<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-31051
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PEOPLE'S PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
5900 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90036 (213) 938-6300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
RUDOLF P. GUENZEL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PEOPLE'S PREFERRED CAPITAL CORPORATION
5900 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
(213) 938-6300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C> <C>
TIMOTHY B. MATZ, ESQ. WILLIAM S. RUBENSTEIN, ESQ.
NORMAN B. ANTIN, ESQ. Skadden, Arps, Slate, Meagher & Flom LLP
JEFFREY D. HAAS, ESQ. AND 919 Third Avenue
Elias, Matz, Tiernan & Herrick L.L.P. New York, New York 10022
734 15th Street, N.W., 12th Floor (212) 735-3000
Washington, D.C. 20005
(202) 347-0300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM AGGREGATE
AMOUNT BEING OFFERING PRICE OFFERING AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
% Noncumulative Exchangeable Preferred Stock,
Series A, par value $0.01 per share 1,426,000 shares $25.00 $35,650,000 $10,803.03*
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
* Previously filed.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1997
1,240,000 SHARES
PEOPLE'S PREFERRED CAPITAL CORPORATION
% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
EXCHANGEABLE INTO PREFERRED STOCK OF PEOPLE'S BANK OF CALIFORNIA
---------------------
People's Preferred Capital Corporation, a Maryland corporation (the
"Company"), is hereby offering 1,240,000 shares of its % Noncumulative
Exchangeable Preferred Stock, Series A, par value $0.01 per share (the "Series A
Preferred Shares"). Dividends on the Series A Preferred Shares are payable at
the rate of % per annum of the liquidation preference (determined without
regard to accrued and unpaid dividends) (an amount equal to $ per annum
per share), if, when and as authorized and declared by the Board of Directors of
the Company.
Dividends on the Series A Preferred Shares are not cumulative and, if
declared, are payable quarterly in arrears on the last day of March, June,
September and December in each year, commencing , 1997. If no
dividend is declared on the Series A Preferred Shares by the Company for a
quarterly dividend period, holders of the Series A Preferred Shares will have no
right to receive a dividend for that period, and the Company will have no
obligation to pay a dividend for that period, whether or not dividends are
declared and paid for any future period. Dividends in each dividend period shall
accrue from the first day of such period, whether or not declared or paid in the
prior period.
(CONTINUED ON NEXT PAGE)
SEE "GLOSSARY" COMMENCING ON PAGE FOR THE DEFINITIONS OF CERTAIN TERMS
USED IN THIS PROSPECTUS. SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SERIES A PREFERRED SHARES OFFERED HEREBY. AMONG THE RISKS
WHICH PROSPECTIVE INVESTORS SHOULD CONSIDER ARE THE FOLLOWING:
- Lack of prior operating history of the Company;
- Dependence on People's Bank of California (the "Bank") as Advisor and on
the Bank and the Bank's designated Servicing Agent as Servicers;
- A decline in the performance or capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could result in
the automatic exchange of the Series A Preferred Shares for Bank Preferred
Shares; an investment in the Bank involves an investment in a business
that is broader in scope than the business of the Company;
- Possibility that federal regulators of the Bank will impose restrictions
on the operations of the Company or the Company's ability to pay
dividends;
- Possibility that a significant decline in interest rates could have an
adverse effect on the Company's cash flow;
- Since dividends are not cumulative, if no dividend is declared on the
Series A Preferred Shares by the Company for a dividend period, holders of
the Series A Preferred Shares will have no right to receive a dividend for
that period (which would reduce an investor's effective annual yield on
the Series A Preferred Shares under such circumstances);
- Investments in real estate mortgages are subject to price fluctuations
based on changes in interest rates and problems unique to particular
geographic regions where investments may be concentrated;
- Ability of the Company to invest up to 20% of its total assets in
non-mortgage related securities (i.e., other than Residential Mortgage
Loans, Commercial Mortgage Loans and Mortgage-Backed Securities (each, as
described herein), and in addition to cash, cash equivalents and
government securities.
- Possibility of conflicts of interest between the Company and the Bank and
that the ultimate beneficial owners of the Bank's common stock may have
investment goals and strategies that differ from those of the holders of
the Series A Preferred Shares;
- Possibility that the Company will not qualify as a real estate investment
trust for federal income tax purposes; and
- Shares held by any investor in excess of certain ownership limits set
forth in the Company's Articles of Incorporation may be automatically
transferred to a trust.
------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER DEBT
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION
INSURANCE FUND, ANY GOVERNMENTAL AGENCY OR OTHERWISE
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO PUBLIC
(1) UNDERWRITING COMMISSION(2) PROCEEDS TO COMPANY(3)
<S> <C> <C> <C>
Per Share....................................... $25.00 $ $
Total(4)........................................ $ 31,000,000 $ $
</TABLE>
(1) Plus accrued dividends, if any, from , 1997.
(2) The Company and the Bank have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
The Bank intends to make a capital contribution to the Company equal to such
expenses and the Total Underwriting Commission. See "Use of Proceeds."
(4) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 186,000 Series A Preferred Shares, on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the Price to Public, Total Underwriting
Commission and Proceeds to Company will be $35,650,000, $ and
$ , respectively.
------------------------------
The Series A Preferred Shares are offered by the Underwriters, as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that the Series A Preferred
Shares offered hereby will be ready for delivery through the facilities of The
Depository Trust Company in New York, New York, on or about , 1997
against payment therefor in immediately available funds.
SANDLER O'NEILL & PARTNERS, L.P.
----------------
The date of this Prospectus is , 1997.
<PAGE>
The Series A Preferred Shares are not redeemable prior to , 2002
(except upon the occurrence of a Tax Event or a Change of Control). On and after
, 2002, the Series A Preferred Shares may be redeemed for cash at the
option of the Company, in whole or in part, at any time and from time to time,
at the redemption price of $25.00 per share, plus authorized, declared and
unpaid dividends, if any, to the date fixed for redemption, without interest.
Upon a Change of Control, the Series A Preferred Shares are redeemable at the
option of the Company, in whole, but not in part, at a price per share equal to
(i) $25.00, plus (ii) an amount equal to the authorized, declared and unpaid
dividends, if any, to the date fixed for redemption, without interest, and,
without duplication, an additional amount equal to the amount of dividends that
would be payable on the Series A Preferred Shares in respect of the period from
the first day of the dividend period in which the date fixed for redemption
occurs to the date fixed for redemption (assuming all such dividends were to be
authorized and declared), plus (iii) the Applicable Premium. Any redemption of
Series A Preferred Shares is subject to the prior approval of the Office of
Thrift Supervision (the "OTS"). The Series A Preferred Shares will not be
subject to any sinking fund or mandatory redemption and will not be convertible
into any other securities of the Company.
Each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") for one newly issued Series A preferred share (the "Bank
Preferred Shares") of the Bank, if the appropriate federal regulatory agency
directs in writing that an exchange of the Series A Preferred Shares for Bank
Preferred Shares occur because (i) the Bank becomes "undercapitalized" under the
prompt corrective action regulations established pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991, as amended ("FDICIA"), (ii) the
Bank is placed into conservatorship or receivership or (iii) the appropriate
federal regulatory agency, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term (an "Exchange Event"). CONSEQUENTLY, AN
INVESTMENT IN SERIES A PREFERRED SHARES COULD BE REPLACED, WITHOUT THE CONSENT
OF THE INVESTOR, BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE
BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN PLACED
INTO CONSERVATORSHIP OR RECEIVERSHIP. ACCORDINGLY, POTENTIAL INVESTORS IN THE
SERIES A PREFERRED SHARES SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK
SET FORTH IN THE OFFERING CIRCULAR, ATTACHED HERETO AS ANNEX I.
In the event of the Automatic Exchange, the Bank Preferred Shares would
constitute a new series of preferred shares of the Bank, would have the same
dividend rights, liquidation preference, redemption options and other attributes
as the Series A Preferred Shares, except that (i) the Bank Preferred Shares
would not be redeemable upon the occurrence of a Tax Event and (ii) the Bank
Preferred Shares would not be listed on a national stock exchange or national
quotation system, and would rank on an equal basis in terms of cash dividend
payments and liquidation preference with any shares of preferred stock of the
Bank outstanding at the time of the Automatic Exchange. Holders of Series A
Preferred Shares cannot exchange their Series A Preferred Shares for Bank
Preferred Shares voluntarily, and, absent the occurrence of the Automatic
Exchange, holders of Series A Preferred Shares will have no dividend, voting,
liquidation preference or other rights with respect to the Bank or any security
of the Bank. See "Description of Series A Preferred Shares--Automatic Exchange."
The Company has been formed for the purpose of acquiring, holding and
managing real estate mortgage assets. The Company expects that all of its
mortgage assets will initially be acquired from the Bank. All of the shares of
the Company's common stock, par value $0.01 per share (the "Common Stock"), are
owned by the Bank. The Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain direct or indirect ownership
of at least a majority of the outstanding shares of Common Stock of the Company.
The Company expects to qualify as a real estate investment trust (a "REIT")
for federal income tax purposes, commencing with the taxable year ending
December 31, 1997, and, as a result, corporate holders of the Series A Preferred
Shares will not be entitled to a dividends received deduction with respect to
any income recognized with respect to the Series A Preferred Shares. Under the
Articles of Incorporation of the Company, as amended and restated (the "Articles
of Incorporation"), subject to certain exceptions, no individual or entity is
permitted to directly or indirectly own more than 7.5% of the aggregate initial
<PAGE>
liquidation preference of the issued and outstanding shares of Preferred Stock,
including the Series A Preferred Shares.
Prior to the Offering, there has been no market for the Series A Preferred
Shares. The Company has received approval to list the Series A Preferred Shares
on the Nasdaq National Market, subject to official notice of issuance, under the
symbol "PPCCP." The Bank has registered the Bank Preferred Shares with the OTS,
but does not intend to apply for listing of the Bank Preferred Shares on any
national securities exchange or for quotation of the Bank Preferred Shares
through the Nasdaq System. Consequently, there can be no assurance as to the
liquidity of the trading markets for the Bank Preferred Shares, if issued, or
that an active public market for the Bank Preferred Shares would develop or be
maintained.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A
PREFERRED SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
SERIES A PREFERRED SHARES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE
STABILIZING THE MARKET PRICE OF THE SERIES A PREFERRED SHARES, THE PURCHASE OF
SERIES A PREFERRED SHARES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY........................................................................................
The Company.............................................................................................
The Bank................................................................................................
Risk Factors............................................................................................
The Offering............................................................................................
The Formation...........................................................................................
Benefits to the Bank....................................................................................
Business and Strategy...................................................................................
Tax Status of the Company...............................................................................
RISK FACTORS..............................................................................................
No Operating History; Dependence Upon the Bank as Advisor and the Bank and the Servicing Agent as
Servicers.............................................................................................
Potential of Automatic Exchange of Series A Preferred Shares into Bank Preferred Shares When Possibility
of Bank Receivership Exists...........................................................................
Dividend and Other Regulatory Restrictions on Operations of the Company.................................
Oversight by Regulatory Authorities; Ability to Restrict Company Action...............................
Restrictions Pertaining to Bank Regulatory Capital Requirements.......................................
Restrictions Pertaining to Automatic Exchange.........................................................
Restrictions Pertaining to Bank Capital Distribution Regulations......................................
Impact of Fluctuations in Interest Rates................................................................
Dividends Not Cumulative................................................................................
Characteristics Associated with Mortgage Loans Generally................................................
Structural Concerns Related to Mortgage Loans.........................................................
Real Estate Market Conditions.........................................................................
Delays in Liquidating Defaulted Mortgage Loans........................................................
Legal Considerations..................................................................................
Environmental Considerations..........................................................................
Special Considerations Relating to Commercial Real Estate Loans.......................................
Geographic Concentration..............................................................................
Concerns with Respect to Investment in Mortgage-Backed Securities and Other Authorized Investments......
Concerns with Respect to Purchasing Mortgage Loans from Unaffiliated Third Parties......................
Possibility of Future Revisions in Policies and Strategies By Board of Directors........................
Considerations Associated with the Use of Leverage......................................................
Relationship with the Bank; Conflicts of Interest.......................................................
The Bank as Sole Common Stockholder...................................................................
The Bank as Servicer..................................................................................
Potential Conflicts from Parent-Subsidiary Relationship...............................................
Potential Conflicts Concerning Commercial Mortgage Loans..............................................
Parties' Intentions with Respect to Potential Conflicts...............................................
Tax Considerations......................................................................................
Adverse Consequences of Failure to Qualify as a REIT..................................................
REIT Requirements with Respect to Stock Ownership.....................................................
REIT Requirements with Respect to Stockholder Distributions...........................................
Redemption Upon Occurrence of a Tax Event.............................................................
Automatic Exchange Upon Occurrence of the Exchange Event..............................................
No Third Party Valuation of the Mortgage Loans; No Arm's-Length Negotiations............................
No Prior Market for Series A Preferred Shares...........................................................
THE COMPANY...............................................................................................
USE OF PROCEEDS...........................................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CAPITALIZATION............................................................................................
BUSINESS AND STRATEGY.....................................................................................
General.................................................................................................
Dividend Policy.........................................................................................
Liquidity and Capital Resources.........................................................................
General Description of Mortgage Assets and Other Authorized Investments; Investment Policy..............
Acquisition of Initial Portfolio........................................................................
Management Policies and Programs........................................................................
Description of Initial Portfolio........................................................................
Servicing...............................................................................................
Employees...............................................................................................
Competition.............................................................................................
Legal Proceedings.......................................................................................
BENEFICIAL OWNERSHIP OF THE COMPANY.......................................................................
MANAGEMENT................................................................................................
Directors and Executive Officers........................................................................
Independent Directors...................................................................................
Audit Committee.........................................................................................
Compensation of Directors and Officers..................................................................
Limitations on Liability of Directors and Officers......................................................
The Advisor.............................................................................................
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION...........................................................
The Formation...........................................................................................
Benefits to the Bank....................................................................................
DESCRIPTION OF SERIES A PREFERRED SHARES..................................................................
General.................................................................................................
Dividends...............................................................................................
Automatic Exchange......................................................................................
Rank....................................................................................................
Voting Rights...........................................................................................
Redemption..............................................................................................
Rights Upon Liquidation.................................................................................
Independent Director Approval...........................................................................
Restrictions on Ownership and Transfer..................................................................
DESCRIPTION OF CAPITAL STOCK..............................................................................
Common Stock............................................................................................
Preferred Stock.........................................................................................
Power to Issue Additional Shares of Common Stock and Preferred Stock....................................
Restrictions on Ownership and Transfer..................................................................
Business Combinations...................................................................................
Control Share Acquisitions..............................................................................
FEDERAL INCOME TAX CONSIDERATIONS.........................................................................
Taxation of the Company.................................................................................
Failure to Qualify......................................................................................
Tax Treatment of Automatic Exchange.....................................................................
Taxation of United States Stockholders..................................................................
Taxation of Foreign Stockholders........................................................................
Information Reporting Requirements and Backup Withholding Tax...........................................
Other Tax Consequences..................................................................................
ERISA CONSIDERATIONS......................................................................................
General.................................................................................................
Plan Asset Regulation...................................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Effect of Plan Asset Status.............................................................................
Prohibited Transactions.................................................................................
Unrelated Business Taxable Income.......................................................................
CERTAIN INFORMATION REGARDING THE BANK....................................................................
General.................................................................................................
Ownership Structure.....................................................................................
Basis for 1992 Recapitalization.........................................................................
Basis for 1995 Recapitalization.........................................................................
New Management and Initiatives..........................................................................
Selected Consolidated Financial and Other Data of the Bank..............................................
Risk Factors and Other Considerations...................................................................
UNDERWRITING..............................................................................................
EXPERTS...................................................................................................
CERTAIN LEGAL MATTERS.....................................................................................
ADDITIONAL INFORMATION....................................................................................
GLOSSARY..................................................................................................
INDEX TO FINANCIAL STATEMENT.............................................................................. F-1
ANNEX I--OFFERING CIRCULAR FOR BANK PREFERRED SHARES...................................................... OC-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "GLOSSARY" COMMENCING AT
PAGE FOR THE DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS. THE
OFFERING OF SHARES OF % NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A,
PAR VALUE $0.01 PER SHARE (THE "SERIES A PREFERRED SHARES"), HEREUNDER IS
REFERRED TO HEREIN AS THE "OFFERING." UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION DESCRIBED
IN "UNDERWRITING" IS NOT EXERCISED.
RISK FACTORS
Prospective purchasers of the Series A Preferred Shares should carefully
read all of the information set forth in this Prospectus and, in particular,
should evaluate the specific factors under "Risk Factors" commencing on page 18
for risks involved with an investment in the Series A Preferred Shares. Among
such risks are the following:
- The Company is a newly organized corporation with no operating history.
- The Company will be dependent in virtually every phase of its operations
on the diligence and skill of the officers, employees and agents of the
Bank.
- A decline in the performance or capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could lead to
an Exchange Event which would require an exchange of the Series A
Preferred Shares for Bank Preferred Shares (which would represent an
investment in the Bank and not in the Company). An investment in the Bank
involves an investment in a business that is broader in scope than the
business of the Company. The Bank is required to, among other things,
maintain certain minimum capital levels and comply with other federal
regulatory requirements applicable to the Bank. In addition, the Bank's
overall profitability depends on the performance of the Bank's loan
portfolio and the Bank's reliance on non-interest income. See "Risk
Factors--Risk Associated with the Bank's Capital Position and the Possible
Receivership of the Bank."
- As a subsidiary of the Bank, the Company is subject to the possibility
that federal regulators will restrict the ability of the Company to
transfer assets, to make distributions to stockholders, including
dividends to the holders of Series A Preferred Shares, or to redeem shares
of Preferred Stock. Under certain circumstances, certain of these
restrictions could result in the Company's failure to qualify as a REIT.
- Because the rate at which dividends are required to be paid is fixed, a
significant decline in interest rates might adversely affect the amount of
the Company's interest income on its assets and therefore its ability to
pay dividends on the Series A Preferred Shares.
- Dividends are not cumulative. Consequently, if the Board of Directors does
not authorize and declare a dividend on the Series A Preferred Shares for
any quarterly period, including if prevented by federal regulators from
paying such dividend, the holders thereof would not be entitled to recover
such dividend whether or not funds are or subsequently become available.
The Board of Directors may determine that it would be in the best
interests of the Company to pay less than the full amount of the stated
dividends on the Series A Preferred Shares or no dividends for any
quarter, notwithstanding that funds are available (which would reduce an
investor's effective annual yield on the Series A Preferred Shares under
such circumstances). To remain qualified as a REIT, however, the Company
must distribute annually at least 95% of its REIT taxable income to
stockholders. The Company expects that the Board of Directors will
authorize dividends on the Series A Preferred Shares quarterly.
1
<PAGE>
- Investments in Mortgage Loans generally are subject to price fluctuations
based on changes in interest rates and problems unique to particular
geographic regions, such as California, where the Company's Mortgage Loans
are concentrated, which could adversely affect the (i) value of the
Mortgage Assets held by the Company and thereby the value of the Series A
Preferred Shares and (ii) the ability of the Company to pay dividends on
the Series A Preferred Shares.
- Because of the relationship between the Company and the Bank, conflicts of
interest may arise between the Bank and the Company. These potential
conflicts arise from the Bank's position as the sole holder of outstanding
voting stock of the Company, the fact that the Bank will act as Advisor
and Servicer (with respect to the Company's Commercial Mortgage Loans),
and it may have interests in such capacities that are not identical to
those of the Company. It is the intention of the Company and the Bank that
any agreements and transactions between the Company, and the Bank, be fair
to all parties and consistent with market terms. The requirement in the
Articles of Incorporation that certain actions of the Company be approved
by a majority of the Independent Directors is also intended to ensure fair
dealings between the Company and the Bank.
- If the Company fails to maintain its status as a REIT, distributions to
its stockholders will not be deductible for federal (or California state)
income tax purposes, which could have an adverse effect on the Company's
financial condition and results of operations.
- The Company's Articles of Incorporation provide that, subject to certain
exceptions, no individual or entity is permitted to own, or be deemed to
own by virtue of the attribution rules of the Code (as defined herein),
more than 7.5% of the aggregate initial liquidation value of the issued
and outstanding shares of Preferred Stock of the Company, including the
Series A Preferred Shares. Any Series A Preferred Shares held by any
individual or entity in violation of the foregoing limits will be
automatically transferred to a trust for the exclusive benefit of a
charity to be named by the Company. See "Description of Capital
Stock--Restrictions on Ownership and Transfer."
- Although the Series A Preferred Shares will be listed on the Nasdaq
National Market, the Bank does not intend to apply for listing of the Bank
Preferred Shares upon the occurrence of an Exchange Event on any national
securities exchange or automated quotation system. Consequently, there can
be no assurance as to the liquidity of the trading market for the Bank
Preferred Shares, if issued, or that an active public market for the Bank
Preferred Shares would develop or be maintained.
THE COMPANY
The Company is a Maryland corporation incorporated in June 1997 for the
purpose of acquiring, holding and managing Mortgage Assets and Other Authorized
Investments. The Company will elect to be subject to tax as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"), and, as a result,
distributions of its earnings to its stockholders will be deductible by the
Company for federal (as well as California state) income tax purposes to the
extent it maintains its qualification as a REIT. All of the shares of the
Company's Common Stock are owned by the Bank. The Bank currently intends that,
so long as any Series A Preferred Shares are outstanding, it will maintain
direct or indirect ownership of at least a majority of the outstanding shares of
Common Stock of the Company.
Simultaneously with the consummation of the Offering, the Bank, as owner of
the Company's Common Stock, will make a capital contribution to the Company
equal to approximately $31.3 million. The Bank will also make additional capital
contributions to the Company in an amount equal to the aggregate amount of
underwriting commissions and expenses incurred by the Company in connection with
the Offering (including, without limitation, any underwriting commissions
associated with any exercise by the Underwriters of their over-allotment option)
and all expenses incurred by the Company in connection with its formation in
order to provide the Company with funds sufficient to pay such expenses. The
Company will use the aggregate net proceeds of approximately $62.3 million
received in connection with
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both the Offering and the capital contribution by the Bank to purchase the
Initial Portfolio from the Bank. The Company will use the additional proceeds
from any such additional sales of Series A Preferred Shares and capital
contributions to purchase additional Mortgage Assets and otherwise to make Other
Authorized Investments. See "Use of Proceeds."
The Company and the Bank are undertaking the Offering for the following
principal reasons: (i) the Offering will strengthen the Bank's regulatory
capital position, as $28.4 million of the proceeds from the Series A Preferred
Shares will qualify as core capital of the Bank under relevant federal
regulatory capital guidelines, (ii) the Offering will provide the Bank with the
opportunity to expand its business and thereby increase its earnings, which
would permit accelerated utilization of existing net operating loss
carryforwards; and (iii) dividends paid on the Series A Preferred Shares will,
as a result of the Company's qualification as a REIT, be tax deductible in
computing the REIT's taxable income. See "Certain Transactions Constituting the
Formation--Benefits to the Bank" and "Pro Forma Regulatory Capital" in the
Offering Circular attached as Annex I hereto.
Upon the occurrence of an Exchange Event, each Series A Preferred Share will
be exchanged automatically for one newly issued Bank Preferred Share.
CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES COULD BE REPLACED,
WITHOUT THE CONSENT OF THE INVESTOR, BY AN INVESTMENT IN BANK PREFERRED SHARES
AT A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR THE BANK HAS
BEEN PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP. ACCORDINGLY, POTENTIAL
INVESTORS IN THE SERIES A PREFERRED SHARES SHOULD CAREFULLY CONSIDER THE
DESCRIPTION OF THE BANK SET FORTH IN THE OFFERING CIRCULAR ATTACHED HERETO AS
ANNEX I. See also "Description of Series A Preferred Shares--Automatic
Exchange."
An Exchange Event is likely to occur if the Bank becomes undercapitalized.
The Bank will be considered to be "undercapitalized" under the current prompt
corrective action regulations if it has (i) a core capital (or leverage) ratio
of less than 4.0%, (ii) a Tier 1 risk-based capital ratio of less than 4.0% or
(iii) a total risk-based capital ratio of less than 8.0%. Core capital generally
consists of common stockholder's equity, noncumulative perpetual preferred
stock, and minority interests in consolidated subsidiaries, less certain
intangible assets and investments in certain subsidiaries. The minimum
risk-based capital requirement represents the ratio of total capital (core
capital plus supplementary capital) to risk-weighted assets (which equals assets
plus the credit risk equivalent of certain off-balance sheet items, each
multiplied by the appropriate risk weight). Supplementary capital includes,
among other things, certain qualifying subordinated debt and a portion of the
general loan loss allowance. For purposes of the prompt corrective action
regulations, the Bank's capital category is determined as of the most recent
date (i) certain quarterly financial reports are required to be filed with the
regulators, (ii) a final report of examination has been delivered to the Bank or
(iii) the Bank is notified in writing by the OTS of its capital category or a
change in such category. At June 30, 1997 and December 31, 1996, 1995 and 1994,
the Bank's core capital (or leverage) ratio was 4.76%, 4.57%, 4.18% and 1.08%,
respectively, its Tier 1 risk-based capital ratio was 9.65%, 9.15%, 7.56% and
2.01%, respectively, and its total risk-based capital ratio was 10.91%, 10.38%,
8.43% and 2.76%, respectively. After giving effect to the Offering, on a pro
forma basis, the Bank's core (or leverage) capital, Tier 1 risk-based capital
and total risk-based capital ratios at June 30, 1997 would have been 6.35%,
12.88% and 14.13%, respectively. After the Offering, the Bank's capital ratios
are expected to decrease as the Bank expands its business and, thus, its total
assets. The Bank currently intends, by managing its growth following the
Offering, to maintain its capital ratios in excess of the "well-capitalized"
levels under the prompt corrective action regulations. However, there can be no
assurance that the Bank will be able to maintain such capital levels. See
"Certain Information Regarding the Bank--Risk Factors and Other
Considerations--Regulatory Capital Levels" and "Pro Forma Regulatory Capital" in
the Offering Circular attached as Annex I hereto.
The principal executive offices of the Company are located at 5900 Wilshire
Boulevard, Los Angeles, California 90036, and the telephone number is (213)
938-6300.
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THE BANK
The Bank, formerly named Southern California Federal Savings and Loan
Association, is a federally chartered and insured stock savings bank which is
wholly owned by SoCal Holdings, Inc. ("SOCAL"). At June 30, 1997, SOCAL had
total assets of $1.8 billion and total stockholders' equity of $72.5 million.
The common stock of SOCAL is (i) 60% owned by the Trustees of the Estate of
Bernice Pauahi Bishop, also known as Kamehameha Schools Bernice Pauahi Bishop
Estate (the "Bishop Estate"), a charitable educational trust established under
Hawaii law, (ii) 30% owned by BIL Securities (Offshore) Limited ("BIL
Securities"), a wholly owned subsidiary of Brierley Investments Limited, a New
Zealand corporation, and (iii) 10% owned by Arbur, Inc. ("Arbur"), a Delaware
corporation. The preferred stock of SOCAL is owned (i) 67% by the Bishop Estate,
(ii) 24.8% by BIL Securities and (iii) 8.2% by Arbur.
The Bishop Estate operates under the terms of the will (the "Will") of
Bernice Pauahi Bishop, and is one of the largest private landowners in the State
of Hawaii. Under the terms of the Will, revenues in excess of expenses from the
Bishop Estate are used to fund the operations of and maintain The Kamehameha
Schools which are located on the islands of Hawaii.
