-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Itp095WjvM41dUksUruF2e6Ajp5r5a7xu6bRav+5lSBxAKNWDvx1hhVI3OqomBr6 UP4mmshx7ZV7KAVZt3z7NQ== 0001024739-00-000168.txt : 20000317 0001024739-00-000168.hdr.sgml : 20000317 ACCESSION NUMBER: 0001024739-00-000168 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UCBH HOLDINGS INC CENTRAL INDEX KEY: 0001061580 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 943072450 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24947 FILM NUMBER: 571863 BUSINESS ADDRESS: STREET 1: 711 VAN NESS AVENUE CITY: SAN FRANCISCO STATE: CA ZIP: 94102 BUSINESS PHONE: 4159280700 MAIL ADDRESS: STREET 1: 711 VAN NESS AVENUE CITY: SAN FRANCISCO STATE: CA ZIP: 94102 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File No.: 0-24947 UCBH HOLDINGS, INC. (exact name of registrant as specified in its charter) DELAWARE 94-3072450 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 711 Van Ness Avenue, San Francisco, California 94102 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 928-0700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) 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 ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers, of the registrant is $174,219,000 and is based upon the last sales price as quoted on The Nasdaq Stock Market for March 10, 2000. As of March 10, 2000, the Registrant had 9,333,333 shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1999, are incorporated by reference into Part II of this Form 10-K. Portions of the Proxy Statement for the April 27, 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ Form 10-K - ------------------------------------------------------------------------------------------------------------------- Part I Item 1. Business...............................................................................1 Our Market Area........................................................................1 Our Current Banking Services...........................................................1 Our Lending Activities.................................................................2 Deposits...............................................................................5 Competition............................................................................5 Our Historical Operations..............................................................6 Supervision and Regulation.............................................................7 Employees..............................................................................9 Additional Item. Executive Officers of the Registrant................................10 Item 2. Properties............................................................................10 Item 3. Legal Proceedings.....................................................................10 Item 4. Submission of Matters to a Vote of Security Holders...................................11 - ------------------------------------------------------------------------------------------------------------------- Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........................................................11 Item 6. Selected Financial Data...............................................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................11 Item 8. Financial Statements and Supplementary Data...........................................11 Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure................................................11 - ------------------------------------------------------------------------------------------------------------------- Part III Item 10. Directors and Executive Officers of the Registrant....................................12 Item 11. Executive Compensation................................................................12 Item 12. Security Ownership of Certain Beneficial Owners and Management........................12 Item 13. Certain Relationships and Related Transactions........................................12 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................13 - ------------------------------------------------------------------------------------------------------------------- Signatures.......................................................................................................14
i Item 1. Business The Form 10-K contains statements about the future that may or may not materialize. When we use words like "anticipate," "believe," "estimate," "may," "intend," or "expect," we are speculating about what will happen in the future. The outcome may be materially different from our speculations. We believe that certain factors identified elsewhere in this Form 10-K could cause a different outcome. There may also be other factors that could cause a different outcome. UCBH Holdings, Inc. (the "Company", "we", "us," or "our") is a Delaware corporation that is registered with the Federal Reserve Board as a bank holding company. We conduct our principal business through our wholly-owned banking subsidiary, United Commercial Bank (the "Bank"), which makes up almost all of our consolidated assets and revenues. United Commercial Bank is a California state-chartered commercial bank. Our Market Area We concentrate on marketing our services in the San Francisco Bay area (which includes the City of Oakland), the Sacramento/Stockton metropolitan area, and the Los Angeles metropolitan area, focusing on the areas with a high concentration of ethnic Chinese. The ethnic Chinese markets within our primary market area recently have grown rapidly. Using the 1998 Census update, we believe there were an estimated 3.9 million Asian and Pacific Islanders living in California. Based on 1995 and 1996 demographic data, we believe there were approximately 250,000 Asian and Pacific Islanders living in San Francisco County, which is approximately 32% of the total population of the county. We currently have 27 branches in the State of California. During 1998, we opened a commercial banking and construction lending regional office in Pasadena, California, to help us take advantage of opportunities in the Los Angeles area, especially in the ethnic Chinese areas. We have tailored our products and services to meet the financial needs of these growing Asian and ethnic Chinese communities. We believe that this approach, together with the relationships of our management and Board of Directors with the Asian and ethnic Chinese communities, provides us with an advantage in competing for customers in our market area. We are the largest financial institution focused on serving the ethnic Chinese community within the United States. Our Current Banking Services Through our branch network, we provide a wide range of personal and commercial banking services to small and medium-sized businesses, business executives, professionals and other individuals. We offer multilingual services to all of our customers in English, Cantonese and Mandarin. We offer the following deposit products: o Business checking, saving accounts and money market accounts o Personal checking, saving accounts and money market accounts o Time deposits (certificates of deposit) o Individual Retirement Accounts (IRAs) We offer a full complement of loans, including the following types of loans: o Commercial real estate loans (residential and nonresidential) o Construction loans to small and medium-sized developers for construction of single family homes, multifamily and commercial properties o Commercial, accounts receivable and inventory loans to small and medium-size businesses with annual revenues generally ranging from $500,000 to $20.0 million o Short-term trade finance facilities for terms of less than one year to U.S. importers, exporters and manufacturers o Loans guaranteed by the Small Business Administration ("SBA") o Residential real estate loans Our commercial borrowers are engaged in a wide variety of manufacturing, wholesale trade and service businesses. Page 1 We also provide a wide range of specialized services, including international trade services for business clients, MasterCard and Visa merchant deposit services, and cash management services. Our Lending Activities Underwriting and Credit Administration. Our Board of Directors has established basic lending policies. Our policies require that loans meet minimum underwriting criteria. The Board has granted limited loan approval authority to certain officers of the Bank. The Board requires that the collateral for all real estate loans be valued by an independent outside real estate appraiser. Any loan requests over individual officer limits must be approved by the President. Our Credit Review Committee, composed of Jonathan H. Downing (Senior Vice President, Chief Financial Officer and Treasurer), William T. Goldrick (Senior Vice President and Chief Credit Officer), Sylvia Loh (Senior Vice President and Director of Commercial Banking), and Thomas S. Wu (President and Chief Executive Officer) reviews and ratifies all loans over $750,000. Loans of over $2.0 million are reviewed and ratified by the Board of Directors. As part of our credit administration process, we conduct an internal asset credit quality review. Additionally, an outside credit review agency, composed of former bank executives and regulators, reviews all commercial loans over $100,000. Our President, Chief Credit Officer, and Chief Financial Officer meet every two weeks to review delinquencies, nonperforming assets, classified assets and other relevant information to evaluate credit risk within our loan portfolio. The results are reviewed by the Board of Directors quarterly. Loan Portfolio. At December 31, 1999, our loan portfolio was made up of the following loans: Commercial real estate loans....................... $ 435.1 million 26% of gross loans Multifamily mortgage loans......................... 423.8 million 25 of gross loans Construction loans................................. 89.7 million 5 of gross loans Commercial business loans.......................... 59.3 million 4 of gross loans Residential mortgage (one to four family) loans.... 665.9 million 39 of gross loans Other consumer loans............................... 14.3 million 1 of gross loans -------- --- Total.............................................. $1,688.1 million 100% of gross loans ======== ===
Our Commercial Lending - General. Our Commercial Banking Division is staffed with experienced commercial lending officers. We also installed software to help identify, market, and develop commercial real estate lending opportunities in our market area. Below is a description of the types of commercial loans we offer. Commercial Real Estate (Nonresidential) Mortgages. We originate medium-term commercial real estate loans that are secured by commercial or industrial buildings. These properties are either used by their owners for business purposes (known as owner-user properties) or have income derived from tenants (known as investment properties). We solicit borrowers in the following ways: o Through referrals from our branch offices o Through direct solicitation of borrowers and real estate brokers by our commercial lending officers o Through analysis provided by our database software system, which provides key information on substantially all commercial real estate loans in our primary market area o Through referrals from existing customers At December 31, 1999, we had approximately 458 commercial real estate loans with a total aggregate balance of $435.1 million. The average balance of these loans was $950,000. Page 2 During the year ended December 31, 1999, we originated $255.5 million of commercial real estate loans, as compared to $129.8 million for 1998, and $23.7 million for 1997. At December 31, 1999, we had $104.1 million of commercial real estate loans in our pipeline. However, we cannot guarantee that all the loans in the pipeline will close. Commercial real estate loans are generally larger and involve more risk than residential mortgages. Payments on commercial real estate loans are generally dependent on the successful operation or management of the properties. Therefore, repayment is more closely tied to the state of the real estate market and the general economy. We attempt to reduce these risks through our stringent underwriting standards. Also, during 1998, we hired an outside loan review firm to help us conduct our internal asset review of our commercial loans, including our commercial real estate loans. This outside firm is comprised of former bank regulators with extensive credit evaluation experience. Multifamily Mortgages. We originate multifamily mortgage loans which are generally secured by five to 50-unit residential buildings. Substantially all of our multifamily mortgage loans are secured by property located in our primary market area. We obtain full credit information on multifamily mortgage borrowers and independently verify their income and assets. We also consider their ability to manage the multifamily property and to assume responsibility for the debt if there are unforeseen expenses or vacancies. We offer both fixed-rate and adjustable-rate multifamily mortgage loans. Our adjustable-rate multifamily loans are fixed for six months and then adjust every six months based upon the LIBOR index. Multifamily loans are generally amortized over 30 years with balloon payments in 10 or 15 years. At December 31, 1999, we had approximately 1,065 multifamily mortgage loans with an aggregate outstanding principal balance of $423.8 million. The average balance of such a loan was $398,000. To avoid an overconcentration of these loans, we limit our total multifamily mortgage loans to not more than 35% of our total loans. At December 31, 1999, multifamily loans were 25.1% of our total loans. In 1998, we began to reemphasize the origination of multifamily mortgage loans, and originated $135.4 million of multifamily during 1999, as compared to $54.5 million in 1998, and $7.5 million in 1997. All new originations are fixed-rate or adjustable-rate loans tied to the LIBOR index. Construction Loans. We originate construction loans primarily for the construction of entry-level and first-time move-up housing within California and also for multifamily and commercial properties. We make these loans to experienced builders and developers with whom we have relationships in our primary market area. As of December 31, 1999, we had approximately 117 outstanding construction loans, with an aggregate principal balance of $89.7 million. The average balance of such loans was $767,000. Construction commitments were $174.5 million in 1999, $127.3 million in 1998 and $59.6 million in 1997. We generally originate construction loans in amounts up to 75% of either the appraised value of the property, as improved, or the sales price, whichever is lower. The funds are disbursed on a percentage of completion basis or as construction thresholds are met. We normally require the guarantee of principals of corporate or partnership borrowers. Construction loans have adjustable interest rates tied to the prime rate. Construction loans are generally prime based and are written for a one-year term and may have up to a one-year renewal option. Construction financing generally has a higher degree of credit risk than does long-term loans on improved, owner-occupied real estate. The risk is dependent largely on the value of the property when completed as compared to the estimated cost, including interest, of building it. If the estimated value is inaccurate, we may have a completed project with a value too low to assure full repayment of the loan. Commercial Business Loans. We provide commercial business loans to customers for working capital purposes for accounts receivable and inventory and loans to finance equipment, accounts receivable and inventory. Working capital loans are subject to annual review, and are generally made against security interests in inventory and accounts receivable. Equipment loans have terms of up to five years, and are secured by the underlying equipment. Interest rates are normally based on the prime rate. During 1999, we originated $73.2 million of commercial loans, as compared to $52.3 million in 1998, and $28.6 million in 1997. Page 3 Unlike residential mortgage (one to four family) loans, which generally are made based on the borrower's ability to make payments from his or her employment or other income, and which are secured by real estate, for which a value can more easily determined, commercial business loans involve more risk because repayment is substantially dependent on the cash flow of the borrower's business. Also, any collateral securing the loan may depreciate, may be difficult to value and may fluctuate in value depending on the success of the business. Commercial Lines of Credit. We provide commercial lines of credit to small- and medium-sized companies to finance their accounts receivable and inventory on a short-term basis (less than one year) and/or to finance their equipment and working capital on a long-term basis (over one year). We structure our short-term financing to allow the borrower to complete its trade cycle from the purchase of inventory to collection of receivables. The line of credit may also include an option for the issuance of letters of credit to overseas suppliers/sellers to permit the borrower to obtain inventory. We also originate and fund loans that qualify for guaranty issued by the Small Business Administration. The SBA currently normally guarantees from 75% to 80% of the principal and accrued interest of such loans. We make these loans to eligible small businesses to finance working capital, the purchase of equipment or the purchase of real estate. Depending on the purpose of the loan, terms generally range from seven to 25 years. We typically require that SBA loans be secured by inventories and receivable or by real property generally if commercial real estate is being financed. During 1999, we originated $18.1 million of SBA loans, as compared to $11.6 million in 1998 and $3.3 million in 1997. SBA loans are generally prime based. Our Consumer Lending - General. We make consumer loans, primarily residential mortgage (one to four family) loans for our customers. We also provide home equity loans. Residential Mortgages (One to Four Family). In conjunction with our transition from a thrift to a commercial bank, we have placed more emphasis on the origination of commercial loans and reduced our emphasis on the origination of consumer loans. The majority of our consumer loan originations are residential mortgage (one to four family) loans. We originated $59.6 million of residential mortgage (one to four family) loans in 1999, $303.8 million in 1998 and $274.8 million in 1997. We offer fixed-rate and adjustable-rate loans, including intermediate fixed-rate mortgages. Intermediate fixed-rate mortgages have fixed interest rates for three or five years and then adjust annually afterward. Our fixed-rate loans have terms of 15 or 30 year and have due-on-sale clauses, which allow us to declare the loan immediately due and payable if the loan is assumed without our consent. We also offer ARM loans, with interest rates fixed for six months and which then adjust every six months. Our intermediate fixed-rate loans have interest rates that are fixed for three or five years, and then adjust annually. Our ARM loans generally have periodic (not more than 2%) and lifetime (not more than 6%) caps on the interest or decrease in interest rates. Our current production of ARM loans are tied to the one-year U.S. Treasury CMT Index. We originate fully-documented loans, with income and assets being verified by third parties, and limited documentation loans, where we rely on the borrower's representations as to income and assets for which we assess the reasonableness of the customers' representations through independent telephone inquiries and review of alternative written documentation. We specialize in these limited documentation loans to borrowers who want quicker loan processing in return for a higher interest rate and a larger down payment. As of December 31, 1999, $497.7 million, or 74.7% of our residential mortgage (one to four family) loans were limited documentation loans. Since we began making these limited documentation loans, we have not had any net charge-offs on any of these loans. We cannot guarantee that these loans will continue to have such low delinquencies in the future. We originate residential mortgage (one to four family) loans for portfolio retention and underwrite loans to our specific guidelines. Our guidelines differ from FannieMae and/or FreddieMac guidelines with respect to factors, such as, for example, loan amounts and the specific documentation required. As a result, we cannot sell these loans to FannieMae and/or FreddieMac. We have sold some of these loans in the secondary market to test the market acceptance of them. Based on these tests, we believe the residential mortgage (one to four family) loans in our portfolio could be readily sold in the secondary market should we decide Page 4 to do so. However, there can be no assurance that such loans can be sold in the secondary market in the future. At December 31, 1999, we had approximately 4,079 residential mortgage (one to four family) loans, totaling $665.9 million. At that date, the balance of an average residential mortgage (one to four family) loan in our portfolio was approximately $163,000. Of our residential mortgage (one to four family) loans as of December 31, 1999, $362.8 million, or 54.5%, were fixed-rate loans, $135.4 million, or 20.3 %, were ARMs adjusting in one year or less, and $167.7 million, or 25.2 %, were intermediate fixed-rate loans. Home Equity and Other Consumer Loans. We also make consumer loans, almost all of which are home equity lines of credit secured by residential real estate. These lines generally consist of floating rate loans tied to the prime rate. Deposits Our depositors are primarily ethnic Chinese households, small and medium-sized businesses owned by ethnic Chinese, and ethnic Chinese business executives, professionals and other individuals. We offer a range of deposit products that are traditionally provided by commercial banks. For interest-bearing deposits, the interest rates we pay vary depending on the size, term and type of deposit. We set our interest rates based on our need for funds and market competition. As of December 31, 1999, less than 2% of our deposits were held by customers located outside of the United States. Additionally, the 100 depositors with the largest aggregate account balances held less than 15% of our total deposits. As of December 31, 1999, our weighted average cost of deposits was 3.80%. Competition The banking and financial services industry in California generally, and in our market area specifically, is highly competitive. The industry has become increasingly competitive recently due in part to changes in regulation, changes in technology and product delivery systems, and the consolidation of the industry. We compete for loans, deposits and customers with the following types of institutions: o Commercial banks o Savings and loan associations o Securities and brokerage companies o Mortgage companies o Insurance companies o Finance companies o Money market funds o Credit unions o Other nonbank financial service providers Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than we do. To compete with these other financial services providers, we rely on local promotional activities, personal relationships established by our officers, directors and bilingual employees with customers, and specialized services tailored to meet our customers' needs. We compete for deposits in the ethnic Chinese markets with other banks that serve the Asian community in California. We believe we have three major competitors targeting the ethnic Chinese market in California. These competitors have branch locations in many of the same neighborhoods as we do, provide similar loan, savings and financial services, and market their services in similar Asian publications and media in California. Page 5 Our Historical Operations Up until our change in business strategy in 1996, our operations consisted of traditional thrift activities of originating residential mortgage (one to four family) loans which we pooled and sold in the secondary market while servicing loans for FannieMae, FreddieMac and GinnieMae, as well as for private investors. We also originated multifamily mortgages and commercial real estate mortgages which we kept in our portfolio. As a result of increased competition in the mortgage banking business, profit margins contracted and loan servicing rights declined in value, due in part to higher levels of prepayments. As a result, we closed our mortgage banking division, stopped originating