts
deposits in excess of $100,000 from customers. Included in time deposits as of
September 30, 1999, is $365.3 million, or 22.3% of total deposits, of deposits
of $100,000 or greater. At September 30, 1999, the Bank had no brokered
deposits. Substantially all of the time deposits as of September 30, 1999 mature
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,
1999 1998
---- ----
Amount Interest Rate Amount Interest Rate
------ ------------- ------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
NOW, demand deposits and
money market accounts $ 198,014 1.27% $ 163,954 1.28%
Savings accounts 269,610 1.94 232,635 2.20
Time deposits 1,170,489 4.48 1,237,306 4.93
-------------- --------------
Total $ 1,638,113 3.67 $ 1,633,895 4.17
============== ==============
</TABLE>
The average cost of deposits during the nine months ended September 30,
1999 was 3.82% as compared to 4.31% for the same period in the previous year.
Other Borrowings. At September 30, 1999, the Bank had $459.4 million of
borrowings outstanding compared with $368.0 million outstanding at December 31,
1998, an increase of $91.4 million, or 24.8%. 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 in April 1998, 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, 1999, the Bank had borrowed $431.0 million
from the Federal Home Loan Bank (FHLB) of San Francisco in conjunction with the
leverage strategy, of which $233.0 million were long-term and $198.0 million
were overnight borrowings. Included in the long-term advances of $233.0 million
were $17.0 million which were fixed-rate for ten years and $216.0 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.
17
<PAGE>
The following table sets forth certain information regarding borrowings of
the Bank at or for the dates indicated.
<TABLE>
<CAPTION>
At or For the Nine Months Ended
-------------------------------
September 30, September 30,
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
FHLB of San Francisco advances
Average balance outstanding $ 385,927 $ 133,067
Maximum amount outstanding at any month end 468,000 324,000
Balance outstanding at end of period 431,000 324,000
Weighted average interest rate during the period 5.32% 5.57%
Weighted average interest rate at end of period 5.42% 5.49%
Weighted average remaining term to maturity at end of period
(in years) 5 7
FRB direct investment borrowings
Average balance outstanding $ 27,099 -
Maximum amount outstanding at any month end 83,739 -
Balance outstanding at end of period 28,405 -
Weighted average interest rate during the period 4.61% -
Weighted average interest rate at end of period 5.51% -
Weighted average remaining term to maturity at end of period
(in years) - -
Securities sold under agreements to repurchase
Average balance outstanding $ 151 $
Maximum amount outstanding at any month end 1,500 -
Balance outstanding at end of period - -
Weighted average interest rate during the period 5.42%
Weighted average interest rate at end of period - -
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. The Bank also participates
in a borrowing program with the Federal Reserve Bank (FRB) under which financial
institutions may receive callable borrowings from the FRB.
Regulatory Capital. The total risk-based capital ratio of the Bank at
September 30, 1999 was 11.52%, as compared with 11.61% at December 31, 1998. The
ratio of Tier 1 capital to total assets of the Bank at September 30, 1999 was
6.60% compared with 6.25% at December 31, 1998. The Bank's capital ratios exceed
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. The Year 2000 issue is the result of certain computer
programs being written using two digits rather than four to define the
applicable year. As a result, date-sensitive software and/or hardware may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or other disruption of operations and impede
normal business activities. The Federal Financial Institutions Examination
Council (FFIEC),
18
<PAGE>
through the bank regulatory agencies, has issued compliance guidelines that
require financial institutions to develop and implement plans for addressing the
Year 2000 problem.
Our State of Readiness. In accordance with the FFIEC guidelines, we have
developed a comprehensive plan which we believe has resulted in timely and
adequate modifications of our systems and technology to address our Year 2000
issues. Also included in this Year 2000 plan is a detailed review of the
readiness of our service providers, vendors, major provider of funds, certain
borrowers and companies with which we have material investments. As of September
30, 1999, we have met all current target objectives of the Year 2000 plan, and
we believe that we will continue to meet all future goals according to the plan.
We have completed the Awareness, Assessment, Renovation, Validation, and
Implementation phases of our mission-critical systems. The remaining period
through December 31, 1999 will be used for fine-tuning our Business
Resumption/Interruption Contingency Plans for the Year 2000.
As the result of the aforementioned efforts, we believe we have resolved
our Year 2000 issues with respect to our mission-critical computer systems and
applications. In addition, the process of testing and implementing Year 2000
modifications to non-mission-critical systems and applications is complete.
Due to our substantial progress, we do not expect that any additional
significant changes will be necessary or that the Year 2000 issue will pose
significant problems with our operations. However, unanticipated problems could
arise that could have a material impact on our financial condition and results
of operations. It should be noted, however, that we have developed contingency
plans designed to mitigate such impact.
Our Vendors. As part of our conversion to a commercial bank, we installed a
new core computer system to better serve our computing needs as a commercial
bank. This system is run in a service bureau environment by one of the leading
national vendors of data processing services for banks. This vendor has
completed its Year 2000 readiness plan in cooperation with us. Our testing of
this system, performed in conjunction with the vendor, indicates that the system
is Year 2000 compliant.