Brierley Investments Limited is a publicly held investment corporation which
is traded on the New Zealand and Australian stock exchanges. At June 30, 1997,
Brierley Investments Limited had approximately $5.4 billion in total assets,
$2.5 billion in total liabilities and $2.9 billion in total equity (all of which
amounts have been converted into U.S. dollars).
Arbur is a closely held Delaware-chartered corporation which is wholly owned
by William E. Simon and his children. William E. Simon is the former U.S.
Secretary of the Treasury.
At June 30, 1997, the Bank conducted business from 19 full service offices
located primarily in Los Angeles County as well as Orange and Ventura Counties
in Southern California. At June 30, 1997, the Bank had total assets of $1.8
billion, total deposits of $1.3 billion and total stockholder's equity of $84.9
million. As of December 31, 1996, the Bank had $146.7 million of federal net
operating loss carryforwards and $8.7 million of state net operating loss
carryforwards which are available, subject to certain limitations, to offset
federal and state taxable income. See "Taxation" in the Offering Circular
attached as Annex I hereto. For the six months ended June 30, 1997 and the year
ended December 31, 1996, the Bank had net earnings of $6.9 million and $13.6
million and a return on average assets of 0.77% and 0.78%, respectively. See
"Certain Information Regarding the Bank--Selected Consolidated Financial Data."
The Bank Preferred Shares will only be issued upon the occurrence of an
Exchange Event. Pursuant to applicable law, the Bank Preferred Shares will not
be registered with the Securities and Exchange Commission (the "Commission") but
are being registered with the OTS. A copy of the Offering Circular filed with
the OTS relating to the Bank Preferred Shares is affixed to this Prospectus as
Annex I. The principal executive offices of the Bank are located at 5900
Wilshire Boulevard, Los Angeles, California 90036, and the telephone number at
such address is (213) 938-6300.
4
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THE OFFERING
For a more complete description of the terms of the Series A Preferred
Shares specified in the following summary, see "Description of Series A
Preferred Shares."
<TABLE>
<S> <C>
Issuer............................ People's Preferred Capital Corporation, a newly formed
Maryland corporation created for the purpose of
acquiring, holding and managing Mortgage Assets and
Other Authorized Investments.
Securities Offered................ 1,240,000 Series A Preferred Shares. The Company has
granted the Underwriters an option for 30 days to
purchase up to an additional 186,000 Series A Preferred
Shares at the initial public offering price solely to
cover over-allotments, if any.
Ranking........................... With respect to the payment of dividends and amounts
upon liquidation, the Series A Preferred Shares will
rank senior to the Company's Common Stock. As long as
any Series A Preferred Shares remain outstanding,
additional shares of Preferred Stock ranking senior to
the Series A Preferred Shares may not be issued without
the approval of the holders of at least two-thirds of
the Series A Preferred Shares. As long as any Series A
Preferred Shares remain outstanding, additional shares
of Preferred Stock ranking on a parity with the Series A
Preferred Shares may not be issued without the approval
of a majority of the Independent Directors. See
"Description of Series A Preferred Shares--Independent
Director Approval."
Use of Proceeds................... The net proceeds to the Company from the Offering,
together with proceeds received as capital contributions
from the Bank, will be used to purchase the Company's
initial portfolio of Mortgage Assets and to pay the
expenses of the Offering and the formation of the
Company (currently estimated by the Company to be
approximately $ million in the aggregate). See
"Use of Proceeds."
Dividends......................... Dividends are noncumulative and will be payable at the
rate of % per annum of the initial liquidation
preference (equivalent to $ per share per annum)
if, when and as authorized and declared by the Board of
Directors. If the Board of Directors does not authorize
and declare a dividend with respect to any quarterly
dividend period (each, a "Dividend Period"), holders of
the Series A Preferred Shares will have no right to
receive a dividend on the Series A Preferred Shares in
respect of such Dividend Period. Dividends are payable,
if authorized and declared, quarterly in arrears (pro
rated for any Dividend Period that is other than three
full months based on a 360-day year of twelve 30-day
months) on March 31, June 30, September 30 and December
31 (or, if any such day is not a business day, on the
next business day) in each year, (each such date a
"Dividend Payment Date") beginning , 1997.
Quarterly Dividend Periods will commence on and include
the first day, and end on
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<S> <C>
and include the last day, of the calendar quarter in
which the corresponding Dividend Payment Date occurs.
If any Series A Preferred Shares are outstanding, no
full dividends or other distributions shall be
authorized, declared or paid or set apart for payment on
any Junior Stock for any Dividend Period unless full
dividends have been or contemporaneously are authorized,
declared and paid, or authorized and declared and a sum
sufficient for the payment thereof is set apart for such
payments on the Series A Preferred Shares for the
then-current Dividend Period. When dividends are not
paid in full (or a sum sufficient for such full payment
is not so set apart) for any Dividend Period upon the
Series A Preferred Shares and the shares of any Parity
Stock, all dividends authorized and declared on the
Series A Preferred Shares and the shares of Parity Stock
shall only be authorized or declared PRO RATA based upon
the respective amounts that would have been paid on the
Series A Preferred Shares and any shares of Parity Stock
had dividends been authorized and declared in full.
In addition to the foregoing restriction, the Company
shall not authorize, declare, pay or set apart funds for
any dividends or other distributions (other than in
Common Stock or other Junior Stock) with respect to any
Common Stock or other Junior Stock or repurchase, redeem
or otherwise acquire, or set apart funds for repurchase,
redemption or other acquisition of, any Common Stock or
other Junior Stock through a sinking fund or otherwise,
unless and until (i) full dividends on the Series A
Preferred Shares for the four most recent preceding
Dividend Periods (or such lesser number of Dividend
Periods during which shares of Series A Preferred Shares
have been outstanding) are authorized, declared and paid
or a sum sufficient for payment has been paid over to
the dividend disbursing agent for payment of such
dividends and (ii) the Company has authorized and
declared a cash dividend on the Series A Preferred
Shares at the annual dividend rate for the then-current
Dividend Period, and sufficient funds have been paid
over to the dividend disbursing agent for the payment of
such cash dividend for such then current Dividend
Period.
No dividend shall be paid or set aside for holders of
Series A Preferred Shares for any Dividend Period unless
full dividends have been paid or set aside for the
holders of each class or series of equity securities, if
any, ranking prior to the Series A Preferred Shares as
to dividends for such Dividend Period. The Company
currently does not have any series of equity securities
outstanding that ranks prior to the Series A Preferred
Shares as to dividends and the Company currently has no
intention to issue any such securities. See "Description
of Series A Preferred Shares--Dividends."
</TABLE>
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Liquidation Preference............ The liquidation preference for each Series A Preferred
Share is $25.00, plus an amount equal to the quarterly
accrued and unpaid dividends, if any, thereon with
respect to the then-current Dividend Payment, but
without accumulation of unpaid dividends for prior
Dividend Periods. See "Description of Series A Preferred
Shares--Rights Upon Liquidation."
Redemption........................ The Series A Preferred Shares are not redeemable prior
to , 2002 (except upon the occurrence of a Tax
Event or a Change of Control). On and after ,
2002, the Series A Preferred Shares may be redeemed for
cash at the option of the Company, in whole or in part,
at any time and from time to time, at the redemption
price of $25.00 per share, plus authorized, declared and
unpaid dividends, if any, to the date fixed for
redemption, without interest.
Upon a Change of Control, the Series A Preferred Shares
are redeemable at the option of the Company, in whole,
but not in part, at a price per share equal to (i)
$25.00, plus (ii) an amount equal to the authorized,
declared and unpaid dividends, if any, to the date fixed
for redemption, without interest, and, without
duplication, an additional amount equal to the amount of
dividends that would be payable on the Series A
Preferred Shares in respect of the period from the first
day of the Dividend Period in which the date fixed for
redemption occurs to the date fixed for redemption
(assuming all such dividends were to be authorized and
declared), plus (iii) the Applicable Premium. Any
redemption of Series A Preferred Shares is subject to
the prior approval of the OTS.
Upon the occurrence of a Tax Event, the Company will
have the right at any time to redeem the Series A
Preferred Shares in whole, but not in part, at a
redemption price of $25.00 per share, plus the accrued
and unpaid dividends, if any, to the date fixed for
redemption, without interest.
Any redemption of Series A Preferred Shares is subject
to compliance with applicable regulatory and other
restrictions, including the prior approval of the OTS.
The Series A Preferred Shares will not be subject to any
sinking fund or mandatory redemption and will not be
convertible into any other securities of the Company.
See "Description of Series A Preferred
Shares--Redemption."
Automatic Exchange................ Each Series A Preferred Share will be exchanged
automatically for one newly issued Bank Preferred Share
if the appropriate federal regulatory agency directs in
writing that an exchange of the Series A Preferred
Shares for Bank Preferred Shares occur because of any of
the following: (i) the Bank becomes "undercapitalized"
under prompt corrective action regulations established
pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate
federal regulatory agency, in its sole discretion,
anticipates the Bank
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<S> <C>
becoming "undercapitalized" in the near term. Upon an
Exchange Event, each holder of Series A Preferred Shares
shall be unconditionally obligated to surrender to the
Bank all certificates representing the Series A
Preferred Shares of such holder, and the Bank shall be
unconditionally obligated to issue to such holder, in
exchange for such certificate(s), a certificate or
certificates representing an equal number of Bank
Preferred Shares.
Holders of Bank Preferred Shares would have the same
dividend rights, liquidation preference, redemption
options and other attributes as to the Bank as holders
of Series A Preferred Shares have as to the Company. Any
accrued and unpaid dividends on the Series A Preferred
Shares as of the time of exchange would be deemed to be
accrued and unpaid dividends on the Bank Preferred
Shares. The Bank Preferred Shares would rank on an equal
basis in terms of dividend payments and liquidation
preference with any then-outstanding shares of preferred
stock of the Bank. See "Description of Series A
Preferred Shares-- Automatic Exchange."
Voting Rights..................... Except as described herein or as may be required by law,
holders of Series A Preferred Shares will not have any
voting rights. In any matter on which the Series A
Preferred Shares may vote, each Series A Preferred Share
will be entitled to one vote. See "Description of Series
A Preferred Shares--Voting Rights."
Tax Consequences.................. As long as the Company qualifies as a REIT, corporate
holders of the Series A Preferred Shares will not be
entitled to a dividends-received deduction with respect
to any income recognized with respect to the Series A
Preferred Shares.
Independent Directors............. The Articles of Incorporation provide that, as long as
any Series A Preferred Shares are outstanding, certain
actions by the Company must be approved by a majority of
the Independent Directors. As long as there are only two
Independent Directors, any action that requires the
approval of a majority of Independent Directors must be
approved by both Independent Directors. In order to be
considered "independent," a director must not be a
current employee or officer of the Company or a current
employee, officer or director of the Bank or any other
affiliate of the Bank. In addition, any members of the
Board of Directors of the Company elected by holders of
Preferred Stock, including the Series A Preferred
Shares, will be deemed to be Independent Directors for
purposes of approving actions requiring the approval of
a majority of the Independent Directors.
The actions which require approval of a majority of the
Independent Directors include: (i) the issuance of
additional Preferred Stock ranking on a parity with the
Series A Preferred Shares; (ii) the incurrence of debt
for borrowed money in excess of 20% of the Company's
total stockholders' equity; (iii) the
</TABLE>
8
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<S> <C>
acquisition of assets other than Mortgage Loans,
Mortgage-Backed Securities or Other Authorized
Investments; (iv) the termination or modification of, or
the election not to renew, the Advisory Agreement or any
Servicing Agreement or the subcontracting of any duties
under the Advisory Agreement or the Servicing Agreements
(other than as specifically contemplated in connection
with the Offering) to third parties unaffiliated with
the Bank; (v) any material amendment to or modification
of either of the Mortgage Purchase Agreements; (vi) the
determination to revoke the Company's REIT status; and
(vii) any dissolution, liquidation or termination of the
Company prior to , 2007. The Articles of
Incorporation provide that the Independent Directors
will consider the interests of holders of both the
Common Stock and the Preferred Stock, including the
Series A Preferred Shares, in determining whether any
proposed action requiring their approval is in the best
interests of the Company.
Ownership Limits.................. In order to reduce the likelihood that the Company's
status as a REIT for federal income tax purposes is
jeopardized, the Articles of Incorporation provide that,
subject to certain exceptions, no individual or entity
may own, or be deemed to own by virtue of the
attribution rules of the Code, more than 7.5% of the
aggregate initial liquidation value of the issued and
outstanding shares of Preferred Stock, including the
Series A Preferred Shares. The transfer of any shares of
Preferred Stock, including the Series A Preferred Shares
(including the occurrence of events other than actual
transfers of Preferred Stock that result in changes in
constructive ownership of Preferred Stock), in violation
of the Ownership Limit will cause the shares of
Preferred Stock owned, or deemed to be owned, by or
transferred to a stockholder in excess of such Ownership
Limit to be automatically be transferred to a trust for
the exclusive benefit of a charitable beneficiary to be
named by the Company. All rights to dividends to such
shares will be held by such trust. See "Description of
Capital Stock--Restrictions on Ownership and Transfer."
Trading........................... The Company has received approval to list the Series A
Preferred Shares on the Nasdaq National Market, subject
to official notice of issuance, under the symbol
"PPCCP."
</TABLE>
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the Company
and the Bank will engage in the transactions described under "Certain
Transactions Constituting the Formation--The Formation." These transactions are
designed (i) to facilitate the Offering, (ii) to transfer the ownership of the
Initial Portfolio to the Company and (iii) to enable the Company to qualify as a
REIT for federal income tax purposes commencing with its taxable year ending
December 31, 1997.
9
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The following chart outlines the relationship between the Company and the
Bank following completion of the Offering (without giving effect to the expenses
of the Offering).
[CHART]
BENEFITS TO THE BANK
The Bank expects to realize the following benefits (which are described in
more detail under "Certain Transactions Constituting the Formation--Benefits to
the Bank") in connection with the Offering and other transactions constituting
the formation of the Company:
- The Bank has advised the Company that the Bank expects a portion of the
Series A Preferred Shares to qualify as core capital of the Bank under
relevant regulatory capital guidelines. The increase in the Bank's core
capital and risk-based capital levels will enable the Bank to originate or
acquire additional interest-earning assets, which management expects will
result in incrementally higher related earnings.
- The dividends paid on the Series A Preferred Shares will be deductible for
income tax purposes as a result of the Company's qualification as a REIT,
which provides the Bank with a more cost-effective means of obtaining
regulatory capital than if the Bank were to issue preferred stock.
- The Bank will receive approximately $62.3 million in connection with the
sale of the Initial Portfolio to the Company (approximately $
million of which represents new funds after giving effect to the Bank's
expense of purchasing the Company's Common Stock and additional capital
contributions).
- The Bank will be entitled to receive annual advisory and servicing fees
and annual dividends in respect of the Common Stock. For the first 12
months following completion of the Offering, these annual fees and
dividends are anticipated to be approximately $234,000 and $ ,
respectively. See "Business and Strategy--Dividend Policy," "--Servicing"
and "Management--The Advisor."
- The Bank also will be entitled to retain any ancillary fees, including,
but not limited to, late payment charges, penalties and assumption fees
collected in connection with the Commercial Mortgage Loans serviced by the
Bank. In addition, the Bank will receive any benefit derived from interest
earned on collected principal and interest payments between the date of
collection and the date of remittance to the Company and from interest
earned on tax and insurance impound funds with respect to Commercial
Mortgage Loans serviced by the Bank. The Bank's designated Servicing
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Agent (as defined herein) will be entitled to receive the fees and other
described associated benefits for servicing the Residential Mortgage Loans
held by the Company.
BUSINESS AND STRATEGY
GENERAL. The Company's principal business objective is to acquire, hold and
manage Mortgage Assets and Other Authorized Investments that will generate net
income for distribution to stockholders. The Company expects that all of its
Mortgage Assets will be acquired from the Bank or purchased from unaffiliated
third parties as whole loans ("Mortgage Loans") secured by first mortgages or
deeds of trust on single-family (one- to four-unit) residential real estate
properties ("Residential Mortgage Loans") or by multi-family residential and
commercial properties (collectively, "Commercial Mortgage Loans"). Although the
Company has the authority to acquire an unlimited number of Residential Mortgage
Loans and Commercial Mortgage Loans from unaffiliated third parties such as
other financial institutions and mortgage banks, all of the Initial Portfolio
will be acquired from the Bank. The Company has no present plans or expectations
with respect to purchases from unaffiliated third parties. The Company may also
from time to time acquire mortgage-backed securities either issued or guaranteed
by agencies of the federal government or government sponsored agencies or issued
by third parties (including the Bank) and rated investment grade by at least one
nationally recognized independent rating organization and representing interests
in or obligations backed by pools of Mortgage Loans ("Mortgage-Backed
Securities"). Mortgage Loans underlying the Mortgage-Backed Securities will be
secured by single-family residential, multifamily or commercial real estate
properties located in the United States. The Company also has the ability to
acquire any non-mortgage related securities, in an amount equal to 20% of the
value of the Company's total assets ("Other Authorized Investments.")
The Company expects that all Mortgage Loans to be acquired by the Company
will be whole loans, will represent first lien positions and will be acquired on
a basis consistent with general loan sale transactions conducted in the
secondary market. Management believes that the Mortgage Loans to be included in
the Initial Portfolio have been, and management currently intends that Mortgage
Loans acquired in the future will have been, originated and underwritten in
conformity with standards generally applied by the Bank at the time the Mortgage
Loans were originated. The Company's current policy prohibits the acquisition of
any Mortgage Loan or any interest in a Mortgage Loan (other than an interest
resulting from the acquisition of Mortgage-Backed Securities), in which the
Mortgage Loan (i) is delinquent in the payment of principal or interest; (ii) is
or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) has been, more than once during the preceding 12 months, more
than 30 days past due in the payment of principal or interest.
INITIAL PORTFOLIO. The Mortgage Loans expected to be included in the
Initial Portfolio had an aggregate outstanding principal balance of $62.3
million (as of June 30, 1997). The Initial Portfolio consists of approximately
78.2% (measured by outstanding principal balance) of Residential Mortgage Loans
and approximately 21.8% of Commercial Mortgage Loans. See "Business and
Strategy--Description of the Initial Portfolio--Residential Mortgage Loans" and
"--Commercial Mortgage Loans." The Bank will enter into a servicing agreement
with respect to the Commercial Mortgage Loans (the "Commercial Servicing
Agreement") pursuant to which it will service the Commercial Mortgage Loans held
by the Company and will be entitled to receive fees in connection with the
servicing of such Commercial Mortgage Loans. In March 1997, the Bank sold the
servicing rights with respect to substantially all of its Residential Mortgage
Loans, including all of the Residential Mortgage Loans to be included in the
Initial Portfolio, to Temple Inland Mortgage Corporation (the "Servicing
Agent"), a wholly owned subsidiary of Guaranty Federal Bank, F.S.B., which is
wholly owned by Temple-Inland Inc., an unrelated third party.
In connection with the Bank's sale of servicing, the Bank in March 1997
entered into a servicing agreement with the Servicing Agent (the "Residential
Servicing Agreement"), pursuant to which the Servicing Agent will service
substantially all of the Bank's Residential Mortgage Loans. Pursuant to an
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Assignment, Assumption and Recognition Agreement to be entered into between the
Company, the Bank and the Servicing Agent (the "Residential Assumption Servicing
Agreement"), the Servicing Agent will service the Residential Mortgage Loans
which will be sold by the Bank to the Company, in accordance with the terms of
the Residential Servicing Agreement.
The Servicing Agent will be entitled to receive fees in connection with the
servicing of such Residential Mortgage Loans. The Residential Servicing
Agreement and the Commercial Servicing Agreement are collectively referred to as
the "Servicing Agreements." The Bank, in its role as servicer under the
Commercial Servicing Agreement and the Servicing Agent, in its role as servicer
under the Residential Servicing Agreement, are hereinafter referred to
individually as the "Servicer" and collectively as the "Servicers." In addition,
the Bank, in its capacity as Servicer under the Commercial Servicing Agreement,
may, from time to time, subject to approval of a majority of the Independent
Directors, subcontract all or a portion of its obligations thereunder. See
"Business and Strategy--Servicing."
The Company and the Bank intend that the fair value of the Initial Portfolio
will approximately equal the amount (approximately $62.3 million) that the
Company will pay for the Initial Portfolio. However, no independent third party
valuations of the Mortgage Loans constituting the Initial Portfolio have been or
will be obtained for purposes of the Offering. See "Risk Factors--No Third Party
Valuation of the Mortgage Loans; No Arm's-Length Negotiations."
ADVISORY AGREEMENT. The Company will enter into an advisory agreement with
the Bank (the "Advisory Agreement") pursuant to which the Bank will administer
the day-to-day operations of the Company. The Bank in its role as advisor under
the terms of the Advisory Agreement is hereinafter referred to as the "Advisor."
The Advisor will be responsible for, among other things: (i) monitoring the
credit quality of Mortgage Assets and Other Authorized Investments held by the
Company; (ii) advising the Company with respect to the acquisition, management,
financing and disposition of the Company's Mortgage Assets and Other Authorized
Investments; and (iii) representing the Company in its day-to-day dealings with
persons to whom the Company interacts. In performing its duties under the
Advisory Agreement, the Advisor is required to act in a manner that is
consistent with maintaining the Company's qualification as a REIT. The Advisor
may from time to time subcontract all or a portion of its obligations under the
Advisory Agreement to one or more of its affiliates involved in the business of
managing Mortgage Assets and Other Authorized Investments. The Advisor may, with
the approval of a majority of the Board of Directors, as well as a majority of
the Independent Directors, subcontract all or a portion of its obligations under
the Advisory Agreement to unrelated third parties. The Advisor will not, in
connection with the subcontracting of any of its obligations under the Advisory
Agreement, be discharged or relieved in any respect from its obligations under
the Advisory Agreement. The Advisor and its personnel have substantial
experience in mortgage finance and in the administration of Mortgage Loans and
Other Authorized Investments.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As long
as any Series A Preferred Shares remain outstanding, any decision by the Company
either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $200,000. See "Management--The Advisor."
See "Certain Transactions Constituting the Formation--Benefits to the Bank"
for information regarding the aggregate amounts payable to the Bank in
connection with the Offering and the transactions to be entered into in
connection with the Offering.
MANAGEMENT. The Company's Board of Directors is composed of seven members,
two of whom will be Independent Directors. Certain actions by the Company
require the prior approval of a majority of Independent Directors. As long as
there are only two Independent Directors, any action that requires the
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approval of a majority of the Independent Directors must be approved by both
Independent Directors. Pursuant to the Articles of Incorporation, the
Independent Directors are required to take into account the interests of the
holders of both the Preferred Stock, including the Series A Preferred Shares,
and the Common Stock in assessing the benefit to the Company of any proposed
action requiring their approval. The Company currently has four officers. The
Company has no other employees and does not anticipate that it will require
additional employees. See "Management."
ADDITIONAL INVESTMENT. The Company may from time to time purchase
additional Mortgage Loans, Mortgage-Backed Securities or Other Authorized
Investments out of proceeds received in connection with the repayment or
disposition of Mortgage Loans, Mortgage-Backed Securities, Other Authorized
Investments or the issuance of additional shares of Common Stock or Preferred
Stock. Additional shares of Preferred Stock ranking senior to the Series A
Preferred Shares may not be issued by the Company without the approval of the
holders of at least two-thirds of the outstanding Series A Preferred Shares.
Additional shares of Preferred Stock ranking on a parity with the Series A
Preferred Shares may not be issued by the Company without the approval of a
majority of the Independent Directors. See "Description of Series A Preferred
Shares--Voting Rights" and "--Independent Director Approval." The Company does
not currently intend to issue any additional shares of Preferred Stock unless it
simultaneously receives additional capital contributions from the Bank equal to
the sum of the aggregate offering price of such additional Preferred Stock and
the Company's expenses (including any underwriting commissions or placement
fees) incurred in connection with the issuance of such additional shares of
Preferred Stock. The Company anticipates that, prior to its issuance of
additional shares of Preferred Stock, it will take into consideration, among
other things, the Bank's regulatory capital requirements and an assessment of
other available options for raising any necessary capital. The Company currently
anticipates that substantially all of the Mortgage Loans that it may acquire in
the future will be purchased from the Bank, although the Company may acquire
Mortgage Loans from unaffiliated third parties (subject in all cases to
satisfaction of the Company's underwriting standards). See "Certain Transactions
Constituting the Formation--Benefits to the Bank and Its Affiliates."
NEWLY FORMED ENTITY. As a newly formed entity, the Company has no prior
operating history. Immediately after the issuance by the Company of the Series A
Preferred Shares to the public and the Common Stock to the Bank and the purchase
by the Company of the Initial Portfolio, the Company (assuming that (i) the
Underwriters' over-allotment option is not exercised and (ii) there are
$ million in aggregate Offering and organizational expenses) will have
$62.3 million in Mortgage Assets, $12,400 of stated capital attributable to the
Series A Preferred Shares, $100 of stated capital attributable to the Common
Stock and approximately $ million of additional paid-in capital. See
"Capitalization."
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ending December 31, 1997. As a
REIT, the Company generally will not be subject to federal (as well as
California state) income tax on net income and capital gains that it distributes
to the holders of its Common Stock and Preferred Stock, including the Series A
Preferred Shares.
The Company has received a legal opinion from its counsel, Elias, Matz,
Tiernan & Herrick L.L.P., to the effect that, based upon the Code,
administrative rulings, judicial decisions and regulations, all as in effect as
of the date of such opinion, commencing with the taxable year ending December
31, 1997, the Company will be owned and organized in such a manner as to qualify
as a REIT, and its proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT. The opinion received by
the Company is based upon certain factual assumptions relating to the
organization and operation of the Company, and the composition of its assets,
and is conditioned upon certain representations made by the Company as to
factual matters, such as the organization and expected manner of
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operation of the Company. The Company's qualification and taxation as a REIT
depends upon the Company's ability to meet, through actual annual operating
results, distribution levels and diversity of stock ownership, and the various
qualification tests imposed under the Code. No assurance can be given that the
actual results of the Company for any one taxable year will satisfy the REIT
requirements. Notwithstanding qualification for taxation as a REIT, the Company
may be subject to certain state and/or local taxes on its income and property
and federal income and excise taxes on its undistributed income. See "Risk
Factors--Tax Risks" and "Federal Income Tax Considerations."
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RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION IN
CONJUNCTION WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE
PURCHASING SERIES A PREFERRED SHARES IN THE OFFERING. FOR A DESCRIPTION OF
CERTAIN RISK FACTORS RELATING TO THE BANK AND THE BANK PREFERRED SHARES,
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER THE INFORMATION
CONTAINED IN THE SECTION ENTITLED "RISK FACTORS" IN THE ATTACHED OFFERING
CIRCULAR. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND
INFORMATION RELATING TO THE COMPANY THAT ARE BASED ON THE BELIEFS OF MANAGEMENT
AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO
MANAGEMENT. IN ADDITION, IN THOSE AND OTHER PORTIONS OF THIS DOCUMENT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND," "SHOULD" AND SIMILAR
EXPRESSIONS, OR THE NEGATIVE THEREOF, AS THEY RELATE TO THE COMPANY OR THE
COMPANY'S MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS REFLECT THE CURRENT VIEWS OF THE COMPANY WITH RESPECT TO FUTURE
LOOKING EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS,
INCLUDING THE RISK FACTORS DESCRIBED IN THIS PROSPECTUS. SHOULD ONE OR MORE OF
THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS
ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE COMPANY DOES NOT
INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
NO OPERATING HISTORY; DEPENDENCE UPON THE BANK AS ADVISOR AND THE BANK AND THE
SERVICING AGENT AS SERVICERS
The Company is a newly organized corporation with no operating history and
no revenues to date. The Company will be dependent for the selection,
structuring and monitoring of its Mortgage Assets and Other Authorized
Investments on the diligence and skill of its officers (all of whom are also
officers of the Bank) and the officers and employees of the Bank, as Advisor.