mortgage loans for sale in the secondary market, and sold our agency loan servicing portfolio. Our Board of Directors decided to shift our business focus from that of a traditional thrift to a full-service commercial bank. They saw opportunities to further improve our long-term prospects, in part by taking advantage of our significant market share and our cross selling opportunities to the ethnic Chinese and Asian communities in our market area. We realigned responsibilities among senior management, and hired new officers who have experience in commercial banking and in Small Business Administration lending within our market area. In January 1998, Thomas S. Wu was appointed the President and Chief Executive Officer of the Bank and assumed the responsibility of successfully shifting our business focus to commercial banking services and products. Mr. Wu has over 20 years of diversified domestic and international commercial banking experience. Sylvia Loh was appointed head of the newly established Commercial Banking Division in January 1996. She also has over 20 years of Commercial banking and trade finance experience with major financial institutions. In January 1997, William T. Goldrick was recruited and appointed Senior Vice President and Chief Credit Officer to establish commercial lending policies and procedures and to strengthen our credit evaluation. He has over 40 years of commercial banking experience. He is also responsible for our regulatory compliance. In 1996, we established a Commercial Banking Division to offer an array of commercial bank services and products mainly to our customers in ethnic Chinese communities. Since its establishment, we originated approximately $608.6 million in commercial loan commitments. To support our commercial banking activities, we implemented a commercial banking data processing system that replaced our previous system that was designed for thrift institutions. The installation was completed in February 1998. We also opened a commercial, construction and Small Business Administration lending office in Pasadena, California, in the second quarter of 1998. We hired a team of commercial loan officers with extensive commercial lending experience and a group of three SBA banking officers, all previously affiliated with one of the leading lenders focusing on SBA lending to Asians, to staff the new office. Additionally, we transferred the lead managers of construction lending to the Pasadena office to cultivate new construction lending relationships in southern California. In January 1998, the Bank changed its name to United Commercial Bank from United Savings Bank, F.S.B., to reflect our new focus on commercial banking. On July 31, 1998, the Bank converted from a federal thrift to a California-chartered commercial bank, and UCBH Holdings, Inc. became a bank holding company. The California Department of Financial Institutions now regulates the Bank, with the FDIC providing secondary regulation, and the Federal Reserve Bank of San Francisco regulates the Company. We are working to expand our presence in the Asian and ethnic Chinese markets through our multilingual ATMs, and through our multilingual telephone banking system and customer service and loan officers. We have established mini-branches in or adjacent to Asian supermarkets in selected areas as another means of increasing our market share and deposit base. At December 31, 1997, our stockholders' equity was $62.6 million or 4.0% of total assets. As a result of the capital raised in April 1998 and the retention of earnings, our stockholders' equity increased to $110.1 million by December 31, 1999, and our consolidated Tier I capital increased from $63.9 million at December 31, 1997 to $153.3 million at December 31, 1999. We believe that these measures positioned us to take advantage of the opportunities that are presented in our market area, and help us to better serve the growing ethnic Chinese market in California. Page 6 Supervision and Regulation Introduction Both UCBH Holdings, Inc., as a bank holding company, and United Commercial Bank, as a commercial bank, are extensively regulated under both federal and state law. The following is a summary of certain laws and regulations that govern the activities of the Company and the Bank. This summary is not a complete description of the regulations that pertain to the Company and the Bank, and is qualified in its entirety by reference to the actual laws and regulations. Regulation of Bank Holding Companies The Company is a bank holding company registered with the Federal Reserve and is subject to the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Company files quarterly and annual reports with the Federal Reserve, as well as any other information that the Federal Reserve may require under the Bank Holding Company Act. The Federal Reserve examines the Company, and its non-bank subsidiary. The Company is also a bank holding company under California law, and is examined by the California Department of Financial Institutions. The Federal Reserve has the authority to require that the Company stop an activity, whether conducted itself or through a subsidiary or affiliate, if the Federal Reserve believes that the activity poses a significant risk to the financial safety, soundness or stability of the Bank. The Federal Reserve can also regulate provisions of certain debt of bank holding companies, including imposing ceilings on interest rates and requiring reserves on such debt. In certain cases, the Company will have to file written notice and obtain approval from the Federal Reserve before repurchasing or redeeming its equity securities. Additionally, the Federal Reserve imposes capital requirements on the Company as a bank holding company. Regulation of the Bank Bank Regulators. The Bank is a California state-chartered commercial bank, and is supervised, examined and regulated by the Commissioner of the California Department of Financial Institutions (the "Commission"), as well as by the FDIC. Either of these regulators may take remedial action if it determines that financial condition, capital resources, asset quality, earnings prospects, management, or liquidity aspects of the Bank's operations are unsatisfactory. Either of these agencies may also take action if the Bank or its management is violating or has violated any law or regulation. No regulator has taken any such actions against the Bank in the past. Safety and Soundness Standards. The FDIC and the Federal Reserve have adopted final guidelines that establish standards for safety and soundness of banks. They are designed to identify potential safety and soundness problems and ensure that banks address those concerns before they pose a risk to the deposit insurance fund. If the FDIC or the Federal Reserve determines that an institution fails to meet any of these standards, the agency can require the institution to prepare and submit a plan to come into compliance. If the agency determines that the plan is unacceptable or is not implemented, the agency must, by order, require the institution to correct the deficiency. The FDIC and the Federal Reserve also have safety and soundness regulations and accompanying guidelines on asset quality and earnings standards. The guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. The guidelines also provide standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient to maintain adequate capital and reserves. If an institution fails to comply with a safety and soundness standard, the agency may require the institution to submit and implement an acceptable compliance plan, or face enforcement action. Capital Requirements. The Bank is subject to the risk-based capital guidelines of the FDIC. These guidelines provide a framework that is more sensitive to differences in risk between banking institutions. The amount of regulatory capital the Bank is required to have is dependent on the risk-weighting of its assets. The ratio of its regulatory capital to its Page 7 risk-weighted assets is called its "risk-based capital ratio." Assets and certain off-balance sheet items are allocated to four categories based on the risk inherent in the asset, and are weighted from 0% to 100%. The higher the category, the more risk the Bank is subject to and thus more capital that is required. The guidelines divide a bank's capital into two tiers. The first tier (known as "Tier I") includes common equity, retained earnings, certain non-cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries. Goodwill and other intangible assets (except for mortgage servicing rights and purchased credit card relationship, subject to certain limitations) are subtracted from Tier I capital. Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt, the allowance for loan losses (subject to certain limitations). Certain items are required to be deducted from Tier II capital. Banks must maintain a total risk-based capital ratio of 8%, of which at least 4% must be Tier I capital. In addition, the FDIC has regulations prescribing a minimum Tier I leverage ratio (Tier I capital to total adjusted assets, as specified in the regulations). These regulations require that banks that meet certain criteria (including having the highest examination rating and not experiencing or expecting significant growth) maintain a minimum Tier I leverage ratio of 3%. Effective April 1, 1999, all other banks must have a Tier I leverage ratio of 4%. The FDIC may impose higher limits on individual institutions when particular circumstances exist. If a bank is experiencing or anticipating significant growth, the FDIC may expect it to have capital ratios well above the minimum. At December 31, 1999, the Bank's tangible and core capital ratios were 6.58%, and its risk-based capital ratio was 11.29%. In 1995, the FDIC, along with the other federal banking agencies, adopted a regulation that provided that the agencies will consider the bank's exposure to interest rate risk in assessing a bank's capital adequacy. They will consider the quality of the bank's interest rate risk management process, the overall financial condition of the bank and the level of other risks the bank is exposed to. They may require an institution with a high level of interest rate risk to hold additional capital. The agencies also have issued a joint policy statement providing guidelines on interest rate risk management, including a discussion of the factors the agency will consider in evaluating interest rate risk. Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act requires the federal banking regulators to take "prompt corrective action" against undercapitalized institutions. The regulators have established the following capital levels to implement these provisions: o Well capitalized has total risk-based capital ratio of 10% or greater, Tier I risk-based capital ratio of 6% or greater, a leverage ratio of 5% or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive. o Adequately capitalized has total risk-based capital ratio of 8% or greater, Tier I risk-based capital ratio of 4% or greater, and a leverage ratio of 4% or greater (3% or greater if rated Composite 1 under the CAMELS rating system) o Undercapitalized has total risk-based capital ratio of less than 8%, Tier I risk-based capital ratio of less than 4%, or a leverage ratio of less than 4% (3% if rated Composite 1 under the CAMELS rating system). o Significantly undercapitalized has a total risk-based capital ratio of less than 6%, Tier I risk-based capital ratio of less than 3%, or a leverage capital ratio of less than 3%. o Critically undercapitalized has a ratio of tangible equity to total assets that is equal to less than 2%. Federal regulators are required to take prompt corrective action to solve the problems of those institutions that fail to satisfy their minimum capital requirements. As an institution's capital level falls, the level of restrictions becomes increasingly severe and the institution is allowed less flexibility in its activities. Page 8 As of December 31, 1999, the Bank was a well capitalized institution under the definitions. Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), as implemented by FDIC regulations, a bank has an obligation, consistent with safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs, nor does it limit a bank's discretion to develop the types of products and services that it believes are best suited to its community. It does require that federal banking regulators, when examining an institution, assess the institution's record of meeting the credit needs of its community and to take such record into account in evaluating certain applications. As a state chartered bank, the Bank is subject to the fair lending requirements and reporting obligations involving home mortgage lending operations of the CRA. Federal regulators are required to provide a written examination of an institution's CRA performance using a four-tiered descriptive rating system. These ratings are available to the public. Based upon examinations by the OTS in 1996 and 1998, the Bank's federal regulator at the time of examination, the Bank's CRA ratings were "Outstanding." Recent Legislative Developments On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial Modernization Act of 1999 into law. The Modernization Act will, among other things, allow bank holding companies meeting management, capital and CRA standards to engage in a substantially broader range of nonbanking activities than currently is permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies; allow insurers and other financial services companies to acquire banks; remove various restrictions that currently apply to bank holding company ownership of securities firms and mutual fund advisory companies; and establish the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. The banking agencies have released for comment proposed regulations to implement the provisions of the Modernization Act. In addition, the Federal Reserve Bank has released an interim regulation permitting the approval of financial holding companies. The Modernization Act also modifies current law related to financial privacy and community reinvestment. The new financial privacy provisions will generally prohibit financial institutions, including the Company, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to "opt out" of the disclosure. At this time the Company is unable to predict the impact the Modernization Act may have on it and the Bank. The Modernization Act permits banks, securities firms and insures to combine and to offer a wide variety of financial products and services. Many of these resulting companies would be larger and have more resources than the Company, and should they choose to compete directly with the Company in its target markets, they could adversely impact the Company's results of operations. Employees At December 31, 1999, we had 365 full-time equivalent employees. None of the employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be satisfactory. Page 9 Additional Item. Executive Officers of the Registrant The following table presents certain information regarding the executive officers of the Company and the Bank:
- ------------------------------------------------------------------------------------------------------------------- Position with the Company and the Bank and Name Age Past Five Years Experience - ------------------------------------------------------------------------------------------------------------------- Thomas S. Wu 41 President and Chief Executive Officer since January 1, 1998. Previously Executive Vice President and Director of the Bank since September 1997. Previously was Director of Customer Care for Pacific Link Communications Limited in Hong Kong. Served as Senior Vice President, Head of Retail Banking of the Bank from 1992 to 1996. - ------------------------------------------------------------------------------------------------------------------- Louis E. Barbarelli 57 Senior Vice President, Chief Information Officer and Director of Operations - ------------------------------------------------------------------------------------------------------------------- Jonathan H. Downing 48 Senior Vice President, Chief Financial Officer and Treasurer - ------------------------------------------------------------------------------------------------------------------- William T. Goldrick 68 Senior Vice President and Chief Credit Officer since January 1997. Previously was Senior Vice President, Senior Credit Officer for American California Bank from 1995 to 1997; was Chief Lending Officer of National American Bank from 1992 to 1995. - ------------------------------------------------------------------------------------------------------------------- Dennis A. Lee 57 Vice President and Corporate Counsel - ------------------------------------------------------------------------------------------------------------------- Sylvia Loh 44 Senior Vice President and Director of Commercial Banking. Previously was Vice President, Relationship Manager for Bank of America until 1996. - ------------------------------------------------------------------------------------------------------------------- Deanne Miller 51 Senior Vice President and Director of Human Resources - -------------------------------------------------------------------------------------------------------------------
Item 2. Properties The Company's principal offices are located at 711 Van Ness Avenue in San Francisco, California, which serves as the Company's and the Bank's headquarters. The Bank leases all of its remaining branch facilities under noncancellable operating leases, many of which contain renewal options and some of which have escalation clauses. At December 31, 1999, premises and equipment owned by the Company, both individually and in aggregate, were not material in relation to the Company's total assets. Item 3. Legal Proceedings Because of the nature of the Company's business, it is subject to various threatened or filed legal actions. Although the amount of the ultimate exposure, if any, cannot be determined at this time, the Company, based upon the advice of counsel, does not expect the final outcome of threatened or filed suits to have a material adverse effect on its financial position. Page 10 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders or otherwise during the fourth quarter of the year ended December 31, 1999. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information on the principal market for and trading price of the Company's common stock, the number of holders of such stock, and dividend payments is incorporated by reference from page 37 and from Note 11 on page 56 of the 1999 Annual Report to Shareholders. Item 6. Selected Financial Data The information required by this item is incorporated by reference to page 17 of the Company's 1999 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated by reference to pages 18 through 37 of the Company's 1999 Annual Report to Shareholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated by reference to pages 35 to 36 of the Company's 1999 Annual Report to Shareholders. Item 8. Financial Statements and Supplementary Data The information required by this item is incorporated by reference to pages 38 through 67 of the Company's 1999 Annual Report to Shareholders. See Item 14 of this report for information concerning financial statements and schedules filed with this report. Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure Not applicable. Page 11 PART III Item 10. Directors and Executive Officers of the Registrant The information relating to directors required by this item is incorporated by reference to pages 5 to 8 of the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders, filed with the Commission on March 13, 2000. Additional information required by Item 10 with respect to executive officers is set forth in Part I, Additional Item hereof. Item 11. Executive Compensation The information required by this item is incorporated by reference to page 10 and pages 14 to 19 of the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders, filed with the Commission on March 13, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference to pages 3 through 7 of the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders, filed with the Commission on March 13, 2000. Item 13. Certain Relationships and Related Transactions None. Page 12 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: (1) The report of independent accountants and the following consolidated financial statements of the Company are incorporated herein by reference to the 1999 Annual Report to Shareholders. Page number references are to the 1999 Annual Report to Shareholders. Page of Annual Report --------------------- UCBH Holdings, Inc. Report of Independent Accountants................................................................38 Consolidated Balance Sheets at December 31, 1999 and 1998........................................39 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997..................................................40 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997..................................................41 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997..................................................42 to 43 Notes to Consolidated Financial Statements.......................................................44 to 66 Unaudited Supplemental Information...............................................................67 (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the Consolidated Financial Statements, or the notes thereto. (3)(a) Exhibits: The exhibits filed as a part of this Form 10-K are as follows (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.* 4.1 Indenture of UCBH Holdings, Inc., dated April 17, 1998, relating to Series B Junior Subordinated Debentures** 4.2 Form of Certificate of Series B Junior Subordinated Debenture** 4.3 Certificate of Trust of UCBH Trust Co.** 4.4 Amended and Restated Declaration of Trust of UCBH Trust Co.** 4.5 Form of Series B Capital Security Certificate for UCBH Trust Co.** 4.6 Form of Series B Guarantee of the Company relating to the Series B Capital Securities** 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*** 13.0 Amended 1999 Annual Report to Shareholders 21.0 Subsidiaries of UCBH Holdings, Inc. (see Item 1 - Business) 23.1 Consent of PricewaterhouseCoopers LLP 27.0 Financial Data Schedule
- -------- * Incorporated herein by reference to the Exhibit of the same number in the Company's Registration Statement on Form S-1 filed with the Commission on July 1, 1998 (SEC File No. 333-58325). ** Incorporated herein by reference to the Exhibit of the same number in the Company's Registration Statement on Form S-4 filed with the Commission on July 1, 1998 (SEC File No. 333-58335). *** Incorporated herein by reference to the Exhibit of the same number in the Company's Form 10-Q for the quarter ended June 30, 1999 filed with the Commission on August 6, 1999 (SEC File No. 0-24947). (b) Reports on Form 8-K None. Page 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: March 10, 2000 UCBH HOLDINGS, INC. By: /s/ Jonathan H. Downing ------------------------------------ Jonathan H. Downing Senior Vice President, Chief Financial Officer, Treasurer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Name Date - ---- ---- /s/ Thomas S. Wu President, Chief Executive Officer March 10, 2000 - --------------------------------------- and Director Thomas S. Wu (principal executive officer) /s/ Jonathan H. Downing Senior Vice President, Chief March 10, 2000 - --------------------------------------- Financial Officer, Treasurer Jonathan H. Downing and Director (principal financial officer) /s/ Sandra Go Vice President March 10, 2000 - --------------------------------------- and Financial Controller Sandra Go (principal accounting officer) /s/ Sau-wing Lam Chairman of the Board of Directors March 10, 2000 - --------------------------------------- Sau-wing Lam /s/ Li-Lin Ko Director March 10, 2000 - --------------------------------------- Li-Lin Ko /s/ Ronald S. McMeekin Director March 10, 2000 - --------------------------------------- Ronald S. McMeekin /s/ Dr. Godwin Wong Director March 10, 2000 - --------------------------------------- Dr. Godwin Wong
Page 14 EX-13 2 SELECTED CONSOLIDATED FINANCIAL DATA Exhibit 13 SELECTED CONSOLIDATED FINANCIAL DATA We are providing the following selected consolidated financial information about us to assist you in your review of the Company. This information is derived from our audited financial statements for each of the fiscal years shown below. The following information is only a summary and you should read it together with our consolidated financial statements and notes included in this Annual Report.