In addition to our core computer system, we also depend on computerized
financial accounting and mortgage loan origination systems. New
Year-2000-compliant systems were installed in October 1998 and December 1998.
Additionally, our mortgage loan servicing system vendor has certified that their
new system is Year 2000 compliant and our review of vendor test results is
complete and indicates that the system is Year 2000 compliant.
In addition to our extensive contacts with our major service providers, we
have communicated with other vendors about their compliance with Year 2000. For
those vendors that have responded that they are Year 2000 compliant and that we
have determined to not have a material impact on our operations, no further work
has been performed. For those vendors that have responded that they are working
towards Year 2000 compliance and that we have determined to be significant,
including mission-critical vendors, we follow up regularly and will continue to
do so through 1999. These vendors have advised us that they expect to be Year
2000 compliant prior to December 31, 1999. If, at any point, these vendors do
not demonstrate satisfactory progress in our judgment, we will implement other
alternatives in accordance with our contingency plan.
Our Borrowers. We have reviewed our loan portfolio to identify those
borrowers who engaged in business activities that, in our judgment, were highly
dependent on Year 2000 compliance. We obtained documents from these borrowers
which assisted us in determining any Year 2000 risk as well as the borrowers'
current state of Year 2000 readiness. We require updated documents on a periodic
basis so that we may continually reassess the borrower's status with respect to
Year 2000 compliance.
Our Costs. We converted to our new core banking system because of the
change in our business focus to commercial banking. Our new commercial banking
products were not supported by the previous software packages. Additionally, the
vendor that ran the old core system had indicated to us that it would not
support that platform beyond 1998, and service quality had deteriorated during
1997. We installed the new financial accounting system in light of the fact that
the vendor of the old system had informed us it would stop supporting the
software at the end of 1998. We purchased our new mortgage loan origination
system to replace the existing system with a lower cost software package.
19
<PAGE>
We put the new systems into place as a result of our closing our mortgage
banking division, our new emphasis on portfolio lending in our niche market, and
our commercial banking focus. In each case, we made the system conversions for
business reasons unrelated to the Year 2000 problem, and therefore they did not
contribute to the direct cost of our Year 2000 compliance. However, all new
systems are Year 2000 compliant. Our costs to achieve Year 2000 compliance are
not expected to materially impact our financial condition or results of
operations.
Our Risks. We believe there are no mission-critical systems which present a
material risk of not being Year 2000 compliant in a timely fashion, or for which
we cannot provide a suitable alternative. It is possible, however, that
unforeseen disruptions may occur as a result of the date change. Such
disruptions may include, among other things, the inability to process and
underwrite loan applications, to credit deposits and withdrawals from and post
interest to customer accounts, to credit loan payments, interest paid or track
delinquencies, to properly reconcile and record daily activity or to engage in
similar normal banking activities. Additionally, if our commercial customers are
not Year 2000 compliant and suffer adverse effects on their operations, their
ability to meet their obligations to us may be impacted.
Any failure on our part to identify unresolved Year 2000 issues that are
critical to our operations, or the failure of others with which we do business
to become Year 2000 ready in a timely manner could materially and adversely
impact our financial condition and results of operations. Moreover, to the
extent that data processing and transmission and communications services
worldwide, as well as utility companies which service our operating locations
are not ready, we cannot predict with any certainty that our operations will
remain materially unaffected after January 1, 2000, or on earlier dates when
post-January 1, 2000 dates become significant within our systems.
Our Business Resumption/Interruption Contingency Plans. Business
Resumption/Interruption plans are plans of action that ensure our ability to
continue functioning in the event of unanticipated system failures at critical
dates prior to, on, or after the Year 2000. We will invoke these plans if
unanticipated Year 2000 problems occur. We have established special teams for
mobilization in case of emergencies that threaten the viability of the Bank, and
require that certain resources be available immediately for use. We have
completed preparation of these plans and now will continue to fine-tune them,
train staff to test them and carry them out.
The discussion above of Year 2000 issues contains certain forward-looking
statements. The costs of the Year 2000 conversion, the date which we have set to
complete the conversion and the possible associated risks are based on our
current estimates and are subject to uncertainties that could cause the actual
results to differ materially from our expectations. These uncertainties include,
among others, our success in identifying systems that are not Year 2000
compliant, the continued availability of qualified personnel, consultants, and
other resources, and the success of 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 Annual Report dated December
31, 1998 on file with the Securities and Exchange Commission (SEC File No.
0-24947).
20
<PAGE>
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.
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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits (Filed 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 Amended 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 File No. 333-58325).
** Incorporated by reference to the exhibit of the same number from the
Company's Form 10-Q for the quarter ended June 30, 1999, filed with the
Securities and Exchange Commission on August 6, 1999 (SEC File No. 0-24947).
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.
Date: November 2, 1999 /s/ Thomas S. Wu
--------------------------------------
Thomas S. Wu
President and Chief Executive Officer
(principal executive officer)
Date: November 2, 1999 /s/ Jonathan H. Downing
--------------------------------------
Jonathan H. Downing
Senior Vice President and
Chief Financial Officer
(principal financial officer)
22
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<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q and is qualified in its
entirety by reference to such financial statements.
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