The Advisor may, subject to the approval of a majority of the Independent
Directors, subcontract all or a portion of its obligations under the Advisory
Agreement to non-affiliates involved in the business of managing Mortgage
Assets. The Company will also be dependent upon the expertise of the Bank and
the Servicing Agent, as Servicers, for the servicing of its Commercial Mortgage
Loans and Residential Mortgage Loans, respectively. In addition, the Bank, in
its capacity as Servicer under the Commercial Servicing Agreement, may, from
time to time, subject to the approval of a majority of the Independent
Directors, subcontract all or a portion of its obligations thereunder. The
Company will be dependent upon any other subcontractor that may be utilized in
the future. See "Management--The Advisor" and "Business and
Strategy--Servicing."
POTENTIAL OF AUTOMATIC EXCHANGE OF SERIES A PREFERRED SHARES INTO BANK PREFERRED
SHARES WHEN POSSIBILITY OF BANK RECEIVERSHIP EXISTS
The returns from an investment in the Series A Preferred Shares will be
dependant to a significant extent on the performance and capital levels of the
Bank. A decline in the performance and capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could result in the
exchange of the Series A Preferred Shares for Bank Preferred Shares, which would
be an investment in the Bank and not in the Company. As a result, holders of
Series A Preferred Shares would become preferred stockholders of the Bank at a
time when the Bank's financial condition had deteriorated or when the Bank had
been placed into conservatorship or receivership. An investment in the Bank also
involves an investment in a business that is broader in scope than the business
of the Company. The Bank is required to, among other things, maintain certain
minimum capital levels and comply with other regulatory requirements applicable
to the Bank. In addition, the Bank's overall profitability depends on the
performance of the Bank's loan portfolio and the Bank's reliance on non-interest
income. As with equity investments in depository institutions generally, in the
event of a liquidation of the Bank, the claims of depositors and creditors of
the Bank would be entitled to a priority of payment over the claims of holders
of equity interests such as the Bank Preferred Shares. As a result of such
subordination, if the Bank were to be placed into receivership (whether before
or after the Automatic Exchange), the holders of the Bank Preferred Shares
likely would receive, if anything, substantially less than the holders of the
Series A Preferred Shares would have
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received had the Series A Preferred Shares not been exchanged for Bank Preferred
Shares. Furthermore, it is unlikely that the Bank would be in a financial
position, after the occurrence of the Automatic Exchange, to make any dividend
payments on the Bank Preferred Shares. In addition, an exchange of the Series A
Preferred Shares for Bank Preferred Shares would be a taxable event under the
Code to each holder of the Series A Preferred Shares. Each holder of the Series
A Preferred Shares would incur a gain or loss, as the case may be, measured by
the difference between the basis of such holder in the Series A Preferred Shares
and the fair market value of the Bank Preferred Shares received in the exchange.
See "Federal Income Tax Consequences--Tax Treatment of Automatic Exchange."
Potential investors in the Series A Preferred Shares should carefully consider
the risks with respect to an investment in the Bank set forth under "Certain
Information Regarding the Bank--Risk Factors and Other Considerations." See also
"Description of Series A Preferred Shares--Automatic Exchange."
Although the Series A Preferred Shares will be listed on the Nasdaq National
Market, the Bank does not intend to apply for listing of the Bank Preferred
Shares on any national securities exchange or for quotation of the Bank
Preferred Shares through the Nasdaq National Market. Consequently, there can be
no assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred Shares
would develop or be maintained.
DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY
OVERSIGHT BY REGULATORY AUTHORITIES; ABILITY TO RESTRICT COMPANY
ACTIONS. Because the Company is a subsidiary of the Bank, regulatory
authorities will have the right to examine the Company and its activities. Under
certain circumstances, including any determination that the Bank's relationship
to the Company results in an unsafe and unsound banking practice, such
regulatory authorities will have the authority to restrict the ability of the
Company to transfer assets, to make distributions to its stockholders (including
dividends to the holders of Series A Preferred Shares) or to redeem shares of
Preferred Stock, or even to require the Bank to sever its relationship with or
divest its ownership of the Company. Such actions could potentially result in
the Company's failure to qualify as a REIT. See "--Tax Risks."
RESTRICTIONS PERTAINING TO BANK REGULATORY CAPITAL REQUIREMENTS. Payment of
dividends on the Series A Preferred Shares could also be subject to regulatory
limitations if the Bank becomes "undercapitalized" for purposes of the OTS
prompt corrective action regulations, which is currently defined as having a
total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital
ratio of less than 4.0% and a core capital (or leverage) ratio of less than
4.0%. At June 30, 1997, the Bank's total risk-based capital ratio was 10.91%,
its Tier 1 risk-based capital ratio was 9.65% and its core capital (or leverage)
ratio was 4.76%. Such ratios, on a pro forma basis as of June 30, 1997 after
giving effect to the Offering, would have been 14.13%, 12.88% and 6.35%,
respectively. After the Offering, the Bank's capital ratios are expected to
decrease as the Bank expands its business and, thus, its total assets. The Bank
currently intends, by managing its growth following the Offering, to maintain
its capital ratios in excess of the "well-capitalized" levels under the prompt
corrective action regulations. However, there can be no assurance that the Bank
will be able to maintain such capital levels. In addition, federal regulatory
authorities would have the authority to restrict the ability of the Company to
pay dividends to its stockholders if such dividend payments were inconsistent
with the safe and sound operation of the Bank. See "Certain Information
Regarding the Bank--Risk Factors and Other Considerations--Regulatory Capital
Levels" and "Pro Forma Regulatory Capital" in the Offering Circular attached as
Annex I hereto.
RESTRICTIONS PERTAINING TO AUTOMATIC EXCHANGE. If the Automatic Exchange
were to occur, the Bank would likely be prohibited from paying dividends on the
Bank Preferred Shares. In all circumstances following the Automatic Exchange,
the Bank's ability to pay dividends would be subject to various restrictions
under OTS regulations. In addition, in the event of a liquidation of the Bank,
the claims of the Bank's depositors and of its creditors would be entitled to a
priority of payment over the dividend and other claims of holders of equity
interests such as the Bank Preferred Shares issued pursuant to the Automatic
Exchange.
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RESTRICTIONS PERTAINING TO BANK CAPITAL DISTRIBUTION REGULATIONS. Under OTS
regulations, the ability of thrift institutions such as the Bank to make
"capital distributions" (defined to include payment of dividends, stock
repurchases, cash-out mergers and other distributions charged against the
capital accounts of an institution) varies depending primarily on the
institution's earnings and regulatory capital levels. While the Company believes
that dividends on the Series A Preferred Shares should not be considered
"capital distributions" for this purpose, there can be no assurances that the
OTS would agree with this position. However, without addressing the issue of
whether dividends on the Series A Preferred Shares are "capital distributions"
subject to the regulations, the Company believes that the OTS would not object
to the Company's payment of quarterly dividends on the Series A Preferred Shares
in an amount up to the amount of the Company's net income for that quarter. The
Company currently expects that its net income will be in excess of amounts
needed to pay dividends on the Series A Preferred Shares. See "Business and
Strategy--Dividends."
Dividends on the Series A Preferred Shares in excess of the Company's net
income could be treated as "capital distributions" by the OTS, in which case the
Company's payment of such dividends would be subject to restrictions under the
OTS capital distribution regulations. Under these regulations, institutions are
divided into three categories, or tiers. Tier 1 institutions are those in
compliance with their "fully phased-in" capital requirements and which have not
been notified by the OTS that they are "in need of more than normal
supervision." Tier 1 institutions may make capital distributions without
regulatory approval of up to the greater of (i) 100% of net income for the
calendar year to date, plus up to one-half of the institution's surplus capital
(i.e., the excess of capital over the fully phased-in requirement) at the
beginning of the calendar year in which the distribution is made or (ii) 75% of
net income for the most recent four quarters. Tier 1 institutions that make
capital distributions under the foregoing rules must continue to meet the
applicable capital requirements on a pro forma basis after giving effect to such
distributions. Tier 1 institutions may seek OTS approval to pay dividends beyond
these amounts.
The category of Tier 2 institutions, which are defined as institutions that
are in compliance with their current, but not their "fully phased-in" capital
requirements, is no longer relevant because all deductions from capital
requirements have been fully phased-in as of July 1, 1996.
Tier 3 institutions have capital levels below their current required minimum
levels and may not make any capital distributions without the prior written
approval of the OTS.
As of June 30, 1997, on the basis of the Bank's capital levels, the Bank was
a Tier 1 institution. However, the OTS retains discretion under its capital
distribution regulations to treat an institution that it believes is in need of
more than normal supervision (after written notice) as a Tier 3 institution.
The OTS retains general discretion to prohibit any otherwise permitted
capital distribution on general safety and soundness grounds and must be given
30 days advance notice of all capital distributions.
IMPACT OF FLUCTUATIONS IN INTEREST RATES
The Company's income will consist primarily of interest payments on the
Mortgage Loans held by it. While the Company anticipates that all of the
Residential Mortgage Loans and Commercial Mortgage Loans included in the Initial
Portfolio will bear interest at fixed rates, the Company may purchase Mortgage
Loans in the future which will bear interest at adjustable rates. Adjustable
rate loans decrease the risks to a lender associated with changes in interest
rates but involve other risks, primarily because as interest rates rise, the
payment by the borrower rises to the extent permitted by the terms of the loan,
thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. In a declining interest rate environment, the Company may
experience an increase in prepayments on its Mortgage Loans as borrowers
refinance their mortgages at lower interest rates. Under such circumstances, the
Company may find it more difficult to purchase additional Mortgage Loans bearing
rates sufficient to support payment of the dividends on the Series A Preferred
Shares. In addition, certain Residential Mortgage Loan products which the
Company may
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purchase in the future could allow borrowers in such an interest rate
environment to convert an adjustable rate mortgage to a fixed rate mortgage,
"locking in" a low fixed interest rate. Because the rate at which dividends are
required to be paid on the Series A Preferred Shares is fixed, there can be no
assurance that an interest rate environment in which there is a significant
decline in interest rates would not adversely affect the Company's ability to
pay dividends on the Series A Preferred Shares.
DIVIDENDS NOT CUMULATIVE
In order to qualify as Tier 1 capital, dividends on the Series A Preferred
Shares are not cumulative. Consequently, if the Board of Directors does not
authorize and declare a dividend on the Series A Preferred Shares for any
quarterly period, including in the event the Company is prevented from paying
such dividend by the OTS, the holders of the Series A Preferred Shares would not
be entitled to recover such dividend whether or not funds are or subsequently
became available. The Board of Directors may determine that it would be in the
best interests of the Company to pay less than the full amount of the stated
dividends on the Series A Preferred Shares or no dividends for any quarter
notwithstanding that funds are available. Factors that would generally be
considered by the Board of Directors in making this determination are the
Company's financial condition and capital needs, the impact of legislation and
regulations as then in effect or as may be proposed, economic conditions and
such other factors as the Board may deem relevant. Notwithstanding the
foregoing, to remain qualified as a REIT, the Company must distribute annually
at least 95% of its "REIT taxable income" (as defined herein) to stockholders.
See "--Tax Risks," below and "Federal Income Tax Considerations--Taxation of the
Company--Organizational Requirements."
CHARACTERISTICS ASSOCIATED WITH MORTGAGE LOANS GENERALLY
An investment in the Series A Preferred Shares may be affected by, among
other things, a decline in real estate values. In the event the Mortgage Assets
held by the Company become nonperforming, the Company may not have funds
sufficient to pay dividends on the Series A Preferred Shares. Factors that could
affect the value of the Mortgage Assets held by the Company include the
following:
STRUCTURAL CONCERNS RELATED TO MORTGAGE LOANS. The Company generally does
not intend to obtain credit enhancements such as mortgagor bankruptcy insurance
or to obtain special hazard insurance for its Mortgage Loans, other than
standard hazard insurance, which will in each case only relate to individual
Mortgage Loans. Accordingly, during the time it holds Mortgage Loans for which
third party insurance is not obtained, the Company will be subject to risks of
borrower defaults and bankruptcies and special hazard losses that are not
covered by standard hazard insurance (such as those occurring from earthquakes).
In addition, in the event of a default on any Mortgage Loan held by the Company
resulting from declining property values or worsening economic conditions, among
other factors, the Company would bear the risk of loss of principal to the
extent of any deficiency between (i) the value of the related mortgaged
property, plus any payments from an insurer (or guarantor in the case of
Commercial Mortgage Loans) and (ii) the amount owing on the Mortgage Loan.
REAL ESTATE MARKET CONDITIONS. The results of the Company's operations will
be affected by various factors, many of which are beyond the control of the
Company, such as: (i) local and other economic conditions affecting real estate
values; (ii) the ability of tenants to make lease payments; (iii) the ability of
a property to attract and retain tenants, which may in turn be affected by local
conditions such as an oversupply of space or a reduction in demand for rental
space in the area, the attractiveness of properties to tenants, competition from
other available space, the ability of the owner to pay leasing commissions,
provide adequate maintenance and insurance, pay tenant improvement costs and
make other tenant concessions; (iv) interest rate levels and the availability of
credit to refinance such loans at or prior to maturity; and (v) increased
operating costs, including energy costs, real estate taxes and costs of
compliance with environmental controls and regulations. The results of the
Company's operations will depend on, among other things, the level of interest
income generated by the Company's Mortgage Assets and Other
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Authorized Investments, the market value of such Mortgage Assets and Other
Authorized Investments and the supply of and demand for such Mortgage Assets and
Other Authorized Investments. Further, no assurance can be given that the values
of the properties securing the Mortgage Loans included in the Company's Initial
Portfolio have remained or will remain at the levels existing on the dates of
origination of such Mortgage Loans.
DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS. Even assuming that the
mortgaged properties underlying the Mortgage Loans held by the Company provide
adequate security for such Mortgage Loans, substantial delays could be
encountered in connection with the liquidation of defaulted Mortgage Loans, with
corresponding delays in the receipt of related proceeds by the Company. An
action to foreclose on a mortgaged property securing a Mortgage Loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in California, an
action to obtain a deficiency judgment is generally not permitted in connection
with a Mortgage Loan, the funds of which were used to purchase an owner-occupied
one-to-four family residence or following a nonjudicial sale of any mortgaged
property. California law also requires the Mortgage Loan beneficiary to exhaust
all real property security in a single action (i.e., a judicial foreclosure)
before a deficiency judgment may be sought against the borrower. In the event of
a default by a mortgagor, these restrictions, among other things, may impede the
ability of the Company to foreclose on or sell the mortgaged property or to
obtain proceeds sufficient to repay all amounts due on the related Mortgage
Loan. In addition, the Servicers will be entitled to deduct from collections
received all expenses reasonably incurred in attempting to recover amounts due
and not yet repaid on liquidated Mortgage Loans, including legal fees and costs
of legal action, real estate taxes and maintenance and preservation expenses,
thereby reducing amounts available to the Company.
LEGAL CONSIDERATIONS. Applicable state laws may regulate interest rates and
other charges and require certain disclosures to borrowers. However, under
California law, the Mortgage Loans secured by property located in California are
exempt from California usury laws. In addition, most states have other laws,
public policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to the
servicing and collection of the Mortgage Loans. Depending on the provisions of
the applicable law and the specific facts and circumstances involved, violations
of these laws, policies and principles may limit the ability of the Company to
collect all or part of the principal of or interest on the Mortgage Loans, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the Company to damages and administrative sanctions. For example,
the California Civil Code prohibits the use of threats, harassment, or other
deceptive practices in the collection of consumer debts, which include
Residential Mortgage Loans secured by owner-occupied properties. A violation of
the California Fair Debt Collection Practices could result in the liability of
the owner or servicer of a Mortgage Loan to the debtor for actual damages
sustained by the debtor as a result of such violation, in addition to a penalty
of not less than $100 nor greater than $1,000. In addition, in California, legal
and equitable principles require good faith and fair dealing by lenders and
require lenders to exercise their rights and remedies under the Mortgage Loan
documents only in circumstances in which it is commercially reasonable to do so,
in good faith and in a manner that is lawful and commercially reasonable.
ENVIRONMENTAL CONSIDERATIONS. In the event that the Company is forced to
foreclose on a defaulted Mortgage Loan to recover its investment in such
Mortgage Loan, the Company may be subject to environmental liabilities in
connection with the underlying real property which could exceed the value of the
real property. Although the Company intends to exercise due diligence to
discover potential environmental liabilities prior to the acquisition of any
property through foreclosure, hazardous substances or wastes, contaminants,
pollutants or sources thereof (as defined by state and federal laws and
regulations) may be discovered on properties during the Company's ownership or
after a sale thereof to a third party. If such hazardous substances are
discovered on a property which the Company has acquired in foreclosure or
otherwise, the Company may be required to remove those substances and clean up
the property. There can
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be no assurance that in such a case the Company would not incur full recourse
liability for the entire cost of any removal and clean-up, that the cost of such
removal and clean-up would not exceed the value of the property or that the
Company could recoup any of such costs from any third party. The Company may
also be liable to tenants and other users of neighboring properties. In
addition, the Company may find it difficult or impossible to sell the property
prior to or following any such clean-up.
SPECIAL CONSIDERATIONS RELATING TO COMMERCIAL MORTGAGE LOANS. The Company
anticipates that approximately 21.8% (measured by aggregate outstanding
principal amount) of the Initial Portfolio of Mortgage Assets will consist of
Commercial Mortgage Loans. The Company's current policy is not to acquire any
Commercial Mortgage Loan if such Commercial Mortgage Loan would constitute more
than 5.0% of the total book value of the Mortgage Assets of the Company at the
time of its acquisition. Commercial Mortgage Loans have certain distinct risk
characteristics. These loans generally lack standardized terms, which may
complicate their structure. Commercial real estate properties themselves tend to
be unique and are more difficult to value than single-family residential real
estate properties. Commercial Mortgage Loans also tend to have shorter
maturities than Residential Mortgage Loans and may not be fully amortizing,
meaning that they may have a significant principal balance or "balloon" payment
due on maturity. In addition, commercial real estate properties are generally
subject to relatively greater environmental risks than non-commercial properties
and to the corresponding burdens and costs of compliance with environmental laws
and regulations. See "--Environmental Considerations." Also, there may be costs
and delays involved in enforcing rights of a property owner against tenants in
default under the terms of leases with respect to commercial properties. For
example, tenants may seek the protection of the bankruptcy laws, which could
result in termination of lease contracts.
GEOGRAPHIC CONCENTRATION. Certain geographic regions of the United States
may from time to time experience natural disasters or weaker regional economic
conditions and housing markets, and, consequently, may experience higher rates
of loss and delinquency on Mortgage Loans generally. Any concentration of the
Mortgage Loans in such a region may present risks in addition to those present
with respect to Mortgage Loans generally. Substantially all of the residential
properties underlying the Company's Residential Mortgage Loans and substantially
all of the multi-family residential and commercial properties underlying its
Commercial Mortgage Loans which are included in the Initial Portfolio are
located in California. Consequently, the Mortgage Loans may be subject to a
greater risk of default than other comparable Mortgage Loans in the event of
adverse economic, political or business developments or natural hazards that may
affect California and the ability of property owners in California to make
payments of principal and interest on the underlying mortgages. The Company
complies with general hazard insurance policy requirements of the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Company will not maintain any special hazard
insurance policies which could mitigate any damages caused by natural disasters
(such as earthquakes and floods) which may occur in California. In the event of
any such natural disaster, the Company's ability to pay dividends on the Series
A Preferred Shares could be adversely affected. See "Business and
Strategy--Description of Initial Portfolio--Geographic Distribution" herein for
further information regarding the geographic concentration of the Mortgage Loans
in the Initial Portfolio.
CONCERNS WITH RESPECT TO INVESTMENTS IN MORTGAGE-BACKED SECURITIES AND OTHER
AUTHORIZED INVESTMENTS
The Company may from time to time acquire Mortgage-Backed Securities
representing interests in or obligations backed by pools of Mortgage Loans. In
order to minimize risk, the Company intends to acquire only investment grade
Mortgage-Backed Securities or those issued or guaranteed by agencies of the
federal government or government sponsored agencies. The Mortgage Loans
underlying the Mortgage-Backed Securities will be secured by single-family
residential, multi-family or commercial real estate properties located
throughout the United States. The Company does not intend to acquire any
interest-only, principal-only or high-risk Mortgage-Backed Securities. In
addition, the Company is authorized to
20
<PAGE>
invest up to 20% of the total value of its portfolio in Other Authorized
Investments, which may consist of, among other things, any note, stock, treasury
stock, debenture, evidence of indebtedness, or certificate of interest or
participation in any profit sharing agreement or a group or index of securities.
The Company intends to make investments in financial service-related industries
in which Management believes it has expertise and to make investments generally
made by financial institutions. In addition, the value of any one issuer's
securities may not exceed 5% of the total assets of the Company and the Company
may not own more than 10% of the voting securities of any one issuer.
CONCERNS WITH RESPECT TO PURCHASING MORTGAGE LOANS FROM UNAFFILIATED THIRD
PARTIES
The Company has the authority to acquire an unlimited number of Residential
Mortgage Loans and Commercial Mortgage Loans from unaffiliated third parties
such as other financial institutions and mortgage banks. However, all of the
Initial Portfolio will be acquired from the Bank, and the Company has no present
plans or expectations with respect to purchases from unaffiliated third parties.
The Company expects to purchase products similar to those originated by the Bank
to the extent that any such purchases from unaffiliated third parties are
undertaken. In order to minimize the risks of purchasing loans originated by
other parties as to whom the Company has no oversight or control, to the extent
that the Company undertakes any future purchases from unaffiliated third
parties, the Company will evaluate the documentation relating to each loan that
is being considered for purchase to verify whether such loan was originated in a
manner that was consistent with the underwriting standards of the Bank. The
Company only intends to purchase loans originated under substantially similar
standards.
POSSIBILITY OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and operating
policies and strategies of the Company, which are described in this Prospectus.
These policies may be amended or revised from time to time at the discretion of
the Board of Directors without a vote of the Company's stockholders, including
holders of the Series A Preferred Shares. The ultimate effect of any change in
the policies and strategies set forth in this Prospectus on a holder of Series A
Preferred Shares may be positive or negative. See "Business and
Strategy--Management Policies and Programs."
CONSIDERATIONS ASSOCIATED WITH THE USE OF LEVERAGE
Although the Company does not currently intend to incur any indebtedness in
connection with the acquisition and holding of Mortgage Loans, the Company may
do so at any time (although indebtedness in excess of 20% of the Company's
stockholders' equity may not be incurred without the approval of a majority of
the Independent Directors of the Company). To the extent the Company were to
change its policy with respect to the incurrence of indebtedness, the Company
would be subject to changes in interest rates, prepayment risk and concerns
associated with the use of various hedging strategies. In addition, if the
Company were to become predominantly held by tax-exempt employee pension trusts
and to incur indebtedness, then under certain circumstances, a percentage of
distributions to such tax-exempt employee pension trusts may be treated as
unrelated business taxable income. See "Federal Income Tax
Considerations--Taxation of United States Stockholders.
RELATIONSHIP WITH THE BANK; CONFLICTS OF INTEREST
THE BANK AS SOLE COMMON STOCKHOLDER. The Bank is involved in virtually
every aspect of the Company's existence. The Bank is the sole holder of the
Common Stock of the Company and administers the day-to-day activities of the
Company in its role as Advisor under the Advisory Agreement. In addition, other
than the Independent Directors, all of the officers and directors of the Company
are also officers and directors of the Bank. As the holder of all of the
outstanding voting stock of the Company, the Bank will have the right to elect
all directors of the Company, including the Independent Directors, except under
limited circumstances with respect to the Company's failure to pay dividends.
21
<PAGE>
THE BANK AS SERVICER. The Bank is responsible for servicing the Company's
Commercial Mortgage Loans in its role as Servicer under the Commercial Servicing
Agreement. See "Business and Strategy-- Servicing" for a discussion of the
Residential Servicing Agreement with a non-affiliated party with respect to the
Residential Mortgage Loans.
POTENTIAL CONFLICTS ARISING FROM PARENT-SUBSIDIARY RELATIONSHIP. The
Company is dependent on the diligence and skill of its officers and the officers
and employees of the Bank for the selection, structuring and monitoring of its
Mortgage Assets and Other Authorized Investments. In addition, the Company is
dependent on the Bank and the Servicing Agent for the servicing of its Mortgage
Loans. The Bank and the Servicing Agent may have interests which are not
identical to those of the Company and the ultimate owners of the Bank's common
stock may have investment goals and strategies that differ from those of the
holders of the Series A Preferred Shares. Consequently, conflicts of interest
may arise with respect to, among other things, the Company's acquisition of the
Initial Portfolio; future acquisitions of Mortgage Loans from the Bank;
servicing of Mortgage Loans, particularly with respect to Mortgage Loans that
are placed in Nonaccrual Status; future dispositions of Mortgage Loans to the
Bank; and the modification of the Advisory Agreement or the Servicing
Agreements.
POTENTIAL CONFLICTS CONCERNING COMMERCIAL MORTGAGE LOANS. Conflicts of
interest may arise between the Bank and the Company with respect to the
Commercial Mortgage Loans included in the Initial Portfolio. The Company's
interest will be limited to its interest in the Commercial Mortgage Loans, but
the Bank may have other interests as a result of the Bank's overall relationship
with mortgagors in the course of its commercial lending business as lender with
respect to other outstanding loans to such mortgagors. The Bank in its role as
Advisor and Servicer may be subject to conflicts of interest with respect to
Commercial Mortgage Loans, in the event that any such loan is placed in
Nonaccrual Status. As a result of such potential conflicts, the Company may hold
a Commercial Mortgage Loan for a shorter or longer period of time than would
otherwise be the case if the Bank were not the Servicer of the Commercial
Mortgage Loan or the Advisor to the Company.
PARTIES' INTENTIONS WITH RESPECT TO POTENTIAL CONFLICTS. It is the
intention of the Company and the Bank that any agreements and transactions
between the Company, on the one hand, and the Bank, on the other hand, be fair
to all parties and consistent with market terms, including the prices paid and
received for Mortgage Loans, including those in the Initial Portfolio, on their
acquisition or disposition by the Company or in connection with the servicing of
such Mortgage Loans. The requirement in the Articles of Incorporation that
certain actions of the Company be approved by a majority of the Independent
Directors is also intended to ensure fair dealings between the Company and the
Bank. However, there can be no assurance that such agreements or transactions
will be on terms as favorable to the Company as those that could have been
obtained from unaffiliated third parties. See "Business and Strategy--Management
Policies and Programs--Conflict of Interest Policies."
TAX CONSIDERATIONS
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT. The Company intends
to operate so as to qualify as a REIT under the Code, commencing with its
taxable year ending December 31, 1997. Although the Company believes that it
will be owned and organized and will operate in such a manner, no assurance can
be given that the Company will be able to operate in such a manner so as to
qualify as a REIT or to remain so qualified. Qualification as a REIT involves
the application of highly technical and complex Code provisions for which there
are only limited judicial or administrative interpretations and involves the
determination of various factual matters and circumstances not entirely within
the Company's control. The Taxpayer Relief Act of 1997 includes several
provisions which liberalize certain of the requirements to qualify as a REIT.