AT DECEMBER 31, ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) FINANCIAL CONDITION AND OTHER DATA: Total assets.................................... $2,284,800 $2,147,332 $1,561,650 $1,474,617 $1,521,699 Net loans....................................... 1,667,192 1,477,226 1,202,095 1,054,686 1,011,909 Securities(1)................................... 512,361 587,557 270,103 343,739 429,005 Deposits........................................ 1,676,148 1,633,895 1,468,987 1,393,125 1,311,604 Guaranteed preferred beneficial interests in junior subordinated debentures................ 30,000 30,000 -- -- -- Borrowings...................................... 449,612 368,000 -- -- 128,600 Long-term debt to affiliates.................... -- -- 20,060 16,736 13,000 Stockholders' equity............................ 110,107 103,638 62,552 54,344 55,457 Nonperforming assets............................ 5,354 6,880 10,266 21,096 22,287 Ratio of equity to assets....................... 4.82% 4.83% 4.01% 3.69% 3.64%
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) OPERATING DATA: Interest income................................. $ 158,683 $ 130,831 $ 107,591 $ 102,964 $ 99,034 Interest expense................................ 87,969 78,393 64,252 63,955 70,196 ---------- ---------- ---------- ---------- ---------- Net interest income............................. 70,714 52,438 43,339 39,009 28,838 Provision for loan losses....................... 5,645 3,412 1,154 1,476 8,777 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses...................................... 65,069 49,026 42,185 37,533 20,061 Noninterest income.............................. 4,075 3,402 3,094 3,397 3,767 SAIF recapitalization assessment................ -- -- -- 7,716(2) -- Noninterest expense............................. 37,198 33,685 32,190 33,697 30,142 ---------- ---------- ---------- ---------- ---------- Income (loss) before taxes...................... 31,946 18,743 13,089 (483) (6,314) Income tax expense (benefit).................... 12,878 7,855 5,790 (177) (3,406) ---------- ---------- ---------- ---------- ---------- Net income (loss)............................... $ 19,068 $ 10,888 $ 7,299 $ (306)(2) $ (2,908) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- OPERATING RATIOS AND OTHER DATA: Return (loss) on average assets................. 0.87% 0.60% 0.47% (0.02)% (0.19)% Return (loss) on average equity................. 18.00 12.52 12.33 (0.48) (4.89) Interest rate spread............................ 3.04 2.72 2.71 2.58 1.85 Net interest margin............................. 3.29 2.95 2.89 2.68 1.96 Efficiency ratio(3)(4).......................... 49.74 60.32 69.33 79.46 92.45 Noninterest expense to average assets(4)........ 1.69 1.84 2.08 2.23 1.98 ASSET QUALITY DATA: Nonperforming assets to total assets............ 0.23% 0.32% 0.66% 1.43% 1.46% Nonperforming loans to total gross loans........ 0.27 0.41 0.81 1.83 2.00 Allowance for loan losses to total gross loans......................................... 1.16 1.00 1.00 1.10 1.34 Allowance for loan losses to nonperforming loans......................................... 421.05 244.30 123.22 59.98 66.88 Net charge-offs to average gross loans.......... 0.07 0.05 0.06 0.34 0.26 BANK REGULATORY CAPITAL RATIOS: Tier 1 risk-based capital....................... 10.04% 10.42% 9.90% 9.41% 9.21% Total risk-based capital........................ 11.29 11.61 11.15 10.67 10.47 Leverage ratio (Tier 1 capital to total average assets)....................................... 6.58 6.25 5.37 4.90 4.50 EARNINGS PER SHARE: Basic earnings (loss) per share................. $ 2.04 $ 1.30 $ 1.22 $ (0.05) $ (0.48) Diluted earnings (loss) per share............... $ 2.01 $ 1.26 $ 1.05 $ (0.05) $ (0.48)
- ------------------ (1) Includes available for sale securities and held to maturity securities. (2) During 1996, our net income was adversely affected by the one-time SAIF recapitalization assessment which we recognized during the third quarter of the year. Without the SAIF recapitalization assessment, our net income would have been $4.3 million for 1996. (3) Represents noninterest expense divided by the total of our net interest income before provision for loan losses and our noninterest income. (4) During the year ended December 31, 1996, such ratios exclude the one-time SAIF recapitalization assessment. Including the SAIF recapitalization assessment, our efficiency ratio would have been 97.66% and our noninterest expense to average assets would have been 2.74%. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements about the future that may or may not materialize. When we use words like 'anticipate,' 'believe,' 'estimate,' 'may,' 'intend,' or 'expect,' we are speculating about what will happen in the future. The outcome may be materially different from our speculations. We believe that certain factors identified elsewhere in this Annual Report could cause a different outcome. There may also be other factors that could cause a different outcome. The following discussion and analysis is intended to assist in an understanding of the significant factors that influence our financial condition at December 31, 1999 as compared to December 31, 1998. It also analyzes our results of operations for the year ended December 31, 1999 as compared to the year ended December 31, 1998, and for the year ended December 31, 1998 as compared to December 31, 1997. You should read the discussion and analysis together with our financial statements and corresponding notes included in this Annual Report. RESULTS OF OPERATIONS General. Our main source of income is net interest income, which is the difference between our interest income (generally interest paid to us by borrowers and paid on our investments) and our interest expense (generally the interest we paid depositors as well as interest we paid on other borrowings, such as loans from the Federal Home Loan Bank). Changes in the average amount of interest-earning assets (generally loans and investments) we hold as well as in interest-bearing liabilities (generally deposits and other borrowings) we incur during a period affect the amount of net interest income we earn. Changes in the interest rates earned on loans and securities and paid on deposits and other borrowings also affect our net interest income. We also earn income through noninterest income, which is generally made up of commercial banking fees and other fees paid by our customers. In addition to interest expense, our income is impacted by noninterest expenses (primarily our compensation, occupancy and furniture and equipment expenses) and our provision for loan losses. Other factors beyond our control, such as general economic conditions, competition from other financial services companies, changes in interest rates, government and regulatory action and policies, may also significantly affect our results of operations. The Bank operates commercial and consumer lending business segments. Through its Commercial Banking Division, the Bank offers commercial deposit facilities and commercial loans. Included in the loans offered are nonresidential real estate loans, commercial business loans, multifamily real estate loans, construction loans, and Small Business Administration ('SBA') loans. Through the consumer business segment, the Bank offers consumer deposit products including savings accounts, checking accounts and time deposits. The consumer segment also originates residential mortgage (one to four family) loans and home equity lines of credit. Through the Commercial Banking Division, the Bank originates commercial real estate loans for primary users as well as investors. The Bank also originates multifamily mortgages which are generally secured by five to 50 unit residential buildings within its primary market areas. Loans secured by residential buildings in excess of 50 units are underwritten pursuant to the Bank's underwriting standards for commercial nonresidential real estate loans. Both types of commercial real estate loans are generally fixed rate for an initial period of time and then become adjustable-rate loans. They are generally amortized over 25 years or less and have balloon payments in ten years or less. Construction loans are originated primarily for the construction of entry-level and first-time move-up housing within California. We also lend for the construction of commercial and mix-used properties. The Bank focuses on mid-tier builders. Construction loans are generally prime based and are written for a one-year term and may have up to a one-year renewal option. The Bank provides commercial business loans to customers for working capital purposes for accounts receivable and inventory and loans to finance equipment, accounts receivable and inventory. SBA loans are generally secured and have personal guarantees from the borrower. 2 The Bank originates fixed-rate and adjustable-rate residential mortgage (one to four family) loans within its primary market area. These loans are originated through the retail branches. Such mortgage loans are originated primarily for owner-occupants. In addition to these residential mortgage loans, the Bank offers home equity loans. Net Income. We earned $19.1 million in net income for 1999 as compared to $10.9 million in net income in 1998. Our annualized return on average assets was 0.87% in 1999 as compared to 0.60% for 1998, and our return on average equity was 18.00% in 1999 as compared to 12.52% in 1998. We earned $10.9 million in net income for 1998 as compared to $7.3 million for 1997. Our annualized return on average assets was 0.60% for 1998 as compared to 0.47% for 1997, and our annualized return on average equity was 12.52% for 1998 as compared to 12.33% for 1997. From 1997 to the year-end 1999, we have experienced steady growth in net income. The increase in our net income in 1999 as compared to 1998 was primarily the result of an increase in net interest income from $52.4 million to $70.7 million. The reasons for the change in the interest income are discussed below. Partially offsetting this increase in interest income was an increase in the provision for loan losses from $3.4 million in 1998 to $5.6 million in 1999. We provided more allowance for loan losses as a result of the increase in the loan portfolio and as a result of the increase in the concentration of commercial loans and the reduction in the concentration of consumer loans, primarily residential mortgage (one to four family) loans which increase the loan portfolio's risk profile. Also partially offsetting the increase in net interest income was the increase in noninterest expenses from $33.7 million in 1998 to $37.2 million in 1999. The increase in our noninterest expenses, as discussed below, resulted primarily from increases in personnel expenses incurred as a result of the continued expansion of our Commercial Banking Division. The increase in our net income in 1998 as compared to 1997 was mainly the result of an increase in net interest income from $43.3 million to $52.4 million as discussed below and was also due to a reduction in deposit insurance expense from $1.8 million to $889,000 in 1998. Net Interest Income and Net Interest Margin. Our net interest margin, calculated on a fully tax equivalent basis (representing net interest income as a percentage of average interest-earning assets), improved to 3.34% for 1999 from 2.98% for 1998. Our net interest income for 1999 was $70.7 million, an increase of $18.3 million, or 34.9%, from our net interest income of $52.4 million for 1998 primarily as a result of the following factors: o We increased the average balance of loans in our portfolio from $1.30 billion to $1.57 billion. o We increased the average balance of securities in our portfolio from $459.7 million in 1998 to $573.7 million in 1999. o We increased our average yield on loans from 7.79% to 7.86% as a result of originating more higher-yielding commercial loans than residential mortgage (one to four family) loans. Our net interest margin, calculated on a fully tax equivalent basis, improved to 2.98% for 1998 from 2.89% for 1997. Net interest income for 1998 was $52.4 million, an increase of $9.1 million, or 18.0%, from our net interest income of $43.3 million for 1997. Net interest income increased in 1998 primarily as a result of the following factors: o We increased the average balance of loans in our portfolio from $1.12 billion to $1.30 billion. o We increased the average balance of securities in our portfolio from $326.7 million in 1997 to $459.7 million in 1998. o We increased our average yield on securities from 5.72% to 6.21% as a result of purchasing new securities which had higher yields and the prepayment of lower-yielding COFI securities. o We increased our average yield on loans from 7.67% to 7.79% as a result of originating more higher-yielding commercial loans than residential mortgage (one to four family) loans. 3 The following table presents, for the periods indicated, the distribution of our average assets, liabilities and stockholders' equity, as well as the total dollar amounts of interest income from average interest-earning assets and the resultant yields and the dollar amounts of interest expense of average interest-bearing liabilities, expressed both in dollars and rates:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------- AT 1999 1998 DECEMBER 31, ------------------------------------- ---------- 1999 INTEREST ------------ AVERAGE INCOME OR AVERAGE AVERAGE YIELD/COST BALANCE EXPENSE YIELD/COST BALANCE ------------ ---------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans(1)............................................. 8.18% $1,573,071 $ 123,705 7.86% $1,306,496 Securities........................................... 6.28 573,737 34,955 6.09 459,700 Other................................................ 4.25 472 23 4.82 8,631 ---------- --------- ---------- Total interest-earning assets.......................... 7.72 2,147,280 158,683 7.39 1,774,827 Noninterest-earning assets............................. -- 55,607 -- -- 53,892 ---------- --------- ---------- Total assets........................................... 7.45 $2,202,887 $ 158,683 7.20 $1,828,719 --- ---------- --------- ----- ---------- ---------- ---------- Interest-bearing liabilities: Deposits: NOW, checking and money market accounts............ 1.66 $ 136,832 $ 2,498 1.83 $ 106,075 Savings accounts................................... 1.92 247,585 5,047 2.04 216,273 Time deposits...................................... 4.64 1,189,798 54,410 4.57 1,148,010 ---------- --------- ---------- Total deposits....................................... 3.95 1,574,215 61,955 3.94 1,470,358 ---------- --------- ---------- Borrowings........................................... 5.55 420,119 23,201 5.52 186,615 Guaranteed preferred beneficial interests in junior subordinated debentures............................ 9.38 30,000 2,812 9.38 21,080 Long-term debt to affiliates......................... -- -- -- -- 5,985 ---------- --------- ---------- Total interest-bearing liabilities..................... 4.37 2,024,334 87,968 4.35 1,684,038 --- ---------- --------- ----- ---------- Noninterest-bearing deposits........................... 54,639 40,804 Other noninterest-bearing liabilities.................. 17,999 16,929 Stockholders' equity................................... 105,915 86,948 ---------- ---------- Total liabilities and stockholders' equity............. $2,202,887 $1,828,719 ---------- ---------- ---------- ---------- Net interest income/net interest rate spread(2)........ 3.35% $ 70,714 3.04% --- --------- ----- --- --------- ----- Net interest-earning assets/net interest margin(3)..... 3.57% $ 122,947 3.29% $ 90,789 --- ---------- ----- ---------- --- ---------- ----- ---------- Ratio of interest-earning assets to interest-bearing liabilities.......................................... 1.05x 1.06x 1.05x --- --- --- --- --- --- 1997 ------------------------------------- INTEREST INTEREST INCOME OR AVERAGE AVERAGE INCOME OR AVERAGE EXPENSE YIELD/COST BALANCE EXPENSE YIELD/COST --------- ---------- ---------- --------- ---------- Interest-earning assets: Loans(1)............................................. $ 101,823 7.79% $1,123,356 $ 86,141 7.67% Securities........................................... 28,525 6.21 326,728 18,690 5.72 Other................................................ 483 5.60 48,944 2,760 5.64 --------- ---------- --------- Total interest-earning assets.......................... 130,831 7.37 1,499,028 107,591 7.18 Noninterest-earning assets............................. -- -- 45,664 -- -- --------- ---------- --------- Total assets........................................... $ 130,831 7.15 $1,544,692 $ 107,591 6.97 --------- ----- ---------- --------- ----- ---------- Interest-bearing liabilities: Deposits: NOW, checking and money market accounts............ $ 1,640 1.55 $ 100,134 $ 1,392 1.39 Savings accounts................................... 4,918 2.27 212,943 4,834 2.27 Time deposits...................................... 58,332 5.08 1,090,320 55,287 5.07 --------- ---------- --------- Total deposits....................................... 64,890 4.41 1,403,397 61,513 4.38 --------- ---------- --------- Borrowings........................................... 10,919 5.85 16,551 914 5.52 Guaranteed preferred beneficial interests in junior subordinated debentures............................ 1,985 9.38 -- -- -- Long-term debt to affiliates......................... 599 10.01 18,398 1,825 9.92 --------- ---------- --------- Total interest-bearing liabilities..................... 78,393 4.65 1,438,346 64,252 4.47 --------- ----- ---------- --------- ----- Noninterest-bearing deposits........................... 33,780 Other noninterest-bearing liabilities.................. 13,358 Stockholders' equity................................... 59,208 ---------- Total liabilities and stockholders' equity............. $1,544,692 ---------- ---------- Net interest income/net interest rate spread(2)........ $ 52,438 2.72% $ 43,339 2.71% --------- ----- --------- ----- --------- ----- --------- ----- Net interest-earning assets/net interest margin(3)..... 2.95% $ 60,682 2.89% ----- ---------- ----- ----- ---------- ----- Ratio of interest-earning assets to interest-bearing liabilities.......................................... 1.04x --- ---
- ------------------ (1) Nonaccrual loans are included in the table for computation purposes, but the foregone interest on such loans is excluded. (2) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average interest-earning assets. 4 Our net interest income is affected by changes in the amount and mix of our interest-earning assets and interest-bearing liabilities, referred to as 'volume changes.' It is also affected by changes in the yields we earn on interest-earning assets and rates we pay on interest-bearing deposits and other borrowed funds, referred to as 'rate changes.' The following table sets forth the changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities, and the amount of change that is attributable to volume changes and rate changes for the years indicated. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.
FOR THE YEAR ENDED FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, THE YEAR ENDED DECEMBER 31, 1998 1997 ------------------------------- ------------------------------ VOLUME RATE NET VOLUME RATE NET ------- ------- ------- ------- ------ ------- (DOLLARS IN THOUSANDS) Interest income: Loans.................................. $20,955 $ 927 $21,882 $14,252 $1,430 $15,682 Securities............................. 6,937 (507) 6,430 8,140 1,695 9,835 Other.................................. (401) (59) (460) (2,255) (22) (2,277) ------- ------- ------- ------- ------ ------- Total interest income on interest-earning assets................................. 27,491 361 27,852 20,137 3,103 23,240 ------- ------- ------- ------- ------ ------- Interest expense: Deposits: NOW, checking, and money market accounts.......................... 531 327 858 108 140 248 Savings accounts.................... 453 (324) 129 76 8 84 Time deposits....................... 2,246 (6,168) (3,922) 2,931 114 3,045 Borrowings............................. 12,860 (577) 12,283 9,947 58 10,005 Guaranteed preferred beneficial interests in junior subordinated debentures.......................... 827 -- 827 1,985 -- 1,985 Long-term debt to affiliates........... (599) -- (599) (1,241) 15 (1,226) ------- ------- ------- ------- ------ ------- Total interest expense on interest- bearing liabilities.................... 16,318 (6,742) 9,576 13,806 335 14,141 ------- ------- ------- ------- ------ ------- Increase in net interest income.......... $11,173 $ 7,103 $18,276 $ 6,331 $2,768 $ 9,099 ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- ------ -------
Provision for Loan Losses. We make provisions for loan losses to bring our allowance for loan losses to a level that we believe is appropriate. We base our determination of the appropriate level on such factors as our historical loss experience, the volume and type of loans we are making, the amount and trends relating to our delinquent and nonperforming loans, regulatory policies, general economic conditions and other factors relating to the collectibility of loans in our portfolio. The amount we provide for loan losses is charged to earnings. For the year ended December 31, 1999, our provision for loan losses was $5.6 million, an increase of $2.2 million from our provision of $3.4 million for the previous year. The provision for loan losses increased in 1999 as a result of the Bank originating more commercial real estate, commercial business and construction loans and a resulting increase in the risk profile inherent within the loan portfolio, and reducing the relative level of residential mortgage (one to four family) loans and as a result of increasing the overall size of the loan portfolio. For the year ended December 31, 1998, our provision for loan losses was $3.4 million, an increase of $2.3 million from our provision of $1.2 million for the previous year as a result of increasing the loan portfolio balance and originating more commercial real estate, commercial business, construction and multifamily loans with an increased inherent risk. 5 Noninterest Income. Below we set forth the makeup of our noninterest income for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) Commercial banking fees.................................................... $ 2,071 $ 1,499 $ 1,104 Service charges on deposit accounts........................................ 840 813 761 Gain on sale of servicing rights........................................... -- 235 1,165 Gain (loss) on loan sales.................................................. 784 308 (204) Gain (loss) on sale of securities.......................................... -- 6 (806) Loan servicing income...................................................... 379 400 601 Miscellaneous income....................................................... 1 141 473 --------- --------- --------- Total noninterest income................................................... $ 4,075 $ 3,402 $ 3,094 --------- --------- --------- --------- --------- ---------
Our noninterest income increased by $673,000, or 19.8%, to $4.1 million for the year ended December 31, 1999, from $3.4 million for the preceding year. The increase is primarily the result of collecting more commercial banking fees during 1999 due to the continued growth of our Commercial Banking Division. We also increased our gain on sale of loans from $308,000 in 1998 to $784,000 in 1999 primarily as a result of the sale of SBA loans and the disposition of one problem asset. Our noninterest income increased by $308,000, or 10.0%, to $3.4 million for the year ended December 31, 1998, from $3.1 million for the preceding year. The increase is primarily the result of collecting more fees on checking accounts and collecting more commercial banking fees during 1998 as a result of the continued growth of our Commercial Banking Division. We also increased our gain on sale of loans from a loss of $204,000 in 1997 to a gain of $308,000 in 1998. Noninterest Expense. Below is a table outlining the components of our noninterest expense for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) Personnel.............................................................. $ 18,427 $ 15,720 $ 14,087 Occupancy.............................................................. 4,885 4,975 4,811 Data processing........................................................ 2,084 2,064 2,059 Furniture and equipment................................................ 2,119 2,316 1,902 Deposit insurance...................................................... 938 889 1,798 Communication.......................................................... 425 414 400 Professional fees and contracted services.............................. 2,240 1,870 2,242 Foreclosed assets expense.............................................. 80 62 671 Miscellaneous expense.................................................. 6,000 5,375 4,220 --------- --------- --------- Total noninterest expense.............................................. $ 37,198 $ 33,685 $ 32,190 --------- --------- --------- --------- --------- --------- Efficiency ratio....................................................... 49.74% 60.32% 69.33% Noninterest expenses to average assets................................. 1.69 1.84 2.08
Our noninterest expense increased to $37.2 million for 1999 from $33.7 million for 1998, an increase of 10.4%. The higher expenses in 1999 primarily resulted from a $2.7 million increase in personnel expenses as a result of hiring additional employees for the Commercial Banking Division. Miscellaneous expenses increased from $5.4 million in 1998 to $6.0 million in 1999 largely as a result of increased advertising expenses. 6 Our noninterest expense increased to $33.7 million for 1998 from $32.2 million for 1997, an increase of 4.7%. The higher expenses in 1998 primarily resulted from a $1.6 million increase in personnel expenses as a result of hiring more employees for the Commercial Banking Division. We hired the additional employees to carry out our strategic plan of transforming the Bank from a thrift to a commercial bank. Miscellaneous expenses increased from $4.2 million for 1997 to $5.4 million for 1998, primarily as a result of increases in advertising and printing expenses in conjunction with our charter change to a commercial bank and our name change to United Commercial Bank (formerly United Savings Bank, F.S.B.). Provision for Income Taxes. During 1999, we recorded a $12.9 million provision for income taxes which resulted in an effective tax rate of 40.3%. This effective tax rate is lower than the expected combined federal and state statutory rates of 42.1% primarily due to the effect of municipal securities which are not fully taxable being held for a full year in 1999 in contrast to a partial year for 1998. During 1998, we recorded a $7.9 million provision for income taxes, which resulted in an effective tax rate of 43.8%. FINANCIAL CONDITION We increased the size of our balance sheet from $2.15 billion at December 31, 1998, to $2.28 billion at December 31, 1999. This increase of $137.5 million, or 6.4%, resulted from the increase in the size of our loan portfolio. Our loan portfolio increased from $1.49 billion at December 31, 1998, to $1.69 billion at December 31, 1999. This increase of $194.5 million, or 13.0%, resulted from the growth in commercial loans. The loan originations and year-end balances are discussed in detail below. Our securities portfolio decreased from $587.6 million at December 31, 1998, to $512.4 million at December 31, 1999, a decrease of $75.2 million, or 12.8%, due primarily to the maturities of existing securities. We funded the $137.5 million of new assets by increasing our deposits and borrowings. Our deposits grew by $42.3 million, or 2.6%, to $1.68 billion at December 31, 1999. This deposit growth is discussed in more detail below. We also increased our borrowings by $81.6 million during 1999 to fund the asset growth. The new borrowings were primarily advances from the Federal Home Loan Bank. Loan Portfolio. We originated commercial real estate loans of $255.5 million in 1999 as compared to $129.8 million in 1998. We increased multifamily originations to $135.4 million in 1999 from $54.5 million in 1998. Additionally, we made commitments for commercial loans of $91.4 million in 1999 as compared to $63.8 million in 1998, of which $18.1 million were SBA loans as compared to $11.6 million in 1998. As a result of the decreased emphasis on consumer lending, primarily residential (one to four family), we originated residential mortgage (one to four family) loans of $59.6 million during 1999 as compared with $303.8 million in 1998. As a result of the shrinking profit margins and declining value of loan servicing rights, due to increased competition, we decided in 1996 to increase the emphasis of commercial real estate and commercial business loans and to reduce the origination volume of residential mortgage (one to four family) loans. We closed our mortgage banking division and sold the loan servicing portfolio. We also stopped originating mortgage loans for sale in the secondary market and now only originate residential mortgage (one to four family) loans for portfolio retention. The majority of our residential mortgage (one to four family) loans originated have been limited documentation which requires a higher down payment and less written documentation from the borrower. 7 The table below shows the makeup of our loan portfolio by amount and percentage of total gross loans in each major loan category at the dates indicated:
AT DECEMBER 31, ----------------------------------------------------------------------------------------------- 1999 1998 1997 1996 -------------------- -------------------- -------------------- -------------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % ---------- ------ ---------- ------ ---------- ------ ---------- ------ (DOLLARS IN THOUSANDS) Commercial: Secured by real estate- nonresidential......... $ 435,061 25.77% $ 229,693 15.39% $ 115,366 9.51% $ 123,003 11.54% Secured by real estate- multifamily............ 423,838 25.11 346,967 23.26 339,257 27.97 361,591 33.93 Construction............. 89,710 5.31 61,486 4.12 26,603 2.19 19,892 1.87 Commercial business...... 59,332 3.52 46,240 3.10 21,146 1.74 6,595 0.62 ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total commercial....... 1,007,941 59.71 684,386 45.87 502,372 41.41 511,081 47.96 ---------- ------ ---------- ------ ---------- ------ ---------- ------ Consumer: Residential mortgage (one to four family)... 665,923 39.45 790,789 53.01 691,167 56.98 541,156 50.79 Other.................... 14,248 0.84 16,711 1.12 19,475 1.61 13,315 1.25 ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total consumer......... 680,171 40.29 807,500 54.13 710,642 58.59 554,471 52.04 ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total gross loans......... 1,688,112 100.00% 1,491,886 100.00% 1,213,014 100.00% 1,065,552 100.00% ------ ------ ------ ------ ------ ------ ------ ------ Net deferred loan origination (fees) costs.................... (1,417) 262 1,223 816 ---------- ---------- ---------- ---------- Loans..................... 1,686,695 1,492,148 1,214,237 1,066,368 Allowance for loan losses................... (19,503) (14,922) (12,142) (11,682) ---------- ---------- ---------- ---------- Total net loans........... $1,667,192 $1,477,226 $1,202,095 $1,054,686 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 1995 -------------------- AMOUNT % ---------- ------ Commercial: Secured by real estate- nonresidential......... $ 131,259 12.80% Secured by real estate- multifamily............ 376,398 36.70 Construction............. 6,612 0.64 Commercial business...... -- -- ---------- ------ Total commercial....... 514,269 50.14 ---------- ------ Consumer: Residential mortgage (one to four family)... 507,121 49.45 Other.................... 4,174 0.41 ---------- ------ Total consumer......... 511,295 49.86 ---------- ------ Total gross loans......... 1,025,564 100.00% ------ ------ Net deferred loan origination (fees) costs.................... 44 ---------- Loans..................... 1,025,608 Allowance for loan losses................... (13,699) ---------- Total net loans........... $1,011,909 ---------- ----------
The table below shows new loan commitments during the years indicated:
1999 1998 1997 -------- -------- -------- (DOLLARS IN THOUSANDS) Commercial: Secured by real estate-nonresidential(1)....................................... $255,456 $129,790 $ 23,743 Secured by real estate-multifamily (1)......................................... 135,375 54,500 7,461 Construction................................................................... 179,489 127,329 59,569 Commercial business............................................................ 73,233 52,269 28,568 Small Business Administration.................................................. 18,141 11,550 3,365 -------- -------- -------- Total commercial loans....................................................... 661,694 375,438 122,706 -------- -------- -------- Consumer: Residential mortgage (one to four family)(1)................................... 59,553 303,804 274,824 Other.......................................................................... 9,943 8,550 13,552 -------- -------- -------- Total consumer loans......................................................... 69,496 312,354 288,376 -------- -------- -------- Total commitments................................................................ $731,190 $687,792 $411,082 -------- -------- -------- -------- -------- --------
- ------------------ (1) For nonresidential, multifamily, and residential mortgage (one to four family) loans, substantially all commitments have been funded. 8 Our total loans increased in 1999 to $1.69 billion at December 31, 1999, an increase of 13.0% as compared to the $1.49 billion of gross loans at December 31, 1998. Our gross loans increased during this period as a result of our increased production of commercial business loans. Gross loans increased 22.9% during 1998 from $1.21 billion at December 31, 1997 as a result of increased production of residential mortgages for retention in our portfolio and commercial business loans by the then newly created Commercial Banking Division. As a result of changing the loan origination focus to commercial loans, we are originating more loans which reprice in shorter time periods than the traditional repricing terms of residential mortgage (one to four family) loans. Construction, commercial business loans and SBA loans generally have monthly repricing terms. Commercial real estate loans generally reprice each month or are intermediate fixed, meaning that the loans have interest rates which are fixed for a period, typically five years, and then generally reprice monthly or become due and payable. As a result of the change in the type of loan originations, the loans which reprice monthly increased to $765.4 million at December 31, 1999 from $704.6 million at December 31, 1998. Also, the loans repricing within five to ten years have increased to $245.6 million at December 31, 1999 from $120.1 million at December 31, 1998. The loans which reprice monthly increased to $704.6 million at December 31, 1998 from $685.0 million at December 31, 1997. The loans which reprice within five to ten years increased to $120.1 million at December 31, 1998 from $12.3 million at December 31, 1997. The table below sets forth the estimated maturity of our loan portfolio at December 31, 1999. Adjustable-rate mortgages are shown in the period in which they reprice rather than when they become due. The table does not include the effects of possible prepayments. The rate of loan prepayment varies from time to time, depending upon various factors, including market interest rates.
AT DECEMBER 31, 1999 -------------------------------------------------------------------------------------------- AFTER AFTER AFTER AFTER ONE YEAR THREE YEARS FIVE YEARS TEN YEARS WITHIN THROUGH THROUGH THROUGH THROUGH AFTER ONE YEAR THREE YEARS FIVE YEARS TEN YEARS TWENTY YEARS TWENTY YEARS TOTAL -------- ----------- ----------- ---------- ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Commercial: Secured by real estate- nonresidential.............. $207,325 $13,015 $ 105,201 $ 88,140 $ 21,380 $ -- $ 435,061 Secured by real estate- multifamily................. 259,694 9,860 5,001 117,783 31,500 -- 423,838 Construction.................. 89,710 -- -- -- -- -- 89,710 Commercial business........... 58,946 256 -- -- -- 130 59,332 -------- ----------- ----------- ---------- ------------ ------------ ---------- Total commercial............ 615,675 23,131 110,202 205,923 52,880 130 1,007,941 -------- ----------- ----------- ---------- ------------ ------------ ---------- Consumer: Residential mortgage (one to four family)................ 135,452 76,760 90,947 39,708 156,178 166,878 665,923 Other......................... 14,248 -- -- -- -- -- 14,248 -------- ----------- ----------- ---------- ------------ ------------ ---------- Total consumer.............. 149,700 76,760 90,947 39,708 156,178 166,878 680,171 -------- ----------- ----------- ---------- ------------ ------------ ---------- Total gross loans........... $765,375 $99,891 $ 201,149 $ 245,631 $209,058 $167,008 $1,688,112 -------- ----------- ----------- ---------- ------------ ------------ ---------- -------- ----------- ----------- ---------- ------------ ------------ ---------- Net deferred origination fees... (1,417) ---------- Loans........................... 1,686,695 Allowance for loan losses....... (19,503) ---------- Net loans....................... $1,667,192 ---------- ----------
9 The following table sets forth the dollar amount of all loans and mortgage-backed securities for which final payment is not due or repricing will not occur until after December 31, 2000. The table also shows the amount of loans and mortgage-backed securities which have fixed rates of interest and those which have adjustable rates of interest.
DUE OR REPRICING AFTER DECEMBER 31, 2000 --------------------------------------- FIXED ADJUSTABLE TOTAL ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Commercial: Secured by real estate-nonresidential...................... $ 103,038 $ 124,698 $ 227,736 Secured by real estate-multifamily......................... 158,280 5,864 164,144 Construction............................................... -- -- -- Commercial business........................................ 386 -- 386 ---------- ---------- ---------- Total commercial........................................ 261,704 130,562 392,266 ---------- ---------- ---------- Consumer: Residential mortgage (one to four family).................. 362,763 167,708 530,471 Other...................................................... -- -- -- ---------- ---------- ---------- Total consumer.......................................... 362,763 167,708 530,471 ---------- ---------- ---------- Total loans.................................................. 624,467 298,270 922,737 Mortgage-backed securities................................... 168,118 -- 168,118 ---------- ---------- ---------- Total loans and mortgage-backed securities................... $ 792,585 $ 298,270 $1,090,855 ---------- ---------- ---------- ---------- ---------- ----------
Nonperforming Assets and Other Real Estate Owned. We generally place loans on nonaccrual status when they become 90 days past due, unless the loan is both well secured and in the process of collection. Loans may be placed on nonaccrual status earlier if, in management's opinion, the full and timely collection of principal or interest becomes uncertain. When a loan is placed on nonaccrual status, unpaid accrued interest is charged against interest income. We charge off loans when we determine that collection has become unlikely. Other real estate owned ('OREO') consists of real estate acquired by us through foreclosure. 10 The following table sets forth information regarding our nonperforming assets at the dates indicated.
AT DECEMBER 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Nonaccrual loans: Commercial: Secured by real estate-nonresidential...... $ 3,806 $ 2,663 $ 2,804 $ 8,896 $ 5,445 Secured by real estate- multifamily.............................. -- -- 904 3,496 5,673 Construction............................... 104 104 -- -- -- Commercial business........................ -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total commercial......................... 3,910 2,767 3,708 12,392 11,118 ----------- ----------- ----------- ----------- ----------- Consumer: Residential mortgage (one to four family).. 722 3,341 6,131 7,085 9,366 Other...................................... -- -- 15 -- -- ----------- ----------- ----------- ----------- ----------- Total consumer........................... 722 3,341 6,146 7,085 9,366 ----------- ----------- ----------- ----------- ----------- Total nonaccrual loans......................... 4,632 6,108 9,854 19,477 20,484 Other real estate owned (OREO)................. 722 772 412 1,619 1,803 ----------- ----------- ----------- ----------- ----------- Total nonperforming assets..................... $ 5,354 $ 6,880 $ 10,266 $ 21,096 $ 22,287 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Nonperforming assets to total assets........... 0.23% 0.32% 0.66% 1.43% 1.46% Nonaccrual loans to total loans................ 0.27 0.41 0.81 1.83 2.00 Nonperforming assets to total loans and OREO... 0.32 0.46 0.85 1.98 2.17 Total gross loans.............................. $ 1,686,695 $ 1,492,148 $ 1,214,237 $ 1,066,368 $ 1,025,608 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross income not recognized on nonaccrual loans........................................ $201 $135 $64 $172 $487 Accruing loans contractually past due 90 days or more...................................... -- -- -- -- -- Loans classified as troubled debt restructurings but not included above........ -- 1,251 1,251 -- --
11 When we acquire OREO, we record it at the lower of its carrying value or its fair value less estimated disposal costs. Any write-down of OREO is charged to earnings. During 1999, we reduced the total nonperforming assets to $5.4 million at December 31, 1999 from $6.9 million at December 31, 1998. This reduction of $1.5 million, or 22.2%, resulted from returning loans that had previously been nonperforming to accrual status after a period of sustained performance. During 1998, we reduced total nonperforming assets to $6.9 million as of December 31, 1998 from $10.3 million as of December 31, 1997, a reduction of $3.4 million, or 33.0%. This resulted from loan repayments on loans that were restored to accrual status. During 1999, the number of OREO properties was reduced from two in 1998 to one at December 31, 1999 with a carrying value of $722,000. During 1998, we reduced the number of OREO properties from six at December 31, 1997 to two at December 31, 1998 by selling the foreclosed assets. We have a risk rating process to which all loans in the portfolio are subjected. Criticized loans are classified in the following categories: o 'Special Mention': loans that should not yet be adversely classified, but have credit deficiencies or potential weaknesses that warrant our attention o 'Substandard': loans with one or more well-defined weaknesses which have the distinct possibility that we will sustain some loss if the weaknesses are not corrected o 'Doubtful': loans with the weaknesses of a substandard loan plus such weaknesses which make collection or liquidation in full questionable, based on current information, and have a high probability of loss o 'Loss': loans considered uncollectible The following table sets forth our criticized loans at the dates indicated:
AT DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Special mention loans........................................ $ 833 $ 8,084 $ 7,182 $ 15,902 $ 3,066 Substandard and doubtful loans............................... 10,889 9,638 16,822 19,235 28,462 --------- --------- --------- --------- --------- Total criticized loans..................................... $ 11,722 $ 17,722 $ 24,004 $ 35,137 $ 31,528 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total allowance for loan losses.............................. $ 19,503 $ 14,922 $ 12,142 $ 11,682 $ 13,699 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Special mention loans to total loans......................... 0.05% 0.54% 0.59% 1.49% 0.30% Substandard and doubtful loans to total loans................ 0.65 0.65 1.39 1.80 2.78 Criticized loans to total loans.............................. 0.69 1.19 1.98 3.30 3.07 Allowance for loan losses to substandard and doubtful loans...................................................... 179.11 154.82 72.18 60.73 48.13 Allowance for loan losses to criticized loans................ 166.38 84.20 50.58 33.25 43.45
With the exception of the loans described above, we are not aware of any other loans as of December 31, 1999 where the known credit problems of the borrower lead us to believe they will not comply with their repayment schedule, or that would result in the loan being included in the criticized loan table above at a future date. During 1999 and 1998, we engaged an independent loan review firm to examine the classification of our commercial loan portfolio. This firm is comprised of former bank regulators and former bankers. They made no material recommendation for changes to our classifications as a result of their review. Despite our efforts, it is impossible for us to accurately predict the extent to which economic conditions in our market area may worsen or estimate the full impact that such changes may have on our loan portfolio. We cannot assure you that no other loans will become 90 days or more past due, be placed on nonaccrual status, or become impaired, restructured or OREO in the future. 12 The following table sets forth delinquencies in our loan portfolio at the dates indicated:
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 ------------------------------------------ ------------------------------------------ 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE ------------------- ------------------- ------------------- ------------------- PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE ------ --------- ------ --------- ------ --------- ------ --------- (DOLLARS IN THOUSANDS) Commercial: Secured by real estate- nonresidential...... -- $ -- 2 $ 3,669 -- $ -- 2 $ 2,663 Secured by real estate- multifamily......... -- -- -- -- -- -- -- -- Construction.......... 2 3,523 1 104 1 104 -- -- Commercial business... -- -- -- -- 2 280 -- -- ---- -------- ---- -------- ---- -------- ---- -------- Total commercial.... 2 3,523 3 3,773 3 384 2 2,663 ---- -------- ---- -------- ---- -------- ---- -------- Consumer: Residential mortgage (one to four family)............. 7 833 6 798 4 637 12 1,450 Other................. 11 17 6 8 8 14 13 113 ---- -------- ---- -------- ---- -------- ---- -------- Total consumer...... 18 850 12 806 12 651 25 1,563 ---- -------- ---- -------- ---- -------- ---- -------- Total loans............ 20 $ 4,373 15 $ 4,579 15 $ 1,035 27 $ 4,226 ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- AT DECEMBER 31, 1997 -------- 60-89 DAYS 90 DAYS OR MORE ------ ------------------- PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE ------ --------- ------ --------- Commercial: Secured by real estate- nonresidential...... -- $ -- 2 $ 2,418 Secured by real estate- multifamily......... -- -- -- -- Construction.......... -- -- -- -- Commercial business... -- -- -- -- ---- ------- ---- -------- Total commercial.... -- -- 2 2,418 ---- ------- ---- -------- Consumer: Residential mortgage (one to four family)............. 6 717 16 3,547 Other................. 29 84 23 59 ---- ------- ---- -------- Total consumer...... 35 801 39 3,606 ---- ------- ---- -------- Total loans............ 35 $ 801 41 $ 6,024 ---- ------- ---- -------- ---- ------- ---- --------
At December 31, 1999, delinquent loans were $18.9 million, or 1.12%, of total loans. This compares with delinquent loans of $11.6 million, or 0.78%, of total loans at December 31, 1998. The delinquency ratio on nonresidential mortgage loans decreased during 1999 from 1.44% at December 31, 1998 to 1.20% at December 31, 1999. However, as a result of the growth in the nonresidential mortgage loan portfolio, the delinquent nonresidential mortgage loans increased slightly during 1999 from $2.7 million at December 31, 1998 to $3.7 million at December 31, 1999. At December 31, 1999, and at December 31, 1998 none of the loans included in the $423.8 million portfolio of multifamily real estate loans were delinquent. We reduced the delinquent residential mortgage (one to four family) loans from $2.1 million at December 31, 1998 to $1.6 million at December 31, 1999. We attribute this decrease to a continuing strong California economy as well as our overall credit processes. During 1998, delinquent residential mortgages decreased to $2.1 million from $4.3 million at December 31, 1997. Allowance for Loan Losses. We have established a formal process for establishing an adequate allowance for loan losses. This process results in an allowance that has two components: allocated and unallocated. To determine the allocated component, we arrive at estimates by analyzing certain individual loans (including impaired loans) and analyzing loans in groups. For the loans we analyze individually, we may use third-party information, such as appraisals to help supplement our internal analysis. For loans we analyze in groups, such as residential mortgage (one to four family) loans, we review delinquency trends, charge-off experience, the makeup of our loan portfolio, current economic conditions, regional trends in collateral values, as well as other factors. We use the unallocated portion of the allowance 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 us, our loan portfolio also undergoes an internal asset review, and is examined by our government regulators. We incorporate the results of these examinations into our assessments. Our allowance for loan losses is increased by provisions for loan losses, which are charged against earnings, and is reduced by charge-offs, net of any recoveries. Loans are charged off when they are classified as loss either internally or by our regulators. For any loan which is past due more than 90 days, we will generally charge off the amount by which the recorded loan amount exceeds the value of the property securing the loan, unless the loan is both well secured and in the process of collection. We generally record recoveries of amounts that have been previously charged off only to the extent that we receive cash. 13 While we use all available evidence in determining whether we believe our allowance for loan losses is adequate, future additions to the allowance will be subject to our continuing evaluation of the inherent risks in our portfolio. We may need to make additional provisions for loan losses if the economy declines or asset quality deteriorates. Also, our regulators review our allowance as part of their examinations. They can require us to increase our provision as a result of such examinations. However, we believe that our allowance for loan losses is adequate to provide for estimated losses inherent in our loan portfolio. The following table sets forth information concerning our allowance for loan losses for the dates indicated:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Allowance for loan losses: Balance beginning of period.................................. $14,922 $12,142 $11,682 $13,699 $ 7,550 ------- ------- ------- ------- ------- Provision for loan losses.................................... 5,645 3,412 1,154 1,476 8,777 Charge-offs: Commercial: Secured by real estate-nonresidential.................... 380 359 246 2,604 930 Secured by real estate-multifamily....................... -- -- 13 783 737 Construction............................................. -- -- -- -- -- Commercial business...................................... 689 -- -- -- -- ------- ------- ------- ------- ------- Total commercial....................................... 1,069 359 259 3,387 1,667 ------- ------- ------- ------- ------- Consumer: Residential mortgage (one to four family)................ 9 135 616 949 1,000 Other.................................................... 120 187 194 227 29 ------- ------- ------- ------- ------- Total consumer........................................... 129 322 810 1,176 1,029 ------- ------- ------- ------- ------- Total charge-offs............................................ 1,198 681 1,069 4,563 2,696 ------- ------- ------- ------- ------- Recoveries: Commercial: Secured by real estate-nonresidential.................... -- -- 279 670 -- Secured by real estate-multifamily....................... 114 -- 10 367 -- Construction............................................. -- -- -- -- -- Commercial business...................................... -- -- -- -- 1 ------- ------- ------- ------- ------- Total commercial....................................... 114 -- 289 1,037 1 ------- ------- ------- ------- ------- Consumer: Residential mortgage (one to four family)................ -- 25 52 -- 60 Other.................................................... 20 24 34 33 7 ------- ------- ------- ------- ------- Total consumer......................................... 20 49 86 33 67 ------- ------- ------- ------- ------- Total recoveries............................................. 134 49 375 1,070 68 ------- ------- ------- ------- ------- Balance at end of period..................................... $19,503 $14,922 $12,142 $11,682 $13,699 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Allowance for loan losses to ending loans.................... 1.16% 1.00% 1.00% 1.10% 1.34% Net charge-offs to average loans outstanding................. 0.07 0.05 0.06 0.34 0.26
During 1999, we increased the allowance for loan losses to $19.5 million from $14.9 million at December 31, 1998, an increase of $4.6 million, or 30.7%. This increase was due primarily to the continued growth of the commercial loan portfolio and the resulting increase in the risk profile inherent in the loan portfolio. This increased allowance resulted from a loan loss provision of $5.6 million and net charge-offs of $1.1 million during the year. During 1998, we increased the allowance for loan losses to $14.9 million from $12.1 million at December 31, 1997, an increase of $2.8 million, or 22.9%. This increase was due primarily to the growth in the commercial loan portfolio as a result of our conversion to a commercial bank. This increase resulted from a loan loss provision of $3.4 million and net charge-offs of $632,000 during the year. 14 The following table presents an analysis of the allocation of our allowance for loan losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future loss in any particular category and does not restrict our use of the allowance to absorb losses in other categories.