However, these provisions have neither a material beneficial nor adverse effect
on the Company's ability to operate as a REIT. See "Federal Income Tax
Consequences." No assurance can be given, however, that new legislation or new
regulations, administrative interpretations or court decisions
22
<PAGE>
will not significantly change the tax laws in the future with respect to
qualification as a REIT or the federal income tax consequences of such
qualification in a way that would materially and adversely affect the Company's
ability to operate.
If the Company were to fail to qualify as a REIT, the dividends on shares of
Preferred Stock, including the Series A Preferred Shares, would not be
deductible by the Company for federal (and California state) income tax purposes
and the Company would likely become part of the consolidated group of which the
Bank is a member. Consequently, the consolidated group would face a greater tax
liability which may result in a reduction in the Bank's net income after taxes.
A reduction in the Bank's net income after taxes could adversely affect the
Bank's ability to raise additional capital (as well as its ability to generate
additional capital internally) and therefore its ability to add interest earning
assets to its portfolio.
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in computing
its taxable income and would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. In addition, unless entitled to relief under certain statutory
provisions, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, the amount available for distribution to the Company's stockholders
would be reduced for the year or years involved. A failure of the Company to
qualify as a REIT would not by itself give the Company the right to redeem the
Series A Preferred Shares. See "Description of Series A Preferred
Shares--Redemption."
Notwithstanding that the Company currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal, tax or other
considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its Common Stock and Preferred Stock
to revoke the REIT election. As long as any Series A Preferred Shares are
outstanding, any such determination by the Company may not be made without the
approval of a majority of the Independent Directors. The tax law would prohibit
the Company from electing treatment as a REIT for the four taxable years
following the year of such revocation. See "Federal Income Tax Considerations."
REIT REQUIREMENTS WITH RESPECT TO STOCK OWNERSHIP. To qualify as a REIT
under the Code, not more than 50% of the value of the Company's outstanding
shares of capital stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year (other than the first year) (the "Five or Fewer Test").
The Code requires that the Five or Fewer Test be applied using constructive
ownership rules which treat certain organizations as one individual.
Consistent with the Company's intention to reduce the likelihood that the
Company's status as a REIT is jeopardized, the Articles of Incorporation provide
that, subject to certain exceptions for Significant Stockholders (as defined
herein), no individual or entity may own, or be deemed to own by virtue of the
attribution rules of the Code, more than 7.5% of the aggregate initial
liquidation value of the issued and outstanding shares of Preferred Stock,
including the Series A Preferred Shares (the "Ownership Limit").
Under the constructive ownership rules which must be used for the Five or
Fewer Test, the Company's Common Stock will be treated as owned by the three
stockholders of SOCAL, which is the sole stockholder of the Bank. The common
stock of SOCAL is owned 60% by the Bishop Estate, 30% by BIL Securities, and 10%
by Arbur. Of these stockholders, only Arbur, which is closely held by the family
of William E. Simon, is considered an "individual" for purposes of the Five or
Fewer Test. Neither the Bishop Estate nor BIL Securities is considered an
"individual" for purposes of the Five or Fewer Test.
Although the Five or Fewer Test references the aggregate value of all shares
of capital stock of the Company, the Ownership Limit has been established with
reference to the aggregate initial liquidation preference of the outstanding
shares of Preferred Stock. If (i) the relative values of the Company's
23
<PAGE>
Common Stock and any outstanding shares of Preferred Stock, including the Series
A Preferred Shares, or (ii) the relative values of the different series or
classes of Preferred Stock, were to change significantly, there is a risk that
the Five or Fewer Test would be violated notwithstanding compliance with the
Ownership Limit. Although the Company believes that it is unlikely that the
relative value of the Common Stock will decrease by an amount sufficient to
cause a violation of the Five or Fewer Test, there can be no assurance that such
a change in value will not occur.
Because the Ownership Limit does not apply to the Bishop Estate, BIL
Securities or Arbur (the "Significant Stockholders"), ownership of the Company's
Common Stock or the transfer of shares of common stock and/or preferred stock of
SOCAL to an entity which is considered an individual for purposes of the Five or
Fewer Test could, in certain circumstances (e.g., the sale of all SOCAL stock to
an individual), cause the Company to fail the Five or Fewer Test and,
consequently, to fail to qualify as a REIT.
The Board of Directors may (but will not be required to), upon the receipt
of a ruling from the Internal Revenue Service (the "IRS") or the advice of
counsel satisfactory to it, waive the Ownership Limit with respect to an
individual or entity if such individual's or entity's proposed ownership will
not then or in the future jeopardize the Company's status as a REIT. The
transfer of any shares of Preferred Stock, including Series A Preferred Shares
(including the occurrence of events other than actual transfers of Preferred
Stock that result in changes in constructive ownership of Preferred Stock), in
violation of such Ownership Limit will cause the shares of any class or series
of Preferred Stock owned, or deemed to be owned, by or transferred to a
stockholder in excess of the Ownership Limit (the "Excess Shares"), to be
automatically transferred to a trust for the exclusive benefit of a charity to
be named by the Company. All rights to dividends to such Excess Shares will be
held by such trust. See "Description of Capital Stock-- Restrictions on
Ownership and Transfer."
REIT REQUIREMENTS WITH RESPECT TO STOCKHOLDER DISTRIBUTIONS. To obtain
favorable tax treatment as a REIT qualifying under the Code, the Company
generally will be required each year to distribute as dividends to its
stockholders at least 95% of its "REIT taxable income" (excluding capital
gains). Failure to comply with this requirement would result in the Company's
income being subject to tax at regular corporate rates. In addition, the Company
would be subject to a 4% nondeductible excise tax on the amount, if any, by
which certain distributions considered as paid by it with respect to any
calendar year are less than the sum of 85% of its ordinary income for the
calendar year, 95% of its capital gains net income for the calendar year and any
undistributed taxable income from prior periods.
REDEMPTION UPON OCCURRENCE OF A TAX EVENT. At any time following the
occurrence of a Tax Event (as defined under "Description of Series A Preferred
Shares--Redemption"), even if such Tax Event occurs prior to , 2002, the
Company will have the right to redeem the Series A Preferred Shares in whole,
but not in part, subject to the prior written approval of the OTS. The
occurrence of a Tax Event will not, however, give the holders of the Series A
Preferred Shares any right to have such shares redeemed. See "Description of
Series A Preferred Shares--Redemption."
AUTOMATIC EXCHANGE UPON OCCURRENCE OF AN EXCHANGE EVENT. Upon the
occurrence of an Exchange Event, the outstanding Series A Preferred Shares will
be automatically exchanged on a one-for-one basis into Bank Preferred Shares.
See "Description of Series A Preferred Shares--Automatic Exchange." The
Automatic Exchange will be taxable, and each holder of Series A Preferred Shares
will have a gain or loss, as the case may be, measured by the difference between
the basis of such holder in the Series A Preferred Shares and the fair market
value of the Bank Preferred Shares received in the Automatic Exchange. Provided
that such holder's Series A Preferred Shares were held as capital assets for
more than 18 months prior to the Automatic Exchange, any gain or loss will be
long-term capital gain or loss. In certain circumstances, holders that are
individuals may be entitled, as a result of recently enacted legislation, to
preferential treatment for net capital gains in the case of a capital asset that
has been held for more than 18 months. See "Federal Income Tax
Considerations--Tax Treatment of Automatic Exchange."
24
<PAGE>
NO THIRD PARTY VALUATION OF THE MORTGAGE LOANS; NO ARM'S-LENGTH NEGOTIATIONS
The Company and the Bank intend that the fair value of the Initial Portfolio
will approximately equal the amount (approximately $62.3 million) that the
Company will pay for the Initial Portfolio. However, no third party valuations
of the Mortgage Loans constituting the Initial Portfolio have been obtained for
purposes of the Offering, and there can be no assurance that the fair value of
the Initial Portfolio does not differ from the purchase price payable by the
Company.
In addition, it is not anticipated that third party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Loans even in circumstances where an affiliate of the Company is selling the
Mortgage Loans to, or purchasing the Mortgage Loans from, the Company.
Accordingly, although the Company and the Bank intend that future acquisitions
or dispositions of Mortgage Loans will be on a fair value basis, there can be no
assurance that the consideration to be paid (or received) by the Company to (or
from) the Bank or any of their affiliates in connection with future acquisitions
or dispositions of Mortgage Loans will not differ from the fair value of such
Mortgage Loans.
NO PRIOR MARKET FOR SERIES A PREFERRED SHARES
Prior to the Offering, there has been no public market for the Series A
Preferred Shares. The Company has received approval to list the Series A
Preferred Shares on the Nasdaq National Market under the symbol "PPCCP," subject
to official notice of issuance. The Company will seek to encourage and assist at
least two market makers to make a market in the Series A Preferred Shares. There
can be no assurance that the Company will be able to obtain two or more market
makers for the Series A Preferred Shares. Sandler O'Neill & Partners, L.P. has
advised the Company that it intends to make a market in the Company's Series A
Preferred Shares. Accordingly, there can be no assurance that an active and
liquid trading market for the Series A Preferred Shares will develop or that, if
developed, it will continue, or that the Series A Preferred Shares may be resold
at or above the Price to Public.
Making a market in securities involves maintaining bid and ask quotations
and being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. The development of a public trading market depends upon the
existence of willing buyers and sellers, the presence of which is not within the
control of the Company or any market maker. The absence of an active and liquid
trading market for the Series A Preferred Shares would affect the price and
liquidity of the Series A Preferred Shares.
Although the Series A Preferred Shares will be listed on the Nasdaq National
Market, the Bank does not intend to apply for listing of the Bank Preferred
Shares, for which the Series A Preferred Shares will be exchanged automatically
on a one-for-one basis upon the occurrence of an Exchange Event, on any national
securities exchange or automated quotation system. Consequently, there can be no
assurance as to the liquidity of the trading market for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred Shares
would develop or be maintained.
25
<PAGE>
THE COMPANY
The Company is a newly formed Maryland corporation created for the purpose
of acquiring, holding and managing Mortgage Assets, Mortgage-Backed Securities
and Other Authorized Investments that will generate net income for distribution
to stockholders. The Company anticipates that approximately 78.2% of its
portfolio of Mortgage Assets will represent interests in Residential Mortgage
Loans and that approximately 21.8% of its portfolio of Mortgage Assets will
represent interests in Commercial Mortgage Loans (in each case measured by
aggregate outstanding principal amounts).
Although the Company has the authority to acquire an unlimited number of
Residential Mortgage Loans and Commercial Mortgage Loans from unaffiliated third
parties such as other financial institutions and mortgage banks, all of the
Initial Portfolio will be acquired from the Bank. The Company has no present
plans or expectations with respect to purchases from unaffiliated third parties.
The Bank will administer the day-to-day operations of the Company in its role as
Advisor under the Advisory Agreement. The Company will elect to be subject to
tax as a REIT under the Code, and will generally not be subject to federal
income tax to the extent that it distributes its earnings to its stockholders
and maintains its qualification as a REIT.
All of the Common Stock of the Company is owned by the Bank, and all of the
common stock of the Bank is owned by SOCAL. SOCAL is a thrift institution
holding company organized under the laws of Delaware in 1987 and registered
under the Home Owners Loan Act, as amended. The common stock of SOCAL is (i) 60%
owned by the Bishop Estate, (ii) 30% owned by BIL Securities, and (iii) 10%
owned by Arbur. The Bank conducts its business through a network of 19
full-service community banking offices located primarily in Los Angeles County
as well as Orange and Ventura Counties in Southern California. As of June 30,
1997, the Bank had total assets of $1.8 billion, total deposits of $1.3 billion
and stockholder's equity of $84.9 million. For the six months ended June 30,
1997 and the year ended December 31, 1996, the Bank had net earnings of $6.9
million and $13.6 million and a return on average assets of 0.77% and 0.78%,
respectively.
The Series A Preferred Shares will be exchanged automatically on a
one-for-one basis for Bank Preferred Shares upon the occurrence of an Exchange
Event. CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES COULD BE
REPLACED, WITHOUT THE CONSENT OF THE INVESTOR, BY AN INVESTMENT IN BANK
PREFERRED SHARES AT A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING
OR WHEN THE BANK HAS BEEN PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP.
ACCORDINGLY, POTENTIAL INVESTORS IN THE SERIES A PREFERRED SHARES SHOULD
CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET FORTH IN THE OFFERING
CIRCULAR ATTACHED HERETO AS ANNEX I. See also "Description of Series A Preferred
Shares--Automatic Exchange."
For a further description of the operations of the Company, see "Business
and Strategy," "Management," "Risk Factors" and "Federal Income Tax
Considerations."
26
<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the sale of the Series A Preferred
Shares offered hereby are expected to be $31.0 million, or $35.65 million if the
Underwriters' over-allotment option is exercised in full. Simultaneously with
the consummation of the Offering, the Bank will make an initial capital
contribution to the Company with respect to its Common Stock equal to
approximately $31.3 million plus an additional capital contribution equal to the
underwriting commissions and expenses of the Offering and the formation of the
Company (currently estimated to be approximately $ million in the
aggregate). The Company will use the aggregate proceeds of $62.3 million
received in connection with both the Offering and the capital contribution by
the Bank to purchase the Initial Portfolio from the Bank. See "Business and
Strategy."
If the Underwriters exercise the over-allotment option in the Offering, the
Bank will make an additional capital contribution equal to the aggregate initial
public offering price of such additional Series A Preferred Shares. The Company
will use the additional proceeds from any such additional sales of Series A
Preferred Shares and capital contributions to purchase additional Mortgage Loans
of the types described in "Business and Strategy--Description of Initial
Portfolio." The Company expects that it will purchase any such additional
Mortgage Loans within six months from the exercise by the Underwriters of their
over-allotment option. Pending such purchase, the Company will invest such
additional proceeds in mortgage-backed securities or short-term money market
investments.
The following table illustrates the source and use of proceeds by the
Company from the sale of the Series A Preferred Shares offered hereby (assuming
the Underwriters' over-allotment option is not exercised) and the capital
contributions by the Bank described above.
SOURCE OF FUNDS
(IN THOUSANDS)
<TABLE>
<S> <C>
Gross proceeds from the Offering of Series A Preferred Shares................... $ 31,000
Gross proceeds from the capital contributions by the Bank....................... (1)
---------
$
---------
---------
</TABLE>
- ------------------------
(1) Expenses incurred in connection with the Offering are expected to total
$ . If actual expenses are in excess of the amounts set forth, the
Bank will make additional capital contributions to the Company equal to such
excess.
USE OF FUNDS
(IN THOUSANDS)
<TABLE>
<S> <C>
Purchase of Mortgage Assets from the Bank......................................... $ 62,300
Underwriting commissions and other expenses of the Offering.......................
---------
$
---------
---------
</TABLE>
The Bank will not receive any transaction fees upon completion of the
Offering or any advance payment in respect of servicing or advisory fees.
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
3, 1997 (the date of the most recent audited financial statement of the Company)
and as adjusted to reflect (i) the consummation of the Offering (assuming the
Underwriters' over-allotment option is not exercised) and (ii) the transactions
described in "Certain Transactions Constituting The Formation--The Formation"
and (iii) the use of the net proceeds therefrom as described under "Use of
Proceeds."
<TABLE>
<CAPTION>
JULY 3, 1997
--------------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------------- ---------------
<CAPTION>
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
STOCKHOLDERS' EQUITY
Preferred Stock, none authorized, actual; and par value, $0.01, 4,000,000 shares
authorized, 1,240,000 shares issued and outstanding, as adjusted.............. $ -- $ 12
Common Stock, par value $0.01 per share(1); 10,000 shares authorized and issued
and outstanding, actual; and 4,000,000 shares authorized, 10,000 shares issued
and outstanding, as adjusted.................................................. -- --
Additional paid-in capital(1)................................................... -- --
------ ------
Total stockholders' equity.................................................. -- --
------ ------
TOTAL CAPITALIZATION.............................................................. $ -- $
------ ------
------ ------
</TABLE>
- ------------------------
(1) The Company was formed with an initial capitalization of $100. Immediately
prior to the consummation of the Offering, the Bank will make capital
contributions to the Company equal to approximately $31.3 million plus an
amount sufficient to pay the aggregate Offering and organization expenses,
currently estimated by the Company to be approximately $ million.
28
<PAGE>
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net earnings for distribution to
stockholders. The Company will acquire the Initial Portfolio of Mortgage Loans
from the Bank for an aggregate purchase price of approximately $62.3 million.
See "Certain Transactions Constituting the Formation."
In order to preserve its status as a REIT under the Code, substantially all
of the assets of the Company will consist of Mortgage Loans, other qualified
REIT real estate assets of the type permitted by the Code and Other Authorized
Investments. See "Federal Income Tax Considerations."
DIVIDEND POLICY
The Company currently expects to distribute annually an aggregate amount of
dividends with respect to its outstanding shares of capital stock equal to
approximately 100% of the Company's "REIT taxable income" (excluding capital
gains). In order to remain qualified as a REIT, the Company must distribute
annually at least 95% of its "REIT taxable income" (excluding capital gains) to
its stockholders.
Dividends will be authorized and declared at the discretion of the Board of
Directors after considering the Company's distributable funds, financial
requirements, tax considerations and other factors. Because (i) the Mortgage
Assets and Other Authorized Investments are interest bearing, (ii) the Series A
Preferred Shares represent only approximately 50% of the Company's
capitalization and (iii) the Company does not anticipate incurring any
indebtedness, the Company currently expects that both its cash available for
distribution and its "REIT taxable income" will be in excess of amounts needed
to pay dividends on the Series A Preferred Shares, even in the event of a
significant drop in interest rate levels. Accordingly, the Company expects that
it will, after paying the quarterly dividends on the Series A Preferred Shares,
pay dividends to holders of its Common Stock in an amount sufficient to comply
with applicable requirements regarding qualification as a REIT.
As of June 30, 1997, the weighted average interest rate of all of the
Mortgage Loans included in the Initial Portfolio was approximately 8.748% per
annum, the weighted average interest rate of the Residential Mortgage Loans
included in the Initial Portfolio was approximately 8.487% per annum and the
weighted average interest rate of the Commercial Mortgage Loans included in the
Initial Portfolio was approximately 9.215% per annum. See "Description of
Initial Portfolio." Assuming that (i) the Mortgage Assets included in the
Initial Portfolio are held for the 12-month period following consummation of the
Offering, (ii) principal repayments are reinvested in additional Mortgage Assets
with characteristics similar to those of the Mortgage Assets included in the
Initial Portfolio and (iii) interest rates remain constant during such 12-month
period, net interest income for the 12-month period following consummation of
the Offering would be approximately $ million, after payment of
anticipated servicing and advisory fees. Because the aggregate annual dividend
payment on the Series A Preferred Shares is approximately $ million, the
Company anticipates, based on the foregoing, that approximately $
million would be available for payment of dividends on the shares of Common
Stock held by the Bank during such 12-month period. However, there are several
limitations which are described in the following paragraph that restrict the
Company's ability to pay dividends on the Common Stock.
First, no cash dividends or other distributions may be paid on the Common
Stock unless and until (i) the Company has paid full dividends on the Series A
Preferred Shares for the four most recent Dividend Periods (or such lesser
number of Dividend Periods during which the Series A Preferred Shares have been
outstanding) and has declared a cash dividend on the Series A Preferred Shares
at the annual dividend rate for the current Dividend Period, and (ii) the terms
of all other stock of the Company ranking senior to the Common Stock have been
complied with. Second, the Maryland General Corporation law ("MGCL") provides
that dividends and other distributions may not be paid by a corporation if,
after giving
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effect to the distribution (i) the corporation would not be able to pay its
indebtedness as it becomes due in the usual course of business or (ii) the
corporation's total assets would be less than the sum of the corporation's total
liabilities plus, unless the articles of incorporation of the corporation
permits otherwise (which the Articles of Incorporation of the Company do not),
the amount that would be needed, if the corporation were to be dissolved at the
time of the distribution, to satisfy the preferential rights on dissolution of
stockholders whose preferential rights on dissolution are superior to those
receiving the distribution. Because upon the consummation of the Offering the
aggregate liquidation value of the Series A Preferred Shares will equal
approximately $31.0 million, the amount of dividends which the Company could
legally pay on its Common Stock cannot exceed an amount which would cause the
Company's net assets to be less than $31.0 million.
The OTS prompt corrective action regulations prohibit thrift institutions
such as the Bank from making "capital distributions" (defined to include a
transaction that the OTS or Federal Deposit Insurance Corporation ("FDIC")
determines, by order or regulation, to be "in substance a distribution of
capital") unless the institution is at least "adequately capitalized" after the
distribution. There can be no assurances that either the OTS or the FDIC would
not seek to restrict the Company's payment of dividends on the Series A
Preferred Shares under this provision if the Bank were to fail to maintain its
status as "adequately capitalized." Currently, an institution is considered
"adequately capitalized" if it has a total risk-based capital ratio of at least
8.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a leverage (or core
capital) ratio of at least 4.0%. At June 30, 1997, the Bank's total risk-based
capital ratio was 10.91%, its Tier 1 risk-based capital ratio was 9.65% and core
capital (or leverage) ratio was 4.76%. Such ratios, on a pro forma basis as of
June 30, 1997 after giving effect to the sale of Series A Preferred Shares in
the Offering, would be 14.13%, 12.88% and 6.35%, respectively. After the
Offering, the Bank's capital ratios are expected to decrease as the Bank expands
its business and, thus, its total assets. The Bank currently intends, by
managing its growth following the Offering, to maintain its capital ratios in
excess of the "well-capitalized" levels under the prompt corrective action
regulations. However, there can be no assurance that the Bank will be able to
maintain such capital levels. See "Certain Information Regarding the Bank-- Risk
Factors and Other Considerations--Regulatory Capital Levels" and "Pro Forma
Regulatory Capital" in the Offering Circular attached as Annex I hereto.
If the Automatic Exchange were to occur, the Bank would likely be prohibited
from paying dividends on the Bank Preferred Shares. In all circumstances
following the Automatic Exchange, the Bank's ability to pay dividends would be
subject to various restrictions under OTS regulations. In addition, in the event
of a liquidation of the Bank, the claims of the Bank's depositors and of its
creditors would be entitled to a priority of payment over the dividend and other
claims of holders of equity interests such as the Bank Preferred Shares issued
pursuant to the Automatic Exchange.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
federal regulatory authorities will have the authority to issue an order which
restricts the ability of the Company to make dividend payments to its
stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Loans, Mortgage-Backed Securities or Other Authorized
Investments as Mortgage Loans held by the Company are repaid. The acquisition of
such additional Mortgage Loans, Mortgage-Backed Securities or Other Authorized
Investments will be funded with the proceeds of principal repayments on its
portfolio of Mortgage Loans. The Company does not anticipate that it will have
any other material capital expenditures. The Company believes that cash
generated from the payment of interest and principal on its Mortgage Loan
portfolio will provide sufficient funds to meet both operating requirements and
payment of dividends by the Company in accordance with the REIT Requirements so
as to be taxed as a REIT for the foreseeable future.
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GENERAL DESCRIPTION OF MORTGAGE ASSETS AND OTHER AUTHORIZED INVESTMENTS;
INVESTMENT POLICY
RESIDENTIAL MORTGAGE LOANS. The Company may from time to time acquire both
conforming and nonconforming Residential Mortgage Loans. Conforming Residential
Mortgage Loans comply with the requirements for inclusion in a loan guarantee
program sponsored by either the FHLMC or FNMA. Under current regulations, the
maximum principal balance allowed on conforming Residential Mortgage Loans
ranges from $214,600 for one-unit residential loans to $412,450 for four-unit
residential loans. Nonconforming Residential Mortgage Loans are Residential
Mortgage Loans that do not qualify in one or more respects for purchase by FNMA
or FHLMC under their standard programs. The Company expects that a majority of
the nonconforming Residential Mortgage Loans it purchases will be nonconforming
because they have original principal balances which exceed the requirements for
FHLMC or FNMA programs or generally because they vary in certain other respects
from the requirements of such programs other than the requirements relating to
creditworthiness of the mortgagors. A substantial portion of the Company's
nonconforming Residential Mortgage Loans are expected to meet the requirements
for sale to national private mortgage conduit programs or other investors in the
secondary mortgage market.
Each Residential Mortgage Loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one- to four-unit) residential
properties. Residential real estate properties underlying Residential Mortgage
Loans consist of individual dwelling units, individual condominium units, two-
to four-family dwelling units, planned unit developments and townhouses. The
Company currently expects that all of the Residential Mortgage Loans included in
the Initial Portfolio will be fixed rate Mortgage Loans. However, the Company
may from time to time acquire adjustable rate Residential Mortgage Loans.
Since the 1980's, the Bank has also offered a variety of adjustable rate
single-family Residential Mortgage Loans which may be made available to the
Company for purchase in the future. Such loans generally have up to 30 year
terms. Presently, the Bank offers a "5/1 Product," in which the interest rate of
the loan is fixed at origination for a five year period, after which the
interest rate adjusts every year in accordance with a designated index (the
weekly average yield on U.S. Treasury securities adjusted to a constant maturity
of one year, as made available by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board")). Such loans currently have a 2% cap on the
amount of any increase or decrease in the interest rate per year, and a 6% limit
on the amount by which the interest rate can increase or decrease over the life
of the loan. In addition, the Bank's adjustable rate loans are currently not
convertible into fixed rate loans and do not contain prepayment penalties.
The Bank previously offered a variety of adjustable rate programs, which
provided for interest rates which adjusted periodically based on a designated
index (the Eleventh District Cost of Funds ("COFI"), as made available by the
FHLB of San Francisco). Adjustments to the interest rate and/or to the monthly
payment of principal and interest occur either monthly, semi-annually or
annually depending on the loan program selected by the borrower. However, to
protect borrowers from unlimited interest rate and payment increases, the
majority of these adjustable rate loans have a maximum interest rate change
("interest rate cap") from the initial reduced interest rate period and/or over
the life of the loan. Additionally, the interest rate may change within a range
of a two to six percentage point increase or decrease in any given period. In
certain loan programs, these protections for borrowers can result in monthly
payments which are greater or less than the amount required to amortize the loan
by its maturity at the interest rate in effect in any particular month. In the
event that the monthly payment is not sufficient to pay the interest accruing
during the month, the deficiency is added to the loan's principal balance
("negative amortization"). For further information on the Bank's current lending
programs and the composition of the Bank's loan portfolio, see "Business of the
Bank--Lending Activities" in the Offering Circular attached hereto as Annex I.
Although the Company has the authority to acquire an unlimited number of
Residential Mortgage Loans and Commercial Mortgage Loans from unaffiliated third
parties such as other financial institutions
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and mortgage banks, all of the Initial Portfolio will be acquired from the Bank.
The Company has no present plans or expectations with respect to purchases from
unaffiliated third parties. The Company expects to purchase products similar to
those originated by the Bank to the extent that any such purchases are
undertaken.
COMMERCIAL MORTGAGE LOANS. The Company may from time to time acquire
Commercial Mortgage Loans secured by multi-family properties of five units or
more, industrial, warehouse and self-storage properties, office buildings,
office and industrial condominiums, retail space and strip shopping centers,
mixed use commercial properties, mobile home parks, nursing homes, hotels and
motels ("Commercial Properties"). The Company expects that substantially all of
the Commercial Mortgage Loans it acquires will be secured by real estate located
in California. Unlike Residential Mortgage Loans, Commercial Mortgage Loans
generally lack standardized terms. Commercial Mortgage Loans may also not be
fully amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. Moreover, commercial properties, particularly
industrial and warehouse properties, are generally subject to relatively greater
environmental risks than non-commercial properties, generally giving rise to
increased costs of compliance with environmental laws and regulations. See "Risk
Factors--Risks Associated with Mortgage Loans Generally" and "--Environmental
Considerations." There is no requirement regarding the percentage of any
commercial real estate property that must be leased at the time the Company
acquires a Commercial Mortgage Loan secured by such commercial real estate
property, and there is no requirement that Commercial Mortgage Loans have third
party guarantees.
The credit quality of a Commercial Mortgage Loan may depend on, among other
factors, the existence and structure of underlying leases, the physical
condition of the property (including whether any maintenance has been deferred),
the creditworthiness of tenants, the historical and anticipated level of
vacancies and rents on the property and on other comparable properties located
in the same region, potential or existing environmental risks, the availability
of credit to refinance the Commercial Mortgage Loan at or prior to maturity and
the local and regional economic climate in general. Foreclosures of defaulted
Commercial Mortgage Loans are generally subject to a number of complicating
factors, including environmental considerations, which are generally not present
in foreclosures of Residential Mortgage Loans. See "Risk Factors--Risks
Associated with Mortgage Loans Generally--Special Risks Relating to Commercial
Mortgage Loans" and "--Environmental Considerations."
MORTGAGE-BACKED SECURITIES. The Company may from time to time acquire
Mortgage-Backed Securities representing interests in or obligations backed by
pools of Mortgage Loans. The Company intends to acquire only investment grade
Mortgage-Backed Securities or those issued or guaranteed by agencies of the
federal government or government sponsored agencies. The Mortgage Loans
underlying the Mortgage-Backed Securities will be secured by single-family
residential, multi-family or commercial real estate properties located
throughout the United States. The Company does not intend to acquire any
interest-only, principal-only or high-risk Mortgage-Backed Securities. The
Company will not be precluded from investing in Mortgage-Backed Securities where
the Bank is the sponsor or issuer.
OTHER ASSETS. The Company may invest up to 20% of the total value of its
portfolio in assets other than Residential Mortgage Loans, Commercial Mortgage
Loans, Mortgage-Backed Securities eligible to be held by REITs, and cash, cash
equivalents (including receivables) and government securities. While the
foregoing assets must constitute at least 75% of the value of the REIT's total
assets under Section 865(c)(5)(A) of the Code, up to 25% of the value of a
REIT's total assets may be comprised of non-mortgage-related securities as
defined in the Investment Company Act of 1940 (the "Investment Company Act").
Under the Investment Company Act, the term "security" is broadly defined to
include, among other things, any note, stock, treasury stock, debenture,
evidence of indebtedness, or certificate of interest or participation in any
profit sharing agreement or a group or index of securities. The Code requires
that the value of any one issuer's securities may not exceed 5% of the total
assets of the REIT and the REIT may not own more than 10% of the voting
securities of any one issuer.
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ACQUISITION OF INITIAL PORTFOLIO
Simultaneously with the consummation of the Offering, the Company will
acquire the Initial Portfolio pursuant to the terms of two mortgage purchase
agreements with the Bank: the Residential Mortgage Loan Purchase and Warranties
Agreement (the "Residential Mortgage Purchase Agreement") and the Commercial
Mortgage Loan Purchase and Warranties Agreement (the "Commercial Mortgage
Purchase Agreement", and, together with the Residential Mortgage Purchase
Agreement, the "Mortgage Purchase Agreements"). The Residential Mortgage Loans
in the Initial Portfolio will be sold to the Company pursuant to the Residential
Mortgage Purchase Agreement. The Commercial Mortgage Loans in the Initial
Portfolio will be sold to the Company pursuant to the Commercial Mortgage
Purchase Agreement. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to its respective mortgage purchase agreement (each, a
"Mortgage Loan Schedule"). Each Mortgage Loan Schedule will specify, among other
things, with respect to each Mortgage Loan: the applicable loan type, the
applicable interest rate, the original principal balance and the unpaid
principal balance as of the purchase date, the monthly payment, the maturity
date, the mortgagor, the type of mortgaged property, the location of the
mortgaged property and the current interest rate.
At or as soon as practicable following the consummation of the Offering, the
Bank will deliver or cause to be delivered to the Company or its designee,
except to the extent inconsistent with the Residential Loan Servicing
Agreements, all documents contained in the Mortgage Loan file, including but not
limited to: either the mortgage note with respect to each Mortgage Loan
(together with all amendments and modifications thereto) endorsed in blank by
the Bank or a lost-note affidavit, the original or certified copy of the
mortgage (together with all amendments and modifications thereto) with evidence
of recording indicated thereon, if available; the original or a copy of all
intervening assignments of the mortgage, if any, evidencing the assignment of
the Mortgage Loan to the Bank (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available; an original
blanket assignment of the mortgages executed by the Bank; the original mortgagee
title policy or, in the event such original title policy is unavailable, a true
copy of the related policy binder or commitment for title; and all insurance
policies relating to the properties underlying the Mortgage Loans and the
proceeds thereof. Such documents will initially be held by the Bank, as Advisor,
acting as custodian for the Company. Although the Company will have the right to
record the blanket assignment of mortgages at any time, it does not currently
anticipate doing so. The Company believes that maintaining record title of the
Mortgage Loans in the name of the Bank will facilitate the servicing of the
Mortgage Loans without adversely affecting the Company's interests in such
Mortgage Loans. However, the Bank will be obligated at the written request of
the Company, or if deemed necessary by the applicable Servicer in connection
with servicing any Mortgage Loan, to execute and record in the appropriate
jurisdiction an individual assignment of mortgage that reflects of record the
ownership of the Mortgage Loan by the Company. See "--Servicing" and
"--Description of Initial Portfolio--General."
The Bank will make certain representations and warranties with respect to
the Mortgage Loans in the Initial Portfolio for the benefit of the Company and
will be obligated to repurchase any Mortgage Loan sold by it to the Company as
to which there is a material breach of any such representation or warranty,
unless the Bank elects to substitute a qualified Mortgage Loan for such Mortgage
Loan. The Bank will also indemnify the Company for damages or costs resulting
from any such breach. The repurchase price for any such Mortgage Loan will be
its outstanding principal amount plus accrued and unpaid interest to the date of
repurchase.
MANAGEMENT POLICIES AND PROGRAMS
In administering the Company's Mortgage Assets and Other Authorized
Investments, the Advisor has a high degree of autonomy. The Board of Directors,
however, has adopted certain policies to guide administration of the Company and
the Advisor with respect to the acquisition and disposition of assets, use of
capital and leverage, credit risk management and certain other activities. These
policies, which are
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discussed below, may be amended or revised from time to time at the discretion
of the Board of Directors (in certain circumstances subject to the approval of a
majority of the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares. See also "--
Dividend Policy."
ASSET ACQUISITION AND DISPOSITION POLICIES. Subsequent to the acquisition
of the Initial Portfolio, the Company anticipates that it will from time to time
purchase additional Mortgage Loans from the Bank on a basis consistent with
secondary market standards pursuant to the Mortgage Purchase Agreements,
although Mortgage Loans may be acquired from unaffiliated third parties, out of
proceeds received in connection with the repayment or disposition of Mortgage
Loans or the issuance of additional shares of Common Stock and Preferred Stock.
The Company anticipates that additional Mortgage Loans purchased from the Bank
will be purchased on terms that are substantially identical to those that could
be obtained by the Company if such additional Mortgage Loans were purchased from
third parties unaffiliated with the Company. The Company has no present plans or
intentions to purchase Mortgage Loans from unaffiliated third parties, and no
arrangements or procedures are currently in place regarding the purchase of
additional Mortgage Loans from unaffiliated third parties. The Company currently
anticipates that additional Mortgage Loans acquired by the Company will be of
the types described in "--Description of Initial Portfolio," although if the
Bank develops additional Mortgage Loan products, the Company may purchase such
additional types of Mortgage Loans and is not limited as to the amount which may
be purchased. The Bank has no current plans with respect to the development of
new Mortgage Loan products. In addition, the Company may from time to time
acquire Mortgage-Backed Securities representing interests in or obligations
backed by pools of Mortgage Loans that will be secured by single-family
residential, multi-family or commercial real estate properties located
throughout the United States as well as a limited amount of Other Authorized
Investments. The Company currently anticipates that it will not acquire the
right to service any Mortgage Loan it acquires in the future and that the Bank
will act as Servicer of any such additional Commercial Mortgage Loans and the
Servicing Agent will act as Servicer of any such additional Residential Mortgage
Loans. The Company anticipates that any servicing arrangement that it enters
into in the future with the Bank will contain fees and other terms that would be
substantially equivalent to those that would be contained in servicing
arrangements entered into with third parties unaffiliated with the Company.
Although the Company's Initial Portfolio includes approximately 78.2% of
Mortgage Assets in Residential Mortgage Loans and approximately 21.8% in
Commercial Mortgage Loans (in each case measured by aggregate outstanding
principal balances), the percentages of Residential Mortgage Loans and
Commercial Mortgage Loans may vary in the future. The Company's current policy
is not to acquire any Commercial Mortgage Loan that constitutes more than 5.0%
of the total book value of the Mortgage Assets of the Company at the time of its
acquisition. In addition, the Company's current policy prohibits the acquisition
of any Mortgage Loan or any interest in a Mortgage Loan (other than an interest
resulting from the acquisition of Mortgage-Backed Securities), which Mortgage
Loan (i) is delinquent in the payment of principal or interest at the time of
proposed acquisition; (ii) is or was at any time during the preceding 12 months
(a) Classified, (b) in Nonaccrual Status or (c) renegotiated due to financial
deterioration of the borrower; or (iii) has been, more than once during the
preceding 12 months, more than 30 days past due in the payment of principal or
interest. Mortgage Loans that are in "Nonaccrual Status" are generally loans
that are past due 90 days or more in principal or interest, and "Classified"
Mortgage Loans are generally troubled loans which are deemed substandard,
doubtful or loss with respect to collectibility.
The Bank's Residential Servicing Agreement with the Servicing Agent provides
that the Bank can direct the Servicing Agent to transfer the servicing and
disposition functions with respect to all Residential Mortgage Loans which
become Nonaccrual back to the Bank. The servicing of properties which become REO
will automatically be transferred back to the Bank for the same purpose. The
Residential Mortgage
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Purchase Agreement and the Residential Assumption Servicing Agreement provide
for the same treatment with respect to Residential Mortgage Loans sold by the
Bank to the Company which become Nonaccrual or REO. Upon receipt of written
direction from the Company, the Servicing Agent is required to promptly transfer
the servicing for any such Nonaccrual Mortgage Loan to the Bank and will
automatically transfer servicing with respect to REO to the Bank. The Bank will
charge a servicing fee with respect to the Nonaccrual Mortgage Loans transferred
to it by the Company. The Bank will then service and dispose of such properties,
as required, on the Company's behalf. The Commercial Mortgage Purchase Agreement
and the Commercial Servicing Agreement provide that the Bank will service and
handle the disposition of Nonaccrual Commercial Real Estate Loans and REO for
the Company.
CAPITAL AND LEVERAGE POLICIES. To the extent that the Board of Directors
determines that additional funding is required, the Company may raise such funds
through additional equity offerings, debt financing or retention of cash flow
(after consideration of provisions of the Code requiring the distribution by a
REIT of at least 95% of its "REIT taxable income" (excluding capital gains) and
taking into account taxes that would be imposed on undistributed taxable
income), or a combination of these methods.
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any indebtedness.
However, the organizational documents of the Company do not contain any
limitation on the amount or percentage of debt, funded or otherwise, the Company
might incur, except that the incurrence by the Company of debt for borrowed
money in excess of 20% of the Company's total stockholders' equity will require
the approval of a majority of the Independent Directors. Any such debt incurred
may include intercompany advances made by the Bank to the Company.
The Company may also issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares without the consent of holders of at least two-thirds
of the outstanding shares of Series A Preferred Shares, and the Company may not
issue additional shares of Preferred Stock on a parity with the Series A
Preferred Shares without the approval of a majority of the Company's Independent
Directors. The Company does not currently intend to issue any additional series
of Preferred Stock unless it simultaneously receives additional capital
contributions from the Bank equal to the aggregate offering price of such
additional Preferred Stock plus the Company's expenses (including underwriting
commissions or placement fees) in connection with the issuance of such
additional shares of Preferred Stock. Prior to the issuance of additional shares
of Preferred Stock, the Company will take into consideration, among other
things, the Bank's regulatory capital requirements and an assessment of other
available options for raising any necessary capital. See "Certain Transactions
Constituting the Formation--Benefits to the Bank."
CREDIT RISK MANAGEMENT POLICIES. The Company expects that each Mortgage
Loan acquired in the future will represent a first lien position and will be
originated by the Bank or an unaffiliated third party in the ordinary course of
its real estate lending activities based on the underwriting standards generally
applied by the Bank (at the time of origination) for its own account. See
"--Description of Initial Portfolio--Underwriting Standards." The Company also
expects that all Mortgage Loans held by the Company will be serviced pursuant to
the Servicing Agreements, which require servicing in conformity with any
servicing guidelines promulgated by the Company with respect to Commercial
Mortgage Loans and, in the case of Residential Mortgage Loans, with FNMA and
FHLMC guidelines and procedures. The Bank's Residential Servicing Agreement with
the Servicing Agent provides that the Bank can direct the Servicing Agent to
transfer the servicing and disposition functions with respect to all Residential
Mortgage Loans which become Nonaccrual back to the Bank. The servicing of
properties which become REO will automatically be transferred back to the Bank
for the same purpose. The Residential Mortgage Purchase Agreement and the
Residential Assumption Servicing Agreement provide for the same treatment with
respect to Residential Mortgage Loans sold by the Bank to the Company which
become Nonaccrual or REO. Upon receipt of written direction from the Company,
the Servicing Agent is required to promptly transfer the servicing for any such
mortgage loan to the Bank and will automatically transfer servicing with respect
to REO to the Bank. The Bank will charge a servicing fee with respect to the
Nonaccrual Mortgage
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Loans transferred to it by the Company. The Bank will then service and dispose
of such properties, as required, on the Company's behalf. The Commercial
Mortgage Purchase Agreement and the Commercial Servicing Agreement provide that
the Bank will service and handle the disposition of Nonaccrual Commercial Real
Estate Loans and REO for the Company.
CONFLICT OF INTEREST POLICIES. Because of the nature of the Company's
relationship with the Bank and the Servicing Agent, it is likely that conflicts
of interest will arise with respect to certain transactions, including, without
limitation, the Company's acquisition of Mortgage Loans from, or disposition of
Mortgage Loans to, the Bank, foreclosure on defaulted Commercial Mortgage Loans
and the modification of the Advisory Agreement or any of the Servicing
Agreements. It is the Company's policy that the terms of any financial dealings
with the Bank will be consistent with those available from third parties in the
mortgage lending industry. In addition, neither the Advisory Agreement nor any
of the Servicing Agreements may be modified or terminated without the approval
of a majority of the Independent Directors.
Conflicts of interest between the Company and the Bank may also arise in
connection with making decisions that bear upon the credit arrangements that the
Bank may have with a mortgagor under a Mortgage Loan. Conflicts could also arise
in connection with actions taken by the Bank as a controlling person in the
Company. It is the intention of the Company and the Bank that any agreements and
transactions between the Company, on the one hand, and the Bank on the other
hand, including without limitation the Mortgage Purchase Agreements and
Servicing Agreements, be fair to all parties and are consistent with market
terms for such types of transactions. The requirement in the Articles of
Incorporation that certain actions of the Company be approved by a majority of
the Independent Directors is also intended to ensure fair dealings between the
Company and the Bank. However, there can be no assurance that any such agreement
or transaction will be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.
There are no provisions in the Company's Articles of Incorporation limiting
any officer, director, security holder or affiliate of the Company from having
any direct or indirect pecuniary interest in any Mortgage Asset to be acquired
or disposed of by the Company or in any transaction in which the Company has an
interest or from engaging in acquiring, holding and managing Mortgage Assets. As
described herein, it is expected that the Bank will have direct interests in
transactions with the Company (including without limitation the sale of Mortgage
Assets to the Company); however, no officers or directors of the Company will
have any interests in such Mortgage Assets.
OTHER POLICIES. The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act. The Company does not
intend to (i) invest in the securities of other issuers for the purpose of
exercising control over such issuers, (ii) underwrite securities of other
issuers, (iii) actively trade in loans or other investments, (iv) offer
securities in exchange for property or (v) make loans to third parties,
including, without limitation, officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares and other shares of its capital stock in the open market or
otherwise. The Company has no present intention of causing the Company to
repurchase any shares of its capital stock, and any such action would be taken
only in conformity with applicable federal and state laws and regulations and
the requirements for qualifying as a REIT.
The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act exempts entities that,
directly or through majority-owned subsidiaries, are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate" ("Qualifying Interests"). Under current
interpretations by the Staff of the Commission, in order to qualify for this
exemption, the Company, among other things, must maintain at least 55% of its
assets in Qualifying Interests and also may be required to maintain an
additional 25% in Qualifying Interests or other real estate-related assets. The
assets that the Company may acquire therefore may be limited by the
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provisions of the Investment Company Act. The Company has established a policy
of limiting Other Authorized Investments to no more than 20% of the value of the
Company's total assets.
The Company intends to publish and distribute to stockholders, in accordance
with the Securities and Exchange Act of 1934, as amended ("Exchange Act"),
annual reports containing financial statements prepared in accordance with
generally accepted accounting principles and certified by the Company's
independent public accountants. The Articles of Incorporation provide that the
Company shall maintain its status as a reporting company under the Exchange Act
for so long as any of the Series A Preferred Shares are outstanding.
The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT. However, future economic, market, legal, tax or other
considerations may cause the Board of Directors, subject to approval by a
majority of Independent Directors, to determine that it is in the best interests
of the Company and its stockholders to revoke its REIT status. The Code
prohibits the Company from electing REIT status for the four taxable years
following the year of such revocation.
DESCRIPTION OF INITIAL PORTFOLIO
Information is provided in this Prospectus regarding the Residential
Mortgage Loans and the Commercial Mortgage Loans that were originated and/or
purchased by the Bank and that are expected to constitute the Initial Portfolio
actually purchased by the Company contemporaneously with the consummation of the
Offering. To the extent the over-allotment option is exercised, the Company
expects to purchase additional Residential Mortgage Loans and/or Commercial
Mortgage Loans from the Bank which have approximately the same characteristics
as those described in this Prospectus. Any such additional Mortgage Loans may
have different characteristics than the Mortgage Loans that are intended to be
included in the Initial Portfolio, but the Company does not expect that any such
differences will be material.
Information with respect to the Residential Mortgage Loans and the
Commercial Mortgage Loans in the Initial Portfolio is presented as of June 30,
1997. The composition of the Initial Portfolio actually purchased by the Company
contemporaneously with the consummation of the Offering will differ from the
Initial Portfolio as described in this Prospectus only to the extent it is
discovered prior to the consummation of the Offering that a Mortgage Loan
included in the Initial Portfolio described herein (i) is delinquent in the
payment of principal or interest; (ii) is or was at any time during the
preceding 12 months (a) Classified, (b) in Nonaccrual Status or (c) renegotiated
due to financial deterioration of the borrower; or (iii) has been, more than
once during the preceding 12 months, more than 30 days past due in the payment
of principal or interest. In such event, a Mortgage Loan similar in aggregate
outstanding principal balance and product type will be substituted for such
non-purchased Mortgage Loan.
References herein to percentages of Mortgage Loans included in the Initial
Portfolio refer in each case to the percentage of the aggregate outstanding
principal balance of the Mortgage Loans in the Initial Portfolio as of June 30,
1997, based on the outstanding principal balances of such Mortgage Loans as of
such date, after giving effect to scheduled monthly payments received and
applied on or prior to such date.
GENERAL. The Initial Portfolio contains 284 Residential Mortgage Loans,
representing approximately 78.2% of the unpaid principal balance of the Mortgage
Loans contained in the Initial Portfolio, and 83 Commercial Mortgage Loans,
representing approximately 21.8% of the unpaid principal balance of the Mortgage
Loans contained in the Initial Portfolio. On June 30, 1997, the Mortgage Loans
included in the Initial Portfolio had an aggregate outstanding principal balance
of $62,252,565.
Substantially all of the Residential Mortgage Loans included in the Initial
Portfolio were originated and/or purchased by the Bank in the ordinary course of
its real estate lending activities. Management believes that substantially all
of the Residential Mortgage Loans included in the Initial Portfolio were
37
<PAGE>
originated and/or purchased in a manner consistent with the underwriting
policies of the Bank at the time at which such Mortgage Loans were originated
and/or purchased.
All of the Residential Mortgage Loans included in the Initial Portfolio were
originated and/or purchased between July 1972 and June 1997, and had original
terms to stated maturity of primarily 15, 20, 25 or 30 years. As of June 30,
1997, the average outstanding principal balance of a Residential Mortgage Loan
was $171,517. The weighted average number of months since origination of the
Residential Mortgage Loans included in the Initial Portfolio (calculated as of
June 30, 1997) was approximately 47 months and the weighted average expected
remaining maturity was 284 months. The weighted average Loan-to-Value Ratio
(defined below) of the Residential Mortgage Loans included in the Initial
Portfolio is 71.8%; however, 13.4% of the Residential Mortgage Loans have
Loan-to-Value Ratios of greater than 80%. "Loan-to-Value Ratio" means the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the underlying
mortgaged property and (ii) if the Mortgage Loan was made to finance the
acquisition of property, the purchase price of the mortgaged property.
The mortgage notes with respect to most of the Mortgage Loans included in
the Initial Portfolio contain "due-on-sale" provisions which prevent the
assumption of the Mortgage Loan by a proposed transferee and accelerate the
payment of the outstanding principal balance of the Mortgage Loan. With respect
to a limited number of Mortgage Loans included in the Initial Portfolio, the
mortgage notes permit assumption of the Residential Mortgage Loan provided that
the proposed transferee satisfies certain criteria with respect to his ability
to repay the Mortgage Loan.
Each Commercial Mortgage Loan included in the Initial Portfolio was
originated and/or purchased by the Bank in the ordinary course of its commercial
real estate lending activities. All of the Commercial Mortgage Loans included in
the Initial Portfolio were originated and/or purchased between September 1973
and June 1997, and had original terms to stated maturity of between 10 and 30
years. As of June 30, 1997, the average outstanding principal balance of a
Commercial Mortgage Loan was $163,153. The weighted average number of months
since origination of the Commercial Mortgage Loans included in the Initial
Portfolio (calculated as of June 30, 1997) was approximately 106 months. The
weighted average Loan-to-Value Ratio of the Commercial Mortgage Loans included
in the Initial Portfolio is 68.6%. In addition, no Commercial Mortgage Loan
included in the Initial Portfolio had a Loan-to-Value Ratio greater than 80%.
None of the Mortgage Loans included in the Initial Portfolio (i) is
delinquent in the payment of principal or interest as of June 30, 1997; (ii) is
or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status or (c) renegotiated due to financial deterioration of the
borrower; or (iii) was, more than once during the preceding 12 months, more than
30 days past due in the payment of principal or interest. If, prior to the
acquisition of the Initial Portfolio, any Mortgage Loan included in the
description of the Initial Portfolio herein falls within any of the foregoing
categories, the Company will not purchase such Mortgage Loan but will instead
purchase a Mortgage Loan similar in aggregate outstanding principal balance and
product type which does not fall into any of these categories.
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<PAGE>
RESIDENTIAL MORTGAGE LOANS. The following table sets forth certain
information with respect to each type of Residential Mortgage Loan included in
the Initial Portfolio:
Type of Residential Mortgage Loan Product
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE RESIDENTIAL WEIGHTED AVERAGE
PRINCIPAL MORTGAGE LOANS WEIGHTED AVERAGE EXPECTED
BALANCE BY AGGREGATE INITIAL LOAN TO REMAINING
TYPE (IN THOUSANDS) PRINCIPAL BALANCE VALUE RATIO MATURITY (MONTHS)
- --------------------------------------- ---------------- ----------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
7/23 Step Rate......................... $ 8,668 17.8% 77.4% 298
15 Year Fixed Rate..................... 6,202 12.7 62.6 126
30 Year Fixed Rate..................... 33,841 69.5 72.4 310
------- ----- --- ---
Total.............................. $ 48,711 100.0% 71.8% 284
------- ----- --- ---
------- ----- --- ---
</TABLE>
The Residential Mortgage Loans included in the Initial Portfolio either bear
interest at fixed rates or are "7/23 step rate" loans. The "7/23 step rate" loan
has a fixed initial interest rate for the first seven years (i.e., 84 monthly
payments) and adjusts once thereafter to a rate which applies for the remaining
23 years (i.e., 276 monthly payments) equal to 150 basis points above the FNMA
30 year commitment rate for delivery as of a date specified in the related
mortgage note. The interest rates of the fixed rate Residential Mortgage Loans
included in the Initial Portfolio range from 7.50% per annum to 13.5% per annum.
The weighted average interest rate of the fixed rate Residential Mortgage Loans
included in the Initial Portfolio is approximately 8.250% per annum.
The following table contains certain additional data with respect to the
interest rates of the Residential Mortgage Loans included in the Initial
Portfolio:
Interest Rate of Residential Mortgage Loans
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF INITIAL
PRINCIPAL PORTFOLIO BY
NUMBER OF BALANCE AGGREGATE
CURRENT INTEREST RATE MORTGAGE LOANS (IN THOUSANDS) PRINCIPAL BALANCE
- ------------------------------------------------------ ------------------- ------------------ ---------------------
<S> <C> <C> <C>
7.500% - 7.749%....................................... 67 $ 15,213 31.3%
7.750% - 7.999%....................................... 78 15,408 31.7
8.000% - 8.249%....................................... 19 3,528 7.2
8.250% - 8.499%....................................... 11 2,076 4.3
8.500% - 8.749%....................................... 16 2,281 4.7
8.750% - 8.999%....................................... 14 2,240 4.6
9.000% - 9.249%....................................... 15 1,093 2.2
9.250% - 9.499%....................................... 9 620 1.3
9.500% - 9.749%....................................... 4 344 0.7
9.750% - 9.999%....................................... 11 1,423 2.9
10.000% - 10.249%..................................... 8 494 1.0
10.250% - 10.499%..................................... 5 367 0.8
10.500% - 10.749%..................................... 12 2,330 4.8
10.750% - 10.999%..................................... 3 601 1.2
11.000% - 11.249%..................................... 2 136 0.3
12.000% - 12.249%..................................... 1 54 0.1
12.250% - 12.499%..................................... 2 218 0.4
12.500% - 12.749%..................................... 3 168 0.3
12.750% - 12.999%..................................... 2 67 0.1
13.500% - 13.749%..................................... 2 50 0.1
--- ------- -----
Total............................................. 284 $ 48,711 100.0%
--- ------- -----
--- ------- -----
</TABLE>
39
<PAGE>
Substantially all of the Mortgage Loans included in the Initial Portfolio
allow the mortgagor to prepay at any time some or all of the outstanding
principal balance of the Mortgage Loan without a fee or penalty.
The Residential Mortgage Loans which are included in the Initial Portfolio
will primarily have original terms to stated maturity of 15, 20, 25 or 30 years.