AT DECEMBER 31, --------------------------------------------------------------------------------------- 1999 1998 1997 1996 -------------------- -------------------- -------------------- -------------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % --------- --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Allocated: Commercial: Secured by real estate- nonresidential......... $ 5,823 25.77% $ 2,847 15.39% $ 1,919 9.51% $ 2,811 11.54% Secured by real estate- multifamily............ 2,919 25.11 2,237 23.26 2,130 27.97 2,533 33.93 Construction............. 2,903 5.31 1,547 4.12 508 2.19 252 1.87 Commercial business...... 1,259 3.52 837 3.10 572 1.74 117 0.62 --------- --------- --------- --------- --------- --------- --------- --------- Total commercial....... 12,904 59.71 7,468 45.87 5,129 41.41 5,713 47.96 --------- --------- --------- --------- --------- --------- --------- --------- Consumer: Residential mortgage (one to four family)........ 1,709 39.45 2,184 53.01 1,982 56.98 1,697 50.79 Other.................... 192 0.84 276 1.12 493 1.61 304 1.25 --------- --------- --------- --------- --------- --------- --------- --------- Total consumer......... 1,901 40.29 2,460 54.13 2,475 58.59 2,001 52.04 --------- --------- --------- --------- --------- --------- --------- --------- Total allocated.............. 14,805 100.00% 9,928 100.00% 7,604 100.00% 7,714 100.00% --------- --------- --------- --------- --------- --------- --------- --------- Unallocated.................. 4,698 4,994 4,538 3,968 --------- --------- --------- --------- Total allowance for loan losses..................... $ 19,503 $ 14,922 $ 12,142 $ 11,682 --------- --------- --------- --------- --------- --------- --------- --------- AT DECEMBER 31, --------------------- 1995 --------------------- AMOUNT % --------- --------- Allocated: Commercial: Secured by real estate- nonresidential......... $ 3,323 12.80% Secured by real estate- multifamily............ 2,384 36.70 Construction............. 98 0.64 Commercial business...... -- -- --------- --------- Total commercial....... 5,805 50.14 --------- --------- Consumer: Residential mortgage (one to four family)........ 2,691 49.45 Other.................... 89 0.41 --------- --------- Total consumer......... 2,780 49.86 --------- --------- Total allocated.............. 8,585 100.00% --------- --------- Unallocated.................. 5,114 --------- Total allowance for loan losses..................... $ 13,699 --------- ---------
15 Securities. Until 1998, we had primarily invested in Freddie Mac and Fannie Mae securities tied to the 11th District Cost of Funds Index, which reprice monthly. In 1998, we used the proceeds from our stock and capital securities private placements to purchase U.S. Government agency mortgage-backed securities, investment grade securities, investment grade municipal bonds and investment grade residential mortgage-backed securities. The following table presents our securities portfolio at the dates indicated:
AT DECEMBER 31, ---------------------------------------------- 1999 1998 --------------------- --------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE --------- -------- --------- -------- (DOLLARS IN THOUSANDS) Investment securities available for sale: Trust preferred securities..................................... $ 103,182 $ 91,270 $ 99,436 $ 97,711 Municipals..................................................... -- -- 43,617 44,464 Other.......................................................... -- -- 1,500 1,500 --------- -------- --------- -------- Total....................................................... $ 103,182 $ 91,270 $ 143,553 $143,675 --------- -------- --------- -------- --------- -------- --------- -------- Mortgage-backed securities available for sale: GNMA........................................................... $ 102,417 $ 97,399 $ 114,403 $115,555 FNMA........................................................... 72,698 69,067 80,660 78,370 Other.......................................................... 73,295 70,719 91,071 91,747 --------- -------- --------- -------- Total....................................................... $ 248,410 $237,185 $ 286,134 $285,672 --------- -------- --------- -------- --------- -------- --------- -------- Investment securities held to maturity: Municipals..................................................... $ 43,633 $ 39,250 $ -- $ -- --------- -------- --------- -------- --------- -------- --------- -------- Mortgage-backed securities held to maturity: FNMA........................................................... $ 91,307 $ 86,395 $ 103,961 $100,645 FHLMC.......................................................... 41,848 39,560 44,218 42,714 Other.......................................................... 7,118 6,790 10,031 9,713 --------- -------- --------- -------- Total....................................................... $ 140,273 $132,745 $ 158,210 $153,072 --------- -------- --------- -------- --------- -------- --------- --------
At December 31, 1999, the carrying value of the securities was $535.5 million and the market value was $500.5 million. The total unrealized loss on these securities was $35.0 million. Of this total, $23.1 million relates to securities which are available for sale. The unrealized $23.1 million loss, net of tax of $9.7 million, is included as a reduction of stockholders' equity. The difference between the carrying value and market value aggregating $11.9 million of securities which are held to maturity has not been recognized in the financial statements as of December 31, 1999. The unrealized losses are the result of movements in market interest rates. 16 The following table presents the carrying value, weighted average yields and contractual maturities of our securities at December 31, 1999:
AT DECEMBER 31, 1999 -------------------------------------------------------------------------------------------- AFTER AFTER ONE YEAR FIVE YEARS THROUGH THROUGH WITHIN ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS -------------------- -------------------- -------------------- -------------------- BOOK WEIGHTED BOOK WEIGHTED BOOK WEIGHTED BOOK WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Investment securities available for sale: Trust preferred securities.............. $ -- --% $ -- --% $ -- --% $ 91,270 8.34% ------ ------- ------ -------- Mortgage-backed securities available for sale: GNMA...................... -- -- -- -- -- -- 97,399 7.05 FNMA...................... -- -- -- -- -- -- 69,067 5.81 Other..................... -- -- -- -- -- -- 70,719 6.77 ------ ------- ------ -------- Total................... -- -- -- -- -- -- 237,185 6.61 ------ ------- ------ -------- Investment securities held to maturity: Municipals................ -- -- -- -- -- -- 43,633 5.03 ------ ------- ------ -------- Mortgage-backed securities held to maturity: FNMA...................... -- -- 1,524 4.82 -- -- 89,783 5.27 FHLMC..................... -- -- -- -- -- -- 41,848 4.38 Other mortgage-backed securities.............. 30 6.50 46 7.79 35 7.38 7,007 6.21 ------ ------- ------ -------- Total................... 30 6.50 1,570 4.91 35 7.38 138,638 5.05 ------ ------- ------ -------- Total securities........... $ 30 6.50 $1,570 4.91 $ 35 7.38 $510,726 6.36 ====== ======= ====== ======== TOTAL -------------------- BOOK WEIGHTED CARRYING AVERAGE VALUE YIELD -------- -------- Investment securities available for sale: Trust preferred securities.............. $ 91,270 8.34% -------- Mortgage-backed securities available for sale: GNMA...................... 97,399 7.05 FNMA...................... 69,067 5.81 Other..................... 70,719 6.77 -------- Total................... 237,185 6.61 -------- Investment securities held to maturity: Municipals................ 43,633 5.03 -------- Mortgage-backed securities held to maturity: FNMA...................... 91,307 5.26 FHLMC..................... 41,848 4.38 Other mortgage-backed securities.............. 7,118 6.23 -------- Total................... 140,273 5.05 -------- Total securities........... $512,361 6.35 -------- --------
17 Deposits. Deposits have traditionally been our primary source of funds to use in lending and investment activities. At December 31, 1999, 72.7% of our deposits were time deposits, 15.7% were savings accounts, and 11.6% were NOW, demand deposit and money market accounts. By comparison, at December 31, 1998, 75.7% of our deposits were time deposits, 14.2% were savings accounts, and 10.1% were NOW, demand deposits and money market accounts. We obtain our deposits primarily from the communities we serve. No material portion of our deposits are from or are dependent upon any one person or industry. At December 31, 1999, less than 2% of our deposits were held by customers located outside of the United States. Additionally, at that date the 100 depositors with the largest aggregate average deposit balances made up less than 15% of our total deposits. Our business is not seasonal in nature. We accept deposits over $100,000 from customers. Included in the figure for time deposits below at December 31, 1999 is $396.7 million of deposits of $100,000 or greater. Such deposits make up 23.7% of total deposits. At December 31, 1999, we did not have any brokered deposits. Our average cost of deposits during 1999 was 3.80% as compared to 4.29% for 1998 and 4.28% for 1997. At December 31, 1999, our average interest rate paid on deposits was 3.80%. The following table presents, by categories, the amount of time deposit accounts as of December 31, 1999 and the time to maturity of the time deposit accounts at December 31, 1999:
PERIOD TO MATURITY FROM DECEMBER 31, 1999 ----------------------------------------- WITHIN ONE THROUGH CERTIFICATE ACCOUNTS ONE YEAR THREE YEARS THEREAFTER AT DECEMBER 31, 1999 - -------------------- ---------- ----------- ---------- -------------------- (DOLLARS IN THOUSANDS) 3.99% or less................................ $ 175,973 $ -- $ -- $ 175,973 4.00% to 4.99%............................... 646,883 4,770 291 651,944 5.00% to 5.99%............................... 375,259 12,172 298 387,729 6.00% to 6.99%............................... 2,264 100 -- 2,364 7.00% to 7.99%............................... -- -- -- -- Over 8.00%................................... -- -- 5 5 ---------- ----------- ---------- -------------------- $1,200,379 $17,042 $594 $1,218,015 ---------- ----------- ---------- -------------------- ---------- ----------- ---------- --------------------
At December 31, 1999, the Bank had $396.7 million in certificate accounts in amounts of $100,000 or more maturing as follows:
MATURITY PERIOD - --------------- AMOUNT ---------------------- (DOLLARS IN THOUSANDS) Three months or less.......................................... $166,712 Over 3 through 6 months....................................... 133,798 Over 6 through 12 months...................................... 94,282 Over 12 months................................................ 1,868 ----------- Total....................................................... $396,660 ----------- -----------
Other Borrowings. Advances may be obtained from the FHLB of San Francisco to supplement our supply of lendable funds. Advances from the FHLB of San Francisco are typically secured by a pledge of our stock in the FHLB of San Francisco, mortgage loans and securities, with a market value at least equal to outstanding advances. At December 31, 1999, we had $421.5 million of advances outstanding and $368.0 million outstanding at December 31, 1998. At December 31, 1999, we had $253.1 million of additional FHLB borrowings we could incur. Included in the $421.5 million of FHLB advances as of December 31, 1999 were $17.0 million of fixed-rate advances for ten years. An additional $216.0 million of the advances had ten-year terms 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 original advance dates. 18 In December of 1998, the Bank entered into the Treasury Investment Program with the Federal Reserve Bank of San Francisco ('FRB'). This borrowing line allows the Bank to utilize deposits made to the U.S. Treasury for federal tax payments until the Treasury needs the funds. This borrowing line must be fully collateralized at all times and at December 31, 1999 the maximum borrowings allowed based on collateral placed with the FRB was approximately $31.5 million. Borrowings outstanding at December 31, 1999 were $28.1 million. Liquidity and Capital Resources. As a financial institution, we must maintain sufficient levels of liquid assets at all times to meet the cash flow needs of our Company. These liquid assets ensure that we have the cash available to pay out deposit withdrawals, meet the credit needs of our customers and be able to take advantage of investment opportunities as they arise. In addition to liquid assets, certain liabilities can provide liquidity as well. Liquid assets can include cash and deposits we have with other banks, federal funds sold and other short-term investments, maturing loans and investments, payments by borrowers of principal and interest on loans, payments of principal and interest on investments and loans sales. Additional sources of liquidity can include increased deposits, lines of credit and other borrowings. At December 31, 1999, we had no outstanding commitments to make and/or purchase mortgage and non-mortgage loans and securities. We also had at that date $1.2 billion of certificates of deposit scheduled to mature within one year. We believe that our liquidity will provide us with sufficient amounts of cash necessary to meet these commitments. Our liquidity may be adversely affected by unexpected withdrawals of deposits, excessive interest rates paid by competitors and other factors. We review our liquidity position regularly in light of our expected growth in loans and deposits. We believe that we are maintaining adequate sources of liquidity to meet our needs. At December 31, 1999, both the Company and the Bank met all of their regulatory capital requirements with a risk-based capital ratio of 11.55% and 11.29%, respectively. Market Risk and Net Portfolio Value. Market risk is the risk of loss of income from adverse changes in prices and rates that are set by the market. We are at risk of changes in interest rates that affect the income we receive on lending and investment activities, as well as the costs associated with our deposits and borrowings. A sudden and substantial change in interest rates may affect our earnings if the rates of interest we earn on our loans and investments do not change at the same speed, to the same extent or on the same basis as the interest rates we pay on our deposits and borrowings. We make it a high priority to actively monitor and manage our exposure to interest rate risk. We accomplish this by first evaluating the interest rate risk that is inherent in the makeup of our assets and liabilities. Then we consider our business strategy, current operating environment, capital and liquidity requirements, as well as our current performance objectives, and determine an appropriate level of risk. Our Board of Directors has adopted guidelines within which we attempt to manage our interest rate risk, trying to minimize to the extent practical our vulnerability to changes in interest rates. Our Board of Directors reviews our interest rate risk exposure quarterly. Our Board of Directors has appointed an Asset/Liability Committee made up of senior management that is responsible for working with the Board of Directors to establish strategies to manage interest rate risk and to evaluate the effectiveness of these strategies. The Committee also attempts to determine the effect that changes in interest rates will have on our portfolio and whether such effects are within the limits set by the Board. We use certain derivative financial instruments, such as interest rate caps, as part of our hedging program, to help mitigate our interest rate risk. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount that is presented on our balance sheet. 19 We also monitor our interest rate sensitivity through the use of a model which estimates the change in our net portfolio value ('NPV') in the event of a range of assumed changes in market interest rates. Net portfolio value is defined as the current market value of our assets, less the current market value of our liabilities, plus or minus the current value of off-balance-sheet items. We estimate current market values through analysis of cash flows. The change in NPV measures our vulnerability to changes in interest rates by estimating the change in the market value of our assets, liabilities and off-balance-sheet items as a result of an instantaneous change in the general level of interest rates. As market interest rates decrease, the average maturities of our loans and investment securities shorten due to quicker prepayments, causing a relatively moderate increase in their value. Our deposit accounts have only relatively minor movements in a declining interest rate environment, since they are primarily short term in nature, resulting in the value of deposits decreasing more quickly than the value of assets increase. The following table lists the percentage change in our net portfolio value assuming an immediate change in interest rates of plus or minus up to 400 basis points from the level at December 31, 1999. All loans and investments presented in this table are classified as held to maturity or available for sale. We had no trading securities at that date.
CHANGE IN INTEREST NET PORTFOLIO VALUE RATES IN BASIS POINTS --------------------------------- (RATE SHOCK) AMOUNT $ CHANGE % CHANGE - ----------------------------------------------------------------------- -------- --------- -------- (DOLLARS IN THOUSANDS) 400............................................................... $ 98,115 $(133,929) -58% 300............................................................... 131,631 (100,413) -43 200**............................................................. 167,442 (64,602) -28 100............................................................... 194,481 (37,563) -16 0................................................................. 232,044 -- -- (100)............................................................. 238,658 6,614 3 (200)............................................................. 223,468 (8,576) -4 (300)............................................................. 194,090 (37,954) -16 (400)............................................................. 159,776 (72,268) -31
- ------------------ ** Denotes rate shock used to compute the NPV capital ratios. As market interest rates rise, the average maturities of our loans and securities lengthen as prepayments decrease. As we have a concentration of loans and securities with interest rates tied to changes in the 11th District Cost of Funds Index, which adjusts to changes in interest rates less frequently than other indexes, the value of these loans and securities decrease when market rates rise. Decreases in the value of these loans and securities occur at a more rapid rate in our NPV model than increases in the value of our deposits. The slow increase in the value of our deposits in a rising interest rate environment is due to the high concentration of time deposits in our deposit base which have terms of one year or less. The NPV model we use has some shortcomings. We have to make certain assumptions that may or may not actually reflect how actual yields and costs will react to market interest rates. For example, the NPV model assumes that the makeup of our interest rate sensitive assets and liabilities will remain constant over the period being measured. Thus, although using such a model can be instructive in providing an indication of the Bank's exposure to interest rate risk, we cannot precisely forecast the effects of a change in market interest rates, and the results indicated by the model are likely to differ from actual results. 20 YEAR 2000 COMPLIANCE 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'), through the bank regulatory agencies, has issued compliance guidelines that require financial institutions to develop and implement plans for addressing the Year 2000 problem. In accordance with the FFIEC guidelines, we developed a comprehensive plan which resulted in timely and adequate modifications of our systems and technology to address our Year 2000 issues. Also included in this Year 2000 plan was a detailed review of the readiness of our service providers, vendors, major fund providers, major borrowers and companies with which we have material investments. As of January 2000, all Y2K sensitive systems were functioning within normal operating parameters. Total expenditures on the project were less than $500,000. Although the Company has not encountered any significant problems nor incurred significant additional expense in conjunction with the Y2K issue, there can be no assurance that the Company and the Bank will not encounter significant Y2K-related problems and/or cost during the course of 2000 or beyond. TRADING PRICE OF COMMON STOCK AND DIVIDENDS On November 5, 1998, the Company's stock began trading on The Nasdaq Stock Market under the ticker symbol 'UCBH'. On December 31, 1999, the stock closed at $20.56. The common stock's high and low bid price for each of the four quarters ended December 31, 1999 and the period November 5, 1998, the date the Company's stock began trading on Nasdaq, and December 31, 1998 were as follows:
1999 1999 1999 1999 1998 FOURTH THIRD SECOND FIRST NOVEMBER 5, 1998 TO QUARTER QUARTER QUARTER QUARTER DECEMBER 31,1998 ------- ------- ------- ------- ------------------- High bid price during quarter.............. $22.63 $20.50 $18.00 $14.38 $ 15.00 Low bid price during quarter............... $17.63 $17.63 $13.19 $13.13 $ 13.13
As of December 31, 1999, there were approximately 1,276 holders of the Company's common stock, which includes the approximate number of holders in street name. The Company did not pay any dividends during 1999. In January 2000, the Board adopted a dividend policy and plans to start declaring dividends in 2000. It is the intention of the Board to continue to pay quarterly dividends on an ongoing basis dependent upon the income and capital levels of the Company and the Bank. However, we cannot assure you that dividends will be paid, or that the dividend amount per share will not decrease. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities,' as amended by SFAS No. 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. 21 [LOGO Omitted] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of UCBH Holdings, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in stockholders' equity and of the cash flows present fairly, in all material respects, the financial position of UCBH Holdings, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - ------------------------------ San Francisco, California February 10, 2000 22 UCBH HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- ASSETS Cash and due from banks............................................................... $ 23,789 $ 15,109 Federal funds sold.................................................................... 500 -- Investment and mortgage-backed securities available for sale, at fair value........... 328,455 429,347 Investment and mortgage-backed securities at cost (fair value $171,995 at December 31, 1999 and $153,072 at December 31, 1998)............................................. 183,906 158,210 Federal Home Loan Bank stock.......................................................... 27,024 20,415 Loans................................................................................. 1,686,695 1,492,148 Allowance for loan losses............................................................. (19,503) (14,922) ---------- ---------- Net loans............................................................................. 1,667,192 1,477,226 ---------- ---------- Accrued interest receivable........................................................... 14,628 13,542 Premises and equipment, net........................................................... 21,064 23,462 Other assets.......................................................................... 18,242 10,021 ---------- ---------- Total assets..................................................................... $2,284,800 $2,147,332 ---------- ---------- ---------- ---------- LIABILITIES Deposits.............................................................................. $1,676,148 $1,633,895 Borrowings............................................................................ 449,612 368,000 Guaranteed preferred beneficial interests in junior subordinated debentures........... 30,000 30,000 Accrued interest payable.............................................................. 3,631 2,440 Other liabilities..................................................................... 15,302 9,359 ---------- ---------- Total liabilities................................................................ 2,174,693 2,043,694 ---------- ---------- Commitments and contingencies STOCKHOLDERS' EQUITY Common stock, $.01 par value, authorized 25,000,000 shares, 9,333,333 shares issued and outstanding at December 31, 1999 and December 31, 1998.......................... 93 93 Additional paid-in capital............................................................ 59,485 59,443 Accumulated other comprehensive income................................................ (13,419) (778) Retained earnings - substantially restricted.......................................... 63,948 44,880 ---------- ---------- Total stockholders' equity............................................................ 110,107 103,638 ---------- ---------- Total liabilities and stockholders' equity....................................... $2,284,800 $2,147,332 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. 23 UCBH HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Interest income: Loans...................................................................... $ 123,705 $ 101,823 $ 86,141 Funds sold and securities purchased under agreements to resell............. 23 483 2,760 Investment and mortgage-backed securities.................................. 34,955 28,525 18,690 ---------- ---------- ---------- Total interest income................................................... 158,683 130,831 107,591 ---------- ---------- ---------- Interest expense: Deposits................................................................... 61,955 64,890 61,513 Short-term borrowings...................................................... 10,390 3,313 914 Guaranteed preferred beneficial interests in junior subordinated debentures.............................................................. 2,812 1,985 -- Long-term borrowings....................................................... 12,812 7,606 -- Long-term debt to affiliates............................................... -- 599 1,825 ---------- ---------- ---------- Total interest expense.................................................. 87,969 78,393 64,252 ---------- ---------- ---------- Net interest income..................................................... 70,714 52,438 43,339 Provision for loan losses.................................................... 5,645 3,412 1,154 ---------- ---------- ---------- Net interest income after provision for loan losses..................... 65,069 49,026 42,185 ---------- ---------- ---------- Noninterest income: Commercial banking fees.................................................... 2,071 1,499 1,104 Service charges on deposits................................................ 840 813 761 Gain on sale of loans, securities and servicing rights..................... 784 549 155 Loan servicing income...................................................... 379 400 601 Miscellaneous income....................................................... 1 141 473 ---------- ---------- ---------- Total noninterest income................................................ 4,075 3,402 3,094 ---------- ---------- ---------- Noninterest expense: Personnel.................................................................. 18,427 15,720 14,087 Occupancy.................................................................. 4,885 4,975 4,811 Data processing............................................................ 2,084 2,064 2,059 Furniture and equipment.................................................... 2,119 2,316 1,902 Professional fees and contracted services.................................. 2,240 1,870 2,242 Deposit insurance.......................................................... 938 889 1,798 Communication.............................................................. 425 414 400 Foreclosed assets.......................................................... 80 62 671 Miscellaneous expense...................................................... 6,000 5,375 4,220 ---------- ---------- ---------- Total noninterest expense............................................... 37,198 33,685 32,190 ---------- ---------- ---------- Income before taxes.......................................................... 31,946 18,743 13,089 Income tax expense........................................................... 12,878 7,855 5,790 ---------- ---------- ---------- Net income.............................................................. $ 19,068 $ 10,888 $ 7,299 ---------- ---------- ---------- ---------- ---------- ---------- Basic earnings per share..................................................... $ 2.04 $ 1.30 $ 1.22 ---------- ---------- ---------- ---------- ---------- ---------- Diluted earnings per share................................................... $ 2.01 $ 1.26 $ 1.05 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. 24 UCBH HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL --------------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' SHARES AMOUNTS CAPITAL INCOME(1) EARNINGS EQUITY ---------- ------- ---------- ------------- -------- ------------- Balance at December 31, 1996..... 6,000,000 $ 10 $ 30,278 $ (2,637) $ 26,693 $ 54,344 Net income..................... 7,299 7,299 Other comprehensive income, net of tax (1)................... 909 909 Comprehensive income........... ---------- ------- ---------- ------------- -------- ------------- Balance at December 31, 1997..... 6,000,000 $ 10 $ 30,278 (1,728) 33,992 62,552 Net income..................... 10,888 10,888 Other comprehensive income, net of tax (1)................... 950 950 Comprehensive income........... Conversion of long-term debt to affiliates to common stock... 1,974,000 3 20,597 20,600 Common stock issued............ 9,333,333 93 128,555 128,648 Common stock redeemed.......... (7,974,000) (13) (119,987) (120,000) ---------- ------- ---------- ------------- -------- ------------- Balance at December 31, 1998..... 9,333,333 93 59,443 (778) 44,880 103,638 Net income..................... 19,068 19,068 Other comprehensive income, net of tax (1)................... (12,641) (12,641) Comprehensive income........... Other contributed capital...... 42 42 ---------- ------- ---------- ------------- -------- ------------- Balance at December 31, 1999..... 9,333,333 $ 93 $ 59,485 $ (13,419) $ 63,948 $ 110,107 ---------- ------- ---------- ------------- -------- ------------- ---------- ------- ---------- ------------- -------- ------------- COMPREHENSIVE INCOME ------------- Balance at December 31, 1996..... Net income..................... $ 7,299 Other comprehensive income, net of tax (1)................... 909 ------------- Comprehensive income........... $ 8,208 ------------- ------------- Balance at December 31, 1997..... Net income..................... $10,888 Other comprehensive income, net of tax (1)................... 950 ------------- Comprehensive income........... $11,838 ------------- ------------- Conversion of long-term debt to affiliates to common stock... Common stock issued............ Common stock redeemed.......... Balance at December 31, 1998..... Net income..................... $19,068 Other comprehensive income, net of tax (1)................... (12,641) ------------- Comprehensive income........... $ 6,427 ------------- ------------- Other contributed capital...... Balance at December 31, 1999.....
- ------------------ (1) Accumulated Other Comprehensive Income includes after tax net unrealized gains (losses) on securities available for sale. The accompanying notes are an integral part of these financial statements. 25 UCBH HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 1999 1998 1997 --------- --------- --------- Operating activities: Net income.................................................................. $ 19,068 $ 10,888 $ 7,299 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Provision for loan losses................................................. 5,645 3,412 1,154 Increase in accrued interest receivable................................... (1,086) (4,948) (592) Depreciation and amortization of premises and equipment................... 2,607 2,643 2,254 Decrease (increase) in other assets....................................... 1,663 (1,826) 2,808 Increase (decrease) in accrued interest payable........................... 1,191 1,988 (49) Gain on sale of loans, securities and other assets........................ (784) (845) (556) Other, net................................................................ 8,674 447 (699) --------- --------- --------- Net cash provided by operating activities............................... 36,978 11,759 11,619 --------- --------- --------- Investing activities: Investments and mortgage-backed securities, held to maturity: Principal payments and maturities......................................... 17,936 27,018 37,980 Purchases................................................................. (6,165) (5,678) (200) Investments and mortgage-backed securities, available for sale: Principal payments and maturities......................................... 40,035 21,164 12,124 Purchases................................................................. (6,012) (370,405) -- Sales..................................................................... -- 5,476 23,495 Loans purchased............................................................. (123) (36,447) (44,416) Loans originated, net of principal collections.............................. (207,748) (262,431) (151,373) Proceeds from the sale of loans............................................. 11,258 18,181 43,350 Purchases of premises and other equipment................................... (1,031) (2,414) (3,453) Proceeds from the sale of other assets...................................... 187 1,937 8,146 --------- --------- --------- Net cash used in investment activities.................................... (151,663) (603,599) (74,347) --------- --------- --------- Financing activities: Net increase (decrease) in NOW, checking and savings accounts............... 61,544 51,606 (90) Net (decrease) increase in time deposits.................................... (19,291) 113,302 75,952 Increase in long-term borrowings............................................ -- 233,000 -- Net increase in short-term borrowings....................................... 81,612 135,000 -- Net (decrease) increase in long-term debt to affiliates..................... -- (20,060) 3,325 Proceeds from issuance of common stock...................................... -- 29,248 -- Proceeds from issuance of guaranteed preferred beneficial interests in junior subordinated debentures............................................ -- 30,000 -- --------- --------- --------- Net cash provided by financing activities................................. 123,865 572,096 79,187 --------- --------- --------- Increase (decrease) in cash and cash equivalents.............................. 9,180 (19,744) 16,459 Cash and cash equivalents at the beginning of the year........................ 15,109 34,853 18,394 --------- --------- --------- Cash and cash equivalents at the end of the year.............................. $ 24,289 $ 15,109 $ 34,853 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. 26 UCBH HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 1999 1998 1997 --------- --------- --------- Supplemental disclosure of cash flow information: Cash paid during the year for interest...................................... $ 86,778 $ 76,405 $ 62,475 Cash paid during the year for income taxes.................................. 6,956 5,748 4,083 Supplemental schedule of noncash investing and financing activities: Real estate acquired through foreclosure.................................... 115 1,899 4,260 Securities transferred to held to maturity.................................. 43,624 -- -- Receivable resulting from sale of servicing rights.......................... -- -- 371 Long-term debt resulting from refinancing of long-term debt to affiliates... -- -- 15,048
The accompanying notes are an integral part of these financial statements. 27 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES Organization UCBH Holdings, Inc. ('the Company'), is a bank holding company that conducts its business through its principal subsidiary, United Commercial Bank ('United' or 'the Bank'), a California state-chartered commercial bank. United offers a full range of commercial and consumer banking products through its retail branches and other banking offices in California. Principles of Consolidation and Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Substantially all loans are originated for portfolio and held for investment. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the December 31, 1999 presentation. On April 17, 1998, the Company completed a 6,000-for-1 stock split. Accordingly, the financial statements for all years 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. Risks and Uncertainties In the normal course of its business, the Company encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, than its interest-earning assets. Incorporated into interest rate risk is prepayment risk. Prepayment risk is the risk associated with the prepayment of assets, and the write-off of premiums associated with those assets, should interest rates fall dramatically. Credit risk is the risk of default, primarily in the Company's loan portfolio that results from the borrowers' inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of securities, the value of collateral underlying loans receivable and the valuation of real estate owned. The Company is subject to the regulations of various governmental agencies. These regulations change significantly from period to period. Such regulations can also restrict the growth of the Company and United as a result of capital requirements. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions. Such changes may result from the regulators' judgment based on information available to them at the time of their examination. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash and noninterest-bearing deposits, federal funds sold and securities purchased under agreements to resell. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities when purchased of three months or less to be cash equivalents. 28 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES--(CONTINUED) Securities Purchased Under Agreements to Resell The Company periodically purchases securities under agreements to resell (repurchase agreements). The amounts advanced under such agreements represent short-term loans. During the agreement period, the securities are maintained by the dealer under a written custodial agreement that explicitly recognizes the Company's interest in the securities. Investment and Mortgage-backed Securities In accordance with Statement of Financial Accounting Standards No. 115 (SFAS No. 115) 'Accounting for Certain Investments in Debt and Equity Securities,' the Company has designated a portion of the investment and mortgage-backed securities portfolio as 'held to maturity' securities. As such, this portion of the portfolio is carried at cost, adjusted for the amortization of premiums and accretion of discounts. Cost is determined on a specific identification basis. Inasmuch as the Company has the ability and intent to hold the 'held to maturity' securities in its portfolio until maturity, the carrying value has not been adjusted to reflect decreases in market value from amortized cost, if any. Also in accordance with SFAS No. 115, the Company has designated a portion of the investment and mortgage-backed securities portfolio as 'available for sale.' Such securities are carried at fair value. Fair value is the quoted market price. Unrealized holding gains or losses for 'available for sale' securities are excluded from earnings and reported in a separate component of stockholders' equity, net of tax. Premiums and discounts on investment and mortgage-backed securities are amortized against interest income, using the interest method, with the amortization period extending to the maturity date of the securities. Gains or losses on the sale of securities are recognized when sold. The Company does not maintain a trading account for securities. Loans Loans are carried at the principal balance outstanding adjusted for the amortization of premiums and the accretion of discounts. Premiums and discounts are recognized as an adjustment of loan yield by the interest method based on the contractual term of the loans. Interest is accrued as earned. Loans are generally placed on nonaccrual status when the payments become 90 days past due, or earlier if, in management's opinion, the full and timely collection of principal or interest becomes uncertain. Any accrued and unpaid interest on such loans is reversed and charged against current income. The Company recognizes interest income on nonaccrual loans to the extent received in cash. However, where there is doubt regarding the ultimate collectibility of the loan principal, cash receipts, whether designated as principal or interest, are applied to reduce the carrying value of the loan. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the loan yield over the contractual life of the loan. Amortization of deferred loan fees is discontinued on nonperforming loans. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. When evaluating loans for possible impairment, the Company makes an individual assessment for impairment when and while such loans are on nonaccrual status, or the loan has been restructured. When a loan has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the primary remaining source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by estimated costs to sell, will be used in place of discounted cash flows. The Company does not apply the loan-by-loan evaluation process described above to large groups of smaller balance homogeneous loans that are evaluated collectively for impairment, such as residential mortgage (one to four family) loans, home equity, and other consumer loans. 29 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES--(CONTINUED) If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. The Company's charge-off policy with respect to impaired loans is similar to its charge-off policy for all loans. Specifically, loans are charged off in the month in which they are considered uncollectible. Allowance for Loan Losses The allowance for loan losses is based on management's continuous evaluation of various factors affecting collectibility of the loan portfolio. These factors include, but are not limited to, changes in the composition of the portfolio, current and forecasted economic conditions, overall portfolio quality, review of specific problem loans, and historical loan loss experience. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the period in which they become known. The allowance is increased by provisions charged to expense and reduced by loan losses, net of recoveries. The determination of the allowance for loan losses is based on estimates that are susceptible to changes in the economic environment and market conditions. Management believes that, as of December 31, 1999 and 1998, the allowance for loan losses is adequate based on information currently available. If the strength of the economy in the Company's principal market areas is not sustainable, the Company's loan portfolios could be adversely affected and higher charge-offs and increases in nonperforming assets could result. Such an adverse impact could also require a larger allowance for loan losses. Loan Servicing Assets Servicing assets consist of originated mortgage servicing rights and are included in other assets. These rights are recorded based on the relative fair values of the servicing rights and underlying loans and are amortized over the period of the related loan servicing income stream. Amortization of these rights is reflected in the statement of income under the caption of loan servicing fees. The Company assesses servicing assets for impairment in accordance with the provisions of SFAS No. 125. For the years presented, servicing assets and the related amortization were not material. Premises and Equipment Premises and equipment are carried at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization are determined on a straight-line basis over the lesser of the estimated useful lives or the terms of the leases. Terms range from three to ten years for furniture, equipment, and computer software, and from forty to fifty years for premises. Other Real Estate Owned ('OREO') Foreclosed assets (other real estate owned) consist of properties acquired through, or in lieu of, foreclosure and are carried at the lower of cost or fair value (less estimated selling costs), and are included in other assets. Cost includes the unpaid loan balance adjusted for applicable accrued interest, unamortized deferred loan fees and acquisition costs. In the event that the fair value (less estimated selling costs) is less than cost at the time of acquisition, the shortfall is charged to the allowance for loan losses. Subsequent write-downs, if any, and disposition gains and losses are reflected as charges to current operations. 30 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES--(CONTINUED) Goodwill Goodwill balances included in other assets are not significant and are amortized over seven years. Securities Sold Under Agreements to Repurchase The Company periodically enters into sales of securities under agreements to repurchase (reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are treated as financing. Accordingly, the securities underlying the agreement remain in the asset accounts and the obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheets. The securities underlying the agreements are delivered to the dealers who arrange the transactions. Under some agreements, the dealers may sell, lend, or otherwise dispose of the securities to other parties and agree to resell to the Company substantially identical securities at the maturities of the agreements. Interest Rate Cap Agreements The Company periodically enters into interest rate cap agreements as a means of managing its interest rate exposure. Premiums paid on cap agreements are amortized over the life of the agreements. The results of cap transactions are recognized currently as an adjustment to interest expense. Accounting for Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), 'Accounting for Income Taxes.' SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The Company provides a valuation allowance against net deferred tax assets to the extent that realization of the assets is not considered more likely than not. The Company and United file a consolidated federal income tax return and a combined California tax return. Earnings Per Share In accordance with SFAS No. 128, 'Earnings per Share,' which specifies the computation, presentation and disclosure requirements for earnings per share ('EPS'), the Company computes basic EPS 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. Transfers of Financial Assets The Company accounts for transfers of financial assets in accordance with SFAS No. 125, 'Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities.' SFAS No. 125 requires application of a financial component's approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The statement also distinguishes transfers of financial assets that are sales from transfers of financial assets that are secured borrowings. 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 decision 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 results of operations or consolidated financial position as previously reported. 31 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities,' as amended by SFAS No. 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. 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The Bank is required to maintain a percentage of its deposits as reserves either in cash or on deposit at the Federal Reserve Bank. As of December 31, 1999 and 1998, the reserve requirements were $4.4 million and $2.4 million, respectively. 4. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL Securities purchased under agreements to resell averaged $403,000 and $8.4 million during 1999 and 1998, respectively. There were no amounts outstanding at any month end in 1999. The maximum amounts outstanding at any month end during 1998 was $25.0 million. There were no securities purchased under agreement to resell at December 31, 1999 and 1998. 5. INVESTMENT AND MORTGAGE-BACKED SECURITIES The amortized cost and approximate market value of investment securities and mortgage-backed securities classified as available for sale and held to maturity at December 31, 1999 and 1998 are shown below (dollars in thousands):