COMMERCIAL MORTGAGE LOANS. The Commercial Mortgage Loans included in the
Initial Portfolio will consist of loans secured by the Commercial Properties
located in California. The borrowers of the Commercial Mortgage Loans included
in the Initial Portfolio are primarily customers of the Bank to which the Bank
has extended such Commercial Mortgage Loans in the ordinary course of its
commercial real estate lending activities. Some of the Commercial Mortgage Loans
included in the Initial Portfolio are either recourse to the borrower or
guaranteed as to the payment of principal and interest by an affiliate of the
borrower. The outstanding principal balances of the Commercial Mortgage Loans
included in the Initial Portfolio ranged from $10,265 to $2.19 million as of
June 30, 1997.
The following table sets forth certain information with respect to each type
of multi-family residential and commercial property underlying each Commercial
Mortgage Loan included in the Initial Portfolio:
Type of Commercial Mortgage Loan
<TABLE>
<CAPTION>
AGGREGATE COMMERCIAL WEIGHTED WEIGHTED
PRINCIPAL MORTGAGE LOANS BY WEIGHTED AVERAGE AVERAGE CURRENT AVERAGE MONTHS
BALANCE AGGREGATE PRINCIPAL INITIAL LOAN TO LOAN TO VALUE REMAINING TO
(IN THOUSANDS) BALANCE VALUE RATIO(1) RATIO(2) MATURITY
---------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Commercial mortgage-fixed rate
balloon..................... $ 5,425 40.1% 68.3% 67.6% 112
Commercial mortgage-fixed
rate........................ 1,657 12.2 73.1 49.9 127
Multi-family-fixed rate
balloon..................... 2,370 17.5 50.0 49.1 117
Multi-family-fixed rate....... 4,090 30.2 73.4 44.9 110
Total..................... $ 13,542 100.0% 68.6% 55.3% 114
</TABLE>
- ------------------------
(1) Represents the ratio of the outstanding principal amount of each Commercial
Mortgage Loan at the time of loan origination or modification, if any, to
the value of the property securing such Commercial Mortgage Loan at the time
of loan origination or modification, if any.
(2) Represents the ratio of the outstanding principal amount of the Commercial
Mortgage Loan at June 30, 1997 to the value of the property securing such
Commercial Mortgage Loan at the time of loan origination or modification, if
any.
Of the Commercial Mortgage Loans included in the Initial Portfolio,
approximately 57.6% are not fully amortizing and will have significant principal
balances or "balloon" payments due upon maturity.
All of the Commercial Mortgage Loans included in the Initial Portfolio bear
interest at fixed rates. The interest rates of the fixed rate Commercial
Mortgage Loans included in the Initial Portfolio range from 8.50% per annum to
14.75% per annum. The following table contains certain additional data with
respect to the interest rates of the fixed rate Commercial Mortgage Loans
included in the Initial Portfolio:
40
<PAGE>
Interest Rate of Commercial Mortgage Loans
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF INITIAL
PRINCIPAL PORTFOLIO BY
NUMBER OF BALANCE AGGREGATE
INTEREST RATE MORTGAGE LOANS (IN THOUSANDS) PRINCIPAL BALANCE
- ------------------------------------------------------ ------------------- ------------------ ---------------------
<S> <C> <C> <C>
8.50% - 8.749%........................................ 1 498 3.7%
9.000% - 9.249%....................................... 5 2,232 16.5
9.250% - 9.499%....................................... 19 3,081 22.8
9.500% - 9.749%....................................... 32 4,048 29.9
9.750% - 9.999%....................................... 6 965 7.1
10.000% - 10.249%..................................... 7 1,722 12.7
10.250% - 10.499%..................................... 1 137 1.0
10.500% - 10.749%..................................... 4 344 2.5
10.750% - 10.999%..................................... 3 168 1.2
11.000% - 11.249%..................................... 2 170 1.3
11.500% - 11.749%..................................... 2 117 0.9
14.750% - 14.999%..................................... 1 60 0.4
--
------- -----
Total............................................. 83 $ 13,542 100.0%
--
--
------- -----
------- -----
</TABLE>
UNDERWRITING STANDARDS. The Bank has represented to the Company that all of
the Residential Mortgage Loans and Commercial Mortgage Loans included in the
Initial Portfolio (including those which were originated by unaffiliated third
parties) were originated generally in accordance with the underwriting policy
customarily employed by the Bank during the period in which the Residential
Mortgage Loans and Commercial Mortgage Loans in the Initial Portfolio were
originated.
RESIDENTIAL MORTGAGE LOANS. The underwriting standards applied at
origination of the Residential Mortgage Loans included in the Initial Portfolio
were intended to evaluate the borrower's credit standing and repayment ability,
and the value and adequacy of the underlying mortgaged property as collateral.
Generally, each prospective borrower was required to provide a loan application
and other supporting documents describing assets and liabilities, the borrower's
income and expenses, as well as, to the extent required by applicable state law,
an authorization to apply for a credit report which summarized the borrower's
credit history with merchants and lenders and any record of bankruptcy.
For any prospective borrower, an employment verification was obtained from
the borrower's employer wherein the employer reported the length of employment
with the employer, the employee's current salary, and whether it was expected
that the borrower would continue such employment in the future or the borrower
submitted such other evidence of employment (such as pay stubs) satisfactory to
the Bank. For a self-employed prospective borrower, the borrower was generally
required to submit copies of personal and business federal income tax returns
for the previous two years. For certain prospective borrowers, the borrower
authorized verification of all deposits at financial institutions at which the
borrower had demand or savings accounts.
Once the credit report and the employment and deposit verifications were
received by the underwriting officer considering the loan application, a
determination was made as to whether the prospective borrower had sufficient
monthly income available (i) to meet the borrower's monthly obligations on the
proposed Residential Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the home
(such as property taxes and hazard insurance) and (ii) to meet other financial
obligations and monthly living expenses. In certain instances, exceptions may
have been made to the Bank's underwriting policies (including those applied in
originating the Mortgage Loans in the Initial Portfolio) in cases deemed
appropriate by its underwriting officers.
In determining the adequacy of the property as collateral, an appraisal was
made of each property considered for financing. Each appraiser was selected in
accordance with predetermined guidelines
41
<PAGE>
established for appraisers. The appraiser was required to inspect the property
and verify that it was in good condition and that construction, if new, had been
completed. If the appraiser reported any exceptions to the verification, the
Bank or its agent determined that such property had been substantially completed
to its satisfaction. The appraisal was based on the appraiser's judgment of
value giving appropriate weight to both the market value of comparable
properties and the cost of replacing the property and other factors as
appropriate. The Bank's underwriting standards also required a search of the
public records relating to a mortgaged property for liens and judgments against
such mortgaged property, as well as customary title insurance.
With respect to Residential Mortgage Loans which were purchased by the Bank,
the Bank evaluated the documentation relating to each purchased loan and
management believes that each such loan was originated in a manner that was
consistent with the underwriting standards of the Bank. All Residential Mortgage
Loans acquired by the Company in the future will be originated and/or purchased
under substantially similar standards.
COMMERCIAL MORTGAGE LOANS. The loan underwriting procedures and guidelines
utilized by the Bank in connection with the origination of the Commercial
Mortgage Loans included in the Initial Portfolio were intended to assess the
value of the related mortgaged property, the ability of such mortgaged property
to be used by the borrower or its agents and the financial condition of the
borrower, including its ability to service the Commercial Mortgage Loan.
The underwriting guidelines took into account such factors as suitability of
the mortgaged property for the proposed use; the availability, rental rates and
relative value of comparable properties in the relevant market area and the
anticipated growth or decline in both the immediate and broader geographic areas
in which the mortgaged property is located; the current or projected occupancy
or leasing ratios, if relevant; the condition and age of the mortgaged property;
the management ability of the borrower, including its business experience and
financial soundness; and such other economic, demographic or other factors as in
the judgment of the Bank might affect the value of the mortgaged property and
the ability of the borrower to service the Commercial Mortgage Loan. Each
proposal for a Commercial Mortgage Loan was presented to the appropriate lending
personnel of the Bank, which analyzed the proposed transaction focusing on
economic assumptions and the feasibility of the loan, identified and evaluated
potential risks and made a recommendation to approve or disapprove the loan. The
proposed transaction was then presented to appropriate credit officers of the
Bank for approval.
Once a loan proposal was approved, a loan commitment was issued by the Bank
to the proposed borrower, subject to, among other things, an appraisal report
and, if deemed appropriate or required, environmental engineering reports. The
Bank contracted with approved firms to prepare certain required reports for the
account of the Bank.
With respect to Commercial Mortgage Loans which were purchased by the Bank,
the Bank evaluated the documentation relating to each purchased loan and
management believes that each such loan was originated in a manner that was
consistent with the underwriting standards of the Bank. All Commercial Mortgage
Loans acquired by the Company in the future will be originated and/or purchased
under substantially similar standards.
GEOGRAPHIC DISTRIBUTION. The Company currently anticipates that 100% of the
residential real estate properties underlying the Company's Residential Mortgage
Loans included in the Initial Portfolio are located in California. Of the
Residential Mortgage Loans included in the Initial Portfolio, approximately
20.8% are secured by real estate located in Northern California and 79.2% are
secured by real estate located in Southern California. Consequently, these
Residential Mortgage Loans may be subject to a greater risk of default than
other comparable Residential Mortgage Loans in the event of adverse economic,
political or business developments and natural hazards (earthquakes, wild fires
and mud slides, for example) in California that may affect the ability of
residential property owners in California to make payments of principal and
interest on the underlying mortgages. Standard hazard insurance required to be
42
<PAGE>
maintained with respect to Residential Mortgage Loans held by the Company may
not protect the Company against losses occurring from earthquakes and other
natural disasters.
All of the commercial mortgaged properties underlying the Company's
Commercial Mortgage Loans included in the Initial Portfolio will be located in
California. Of the Commercial Mortgage Loans included in the Initial Portfolio,
approximately 2.2% are secured by real estate located in Northern California and
97.8% are secured by real estate located in Southern California. Consequently,
these Commercial Mortgage Loans may be subject to a greater risk of default than
other comparable Commercial Mortgage Loans in the event of adverse economic,
political or business developments in California that may affect the ability of
businesses in that area to make payments of principal and interest on the
underlying mortgages. Consequently, in the event of a natural disaster, the
Company's ability to pay dividends on the Series A Preferred Shares could be
adversely affected as it is the Company's current intention to not maintain
special hazard insurance to protect against such losses.
LOAN-TO-VALUE RATIOS; INSURANCE. Approximately $6.53 million (original
principal balance) of the Residential Mortgage Loans included in the Initial
Portfolio had Loan-to-Value Ratios of greater than 80% at the time of
origination. Of such Residential Mortgage Loans, at June 30, 1997, approximately
$5.2 million were insured under primary mortgage insurance policies. The
remaining $1.33 million of such Residential Mortgage Loans at June 30, 1997,
included in the Initial Portfolio with Loan-to-Value Ratios at origination of
greater than 80% did not require primary mortgage insurance policies because the
outstanding principal balances of such loans have been reduced (due to
amortization) to levels which are less than 80% of the lesser of (i) the
appraised value at origination and (ii) the purchase price of the mortgaged
property (the "Current LTV Ratio"). Residential Mortgage Loans included in the
Initial Portfolio with Loan-to-Value Ratios greater than 80% and Current LTV
Ratios less than 80% that do not require private mortgage insurance coverage
have a weighted average Current LTV Ratio of 68.8% and have a weighted average
seasoning since origination (calculated as of June 30, 1997) of 158 months. As
of June 30, 1997, not more than approximately 59.3% of the Residential Mortgage
Loans which require private mortgage insurance are insured by any one primary
mortgage insurance policy issuer. At the time of origination of the Residential
Mortgage Loans, each of the primary mortgage insurance policy insurers was
approved by FNMA or FHLMC. A standard hazard insurance policy is required to be
maintained by the mortgagor with respect to each Residential Mortgage Loan in an
amount equal to the maximum insurable value of the improvements securing such
Residential Mortgage Loan or the principal balance of such Residential Mortgage
Loan, whichever is less. If the residential real estate property underlying a
Residential Mortgage Loan is located in a flood zone, such Residential Mortgage
Loan may also be covered by a flood insurance policy as required by law. No
mortgagor bankruptcy insurance will be maintained by the Company with respect to
the Residential Mortgage Loans in the Initial Portfolio, nor will any
Residential Mortgage Loan be insured by the Federal Housing Administration or
guaranteed by the Veterans Administration. The Company will not maintain any
special hazard insurance policy with respect to any Residential Mortgage Loan
which could mitigate damages caused by any natural disaster.
A standard hazard insurance policy is also required to be maintained by the
mortgagor with respect to each of the Commercial Mortgage Loans included in the
Initial Portfolio. If the commercial real estate property securing a Commercial
Mortgage Loan is located in a flood zone, such Commercial Mortgage Loan may be
covered by a flood insurance policy as required by law. However, as with the
Residential Mortgage Loans in the Initial Portfolio, no special hazard insurance
or mortgagor bankruptcy insurance will be maintained by the Company with respect
to the Commercial Mortgage Loans in the Initial Portfolio.
SERVICING
The Mortgage Loans included in the Initial Portfolio will be sold to the
Company by the Bank on a servicing retained basis.
43
<PAGE>
RESIDENTIAL MORTGAGE LOAN SERVICING. In March 1997, the Bank sold the
servicing rights with respect to substantially all of the Residential Mortgage
Loans held by the Bank at that time, including all of the Residential Mortgage
Loans to be included in the Initial Portfolio, to the Servicing Agent. In
connection with such sale, the Bank entered into the Residential Servicing
Agreement with the Servicing Agent pursuant to which the Servicing Agent will
service substantially all of the Bank's Residential Mortgage Loans, including
all of the Residential Mortgage Loans to be included in the Initial Portfolio.
The Bank also entered into a Forward Production Servicing Purchase and Sale
Agreement in July 1997 ("Forward Production Agreement"), pursuant to which the
Bank will sell to the Servicing Agent the servicing rights associated with (i)
Residential Mortgage Loans owned by the Bank and closed and funded subsequent to
the closing of the Residential Servicing Agreement, and (ii) Residential
Mortgage Loans owned by the Bank prior to such date which were serviced by
others and as to which the Bank has reacquired such servicing rights. Pursuant
to the Residential Assumption Servicing Agreement to be entered into between the
Company, the Bank and the Servicing Agent, the Servicing Agent will service
Residential Mortgage Loans which are sold by the Bank to the Company,
substantially in accordance with the terms of the Residential Servicing
Agreement. Pursuant to the terms of both the Residential Assumption Servicing
Agreement and the Forward Production Agreement, the Servicing Agent will, for so
long as the Forward Production Agreement remains in effect, service any
additional Residential Mortgage Loans which may in the future be originated by
the Bank and sold to the Company.
The Residential Servicing Agreement and the Residential Assumption Servicing
Agreement (collectively, the "Residential Servicing Agreements") provide that
the Servicing Agent will receive an annual servicing fee with respect to each
Residential Mortgage Loan serviced for the Company which shall be equal to the
outstanding principal balance of such Residential Mortgage Loans multiplied by a
fee of 0.25% (in the case of fixed rate Residential Mortgage Loans (including
"7/23 step rate" loans)) and 0.375% (in the case of adjustable rate Residential
Mortgage Loans). The Bank's Servicing Agent, Temple Inland Mortgage Corporation,
is a Nevada corporation and wholly owned subsidiary of Guaranty Federal Bank,
F.S.B., which is wholly owned by Temple-Inland Inc. As of [the date of this
Prospectus,] Temple-Inland's public debt is rated A- by Standard and Poors and
A2 by Moodys. At December 31, 1996, according to public filings, the Servicing
Agent was servicing $17.9 billion in mortgage loans, including loans serviced
for affiliates.
The Residential Servicing Agreements require the Servicing Agent to service
the Company's Residential Mortgage Loans in a manner generally consistent with
servicing guidelines promulgated by the Bank (and previously determined to be
acceptable to the Servicing Agent) and with FNMA and FHLMC guidelines and
procedures and as otherwise set forth in the Residential Servicing Agreements.
The Servicing Agent will collect and remit principal and interest payments,
administer mortgage, custodial and escrow accounts, submit and pursue insurance
claims and initiate and supervise foreclosure proceedings on the Residential
Mortgage Loans it services. The Servicing Agent will also provide accounting and
reporting services to the Company for such Residential Mortgage Loans.
Additionally the Servicing Agent will assume responsibility for payment of
ground rents, taxes, assessments, water rates, mortgage insurance premiums, and
other charges which are or may become a lien upon the mortgaged property. The
Servicing Agent also will be responsible for any late charges or tax penalties
incurred due to its failure to pay such bills. The Residential Servicing
Agreements require the Servicing Agent to follow such collection procedures that
are consistent with the Servicing Agent's procedures for servicing mortgage
loans comparable to the Residential Mortgage Loans and to exercise the degree of
care required by FNMA and FHLMC.
The Servicing Agent may waive, modify or vary any term of any Residential
Mortgage Loan or consent to the postponement of compliance with any such term or
in any manner grant indulgence to any borrower if in the Servicing Agent's
reasonable and prudent determination such waiver, modification, postponement or
indulgence is not materially adverse to the Company; provided, however, that the
Servicing Agent shall not permit any modification with respect to any
Residential Mortgage Loan that would decrease the mortgage interest rate (other
than by adjustments required by the terms of the
44
<PAGE>
mortgage note), defer or forgive the payment thereof or of any principal or
interest payments, reduce the outstanding principal amount (except for actual
payments of principal), make future advances or extend the final maturity date
on such Residential Mortgage Loan without the Company's prior written consent.
However, the Servicing Agent may permit forbearance or allow for suspension of
monthly payments if the borrower is in default or the Servicing Agent determines
in its reasonable discretion that default is imminent and if the Servicing Agent
determines that granting such forbearance or suspension is in the best interest
of the Company. The Servicing Agent will use its best efforts, consistent with
the procedures that the Servicing Agent would use in servicing loans for its own
accounts, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Residential Mortgage Loans as come into and
continue in default and as to which no satisfactory agreements can be made for
collection of delinquent payments.
The Bank's Residential Servicing Agreement with the Servicing Agent provides
that the Bank can direct the Servicing Agent to transfer the servicing and
disposition functions with respect to all Residential Mortgage Loans which
become Nonaccrual back to the Bank. All of such properties which become REO will
automatically be transferred back to the Bank for the same purpose. The
Residential Mortgage Purchase Agreement and the Residential Assumption Servicing
Agreement provide for the same treatment with respect to Residential Mortgage
Loans sold by the Bank to the Company which become Nonaccrual or REO. Upon
receipt of written direction from the Company, the Servicing Agent is required
to promptly transfer the servicing for any such Nonaccrual Mortgage Loan to the
Bank and will automatically transfer servicing with respect to REO to the Bank.
The Bank will charge a servicing fee with respect to the Nonaccrual Mortgage
Loans transferred to it by the Company. The Bank will then service and dispose
of such properties, as required, on the Company's behalf.
The Residential Servicing Agreements require the Servicing Agent to pay all
expenses related to the performance of its duties under such agreements. For
advances of reimbursable out of pocket costs and expenses, the Servicing Agent
generally will be reimbursed out of proceeds related to such Residential
Mortgage Loan.
In connection with any foreclosure proceedings that the Servicing Agent may
institute, the Servicing Agent may exercise any power of sale contained in any
mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise
acquire title to a mortgaged property underlying a Residential Mortgage Loan by
operation of law or otherwise in accordance with the terms of the Residential
Servicing Agreements. In the event that title to the property securing a
Residential Mortgage Loan is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale shall be taken in the name of the
Company with the servicing with respect to such Residential Mortgage Loan to be
transferred back to the Company. It is expected that the Bank will service such
REO on behalf of the Company.
The Company may terminate the Residential Servicing Agreements upon the
happening of one or more events specified in such Residential Servicing
Agreements. Such events relate generally to either (i) the Servicer's proper and
timely performance of its duties and obligations under the Residential Servicing
Agreements, or (ii) the appointment of a conservator, receiver or liquidator in
any insolvency, bankruptcy or similar proceeding. In addition, the Company may
also terminate the Residential Servicing Agreements without cause but will be
required to pay a termination fee which, for the first seven years from June 1,
1997 shall be equal to 1.10% of the aggregate outstanding principal amount of
the loans then serviced and thereafter, 1.0% of the aggregate outstanding
principal amount of the loans then serviced. The Forward Production Agreement
may be terminated upon 60 days notice by either party. As long as any Series A
Preferred Shares remain outstanding, the Company may not terminate, or elect not
to renew, the Residential Servicing Agreements without the approval of a
majority of the Independent Directors.
As is customary in the mortgage loan servicing industry, the Servicing Agent
will be entitled to retain any late payment charges, penalties and assumption
fees collected in connection with the Residential Mortgage Loans serviced by it.
In addition, the Servicing Agent will receive any benefit derived from
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<PAGE>
interest earned on collected principal and interest payments between the date of
collection and the date of remittance to the Company and from interest earned on
tax and insurance impound funds with respect to Residential Mortgage Loans
serviced by it. The Residential Servicing Agreements require the Servicing Agent
to remit to the Company no later than the 18th day of each month (or the next
business day if such 18th day is not a business day) all principal and interest
collected from borrowers of Residential Mortgage Loans serviced by it during the
immediately preceding month.
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicing Agent generally will enforce any "due-on-sale" clause
contained in the Residential Mortgage Loan, to the extent permitted under
applicable law and governmental regulations and subject to the Company's prior
approval. The terms of a particular Residential Mortgage Loan or applicable law,
however, may provide that the exercise of the "due-on-sale" clause is prohibited
under certain circumstances. Under such circumstances, the Servicing Agent will
negotiate an assumption agreement with the person to whom the mortgaged property
has been conveyed or is proposed to be conveyed, pursuant to which such person
becomes liable under the mortgage note. Where an assumption is allowed, the
Servicing Agent will be authorized to negotiate a substitution of liability
agreement with the person to whom the mortgage property has been conveyed or is
proposed to be conveyed pursuant to which the original mortgagor is released
from liability and such person is substituted as mortgagor and becomes liable
under the related mortgage note. The Servicing Agent will be authorized to
collect and retain such assumption fees as are permitted by the terms of the
mortgage loan documents and applicable law. Upon any assumption of a Residential
Mortgage Loan by a transferee, a fee equal to a specified percentage of the
outstanding principal balance of the Residential Mortgage Loan is typically
required, which sum will be retained by the Servicing Agent as additional
servicing compensation.
COMMERCIAL MORTGAGE LOAN SERVICING. The Bank will service the Commercial
Mortgage Loans included in the Initial Portfolio pursuant to the terms of the
Commercial Servicing Agreement. The Bank will receive an annual servicing fee
with respect to each Commercial Mortgage Loan serviced for the Company which
shall equal the outstanding principal balance of such Commercial Mortgage Loans
multiplied by a fee of 0.25%.
The Bank may, from time to time, subject to approval of a majority of the
Independent Directors, subcontract all or a portion of its obligations under the
Commercial Servicing Agreement. The Bank will not, to the extent it subcontracts
any of its obligations under the Commercial Servicing Agreement, be discharged
or relieved in any respect from its obligations to the Company to perform
thereunder.
The Commercial Servicing Agreement requires the Bank to service the
Company's Commercial Mortgage Loans in a manner generally consistent with
procedures and practices customarily employed and exercised by the Bank and with
any servicing guidelines promulgated by the Company. The Bank will collect and
remit principal and interest payments, administer mortgage, custodial and escrow
accounts, submit and pursue insurance claims and initiate and supervise
foreclosure proceedings on the Commercial Mortgage Loans it services. The Bank
will also provide accounting and reporting services required by the Company for
such Commercial Mortgage Loans. Additionally, for all Commercial Mortgage Loans,
the Bank will assume responsibility for payment of taxes and other charges which
are or may become a lien upon the mortgaged property. The Bank also will be
responsible for any late charges or tax penalties incurred due to its failure to
pay such bills. The Commercial Servicing Agreement requires the Bank to follow
such collection procedures that are consistent with the Bank's procedures for
mortgage loans comparable to the Commercial Mortgage Loans held for its own
account, including contacting delinquent borrowers and supervising foreclosures
and property dispositions in the event of unremedied defaults. The Bank may, in
its discretion, arrange with a defaulting borrower a schedule for the
liquidation of delinquencies. The Bank will use its best efforts, consistent
with the procedures that the Bank would use in servicing loans for its own
account, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Commercial Mortgage Loans as come into and
continue in default and as to which no satisfactory agreements can be made for
collection of delinquent payments. The Bank also will
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use its best efforts to realize upon defaulted Commercial Mortgage Loans in such
manner as will maximize the receipt of principal and interest.
The Commercial Servicing Agreement requires the Bank to pay all expenses
related to the performance of its duties under such Servicing Agreement. For
advances of reimbursable out of pocket costs and expenses, the Bank generally
will be reimbursed prior to the Company out of proceeds related to such
Commercial Mortgage Loan. The Bank also will be entitled to reimbursement by the
Company for expenses incurred by it in connection with the liquidation of
defaulted Commercial Mortgage Loans serviced by it and in connection with the
restoration of mortgaged property.
If claims are not made or paid under applicable insurance policies or if
coverage thereunder has ceased, the Company will suffer a loss to the extent
that the proceeds from liquidation of the mortgaged property, after
reimbursement of the Bank's expenses in the sale, are less than the outstanding
principal balance of the related Commercial Mortgage Loan. The Bank will be
responsible to the Company for any loss suffered as a result of its failure to
make and pursue timely claims or as a result of actions taken or omissions made
by it which cause the policies to be canceled by the insurer.
In connection with any foreclosure proceedings that the Bank may institute,
the Bank may exercise any power of sale contained in any mortgage or deed of
trust, obtain a deed in lieu of foreclosure or otherwise acquire title to a
mortgaged property underlying a Commercial Mortgage Loan by operation of law or
otherwise in accordance with the terms of the Commercial Servicing Agreement.
The Bank will not be permitted under the terms of the Commercial Servicing
Agreement to acquire title to any commercial real estate property underlying a
Commercial Mortgage Loan or take any action that would cause the Company to be
an "owner" or an "operator" within the meaning of certain federal environmental
laws, unless it has also previously determined, subject to the approval of the
Advisor, based on a report prepared by an independent person who regularly
conducts environmental assessments, that (i) the mortgaged property is in
compliance with applicable environmental laws or that it would be in the best
interests of the Company to take such actions as are necessary to cause the
mortgaged property to comply therewith and (ii) there are no circumstances or
conditions present at the mortgaged property relating to the use, management or
disposal of any hazardous substances, hazardous materials, hazardous wastes or
petroleum-based materials for which investigation, testing, monitoring,
containment, clean-up or remediation could be required under any federal, state
or local law or regulation, or, if any such materials are present for which such
action could be required, that it would be in the best interest of the Company
to take such actions with respect to the mortgage property.
The Company may terminate the Commercial Servicing Agreement upon the
happening of one or more events specified in such Commercial Servicing
Agreement. Such events relate generally to (i) the Bank's proper and timely
performance of its duties and obligations under the Commercial Servicing
Agreement or (ii) the appointment of a conservator, receiver or liquidator in
any insolvency, bankruptcy or similar proceeding. In addition, the Company may
also terminate the Commercial Servicing Agreement without cause but will be
required to pay a termination fee that is competitive with that which is
generally payable in the industry, equal to 0.25% of the aggregate outstanding
principal amount of the loans then serviced under the Commercial Servicing
Agreement. As long as any Series A Preferred Shares remain outstanding, the
Company may not terminate or elect not to renew, the Commercial Servicing
Agreement without the approval of a majority of the Independent Directors.