1999 ------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- -------- Investment securities available for sale: Trust Preferred Securities..................................... $ 103,182 $ -- $ 11,912 $ 91,270 --------- ---------- ---------- -------- Mortgage-backed securities available for sale: GNMA........................................................... 102,417 -- 5,018 97,399 FNMA........................................................... 72,698 -- 3,631 69,067 Other.......................................................... 73,295 -- 2,576 70,719 --------- ---------- ---------- -------- Total mortgage-backed securities available for sale......... 248,410 -- 11,225 237,185 --------- ---------- ---------- -------- Total investment and mortgage-backed securities available for sale........................................................... $ 351,592 $ -- $ 23,137 $328,455 --------- ---------- ---------- -------- --------- ---------- ---------- -------- Investment securities held to maturity: Municipal Securities........................................... $ 43,633 $ -- $ 4,383 $ 39,250 --------- ---------- ---------- -------- Mortgage-backed securities held to maturity: FNMA........................................................... 91,307 -- 4,912 86,395 FHLMC.......................................................... 41,848 -- 2,288 39,560 Other.......................................................... 7,118 -- 328 6,790 --------- ---------- ---------- -------- Total mortgage-backed securities held to maturity.............. 140,273 -- 7,528 132,745 --------- ---------- ---------- -------- Total investment and mortgage-backed securities held to maturity....................................................... $ 183,906 $ -- $ 11,911 $171,995 --------- ---------- ---------- -------- --------- ---------- ---------- --------
32 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. INVESTMENT AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
1998 ------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- -------- Investment securities available for sale: Trust Preferred Securities..................................... $ 99,436 $ -- $1,725 $ 97,711 Municipal Securities........................................... 43,617 847 -- 44,464 Other.......................................................... 1,500 -- -- 1,500 --------- ---------- ---------- -------- Total investment securities available for sale.............. 144,553 847 1,725 143,675 --------- ---------- ---------- -------- Mortgage-backed securities available for sale: GNMA........................................................... 114,403 1,152 -- 115,555 FNMA........................................................... 80,660 -- 2,290 78,370 Other.......................................................... 91,071 676 -- 91,747 --------- ---------- ---------- -------- Total mortgage-backed securities available for sale......... 286,134 1,828 2,290 285,672 --------- ---------- ---------- -------- Total investment and mortgage-backed securities available for sale........................................................... $ 430,687 $2,675 $4,015 $429,347 --------- ---------- ---------- -------- --------- ---------- ---------- -------- Mortgage-backed securities held to maturity: FNMA........................................................... $ 103,961 $ -- $3,316 $100,645 FHLMC.......................................................... 44,218 -- 1,504 42,714 Other.......................................................... 10,031 -- 318 9,713 --------- ---------- ---------- -------- Total mortgage-backed securities held to maturity................ $ 158,210 $ -- $5,138 $153,072 --------- ---------- ---------- -------- --------- ---------- ---------- --------
During 1998, United purchased $368.9 million of securities in conjunction with a leverage strategy which was adopted to leverage the capital which was raised in April 1998. Included in the security purchases were $120.4 million of GNMA securities, $99.9 million of AAA rated fifteen-year mortgage-backed securities, $105.0 million of municipal bonds and $43.6 million of trust preferred securities. The average yield on the securities purchased was 6.73%. The interest income on the municipal securities which were purchased during 1998 and included in the 1999 and 1998 results of operations were the stated yields of 5.03% and 5.00%, respectively. The tax equivalent yields on the securities were 7.46% and 7.41%, respectively. 33 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. INVESTMENT AND MORTGAGE-BACKED SECURITIES--(CONTINUED) As of December 31, 1999, remaining maturities on mortgage-backed securities classified as held to maturity and available for sale were as follows (dollars in thousands):
1999 --------------------- AMORTIZED MARKET COST VALUE --------- -------- Available for sale: Investment securities available for sale After ten years.................................................. $ 103,182 $ 91,270 Mortgage-backed securities available for sale After ten years.................................................. 248,410 237,185 --------- -------- Total investment and mortgage-backed securities available for sale............................................................ $ 351,592 $328,455 --------- -------- --------- -------- Held to maturity: Investment securities held to maturity After ten years.................................................. $ 43,633 $ 39,250 --------- -------- Mortgage-backed securities held to maturity: In one year or less.............................................. 30 30 After one year through five years................................ 1,570 1,510 After five years through ten years............................... 35 35 After ten years.................................................. 138,638 131,170 --------- -------- Total mortgage-backed securities held to maturity......................................................... $ 140,273 $132,745 --------- -------- Total investment and mortgage-backed securities held to maturity............................................................ $ 183,906 $171,995 --------- -------- --------- --------
Approximately $386.8 million and $448.5 million of mortgage-backed securities have been pledged to secure contractual arrangements entered into by the Company at December 31, 1999 and 1998, respectively. No available for sale securities were sold in 1999. Proceeds from the sale of available for sale securities during 1998 and 1997 totaled $5.5 million and $23.4 million, respectively. Gross realized losses totaled $6,000 in 1998 and $806,000 in 1997. There were no mortgage-backed securities sold under agreements to repurchase as of December 31, 1999 or 1998 or at any time during 1999. When the Company enters into these transactions, the obligations generally mature within one year and generally represent agreements to repurchase the same securities. 34 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. LOANS As of December 31, 1999 and 1998, the composition of the loan portfolio was as follows (dollars in thousands):
1999 1998 ------------ ------------ Commercial: Secured by real estate-nonresidential........................... $ 435,061 $ 229,693 Secured by real estate-multifamily.............................. 423,838 346,967 Construction.................................................... 89,710 61,486 Commercial business............................................. 59,332 46,240 ------------ ------------ Total commercial loans............................................ 1,007,941 684,386 ------------ ------------ Consumer: Residential mortgage (one to four family)....................... 665,923 790,789 Other........................................................... 14,248 16,711 ------------ ------------ Total consumer loans.............................................. 680,171 807,500 ------------ ------------ Gross loans....................................................... 1,688,112 1,491,886 Net deferred loan (fees) costs.................................... (1,417) 262 ------------ ------------ Loans............................................................. 1,686,695 1,492,148 Allowance for loan losses......................................... (19,503) (14,922) ------------ ------------ Net loans......................................................... $ 1,667,192 $ 1,477,226 ------------ ------------ ------------ ------------
In the table above, construction loans are presented net of undrawn commitments of $118.1 million and $121.3 million at December 31, 1999 and 1998, respectively. As of December 31, 1999, loans at fixed interest rates amounted to $628.0 million, and loans at variable interest rates amounted to $1.06 billion. As of December 31, 1999, the portfolio above contained $765.4 million of loans that were interest-rate sensitive within one year, $301.0 million from one to five years, $245.6 million from five to ten years, $209.1 million from ten to twenty years and $167.0 million over twenty years. Loans of approximately $4.6 million and $6.1 million were on nonaccrual status at December 31, 1999 and 1998, respectively. As of December 31, 1999, residential mortgage (one to four family) and multifamily loans with a book value and market value of $982.0 million were pledged to secure FHLB advances (see Note 9). The Company serviced real estate loans for others of $20.1 million and $12.2 million at December 31, 1999 and 1998, respectively. These loans are not included in the consolidated balance sheets. In connection therewith, the Company held trust funds of approximately $1.0 million and $1.5 million as of December 31, 1999 and 1998, respectively, all of which were segregated in separate accounts and included in the respective balance sheets. Some agreements with investors to whom the Company has sold loans have provisions which could require repurchase of loans under certain circumstances. Management does not believe that any such repurchases will be significant. The following table sets forth impaired loan disclosures as of and for the years ended December 31, 1999, 1998, and 1997 (dollars in thousands):
1999 1998 1997 ---- ------ ------ Impaired loan with an allowance..................................... $-- $1,359 $1,359 Impaired loan without an allowance.................................. -- -- 20 ---- ------ ------ Total impaired loans........................................... $-- $1,359 $1,379 ---- ------ ------ ---- ------ ------ Allowance for impaired loan under SFAS No. 114...................... $-- $ 109 $ 109 ---- ------ ------ ---- ------ ------ Interest income recognized on impaired loans during the year........ $69 $ 89 $ 68 ---- ------ ------ ---- ------ ------
35 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. LOANS--(CONTINUED) In the table above, the loan included in the impaired loan without an allowance category is a loan for which the discounted cash flows, collateral value (net of estimated selling costs) or market price equals or exceeds the carrying value of the loan. This loan does not require an allowance. For the years ended December 31, 1999, 1998 and 1997, the activity in the allowance for loan losses was as follows (dollars in thousands):
1999 1998 1997 --------- --------- --------- Balance at beginning of year................................. $ 14,922 $ 12,142 $ 11,682 Provision for loan losses.................................... 5,645 3,412 1,154 Loans charged off............................................ (1,198) (681) (1,069) Recoveries................................................... 134 49 375 --------- --------- --------- Balance at end of year....................................... $ 19,503 $ 14,922 $ 12,142 --------- --------- --------- --------- --------- ---------
7. PREMISES AND EQUIPMENT As of December 31, 1999 and 1998, premises and equipment were as follows (dollars in thousands):
1999 1998 --------- --------- Land and buildings..................................................... $ 19,135 $ 19,114 Leasehold improvements................................................. 8,877 8,596 Equipment, furniture and fixtures...................................... 11,000 13,578 --------- --------- 39,012 41,288 Less accumulated depreciation and amortization......................... (17,948) (17,826) --------- --------- Total............................................................. $ 21,064 $ 23,462 --------- --------- --------- ---------
Depreciation and amortization expense was $2.6 million, $2.6 million and $2.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. 8. DEPOSITS As of December 31, 1999 and 1998, deposit balances were as follows (dollars in thousands):
1999 1998 ---------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE BALANCE RATE BALANCE RATE ---------- -------- ---------- -------- NOW, checking and money market accounts............... $ 193,995 1.14% $ 163,954 1.28% Savings accounts...................................... 264,138 1.92 232,635 2.20 Time deposits: Less than $100,000............................... 821,355 4.50 878,197 4.88 $100,000 or greater.............................. 396,660 4.91 359,109 5.04 ---------- ---------- Total time deposits.............................. 1,218,015 4.64 1,237,306 4.93 ---------- ---------- Total deposits................................. $1,676,148 3.80 $1,633,895 4.17 ---------- ---------- ---------- ----------
36 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. DEPOSITS--(CONTINUED) As of December 31, 1999, remaining maturities on time deposits were as follows (dollars in thousands): 2000........................................................ $ 1,200,380 2001........................................................ 15,963 2002........................................................ 1,078 2003........................................................ 204 2004........................................................ 278 Aggregate thereafter........................................ 112 ------------ Total....................................................... $ 1,218,015 ------------ ------------
For the years ended December 31, 1999, 1998 and 1997, interest expense on deposits was as follows (dollars in thousands):
1999 1998 1997 --------- --------- --------- NOW, checking and money market accounts................................ $ 2,498 $ 1,640 $ 1,392 Savings accounts....................................................... 5,047 4,918 4,834 Time deposits.......................................................... 54,677 58,568 55,570 Less penalties for early withdrawal.................................... (267) (236) (283) --------- --------- --------- Total.................................................................. $ 61,955 $ 64,890 $ 61,513 --------- --------- --------- --------- --------- ---------
As of December 31, 1999 and 1998, the composition of deposits by interest rate was as follows (dollars in thousands):
1999 1998 ------------ ------------ Under 3%.................................................................... $ 393,861 $ 371,021 3.00% to 3.99%.............................................................. 227,568 226,293 4.00% to 4.99%.............................................................. 664,621 384,220 5.00% to 5.99%.............................................................. 387,729 643,079 6.00% to 6.99%.............................................................. 2,364 9,277 7.00% to 7.99%.............................................................. -- -- 8.00% to 8.99%.............................................................. 5 5 ------------ ------------ Total.................................................................. $ 1,676,148 $ 1,633,895 ------------ ------------ ------------ ------------
9. BORROWINGS Federal Home Loan Bank Advances The Company maintains a secured credit facility with the Federal Home Loan Bank of San Francisco (FHLB-SF) against which the Company may take advances. The terms of this credit facility require the Company to maintain in safekeeping with the FHLB-SF eligible collateral of at least 100% of outstanding advances. At December 31,1999, there were $421.5 million of advances outstanding, of which $188.5 million were short term and $233.0 million were long term. Included in the long-term FHLB advances as of December 31, 1999 were $216.0 million of advances with provisions which allow the FHLB-SF, at their option, to terminate the advances at quarterly intervals at specified periods ranging from three to five years beyond the advance dates. The advances were secured with mortgage-backed securities and loans. At December 31, 1998, there were $368.0 million of advances outstanding, of which $135.0 million were short term and $233.0 million were long term. The fixed-rate long-term debt outstanding as of December 31, 1999, of $233.0 million matures in 2008. The weighted average contractual maturity as of December 31, 1999 was 100 months. At December 31, 1999, credit availability under this facility was approximately $253.1 million. 37 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. BORROWINGS--(CONTINUED) Federal Reserve Bank Borrowings In December of 1998, the Bank entered into the Treasury Investment Program with the Federal Reserve Bank of San Francisco. This borrowing line allows the Bank to utilize deposits made to the U.S. Treasury for federal tax payments until the Treasury needs the funds. This borrowing line must be fully collateralized at all times, and at December 31, 1999 the maximum amount of borrowings allowed based on collateral placed with the Federal Reserve Bank was approximately $31.5 million. Borrowings outstanding at December 31, 1999 were $28.1 million. For the years ended December 31, 1999 and 1998, the following advances were outstanding (dollars in thousands):
1999 1998 ---------- ---------- FHLB of San Francisco advances: Average balance outstanding................................................... $ 397,394 $ 186,504 Maximum amount outstanding at any month end period............................ 468,000 368,000 Balance outstanding at end of period.......................................... 421,500 368,000 Weighted average interest rate during the period.............................. 5.38% 5.51% Weighted average interest rate at end of period............................... 5.65% 5.33% Weighted average remaining term to maturity at end of period (in years)....... 5 6 FRB direct investment borrowings: Average balance outstanding................................................... $ 22,595 $ -- Maximum amount outstanding at any month end period............................ 83,739 -- Balance outstanding at end of period.......................................... 28,112 -- Weighted average interest rate during the period.............................. 4.65% -- Weighted average interest rate at end of period............................... 3.99% -- Weighted average remaining term to maturity at end of period (in years)....... 0 -- Securities sold under agreements to repurchase: Average balance outstanding................................................... $ 130 $ 112 Maximum amount outstanding at any month end................................... 1,500 -- Balance outstanding at end of period.......................................... -- -- Weighted average interest rate during the period.............................. 5.48% 6.75% Weighted average interest rate at end of period............................... -- -- Weighted average remaining term to maturity at end of period.................. -- --
The interest rate on the FHLB debt ranged from 4.06% to 6.05% and the weighted average interest rate was 5.65% at December 31, 1999 and 5.38% for the year then ended. Interest is paid either at maturity for overnight advances, and monthly or quarterly for other advances, dependent upon the term of the advance and the collateral supporting the advance. Principal is due at maturity. The interest expense on such advances was $21.4 million and $10.3 million for the years ended December 31, 1999 and 1998, respectively. 10. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEBENTURES OF UCBH HOLDINGS, INC. (UCBH) On April 17, 1998, UCBH Trust Co. (the 'Trust'), a Delaware statutory business trust owned by the Company, issued $30 million of 9.375% Guaranteed Preferred Beneficial Interests in UCBH's Subordinated Debentures ('Capital Securities'). The Trust exists for the sole purpose of issuing the Capital Securities and investing the proceeds thereof in 9.375% Junior Subordinated Debentures issued by UCBH. The Junior Subordinated Debentures mature on May 1, 2028. Payment of distributions out of the monies held by the Trust and payments on liquidation of the Trust or the redemption of the Capital Securities are guaranteed by UCBH to the extent the Trust has funds available therefor. The obligations of UCBH under the Guarantee and the Junior 38 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEBENTURES OF UCBH HOLDINGS, INC. (UCBH)--(CONTINUED) Subordinated Debentures are subordinate and junior in right of payment to all indebtedness of UCBH and will be structurally subordinated to all liabilities and obligations of UCBH's subsidiaries. Distributions on the Capital Securities are payable semi-annually, in arrears on May 1 and November 1 of each year, commencing November 1, 1998. The Junior Subordinated Debentures are not redeemable prior to May 1, 2005, unless certain events have occurred. The proceeds from the issuance of the Capital Securities were used primarily to provide additional capital for the Bank. Interest expense on the Capital Securities was $2.8 million for the year ended December 31, 1999, and $2.0 million in 1998. 11. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts are also subject to qualitative judgments by the regulators about components, weightings, and other factors. Qualitative measures established by regulation to ensure capital adequacy require financial institutions to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I Capital (as defined in the regulations) to risk weighed assets (as defined), and of Tier I Capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 1999, the Bank met the 'well capitalized' requirements under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratio as set forth in the table. There are no conditions or events since December 31, 1999 that management believes have changed the institution's category. The Company's and the Bank's actual capital amounts and ratios are also presented in the following table (dollars in thousands):
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------- ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- -------- ----- As of December 31, 1999: Total Capital (to risk weighted assets) United Commercial Bank......................... $167,919 11.29% $118,938 8.00% $148,672 10.00% UCBH Holdings, Inc............................. 171,925 11.55 119,067 8.00 Tier I Capital (to risk weighted assets) United Commercial Bank......................... $149,324 10.04% $ 59,469 4.00% $ 89,203 6.00% UCBH Holdings, Inc............................. 153,310 10.30 59,534 4.00 Tier I Capital (to average assets) (Leverage Ratio) United Commercial Bank......................... $149,324 6.58% $ 90,722 4.00% $113,403 5.00% UCBH Holdings, Inc............................. 153,310 6.75 90,824 4.00
39 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS--(CONTINUED) The following is a reconciliation of capital under Generally Accepted Accounting Principles ('GAAP') with regulatory capital at December 31, 1999 (dollars in thousands):
TIER I CAPITAL RISK-BASED CAPITAL --------------------------------- --------------------------------- UNITED UCBH UNITED UCBH COMMERCIAL BANK HOLDINGS, INC. COMMERCIAL BANK HOLDINGS, INC. --------------- -------------- --------------- -------------- GAAP Capital................................... $ 136,121 $110,107 $ 136,121 $110,107 Nonallowable components: Unrealized losses on securities available for sale...................................... 13,419 13,419 13,419 13,419 Goodwill..................................... (181) (181) (181) (181) Servicing rights............................. (35) (35) (35) (35) Additional capital components: Guaranteed preferred beneficial interests in junior subordinated debentures............ -- 30,000 -- 30,000 Allowance for loan losses-limited............ -- -- 18,595 18,615 --------------- -------------- --------------- -------------- Regulatory capital............................. $ 149,324 $153,310 $ 167,919 $171,925 --------------- -------------- --------------- -------------- --------------- -------------- --------------- --------------
During 1998, in a Private Offering, the Company issued common stock to various purchasers raising $128.6 million net of issue costs. In conjunction with the Private Offering, and pursuant to the terms of an Exchange and Redemption Agreement (the Agreement) with Selling Stockholders, $20.6 million of Long-Term Debt to Affiliates, which was due to Selling Stockholders, was exchanged for shares of Common Stock. The Company used approximately $120.0 million of the proceeds raised to redeem all of the shares of Common Stock then owned by the Selling Shareholders, which included the shares of Common Stock exchanged for the Long-Term Debt to Affiliates. As a result, the Selling Shareholders are no longer affiliated with the Company. The Company and United are prohibited by federal regulations from paying dividends if the payment would reduce their regulatory capital below certain minimum requirements. The Company did not declare or pay dividends in the years ended December 31, 1999, 1998 or 1997. 40 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. EARNINGS PER SHARE The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share:
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ----------------------------------------------- INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999: Basic: Net income.......................................... $19,068 9,333,333 $2.04 Effect of stock options............................... -- 151,694 ----------- ------------- Diluted: Net income.......................................... $19,068 9,485,027 $2.01 ----------- ------------- ----------- ------------- 1998: Basic: Net income.......................................... $10,888 8,351,852 $1.30 Effect of long-term debt to affiliates................ 347 581,233 ----------- ------------- Diluted: Net income and assumed conversions.................. $11,235 8,933,085 $1.26 ----------- ------------- ----------- ------------- 1997: Basic: Net income.......................................... $ 7,299 6,000,000 $1.22 Effect of long-term debt to affiliates................ 1,077 1,974,000 ----------- ------------- Diluted: Net income and assumed conversions.................. $ 8,376 7,974,000 $1.05 ----------- ------------- ----------- -------------
13. SEGMENT INFORMATION The Company adopted SFAS No. 131 'Disclosures about Segments of an Enterprise and Related Information,' on January 1, 1998. SFAS No. 131 superseded 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. The adoption of SFAS No. 131 did not affect the consolidated results of operations or 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 residents. Historically, our customer base has been 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. 41 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. SEGMENT INFORMATION--(CONTINUED) Following is segment information of the Company for the years ended December 31, 1999, 1998 and 1997:
RECONCILING IN MILLIONS COMMERCIAL CONSUMER ITEMS TOTAL ---------- ---------- ----------- ---------- 1999 Net interest income (before provision for loan losses)..... $ 22,768 $ 47,946 $ -- $ 70,714 Segment net income......................................... 4,368 14,700 -- 19,068 Segment total assets....................................... 998,086 1,286,714 -- 2,284,800 1998 Net interest income (before provision for loan losses)..... $ 13,686 $ 38,751 $ -- $ 52,437 Segment net income......................................... 2,614 8,278 (4)(1) 10,888 Segment total assets....................................... 679,656 1,467,676 -- 2,147,332 1997 Net interest income (before provision for loan losses)..... $ 10,074 $ 33,265 $ -- $ 43,339 Segment net income......................................... 2,565 5,184 (450)(1) 7,299 Segment total assets....................................... 496,933 1,064,717 -- 1,561,650
- ------------------ (1) Represents losses on sale of securities, net of taxes 14. STOCK OPTION PLAN In May 1998, the Company adopted a Stock Option Plan ('Plan') which provides for the granting of stock options to eligible officers, employees and directors of the Company and United. The Company has reserved 933,333 shares of Common Stock to be issued pursuant to the Plan. All of the options are exercisable for ten years following the option grant date and vest over a three year period. The following table summarizes the stock option activity during the years ended December 31, 1999 and 1998.
1999 1998 ------------------------- ------------------------- NUMBER WEIGHTED NUMBER WEIGHTED OF AVERAGE OF AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------- -------------- ------- -------------- Options outstanding, beginning of year........................ 620,000 $15.00 -- $ -- Granted....................................................... 265,000 15.24 620,000 15.00 Canceled or expired........................................... (500) 15.00 -- -- Exercised..................................................... -- -- -- -- ------- ------- Options outstanding, end of year.............................. 884,500 15.07 620,000 15.00 ------- ------- ------- ------- Shares exercisable end of year................................ 215,000 15.00 -- -- Weighted average fair value of options granted during the year........................................................ 3.72 3.71 Market value of stock at December 31, 1999.................... 20.56 13.25
For options outstanding at December 31, 1999, the range of exercise prices was as follows:
OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE EXERCISE PRICE OUTSTANDING EXERCISE PRICE REMAINING LIFE EXERCISABLE EXERCISE PRICE - ----------------- ----------- ---------------- ---------------- ----------- ---------------- $15.00 871,000 $15.00 8.56 215,000 $15.00 19.75 13,500 19.75 9.54 -- -- ----------- ----------- Total/Average 884,500 15.07 8.57 215,000 15.00 ----------- ----------- ----------- -----------
42 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. STOCK OPTION PLAN--(CONTINUED) In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 (SFAS No. 123), 'Accounting for Stock-Based Compensation.' This Statement establishes a new fair value based accounting method for stock-based compensation for plans and encourages, but does not require, employers to adopt the new method in place of the provisions of Accounting Principles Board ('APB') Release No. 25. Companies may continue to apply the accounting provisions of APB No. 25 in determining net income. However, they must apply the disclosure requirements of SFAS No. 123 for all grants issued after 1994. The Company elected to apply the provisions of APB No. 25 in accounting for the employee stock plan described above. Accordingly, no compensation cost has been recognized for stock options granted under the Plan. If the computed fair values of the stock awards had been amortized to expense over the vesting period of the awards, pro forma amounts would have been as shown in the following table. The impact of outstanding nonvested stock options has been excluded from the pro forma calculation.
1999 1998 ------- ------- (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Net income: As reported......................................................... $19,068 $10,888 Pro forma........................................................... 18,476 10,561 Basic earnings per share: As reported......................................................... 2.04 1.30 Pro forma........................................................... 1.98 1.26 Diluted earnings per share: As reported......................................................... 2.01 1.26 Pro forma........................................................... 1.95 1.22
These calculations require the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility, dividend yield, and expected time to exercise, which greatly affect the calculated values. The following weighted average assumptions were used in the Black-Scholes option pricing model for options granted in 1999 and 1998:
1999 1998 ------ ------ Dividend yield....................................................................... 1.70% 1.50% Volatility........................................................................... 28.20% 28.12% Risk-free interest rate.............................................................. 5.20% 5.60% Expected lives (years)............................................................... 5 5
43 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15. FEDERAL AND STATE TAXES ON INCOME Following is a summary of the provision for taxes on income (dollars in thousands):
YEARS ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------- ------ ------ Current tax expense: Federal................................................................. $ 1,933 $6,080 $3,244 State................................................................... 1,104 1,282 1,881 ------- ------ ------ 3,037 7,362 5,125 ------- ------ ------ Deferred tax (benefit) expense: Federal................................................................. 8,288 411 1,155 State................................................................... 1,553 82 (490) ------- ------ ------ 9,841 493 665 ------- ------ ------ $12,878 $7,855 $5,790 ------- ------ ------ ------- ------ ------
Deferred tax liabilities (assets) are comprised of the following (dollars in thousands):
YEARS ENDED DECEMBER 31, ------------------ 1999 1998 ------- ------- Deferred tax liabilities: Deferred loan fees............................................................... $ 2,640 $ 2,786 FHLB dividends................................................................... 2,966 2,691 Purchase accounting adjustments.................................................. 124 177 Market value adjustments on certain loans and securities......................... 8,208 -- State taxes...................................................................... 1,231 -- Other............................................................................ 137 48 ------- ------- 15,306 5,702 ------- ------- Deferred tax assets: Loan and OREO loss allowances.................................................... (6,477) (4,927) Market value adjustments on certain loans and securities......................... -- (1,243) Depreciation..................................................................... (515) (637) Unrealized losses on securities available for sale............................... (9,700) (546) State taxes...................................................................... -- (322) Compensation and benefits........................................................ (213) (271) Other............................................................................ (162) (204) ------- ------- (17,067) (8,150) ------- ------- Net deferred tax assets............................................................ $(1,761) $(2,448) ------- ------- ------- -------
44 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15. FEDERAL AND STATE TAXES ON INCOME--(CONTINUED) The following table reconciles the statutory income tax rate to the consolidated effective income tax rate:
YEARS ENDED DECEMBER 31, ---------------------- 1999 1998 1997 ---- ---- ---- Federal income tax rate............................................. 35.0% 35.0% 34.0% State franchise tax rate, net of federal income tax effects......... 6.9% 6.9% 7.2% ---- ---- ---- Statutory income tax rate........................................... 41.9% 41.9% 41.2% ---- ---- ---- Increase (reduction) in tax rate resulting from: Tax exempt income................................................. (2.3%) (1.9%) -- Amortization of intangibles....................................... 0.1% 0.1% 0.2% Reversal of allowance............................................. -- -- (2.2%) Other, net........................................................ 0.6% 3.7% 5.0% ---- ---- ---- 40.3% 43.8% 44.2% ---- ---- ---- ---- ---- ----
Taxes on income included the following (dollars in thousands):
YEARS ENDED DECEMBER 31, ------------------ 1999 1998 ------- ------- Net deferred (asset) liability: $(1,461) $(2,036) Federal income tax..................................................... (300) (412) ------- ------- State franchise tax.................................................... (1,761) (2,448) ------- ------- (Prepaid income taxes) taxes payable..................................... (2,772) 877 ------- ------- $(4,533) $(1,571) ------- ------- ------- -------
Tax years 1996 through 1999 remain open for both Internal Revenue Service purposes and California Franchise Tax Board purposes. 16. DERIVATIVE FINANCIAL INSTRUMENT AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to derivative financial instruments and financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. The Company does not hold or issue financial instruments for trading purposes. Financial instruments in the normal course of business include commitments to extend and purchase credit, forward commitments to sell loans, letters of credit and interest-rate caps. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the statement of financial position. The contract or notional amounts of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest-rate swap and cap transactions and forward commitments to sell loans, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its interest-rate swap and cap agreements and forward commitments to sell loans through credit approvals, limits, and monitoring procedures. The Company does not require collateral or other security to support interest-rate swap transactions with credit risk. 45 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 16. DERIVATIVE FINANCIAL INSTRUMENT AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK--(CONTINUED) Contract or notional amounts of derivative financial instruments and financial instruments with off-balance-sheet risk as of December 31, 1999 and 1998 are as follows (dollars in millions):
1999 1998 ------ ------ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Consumer (including residential mortgage)............................. $ 32.0 $ 33.2 Commercial (excluding construction)................................... 77.0 44.6 Construction.......................................................... 126.9 135.0 Letters of credit........................................................ 6.4 4.5 Financial instruments whose notional or contract amounts exceed the amount of credit risk: Interest-rate cap agreements............................................. $160.0 $200.0
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. 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. In order to minimize the exposure arising from forward contracts, the Company enters into hedge options from time to time. 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. At December 31, 1999 and at December 31, 1998 the Company had LIBOR-based interest rate caps with a notional amount of $160 million and $200 million, respectively, outstanding. The Company had no interest rate caps outstanding as of December 31, 1997. Entering into interest-rate cap agreements involves the risk of dealing with counterparties and their ability to meet the terms of the contracts. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. For the years ended December 31, 1999 and 1998, costs associated with the interest rate caps negatively impacted net interest income by $753,000 and $638,000, respectively. 17. CONCENTRATIONS OF CREDIT RISK The Company's loan activity is primarily with customers located throughout the State of California. Substantially all residential and commercial real estate loans are secured by properties located in the State of California and are originated at 80% loan-to-value or less. Management believes that the risk of significant losses in excess of underlying collateral value is low. 46 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 18. LEASE COMMITMENTS AND CONTINGENT LIABILITIES Lease Commitments The Company leases various premises under noncancellable operating leases, many of which contain renewal options and some of which contain escalation clauses. Future minimum rental payments, which do not include common area costs, due each year under existing operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1999, are payable as follows (dollars in thousands): 2000..................................................................... $ 3,372 2001..................................................................... 2,856 2002..................................................................... 2,417 2003..................................................................... 2,085 2004..................................................................... 1,302 Aggregate thereafter..................................................... 8,523 --------- Total minimum payments required.......................................... $ 20,555 --------- ---------
Rental expense was approximately $3.5 million, $3.4 million and $3.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. Contingent Liabilities The Company is subject to pending or threatened actions and proceedings arising in the normal course of business. In the opinion of management, the ultimate disposition of all pending or threatened actions and proceedings will not have a material adverse effect on the Company's operations or financial condition. 19. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, 'Disclosures about Fair Value of Financial Instrument,' requires all entities to estimate the fair value of all financial instrument assets, liabilities, and off-balance-sheet transactions. Fair values are point-in-time estimates that can change significantly based on numerous factors. Accordingly, management cannot provide any assurance that the estimated fair values presented below could actually be realized. The fair value estimates for financial instruments were determined as of December 31, 1999 and 1998, by application of the described methods and significant assumptions. Cash and Short-Term Investments For these short-term instruments, the carrying value of $24.3 million at December 31, 1999 and $15.1 million at December 31, 1998 is a reasonable estimate of fair value. Investment and Mortgage-backed Securities The aggregate fair value of investment and mortgage-backed securities is $527.5 million at December 31, 1999 and $602.8 million at December 31, 1998. Fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans Receivable The aggregate fair value of loans receivable is $1.66 billion at December 31, 1999 and $1.51 billion at December 31, 1998. Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings at the same remaining maturities. In addition, the allowance for loan losses was considered a reasonable adjustment for credit risk for the entire portfolio. Deposit Liabilities Fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The aggregate fair value of deposits is $1.68 billion at December 31, 1999 and $1.64 billion at December 31, 1998. 47 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 19. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED) Federal Home Loan Bank Advances and Other Borrowings Fair value of Federal Home Loan Bank advances and other borrowings is estimated using the rates currently being offered for advances with similar remaining maturities. The aggregate fair value of Federal Home Loan Bank advances and other borrowings at December 31, 1999 was $403.6 million and $376.9 million at December 31, 1998. There were no borrowings outstanding at December 31, 1997. Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures The fair value of the Company's junior subordinated debentures is estimated using market interest rates currently being offered for similar unrated debt instruments. The fair market value of junior subordinated debentures was $28.2 million at December 31, 1999 and $32.0 million at December 31, 1998. Interest Rate Cap Agreements The fair value of the cap agreements used for hedging purposes is the estimated amount that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the cap counterparties. The fair market value of cap agreements at December 31, 1999 was $3.2 million and $2.0 million at December 31, 1998. Commitments to Extend Credit, Commitments to Purchase Loans, Securities Sold But Not Owned, and Options on Interest Rate Futures The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Fair values for securities sold but not owned and options on interest rate futures are based on quoted market prices or dealer quotes. The fair value of commitments to extend credit and commitments to purchase loans cannot be readily determined. There were no put or call options at December 31, 1999 and 1998. 48 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 20. PARENT COMPANY Condensed unconsolidated financial information of UCBH Holdings, Inc. is presented below. CONDENSED BALANCE SHEET (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, -------------------- 1999 1998 --------- --------- ASSETS Cash and due from banks.......................................................... $ -- $ -- Investment and mortgage-backed securities available for sale, at fair value...... 500 1,500 Investment in subsidiaries....................................................... 136,121 130,477 Other assets..................................................................... 3,984 2,361 --------- --------- Total assets................................................................... $ 140,605 $ 134,338 --------- --------- --------- --------- LIABILITIES Accrued interest payable......................................................... $ 469 $ 469 Other liabilities................................................................ 29 231 Junior subordinated debentures payable to UCBH Trust Co.......................... 30,000 30,000 --------- --------- Total liabilities.............................................................. 30,498 30,700 --------- --------- STOCKHOLDERS' EQUITY Common stock..................................................................... 93 93 Additional paid-in capital....................................................... 59,485 59,443 Subsidiary's accumulated other comprehensive income.............................. (13,419) (778) Retained earnings................................................................ 63,948 44,880 --------- --------- Total stockholders' equity..................................................... 110,107 103,638 --------- --------- Total liabilities and stockholders' equity..................................... $ 140,605 $ 134,338 --------- --------- --------- ---------
CONDENSED STATEMENT OF INCOME (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 --------- --------- --------- INCOME Interest income on investment securities................................ $ 18 $ 50 $ -- Dividends from subsidiary............................................... 3,100 1,625 250 Miscellaneous income.................................................... -- 6 -- --------- --------- --------- Total income.......................................................... 3,118 1,681 250 --------- --------- --------- EXPENSE Interest expense on junior subordinated debentures...................... 2,812 1,985 -- Interest expense on long-term debt to affiliates........................ -- 599 1,825 Miscellaneous expense................................................... 878 257 205 --------- --------- --------- Total expense......................................................... 3,690 2,841 2,030 --------- --------- --------- Loss before taxes and equity in undistributed net income of subsidiary............................................................ (572) (1,160) (1,780) Income tax benefit...................................................... 1,355 827 -- Equity in undistributed net income of subsidiary........................ 18,285 11,221 9,079 --------- --------- --------- Net income............................................................ $ 19,068 $ 10,888 $ 7,299 --------- --------- --------- --------- --------- ---------
49 UCBH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 20. PARENT COMPANY--(CONTINUED) CONDENSED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 --------- --------- --------- OPERATING ACTIVITIES Net income $ 19,068 $ 10,888 $ 7,299 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Equity in undistributed net income of subsidiary........................ (18,285) (11,221) (9,079) Decrease in other assets................................................ (1,623) (2,361) -- Increase in accrued interest payable.................................... -- 469 -- (Decrease) increase in other liabilities................................ (160) 231 -- --------- --------- --------- Net cash used for operating activities................................ (1,000) (1,994) (1,780) --------- --------- --------- INVESTING ACTIVITIES Purchases of investments and mortgage-backed securities, available for sale....................................................................... -- (1,500) -- Maturities of investments available for sale................................. 1,500 -- -- Capital contribution to subsidiary........................................... -- (35,750) (1,500) --------- --------- --------- Net cash provided by (used in) investing activities................... 1,500 (37,250) (1,500) --------- --------- --------- FINANCING ACTIVITIES Proceeds from issuance of common stock, net of redemptions and of issue costs...................................................................... -- 29,248 -- Proceeds from issuance of junior subordinated debentures to UCBH Trust Co. ....................................................................... -- 30,000 -- Long-term debt to affiliates issued.......................................... -- -- 1,500 Increase in capitalized interest component of long-term debt to affiliates... -- (20,060) 1,825 --------- --------- --------- Net cash provided by financing activities............................. -- 39,188 3,325 --------- --------- --------- Net increase (decrease) in cash and cash equivalents......................... 500 (56) 45 Cash and cash equivalents beginning of year.................................. 0 56 11 --------- --------- --------- Cash and cash equivalents end of year........................................ $ 500 $ 0 $ 56 --------- --------- --------- --------- --------- ---------
50 UNAUDITED SUPPLEMENTAL INFORMATION UCBH HOLDINGS, INC. Quarterly Condensed Consolidated Financial Information
1999 QUARTERS 1998 QUARTERS ---------------------------------------- ---------------------------------------- FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST ------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Interest income................. $41,617 $40,412 $38,727 $37,927 $37,375 $35,265 $30,071 $28,120 Interest expense................ 22,498 21,956 21,493 22,022 22,814 21,820 17,588 16,171 ------- ------- ------- ------- ------- ------- ------- ------- Net interest income............. 19,119 18,456 17,234 15,905 14,561 13,445 12,483 11,949 ------- ------- ------- ------- ------- ------- ------- ------- Provision for credit losses..... 2,167 1,475 1,278 725 1,229 782 768 633 Noninterest income.............. 926 997 1,436 716 916 754 1,174 558 Noninterest expense............. 9,155 9,384 9,289 9,370 8,441 7,950 8,049 9,245 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes...... 8,723 8,594 8,103 6,526 5,807 5,467 4,840 2,629 Income tax expense.............. 3,471 3,506 3,303 2,598 2,446 2,339 1,992 1,078 ------- ------- ------- ------- ------- ------- ------- ------- Net income...................... $ 5,252 $ 5,088 $ 4,800 $ 3,928 $ 3,361 $ 3,128 $ 2,848 $ 1,551 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income per common share: Basic net income................ $ 0.56 $ 0.55 $ 0.51 $ 0.42 $ 0.36 $ 0.34 $ 0.33 $ 0.26 Diluted net income.............. 0.55 0.53 0.50 0.42 0.36 0.34 0.32 0.23
51 EX-23.1 3 REPORT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-79703) of UCBH Holdings, Inc. of our report dated February 10, 2000 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP San Francisco, California March 10, 2000 EX-27.1 4 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the UCBH Holdings, Inc. financial statements incorporated by reference into the Form 10-K for the year ended December 31, 1999 and is qualified in its entirety by reference to such financial statements. 0001061580 UCBH Holdings, Inc. 1,000 U.S. Dollars 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 23,789 0 500 0 328,455 183,906 171,995 1,686,695 19,503 2,284,800 1,676,148 216,612 18,933 233,000 0 0 93 110,014 2,284,800 123,705 34,955 23 158,683 61,955 87,969 70,714 5,645 0 37,198 31,946 31,946 0 0 19,068 2.04 2.01 7.39 4,632 0 0 11,722 14,922 1,198 134 19,503 14,805 0 4,698
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