The Bank will be entitled to retain any late payment charges, prepayment
fees, penalties and assumption fees collected in connection with the Commercial
Mortgage Loans serviced by it. In addition, the Bank will receive any benefit
derived from interest earned on collected principal and interest payments
between the date of collection and the date of remittance to the Company and
from interest earned on tax and insurance impound funds with respect to
Commercial Mortgage Loans serviced by it. The Commercial Servicing Agreement
requires the Bank to remit to the Company no later than the 18th day of each
month (or the next business day if such 18th day is not a business day) all
principal and interest collected from
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borrowers of Commercial Mortgage Loans serviced by it on the last day of the
immediately preceding month.
When any mortgage property underlying a Commercial Mortgage Loan is conveyed
by a mortgagor, the Bank generally will enforce any "due-on-sale" clause
contained in the Commercial Mortgage Loan, including collection of any mortgage
prepayment penalties, to the extent permitted under applicable law, governmental
regulations and the loan documents.
As a result of the relationship between the Bank, the Servicing Agent and
the Company, certain conflicts of interest may arise. See "Risk
Factors--Relationship with the Bank; Conflicts of Interest."
EMPLOYEES
The Company has four officers, each of whom is described further below under
"Management." The Company does not anticipate that it will require any
additional employees because it has retained the Advisor to perform certain
functions pursuant to the Advisory Agreement described below under
"Management--The Advisor." It is currently anticipated that all of the officers
of the Company will also be officers or employees of SOCAL or the Bank. The
Company will maintain corporate records and audited financial statements that
are separate from those of the Bank. None of the officers, employees or
directors of the Company will have any direct or indirect pecuniary interest in
any Mortgage Asset to be acquired or disposed of by the Company or in any
transaction in which the Company has an interest or will engage in acquiring,
holding and managing Mortgage Assets.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Loans in addition to those in the Initial Portfolio and that substantially all
of these Mortgage Loans will be purchased from the Bank, although the Company
may purchase Mortgage Loans from unaffiliated third parties. Accordingly, the
Company does not expect to compete with mortgage conduit programs, investment
banking firms, savings and loan associations, banks, thrift and loan
associations, finance companies, mortgage bankers or insurance companies in
acquiring Mortgage Loans.
LEGAL PROCEEDINGS
The Company is not the subject of any litigation. None of the Company, the
Advisor or the Bank is currently involved in nor, to the Company's knowledge,
currently threatened with any material litigation with respect to the Mortgage
Loans to be included in the Initial Portfolio, other than routine litigation
arising in the ordinary course of business, most of which is expected to be
covered by liability insurance.
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BENEFICIAL OWNERSHIP OF THE COMPANY
As of July 3, 1997, there were 10,000 shares of Common Stock of the Company
issued and outstanding, all of which were owned by the Bank. The following table
set forth certain information concerning the ownership of the Company's
outstanding Common Stock as of that date.
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS AMOUNT AND NATURE OF OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ----------------- --------------------------------- -------------------- ---------
<S> <C> <C> <C>
Common Stock People's Bank of California 10,000 100%
5900 Wilshire Boulevard
Los Angeles, California 90036
</TABLE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors will initially be composed of seven
members, two of whom are Independent Directors. An "Independent Director" is a
director who is not a current officer or employee of the Company or a current
director, officer or employee of the Bank or any affiliate of the Bank. These
directors will serve until their successors are duly elected and qualified.
There is no current intention to alter the number of directors comprising the
Board of Directors. Pursuant to the Articles of Incorporation, the Independent
Directors are required to consider the interests of the holders of both the
Common Stock and the Preferred Stock, including the Series A Preferred Shares,
in determining whether any proposed action requiring their approval is in the
best interests of the Company. The Company currently has four officers. The
Company has no other employees and does not anticipate that it will require
additional employees. See "Business and Strategy--Employees."
The persons who are directors and executive officers of the Company (ages as
of June 30, 1997) are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Rudolf P. Guenzel.................................... 57 President, Chief Executive Officer and Director
Henry Peters......................................... 56 Chairman of the Board of Directors
Gerard Jervis........................................ 49 Director
Robert W. MacDonald.................................. 50 Director
John F. Davis........................................ 50 Director
David S. Honda....................................... 56 Director
J. Michael Holmes.................................... 51 Executive Vice President, Chief Financial
Officer, Secretary and Director
John T. Wasley....................................... 35 Senior Vice President
Gerald A. Timpone.................................... 46 Vice President
</TABLE>
Set forth below is information with respect to the principal occupations
during the last five years of the Company's directors and officers.
RUDOLF P. GUENZEL. Mr. Guenzel is President and Chief Executive Officer and
a director of the Company, positions he has held since the Company's inception
in June 1997. Mr. Guenzel has served as President of SOCAL and President, Chief
Executive Officer and a director of the Bank since March 1995. From September
1994 through March 1995, Mr. Guenzel worked as a consultant in the area of bank
profitability analysis. Mr. Guenzel formerly was the President and Chief
Executive Officer and a director of BancFlorida Financial Corp., which was a New
York Stock Exchange listed company, and its subsidiary, Banc Florida, FSB. He
joined the BancFlorida Group in March 1991 when the company was experiencing
serious financial difficulties associated with high non-performing assets
attributable to the national recession and local economic conditions. Mr.
Guenzel directed the Company's attention to problem asset
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resolution and returned BancFlorida to profitability. The price of BancFlorida
Financial's common stock increased from a low of $2.375 per share during the
first quarter of 1994 to $30.00 per share, the price at which the shares were
acquired by First Union Corp. in August 1994. Mr. Guenzel served as Chief
Executive Officer through BancFlorida Financial's merger with First Union Corp.
Prior to BancFlorida Financial, Mr. Guenzel was employed by European American
Bank from 1971 until 1989. Mr. Guenzel started as head of the Credit Division,
worked in problem loan resolutions and eventually was responsible for the
Operations and Systems Division.
HENRY PETERS. Mr. Peters, a director of the Company, the Bank and SOCAL,
has served as a trustee of the Bishop Estate, which owns 60% of the common
equity of SOCAL, since 1984. In addition, he is Chairman of the Board of the
Bishop Estate's property and investment management subsidiary, Royal Hawaiian
Shopping Center, Inc. From 1978 through 1984, Mr. Peters served as Industrial
Division Manager of Dura Constructors, a construction firm located in Honolulu,
Hawaii. From 1974 through 1994, Mr. Peters served as a Representative to the
House of Representatives of the State of Hawaii and from 1981 through 1986, Mr.
Peters served as Speaker of the House.
GERARD JERVIS. Mr. Jervis, a director of the Company, the Bank and SOCAL,
has served as a trustee of the Bishop Estate since 1994. From 1986 through 1994,
Mr. Jervis was partner in the law firm of Jervis, Winer & Meheula located in
Kailua, Hawaii.
ROBERT W. MACDONALD. Mr. MacDonald, a director of the Company and the Bank,
is Managing Director of William E. Simon & Sons, a merchant banking firm, where
he has been employed since 1991. William E. Simon & Sons has an indirect
ownership interest in SOCAL through Arbur, Inc. Mr. MacDonald was with Salomon
Brothers between 1971 and 1979, at which time he started a financial advisory
firm and Catalyst Energy Corporation, a leading developer of independent power
facilities. The company went public in 1984 and was sold to an investor group in
1988. Between 1988 and 1991, Mr. MacDonald created a merchant banking
corporation, East Rock Partners, which invested in alternative energy products
and other projects.
JOHN F. DAVIS. Mr. Davis, a director of the Company, is an attorney who
specializes in federal and state depository institution law and regulation. Mr.
Davis has served as a legal consultant for two local financial institutions
since 1993 and 1995, respectively, during which he was actively involved in
troubled real estate work-outs, foreclosed real estate disposition and related
litigation and, with one of such institutions, a reorganization and
recapitalization. During 1991 and 1992, Mr. Davis served as Of Counsel to
Griffinger, Freed, Heinemann, Cook & Foreman, San Francisco, California.
DAVID S. HONDA. Mr. Honda, a director of the Company, has since 1980 been
President of D.S. Honda Construction, Inc., a general contracting construction,
interior design and space planning firm located in Northridge, California. Mr.
Honda has been responsible for the creation or renovation of millions of square
feet of commercial real estate in Los Angeles and he is actively involved with
economic development and small business organizations generally and with Asian
business associations in particular throughout the city. Mr. Honda has been
extensively involved with civic and service organizations in the community for
many years. His firm has been recognized by local County Board of Supervisors
and Chambers of Commerce. As a result of the Northridge earthquake in 1994, an
office building personally owned by Mr. Honda and his wife was severely damaged,
resulting in a complete tenant vacancy of the property. Because Mr. Honda was
unable to obtain additional financing or an acceptable work-out program on the
damaged property, Mr. Honda filed for personal bankruptcy under the federal
bankruptcy laws in 1995 which was fully discharged in July 1996.
J. MICHAEL HOLMES. Mr. Holmes is the Executive Vice President, Chief
Financial Officer and Secretary of the Company, positions he had held since the
Company's inception in June 1997. Mr. Holmes became a director of the Company in
September 1997. He has served as Secretary and Treasurer of SOCAL and Executive
Vice President and Chief Financial Officer of the Bank since March 1995.
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<PAGE>
Mr. Holmes also serves as Secretary and Treasurer of SOCAL. Prior to SOCAL, Mr.
Holmes joined Banc Florida, FSB in 1974 as Controller and served in various
capacities, culminating as Executive Vice President and Chief Financial Officer
in 1985, a position he held through the company's merger with First Union in
August 1994. Mr. Holmes also served as Secretary, Treasurer and Chief Financial
Officer of the parent holding company, BancFlorida Financial Corp., between 1985
and August 1994.
JOHN T. WASLEY. Mr. Wasley is the Senior Vice President of the Company, a
position he has held since September 1997. He is Senior Vice President of the
Bank and manages the Loan Servicing, Commercial Real Estate Lending, Special
Assets, Corporate Real Estate and General Services Departments of the Bank. Mr.
Wasley joined the Bank in 1992 to establish the Special Assets Department.
During his tenure at the Bank, Mr. Wasley has managed the liquidation of $112
million in non-performing assets. Between 1988 and 1992, Mr. Wasley was
President of Wedgewood Development Company, which was a Los Angeles-based real
estate development company. Between 1984 and 1988, Mr. Wasley was the Chief
Financial Officer of Wedgewood Investment Corporation, which is a Los
Angeles-based real estate investment firm.
GERALD A. TIMPONE. Mr. Timpone is a Vice President of the Company, a
position he has held since September 1997. He is also an Assistant Vice
President of the Bank and its Compliance Manager and Community Reinvestment Act
("CRA")/Fair Lending Officer. Mr. Timpone has held such positions with the Bank
since May 1992. Prior thereto, from December 1991 to May 1992, Mr. Timpone was
Office Manager and Senior Appraiser for Full Service Appraisal Group, San
Bernardino, California.
INDEPENDENT DIRECTORS
The Company's Articles of Incorporation require that, so long as any Series
A Preferred Shares are outstanding, certain actions by the Company be approved
by a majority of the Independent Directors of the Company. See "Description of
Series A Preferred Shares--Independent Director Approval." In addition, although
not restricted from doing so, the Board of Directors does not currently intend
to approve the following transactions without the approval of a majority of the
Independent Directors: (i) the modification of the general distribution policy
or the authorization or declaration of any distribution in respect of Common
Stock for any year if, after taking into account any such proposed distribution,
total distributions on the Series A Preferred Shares and the Common Stock would
exceed an amount equal to the sum of 105% of the Company's REIT taxable income
(excluding capital gains) for such year plus net capital gains of the Company
for that year and (ii) the redemption of any shares of Common Stock. Messrs.
Davis and Honda are the Company's initial Independent Directors. For so long as
there are only two Independent Directors, any action that requires the approval
of a majority of Independent Directors must be approved by both Independent
Directors.
If full dividends on shares of Series A Preferred Shares shall not have been
paid for six Dividend Periods, the maximum authorized number of directors of the
Company shall thereupon be increased by two. Subject to compliance with any
requirement for regulatory approval of (or non-objection to) persons serving as
directors, the holders of Series A Preferred Shares, voting together as a class
with the holders of any Parity Stock upon which the same voting rights as those
of the Series A Preferred Shares have been conferred and are irrevocable, shall
have the exclusive right to elect the two additional directors at the Company's
next annual meeting of stockholders and at each subsequent annual meeting until
full dividends have been authorized, declared and paid or authorized and
declared and a sum sufficient for payment thereof is set apart for payment on
the Series A Preferred Shares for four consecutive Dividend Periods. The term of
such directors elected thereby shall terminate, and the total number of
directors shall be decreased by two, upon the payment or the declaration and
setting aside for payment of full dividends on the Series A Preferred Shares for
four consecutive Dividend Periods. Any member of the Board of Directors elected
by holders of the Company's Preferred Stock will be deemed to be an Independent
Director for purposes of the actions requiring the approval of a majority of the
Independent Directors. See "Description of Series A Preferred Shares--Voting
Rights."
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<PAGE>
AUDIT COMMITTEE
The Company has established an audit committee which will review the
engagement and independence of its auditors. The audit committee will also
review the adequacy of the Company's internal accounting controls. The audit
committee will initially be comprised of Messrs. Davis and Honda.
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors of the Company fees for
their services as directors. The Independent Directors will receive a fee of
$1,000 for attendance (in person or by telephone) at each meeting of the Board
of Directors or Committee of the Board. However, multiple fees shall not be paid
for two or more meetings attended on the same day. The Company will not pay any
compensation to its officers or employees or to directors who are not
Independent Directors.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation eliminate, to the fullest extent
permitted by the MGCL, the personal liability of a director to the Company or
its stockholders for monetary damages for breach of such director's fiduciary
duty. The Company's Articles of Incorporation empower the Company to indemnify,
to the fullest extent permitted by the MGCL, any director or officer of the
Company. The Company's Articles of Incorporation also empower the Company to
purchase and maintain insurance to protect any director or officer against any
liability asserted against him or her, or incurred by him or her, arising out of
his or her status as such.
The bylaws of the Company (the "Bylaws") require indemnification of the
Company's directors and officers and specify that the right to indemnification
is a contract right, setting forth certain procedural and evidentiary standards
applicable to the enforcement of a claim under the Bylaws. The Bylaws also
entitle any director or officer to be reimbursed for the expenses of defending
any claim against him or her arising out of his or her status as such. The
Bylaws of the Company also provide that the Company may enter into contracts
with any director or officer in furtherance of the indemnification provisions
contained in the Bylaws and allow the Company to create a trust fund to ensure
payment of amounts indemnified.
THE ADVISOR
In connection with the consummation of the Offering and the formation of the
Company as described herein, the Company will enter into the Advisory Agreement
with the Bank to administer the day-to-day operations of the Company. The Bank
in its role as advisor under the terms of the Advisory Agreement is herein
referred to as the "Advisor." The Advisor will be responsible for, among other
things: (i) monitoring the credit quality of the Mortgage Assets and Other
Authorized Investments held by the Company; (ii) advising the Company with
respect to the acquisition, management, financing and disposition of the
Company's Mortgage Assets and Other Authorized Investments; and (iii)
representing the Company in its day-to-day dealings with persons with whom the
Company interacts. In performing its duties under the Advisory Agreement, the
Advisor is required to act in a manner that is consistent with maintaining the
Company's qualification as a REIT. The Advisor may, from time to time,
subcontract all or a portion of its obligations under the Advisory Agreement,
with the approval of a majority of the Board of Directors as well as a majority
of the Independent Directors, to unrelated third parties. The Advisor will not,
in connection with the subcontracting of any of its obligations under the
Advisory Agreement, be discharged or relieved in any respect from its
obligations under the Advisory Agreement. Notwithstanding the above, the Company
will control the activities of the Advisor and the Company's directors will
maintain the continuing and exclusive authority to manage the operations of the
Company.
The Advisor has substantial experience in the mortgage lending industry,
both in the origination and in the servicing of mortgage loans. At June 30,
1997, the Advisor held approximately $547.1 million of single-family residential
mortgage loans and approximately $442.7 million and $117.9 million of multi-
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family residential and commercial mortgage loans, respectively. In its
residential mortgage loan business, the Advisor originates and purchases
residential mortgage loans and may sell such loans to investors, primarily in
the secondary market. The Advisor has recently sold to the Servicing Agent the
servicing rights with respect to substantially all of its Residential Mortgage
Loans. See "Business and Strategy--Servicing." In its commercial mortgage loan
business, the Advisor typically services the commercial mortgage loans in its
portfolio which it has originated.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As long
as any Series A Preferred Shares remain outstanding, any decision by the Company
either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $200,000 with respect to the advisory
and management services provided by it to the Company.
As a result of the relationship between the Bank and the Company, certain
conflicts of interest may arise. See "Risk Factors--Relationship with the Bank;
Conflicts of Interest."
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the Company
and the Bank will engage in the transactions described below which are designed
(i) to facilitate the Offering, (ii) to transfer the ownership of the Initial
Portfolio to the Company and (iii) to enable the Company to qualify as a REIT
for federal income tax purposes commencing with its taxable year ending December
31, 1997.
The transactions constituting the formation of the Company will include the
following:
- The Articles of Incorporation of the Company will be amended and restated
to provide for 4,000,000 authorized shares of Preferred Stock and
4,000,000 authorized shares of Common Stock, and to establish the terms of
the Series A Preferred Shares.
- The Company will sell to the public 1,240,000 Series A Preferred Shares in
the Offering (assuming the Underwriters' over-allotment option is not
exercised).
- The Bank has acquired 10,000 shares of Common Stock for an aggregate
purchase price equal to $100. In addition, the Bank will make capital
contributions to the Company equal to the sum of $31.3 million plus the
aggregate amount of underwriting commissions and expenses of the Offering
and the formation of the Company. The Bank currently owns, and following
the completion of the Offering will continue to own, all of the issued and
outstanding shares of Common Stock of the Company. The Bank currently
intends that, so long as any Series A Preferred Shares are outstanding, it
will maintain direct ownership of at least a majority of the outstanding
shares of Common Stock.
- The Bank will sell the Initial Portfolio to the Company for an aggregate
purchase price equal to approximately $62.3 million pursuant to the terms
of the Residential Mortgage Purchase Agreement and the Commercial Mortgage
Purchase Agreement. See "Business and Strategy--Acquisition of the Initial
Portfolio."
- The Company will enter into the Advisory Agreement with the Bank pursuant
to which the Bank, as Advisor, will manage the Mortgage Assets held by the
Company and administer the day-to-day operations of the Company. See
"Management--The Advisor."
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<PAGE>
- The Company will enter into the Commercial Servicing Agreement with the
Bank pursuant to which the Bank will service the Commercial Mortgage Loans
included in the Initial Portfolio and the Company will, upon purchase of
the Residential Mortgage Loans, enter into the Residential Assumption
Servicing Agreement, pursuant to which the Servicing Agent will service
the Residential Mortgage Loans which the Company acquires from the Bank.
See "Business and Strategy-- Servicing."
In addition to its ownership of 100% of the Common Stock of the Company, the
Bank will also have responsibility for the day-to-day management and custody of
the Company's assets, in its capacity as Advisor under the Advisory Agreement,
and will have responsibility for servicing the Commercial Mortgage Loans as
Servicer under the Commercial Servicing Agreement. See "Management--The Advisor"
and "Risk Factors--Relationship with the Bank; Conflicts of Interest."
The Company and the Bank intend that the fair value of the Initial Portfolio
will approximately equal the amount (approximately $62.3 million) that the
Company will pay for the Initial Portfolio. However, no third party valuations
of the Mortgage Loans constituting the Initial Portfolio have been or will be
obtained for purposes of the Offering, and there can be no assurance that the
fair value of the Initial Portfolio will not differ from the purchase price to
be paid by the Company. See "Risk Factors--No Third Party Valuation of the
Mortgage Loans; No Arm's-Length Negotiations with Affiliates" and
"--Relationship with the Bank and its Affiliates; Conflicts of Interest."
BENEFITS TO THE BANK
The Bank expects to realize the following benefits in connection with the
Offering and the formation of the Company:
- The Bank has advised the Company that the Bank expects the Series A
Preferred Shares to qualify as core capital of the Bank under relevant
regulatory capital guidelines. The increase in the Bank's core capital and
risk-based capital levels that will result from the treatment of the
Series A Preferred Shares as core capital will enable the Bank to retain a
higher base of interest-earning assets, resulting in incrementally higher
related earnings.
- The dividends paid on the Series A Preferred Shares will be deductible for
income tax purposes as a result of the Company's qualification as a REIT,
which provides the Bank with a more cost-effective means of obtaining
regulatory capital than if the Bank were to issue preferred stock.
- The Bank will receive approximately $62.3 million in connection with the
sale of the Initial Portfolio to the Company (approximately $
million of which represents new funds after giving effect to the Bank's
expense of purchasing the Company's Common Stock and additional capital
contributions).
- The Bank will be entitled to receive annual advisory and servicing fees
and annual dividends in respect of the Common Stock. For the first full
year following completion of the Offering, these annual fees and dividends
are anticipated to be as follows:
<TABLE>
<S> <C>
Advisory Fee............................................... $ 200,000
Servicing Fee(1)(2)........................................ 34,000
Common Stock Dividend(3)...................................
---------
$
---------
---------
</TABLE>
-------------------------------
(1) Assumes that for the first full year following completion of the
Offering, the Company holds Commercial Mortgage Loans with the same
outstanding principal balances as those Commercial Mortgage Loans
included in the Initial Portfolio. See "Business and Strategy--
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<PAGE>
Servicing" for a description of the basis upon which the servicing
fees to be paid to the Bank will be calculated.
(2) Does not include an estimated $122,000 of servicing fees to be paid
to the Servicing Agent for the first full year following completion
of the Offering with respect to the Servicing Agent's servicing of
the Residential Mortgage Loans included in the Initial Portfolio. The
estimated amount of servicing fees to be paid to the Servicing Agent
assumes that for the first full year following completion of the
Offering, the Company holds Residential Mortgage Loans with the same
outstanding principal balances as those Residential Mortgage Loans
included in the Initial Portfolio. See "Business and
Strategy--Servicing" for a description of the basis upon which the
servicing fees to be paid to the Servicing Agent will be calculated.
(3) The dividends to be paid on the Common Stock are expected to equal
the excess of the Company's "REIT taxable income" (excluding capital
gains) after the payment of dividends on the Preferred Stock. The
aggregate annual dividend amount of the Series A Preferred Shares is
approximately $ million at an assumed rate of %. Assuming
that (i) the Mortgage Loans included in the Initial Portfolio are
held for the first full year period following completion of the
Offering, (ii) principal repayments are reinvested in additional
Mortgage Loans with characteristics similar to those of the Mortgage
Loans included in the Initial Portfolio and (iii) interest rates
remain constant during such year, the Company anticipates that the
Initial Portfolio will generate "REIT taxable income" (excluding
capital gains) of approximately $ million, after payment of
servicing and advisory fees, during such 12-month period.
- The Bank and the Servicing Agent will also be entitled to retain any late
payment charges, prepayment fees (only as to the Company with respect to
Commercial Mortgage Loans) or penalties and assumption fees and conversion
fees collected in connection with the Mortgage Loans serviced by them. In
addition, the Bank and the Servicing Agent will receive any benefit
derived from interest earned on collected principal and interest payments
between the date of collection and the date of remittance to the Company
and from interest earned on tax and insurance escrow funds with respect to
Mortgage Loans serviced by them.
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<PAGE>
DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series A Preferred Shares, and is qualified in its entirety by reference to the
terms and provisions of the Articles of Incorporation. The Articles of
Incorporation have been filed with the Commission as exhibits to the
registration statement of which this Prospectus forms a part. See "Description
of Capital Stock" below.
GENERAL
The Series A Preferred Shares form a series of the Preferred Stock of the
Company, which Preferred Stock may be issued from time to time in one or more
series with such designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption as are determined by the
Company's Board of Directors or, if then constituted, a duly authorized
committee thereof. The Board of Directors has authorized the Company to issue
the Series A Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series A Preferred Shares will have
no preemptive rights with respect to any shares of the capital stock of the
Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares are
perpetual and will not be convertible into shares of Common Stock or any other
class or series of capital stock of the Company and will not be subject to any
sinking fund or other obligation of the Company for its repurchase or
retirement.
The transfer agent, registrar and dividend disbursement agent for the
Preferred Stock will be . The registrar for shares of
Preferred Stock will send notices to stockholders of any meetings at which
holders of the Preferred Stock have the right to elect directors of the Company
or to vote on any other matter.
DIVIDENDS
Holders of Series A Preferred Shares will be entitled to receive, if, when
and as authorized and declared by the Board of Directors of the Company out of
assets of the Company legally available therefor, noncumulative cash dividends
at the rate of % per annum of the initial liquidation preference (equivalent
to $ per share per annum). Dividends on the Series A Preferred Shares
will be payable, if authorized and declared, quarterly in arrears on March 31,
June 30, September 30 and December 31 (or, if any such day is not a business
day, on the next business day) of each year, commencing on , 1997.
Quarterly Dividend Periods will commence on and include the first day, and end
on and include the last day, of the calendar quarter in which the corresponding
Dividend Payment Date occurs; provided, however, that the first Dividend Period
(the "Initial Dividend Period") shall commence on and include the original issue
date of the Series A Preferred Shares and shall end on and include , 1997.
Each authorized and declared dividend will be payable to holders of record as
they appear on the stock register of the Company on such record dates, not
exceeding 45 days nor less than 10 days preceding the Dividend Payment Dates
thereof, as shall be fixed by the Board of Directors of the Company or a duly
authorized committee thereof. Dividends payable on the Series A Preferred Shares
for any period greater or less than a full Dividend Period shall be computed on
the basis of twelve 30-day months, a 360-day year and the actual number of days
elapsed in the period; provided, however, that in the event of an Automatic
Exchange, any accrued and unpaid dividends on the Series A Preferred Shares as
of the Time of Exchange (as defined herein) shall be deemed to be accrued and
unpaid dividends on the Bank Preferred Shares.
The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors does not authorize or
declare a dividend on the Series A Preferred Shares in respect of any Dividend
Period, then holders of the Series A Preferred Shares will have no right to
receive a dividend for that Dividend Period, and the Company will have no
obligation to pay a dividend for that Dividend Period, whether or not dividends
are declared and paid for any future Dividend Period with
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<PAGE>
respect to either the Series A Preferred Shares or the Common Stock. If the
Company fails to pay or declare and set aside for payment full dividends on the
Series A Preferred Shares for six Dividend Periods, holders of the Series A
Preferred Shares will be entitled to elect two directors. See "--Voting Rights."
If any Series A Preferred Shares are outstanding, no full dividends or other
distributions shall be authorized, declared or paid or set apart for payment on
any Junior Stock for any Dividend Period unless full dividends have been or
contemporaneously are authorized, declared and paid, or authorized and declared
and a sum sufficient for the payment thereof is set apart for such payments on
the Series A Preferred Shares for the then-current Dividend Period. When
dividends are not paid in full (or a sum sufficient for such full payment is not
so set apart) upon the Series A Preferred Shares for any Dividend Period and the
shares of any Parity Stock, all dividends authorized and declared on the Series
A Preferred Shares and the shares of Parity Stock shall only be authorized and
declared PRO RATA based upon the respective amounts that would have been paid on
the Series A Preferred Shares and any shares of Parity Stock had dividends been
authorized and declared in full.
In addition to the foregoing restriction, the Company shall not authorize,
declare, pay or set apart funds for any dividends or other distributions (other
than in Common Stock or other Junior Stock) with respect to any Common Stock or
other Junior Stock or repurchase, redeem or otherwise acquire, or set apart
funds for the repurchase, redemption or other acquisition of, any Common Stock
or other Junior Stock through a sinking fund or otherwise, unless and until: (i)
full dividends on the Series A Preferred Shares for the four most recent
preceding Dividend Periods (or such lesser number of Dividend Periods during
which shares of Series A Preferred Shares have been outstanding) are authorized
and declared and paid or a sum sufficient for payment has been paid over to the
dividend disbursing agent for payment of such dividends and (ii) the Company has
authorized and declared a cash dividend on the Series A Preferred Shares at the
annual dividend rate for the then-current Dividend Period, and sufficient funds
have been paid over to the dividend disbursing agent for the payment of such
cash dividend for such then-current Dividend Period.
No dividend shall be paid or set aside for holders of Series A Preferred
Shares for any Dividend Period unless full dividends have been paid or set aside
for the holders of each class or series of equity securities, if any, ranking
prior to the Series A Preferred Shares as to dividends for such Dividend Period.
AUTOMATIC EXCHANGE
Each Series A Preferred Share will be exchanged automatically for one newly
issued Bank Preferred Share if the appropriate federal regulatory agency directs
in writing that an exchange of the Series A Preferred Shares for Bank Preferred
Shares occur because: (i) the Bank becomes "undercapitalized" under prompt
corrective action regulations; (ii) the Bank is placed into conservatorship or
receivership; or (iii) the appropriate federal regulatory agency, in its sole
discretion, anticipates the Bank becoming "undercapitalized" in the near term
(an "Exchange Event"). Upon the occurrence of an Exchange Event, each holder of
Series A Preferred Shares shall be unconditionally obligated to surrender to the
Bank the certificates representing each Series A Preferred Share of such holder,
and the Bank shall be unconditionally obligated to issue to such holder in
exchange for each such Series A Preferred Share a certificate representing one
Bank Preferred Share. Any Series A Preferred Shares purchased or redeemed by the
Company prior to the Time of Exchange (as defined below) shall not be deemed
outstanding and shall not be subject to the Automatic Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the date
for such exchange set forth in the Directive, or, if such date is not set forth
in the Directive, as of 8:00 a.m. on the earliest possible date such exchange
could occur consistent with the Directive (the "Time of Exchange"), as evidenced
by the issuance by the Bank of a press release prior to such time. As of the
Time of Exchange, all of the Series A Preferred Shares will be deemed cancelled
without any further action by the Company, all rights of the holders of Series A
Preferred Shares as stockholders of the Company will cease, and such
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<PAGE>
persons shall thereupon and thereafter be deemed to be and shall be for all
purposes the holders of Bank Preferred Shares. The Company will mail notice of
the occurrence of an Exchange Event to each holder, and the Bank will deliver to
each such holder certificates for Bank Preferred Shares upon surrender of
certificates for Series A Preferred Shares. Until such replacement stock
certificates are delivered (or in the event such replacement certificates are
not delivered), certificates previously representing Series A Preferred Shares
shall be deemed for all purposes to represent Bank Preferred Shares. All
corporate action necessary for the Bank to issue the Bank Preferred Shares as of
the Time of Exchange will be completed prior to or upon completion of the
Offering. Accordingly, once the Directive is issued, no action will be required
to be taken by holders of Series A Preferred Shares, by the Bank or by the
Company in order to effect the Automatic Exchange as of the Time of Exchange.
Holders of Series A Preferred Shares, by purchasing such shares (whether in
the Offering or in the secondary market after the Offering), will be deemed to
have agreed to be bound by the unconditional obligation to exchange such shares
of Series A Preferred Shares for Bank Preferred Shares upon the occurrence of an
Exchange Event. The Articles of Incorporation provide that the holders of Series
A Preferred Shares shall be unconditionally obligated to surrender such shares
and the Bank shall be unconditionally obligated to issue Bank Preferred Shares
in exchange for Series A Preferred Shares.
Absent the occurrence of an Exchange Event, no shares of Bank Preferred
Shares will be issued. Holders of Series A Preferred Shares cannot exchange
their Series A Preferred Shares for Bank Preferred Shares voluntarily. Upon the
occurrence of an Exchange Event, the Bank Preferred Shares to be issued as part
of the Automatic Exchange would constitute a newly issued series of preferred
stock of the Bank and would have the same terms and provisions with respect to
dividends, liquidation, redemption (except with respect to a Tax Event), voting
rights and Independent Directors as the Series A Preferred Shares, except that
the Bank Preferred Shares would not be listed on any national securities
exchange or national quotation system. Any accrued and unpaid dividends on the
Series A Preferred Shares as of the Time of Exchange would be deemed to be
accrued and unpaid dividends on the Bank Preferred Shares. The Bank Preferred
Shares would rank on an equal basis in terms of dividend payment and liquidation
preference with any then-outstanding shares of preferred stock of the Bank. The
Bank has registered the Bank Preferred Shares with the OTS pursuant to an
Offering Circular, a copy of which is affixed to this Prospectus as Annex I and
incorporated herein by reference. The Bank Preferred Shares will not be
registered with the Commission and will be offered pursuant to an exemption from
registration under Section 3(a)(5) of the Securities Act of 1933, as amended
(the "Securities Act"). Absent the occurrence of an Exchange Event, however, the
Bank will not issue any Bank Preferred Shares, although the Bank will be able to
issue preferred stock in series other than that of the Bank Preferred Stock.
There can be no assurance as to the liquidity of the trading markets for the
Bank Preferred Shares, if issued, or that an active public market for the Bank
Preferred Shares would develop or be maintained.
Absent the occurrence of the Automatic Exchange, holders of Series A
Preferred Shares will have no dividend, voting, liquidation preference or other
rights with respect to any security of the Bank; such rights as are conferred by
the Series A Preferred Shares exist solely as to the Company.
RANK
The Series A Preferred Shares will rank prior to the Common Stock and to all
other classes and series of equity securities of the Company now or hereafter
issued (collectively, "Junior Stock"), other than any class or series of equity
securities of the Company expressly designated as being on a parity with
("Parity Stock") or senior to ("Senior Stock") the Series A Preferred Shares as
to dividend rights and rights upon liquidation, winding up or dissolution. The
Company has the power to create and issue additional Preferred Stock or other
classes of stock ranking on a parity with the Series A Preferred Shares, or that
constitute Junior Stock, without any approval or consent of the holders of
Series A Preferred Shares. So long as any Series A Preferred Shares remain
outstanding, additional shares of Senior Stock may not be issued without the
approval of the holders of at least two-thirds of the Series A Preferred Shares.
See "--
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<PAGE>
Voting Rights." So long as any Series A Preferred Shares remain outstanding,
additional shares of Parity Stock may not be issued without the approval of a
majority of the Independent Directors. See "-- Independent Director Approval."
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to
vote, each Series A Preferred Share will be entitled to one vote.
If full dividends on the Series A Preferred Shares shall not have been paid
for six Dividend Periods (whether or not consecutive), the maximum authorized
number of directors of the Company shall thereupon be increased by two. Subject
to compliance with any requirement for regulatory approval of (or non-objection
to) persons serving as directors, the holders of Series A Preferred Shares,
voting together as a class with the holders of any Parity Stock upon which the
same voting rights as those of the Series A Preferred Shares have been conferred
and are irrevocable, shall have the exclusive right to elect the two additional
directors at the Company's next annual meeting of stockholders and at each
subsequent annual meeting until full dividends have been authorized, declared
and paid or authorized and declared and a sum sufficient for payment thereof is
set apart for payment on the Series A Preferred Shares for four consecutive
Dividend Periods. The term of such directors elected thereby shall terminate,
and the total number of directors shall be decreased by two, upon the first
annual meeting of stockholders after the payment or the authorization or
declaration and setting aside for payment of full dividends on the Series A
Preferred Shares for four consecutive Dividend Periods. Thereafter, the holders
of the Series A Preferred Shares will not be able to elect directors unless
dividends on the Series A Preferred Shares have again not been paid for six
Dividend Periods. Any such director may be removed by, and shall not be removed
except by, the vote of the holders of record of the outstanding Series A
Preferred Shares and Parity Stock entitled to vote, voting together as a single
class without regard to series, at a meeting of the Company's stockholders
called for that purpose. As long as dividends on the Series A Preferred Shares
shall not have been paid for six Dividend Periods, (i) any vacancy in the office
of any such director may be filled (except as provided in the following clause
(ii)) by an instrument in writing signed by any such remaining director and
filed with the Company, and (ii) in the case of the removal of any such
director, the vacancy may be filled by the vote of the holders of the
outstanding Series A Preferred Shares and Parity Stock entitled to vote, voting
together as a single class without regard to series, at the same meeting at
which such removal shall be voted.
So long as any shares of Series A Preferred Shares are outstanding, the
Company shall not, without the consent or vote of the holders of at least
two-thirds of the outstanding Series A Preferred Shares, voting separately as a
class, (i) amend, alter or repeal or otherwise change any provision of the
Articles of Incorporation, including the terms of the Series A Preferred Shares,
if such amendment, alteration, repeal or change would materially and adversely
affect the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption of the Series A Preferred Shares, or (ii) authorize,
create or increase the authorized amount of or issue any class or series of any
equity securities of the Company, or any warrants, options or other rights
exercisable for or convertible or exchangeable into any class or series of any
equity securities of the Company, ranking senior to the Series A Preferred
Shares, either as to dividend rights or rights on liquidation, dissolution or
winding up of the Company or (iii) merge, consolidate, reorganize or effect any
other business combination involving the Company, unless the resulting
corporation will thereafter have no class or series of equity securities either
authorized or outstanding ranking senior to the Series A Preferred Shares as to
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up, except the same number of shares of such equity securities with the
same preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption as the shares of equity securities of the Company that
are authorized and
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outstanding immediately prior to such transaction, and each holder of Series A
Preferred Shares immediately prior to such transaction shall receive shares with
the same preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption of the resulting corporation as the Series A Preferred
Shares held by such holder immediately prior thereto.
The creation or issuance of Parity Stock or Junior Stock, or an amendment
that increases the number of authorized shares of Preferred Stock, or Series A
Preferred Shares or any Junior Stock or Parity Stock, shall not be deemed to be
a material and adverse change requiring a vote of the holders of Series A
Preferred Shares.
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to , 2002,
(except upon the occurrence of a Tax Event or a Change of Control). On or after
such date, the Series A Preferred Shares may be redeemable for cash by the
Company or its successor or any acquiring or resulting entity with respect to
the Company, including by any parent or subsidiary of the Company, any such
successor, or any such acquiring or resulting entity as applicable, at its
option, in whole or in part, at any time and from time to time, at the
redemption price of $25.00 per share, plus authorized, declared and unpaid
dividends to the date of redemption, without interest.
In the event that fewer than all the outstanding Series A Preferred Shares
are to be redeemed, the number of Series A Preferred Shares to be redeemed shall
be determined by the Board of Directors, and the shares to be redeemed shall be
determined by lot or PRO RATA as may be determined by the Board of Directors or
by any other method as may be determined by the Board of Directors in its sole
discretion to be equitable, provided that such method satisfies any applicable
requirements of any securities exchange on which Series A Preferred Shares are
then listed.
The Company will also have the right at any time, upon the occurrence of a
Tax Event, to redeem the Series A Preferred Shares, in whole, but not in part,
at a redemption price of $25.00 per share, plus all authorized, declared and
unpaid dividends for the then-current Dividend Period to the date of redemption,
without interest. "Tax Event" means the receipt by the Company of an opinion of
a law firm experienced in such matters to the effect that, as a result of: (i)
any amendment to, clarification of, or change (including any announced
prospective change) in, the laws, treaties or any regulations thereunder of the
United States or any political subdivision or taxing authority thereof or
therein affecting taxation, (ii) any Administrative Action or (iii) any
amendment to, clarification of, or change in the official position or the
interpretation of such Administrative Action or any interpretation or
pronouncement that provides for a position with respect to such Administrative
Action that differs from the theretofore generally accepted position, in each
case, by any legislative body, court, governmental authority or regulatory body,
irrespective of the manner in which such amendment, clarification or change is
made known, which amendment, clarification or change is effective, or such
pronouncement or decision is announced, on or after the date of issuance of the
Series A Preferred Shares, there is more than an insubstantial risk that: (a)
dividends paid or to be paid by the Company with respect to the stock of the
Company are not, or will not be, fully deductible by the Company for United
States federal income tax purposes or (b) the Company is, or will be, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges as a result of dividends paid or to be paid by the Company.
Upon a Change of Control, the Series A Preferred Shares are redeemable on or
prior to , 2002, at the option of the Company or its successor or any
acquiring or resulting entity with respect to the Company, including by any
parent or subsidiary of the Company, any such successor, or any such acquiring
or resulting entity, as applicable, in whole, but not in part, at a redemption
price per share equal to (i) $25.00, plus (ii) an amount equal to all
authorized, declared and unpaid dividends, if any, to the date fixed for
redemption, without interest, and without duplication, an additional amount
equal to the amount of
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dividends that would be payable on the Series A Preferred Shares in respect of
the period from the first day of the Dividend Period in which the date fixed for
redemption occurs to the date fixed for redemption (assuming all such dividends
were to be authorized and declared), plus (iii) the Applicable Premium, payable
in cash.
The Company or any such successor or any acquiring or resulting entity will
be entitled to issue a notice of redemption after the Company or a parent
company has entered into a definitive binding agreement with a third party that
will result in a Change of Control, provided that (i) the date fixed for
redemption is not earlier than the date on which the related Change of Control
occurs and (ii) the obligation to effect such redemption is contingent upon the
occurrence of such Change of Control.
"Applicable Premium" means the greater of: (i) $25.00 or (ii) the excess
of (A) the present value of (l) an amount equal to the amount of dividends
that would be payable on the Series A Preferred Shares in respect of the
period from the date fixed for redemption through , 2002 (assuming all
such dividends were to be authorized and declared) plus (2) $ ,
computed using a discount rate equal to the Treasury Rate plus [75] basis
points, over (B) $25.00.
"Change of Control" means the occurrence of any of the following events:
(i) any Person (as defined herein) other than a Permitted Holder (as
defined herein) shall be the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a
majority in the aggregate of the total voting power of the voting stock
of the Bank or SOCAL, whether as a result of issuance of securities of
the Bank or SOCAL, any merger, consolidation, liquidation or dissolution
of the Bank or SOCAL, any direct or indirect transfer of securities by a
Permitted Holder, or otherwise; or
(ii) a sale, transfer, conveyance or other disposition, in a single
transaction or in a series of related transactions (other than to an
affiliate of the Bank or any of its subsidiaries), in either case
occurring outside the ordinary course of business, of more than 75% of
the assets and 75% of the deposit liabilities of the Bank shown on the
consolidated balance sheet of the Bank as of the end of the most recent
fiscal quarter ending at least 45 days prior to such transaction (or the
first in such related series of transactions).
"Permitted Holder" means the Bishop Estate, BIL Securities or Arbur, or
any Person controlled, directly or indirectly, by the Bishop Estate, BIL
Securities or Arbur.
"Treasury Rate" means the yield to maturity at the time of computation
of United States Treasury securities with a constant maturity (as compiled
and published in the most recent Federal Reserve Statistical Release H.15
(510) which has become publicly available at least two business days prior
to the date fixed for redemption (or, if such Statistical Release is no
longer published, any publicly available source of similar market data))
most nearly equal to the period of time to , 2002; provided, however,
that if such period is not equal to the constant maturity of a United States
Treasury security for which a weekly average yield is given, the Treasury
Rate shall be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that, if such
remaining life is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of
one year shall be used.
If redemption is being effected by the Company, on and as of the date fixed
for redemption, dividends shall cease to accrue on the Series A Preferred Shares
called for redemption, and they shall be deemed to cease to be outstanding,
provided that the redemption price (including any authorized and declared but
unpaid dividends to the date fixed for redemption, without interest) has been
duly paid or provided for. If redemption is being effected by an entity other
than the Company, on and as of the redemption date such entity shall be deemed
to own the Series A Preferred Shares being redeemed for all purposes of the
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Articles of Incorporation, provided that the redemption price (including the
amount of any authorized and declared but unpaid dividends to the date fixed for
redemption) has been duly paid or provided for.
Notice of any redemption will be mailed at least 30 days, but not more than
60 days, prior to any redemption date to each holder of Series A Preferred
Shares to be redeemed at such holder's registered address.
The Company's ability to redeem any Series A Preferred Shares, whether as a
result of a Change of Control or otherwise, is subject to compliance with
applicable regulatory requirements, including the prior approval of the OTS,
relating to the redemption of capital instruments. Under current policies of the
OTS, such approval would be granted only if the redemption were to be made out
of the proceeds of the issuance of another capital instrument or if the OTS were
to determine that the conditions and circumstances of SOCAL and the Bank warrant
the reduction of a source of permanent capital.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive in respect of each share, out of
assets of the Company legally available for distribution to its stockholders,
before any distribution of assets is made to holders of Junior Stock and subject
to the rights of the holders of any class or series of equity securities having
preference with respect to distributions upon liquidation and the rights of the
Company's general creditors, liquidating distributions in the amount of $25 per
share, plus the authorized, declared and unpaid dividends for the most recent
quarter thereon, if any, to the date of liquidation.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series A Preferred Shares will have no right
or claim to any of the remaining assets of the Company. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on any Parity Stock, then the holders of the
Series A Preferred Shares and Parity Stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Company with or into
any other entity, the consolidation or merger of any other entity with or into
the Company or the sale of all or substantially all of the property or business
of the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The Articles of Incorporation require that, so long as any Series A
Preferred Shares are outstanding, certain actions by the Company be approved by
a majority of the Independent Directors. For so long as there are only two
Independent Directors, any action that requires the approval of a majority of
Independent Directors must be approved by both Independent Directors. Messrs.
Davis and Honda are the Company's initial Independent Directors. See
"Management--Independent Directors." In order to be considered "independent", a
director must not be a current director, officer or employee of the Company, or
a current director, officer or employee of the Bank or any affiliate of the
Bank. In addition, any members of the Board of Directors of the Company elected
by holders of Preferred Stock, including the Series A Preferred Shares, will be
deemed to be Independent Directors for purposes of approving actions requiring
the approval of a majority of the Independent Directors.
The actions which may not be taken without the approval of a majority of the
Independent Directors include: (i) the issuance of additional Preferred Stock
ranking on a parity with the Series A Preferred
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Shares, (ii) the incurrence of debt for borrowed money in excess of 20% of the
Company's total stockholders' equity, (iii) the acquisition of assets other than
Mortgage Loans, Mortgage-Backed Securities or Other Authorized Investments, (iv)
the termination or modification of, or the election not to renew, the Advisory
Agreement or any Servicing Agreement or the subcontracting of any duties under
the Advisory Agreement or the Commercial Mortgage Servicing Agreement (other
than as specifically established and as contemplated in connection with the
Offering) to third parties unaffiliated with the Bank, (v) any material
amendment to or modification of either of the Mortgage Purchase Agreements, (vi)
the determination to revoke the Company's REIT status or (vii) any dissolution,
liquidation or termination of the Company prior to , 2007. The Articles of
Incorporation require that, in assessing the benefits to the Company of any
proposed action requiring their consent, the Independent Directors take into
account the interests of holders of both the Common Stock and the Preferred
Stock, including, without limitation, holders of the Series A Preferred Shares.
The Articles of Incorporation provide that in considering the interests of the
holders of Preferred Stock, including, without limitation, the holders of the
Series A Preferred Shares, the Independent Directors shall owe the same duties
which the Independent Directors owe to the holders of Common Stock.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For information regarding restrictions on ownership of the Series A
Preferred Shares, see "Description of Capital Stock--Restrictions on Ownership
and Transfer."
DESCRIPTION OF CAPITAL STOCK
The following summary of the material terms of the capital stock of the
Company does not purport to be complete and is subject in all respects to the
applicable provisions of the MGCL and the Articles of Incorporation and Bylaws
of the Company.
COMMON STOCK
GENERAL. The Company is authorized by its Articles of Incorporation to
issue up to 4,000,000 shares of Common Stock. Upon consummation of the Offering
and the transactions described in "Certain Transactions Constituting the
Formation," the Company will have outstanding 10,000 shares of Common Stock, all
of which will be held by the Bank. In addition, the Bank currently intends that,
so long as any Series A Preferred Shares are outstanding, it will maintain
direct or indirect ownership of at least a majority of the outstanding shares of
Common Stock of the Company.
DIVIDENDS. Holders of Common Stock are entitled to receive dividends when,
as and if authorized and declared by the Board of Directors out of assets
legally available therefor, provided that, so long as any shares of Preferred
Stock are outstanding, no dividends or other distributions (including
redemptions and purchases) may be made with respect to the Common Stock unless
full dividends on the shares of all series of Preferred Stock, including
accumulations in the case of cumulative Preferred Stock, have been paid and any
other conditions precedent established under the terms of such series of
Preferred Stock have been satisfied. In order to remain qualified as a REIT, the
Company must distribute annually at least 95% of its annual "REIT taxable
income" (not including capital gains) to stockholders. Several limitations exist
which may restrict the Company's ability to pay dividends on the Common Stock.
See "Business and Strategy-- Dividend Policy."
VOTING RIGHTS. Subject to the rights, if any, of the holders of any class
or series of Preferred Stock, including the Series A Preferred Shares, all
voting rights are vested in the Common Stock. The holders of Common Stock are
entitled to one vote per share. All of the issued and outstanding shares of
Common Stock are currently, and upon consummation of the Offering will be, held
by the Bank.
As the holder of all of the outstanding shares of Common Stock of the
Company, the Bank will be able, subject to the terms of the Series A Preferred
Shares and of any other class or series of stock
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subsequently issued by the Company, to elect and remove directors, amend the
Articles of Incorporation and approve other actions requiring stockholder
approval under the MGCL or otherwise.
RIGHTS UPON LIQUIDATION. In the event of the liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, after there have
been paid or set aside for the holders of all series of Preferred Stock the full
preferential amounts to which such holders are entitled, the holders of Common
Stock will be entitled to share equally and ratably in any assets remaining
after the payment of all debts and liabilities.
PREFERRED STOCK
The Company is authorized by its Articles of Incorporation to issue up to
4,000,000 shares of Preferred Stock. Subject to limitations prescribed by
Maryland law and the Company's Articles of Incorporation, the Board of Directors
or, if then constituted, a duly authorized committee thereof is authorized to
issue, from the authorized but unissued shares of capital stock of the Company,
Preferred Stock in such classes or series as the Board of Directors may
determine and to establish, from time to time, the number of shares of Preferred
Stock to be included in any such class or series and to fix the designation and
any preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms and
conditions of redemption of the shares of any such class or series, and such
other subjects or matters as may be fixed by resolution of the Board of
Directors.
Shares of Preferred Stock, upon issuance against full payment of the
purchase price therefor, will be fully paid and nonassessable. The specific
terms of a particular class or series of Preferred Stock will be described in
the Articles of Incorporation or in supplementary articles relating to that
class or series.
The Articles of Incorporation or supplementary articles relating to each
class or series of Preferred Stock will set forth the preferences and other
terms of such class or series, including, without limitation, the following: (i)
the designation and stated value of such class or series; (ii) the number of
shares of such class or series offered and the liquidation preference per share
of such class or series; (iii) the dividend rate(s), period(s), and/or payment
date(s) or method(s) of calculation thereof applicable to such class or series;
(iv) whether dividends on such class or series of Preferred Stock are cumulative
or not and, if cumulative, the date from which dividends on such class or series
shall accumulate; (v) the provision for a sinking fund, if any, for such class
or series; (vi) the provision for redemption, if applicable, of such class or
series; (vii) any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the status of the
Company as a REIT or as otherwise deemed appropriate by the Board of Directors;
(viii) any voting rights of such class or series; (ix) the relative ranking and
preferences of such class or series as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; (x) any
limitations on issuance of any class or series of Preferred Stock ranking senior
to or on a parity with such class or series of Preferred Stock as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs of
the Company; and (xi) any other specific terms, preferences, rights, limitations
or restrictions of such class or series.
As of the date of this Prospectus, no shares of Preferred Stock are
outstanding and the Company has no present plans to issue any Preferred Stock
other than the Series A Preferred Shares.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Common Stock or Preferred Stock and
thereafter to cause the Company to issue such classified or reclassified shares
of stock will provide the Company with increased flexibility in structuring
possible future financings and acquisitions and in meeting other needs which
might arise. The additional shares of stock will be available for issuance
without further action by the Company's stockholders, unless such action is
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required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded,
except that as long as any Series A Preferred Shares remain outstanding,
additional shares of Preferred Stock ranking senior to the Series A Preferred
Shares may not be issued without the approval of the holders of at least
two-thirds of the Series A Preferred Shares.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
REIT REQUIREMENTS WITH RESPECT TO STOCK OWNERSHIP. To qualify as a REIT
under the Code, not more than 50% of the value of the Company's outstanding
shares of stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year, other than the first year, (the "Five or Fewer Test").
The Code requires that the Five or Fewer Test be applied using constructive
ownership rules which treat certain organizations as one individual.
Consistent with the Company's intention to reduce the likelihood that the
Company's status as a REIT is jeopardized, the Articles of Incorporation provide
that, subject to certain exceptions for Significant Stockholders, no individual
or entity may own, or be deemed to own by virtue of the attribution rules of the
Code, more than the Ownership Limit.
Under the constructive ownership rules which must be used for the Five or
Fewer Test, the Company's Common Stock will be treated as owned by the three
stockholders of SOCAL, which is the sole stockholder of the Bank.
The classes of capital stock of SOCAL, which consists of common and three
series of preferred stock, are held by the three stockholders in varying
percentages. The common stock of SOCAL is owned 60% by the Bishop Estate,30% by
BIL Securities, and 10% by Arbur. The preferred stock is owned approximately 67%
by the Bishop Estate, 24.8% by BIL Securities, and 8.2% by Arbur. (Such
percentages are approximate because they are based on an estimate of the
relative values of the three series of preferred stock.) Since the ownership
percentage for the Five or Fewer Test is based on relative values, the
percentage of the Company that would be attributable to the three stockholders
of SOCAL will vary based upon the relative value of the capital stock of SOCAL.
Of these stockholders, however, only Arbur, which is closely held by the family
of William E. Simon, is considered an "individual" for purposes of the Five or
Fewer Test. Neither the Bishop Estate nor BIL Securities is considered an
"individual" for purposes of the Five or Fewer Test.
Although the Five or Fewer Test references the aggregate value of all shares
of capital stock of the Company, the Ownership Limit has been established with
reference to the aggregate initial liquidation preference of the outstanding
shares of Preferred Stock. If (i) the relative values of the Company's Common
Stock and any outstanding shares of Preferred Stock, including the Series A
Preferred Shares, or (ii) the relative values of the different series or classes
of Preferred Stock, were to change significantly, there is a risk that the Five
or Fewer Test would be violated notwithstanding compliance with the Ownership
Limit. Although the Company believes that it is unlikely that the relative value
of the Common Stock will decrease by an amount sufficient to cause a violation
of the Five or Fewer Test, there can be no assurance that such a change in value
will not occur.
Because the Ownership Limit does not apply to the Significant Stockholders,
ownership of the Company's Common Stock or the transfer of shares of common
stock and/or preferred stock of SOCAL to an entity which is considered an
individual for purposes of the Five or Fewer Test could, in certain
circumstances, cause the Company to fail the Five or Fewer Test and,
consequently, to fail to qualify as a REIT.
The Board of Directors may (but will not be required to), upon the receipt
of a ruling from the IRS or the advice of counsel satisfactory to it, waive the
Ownership Limit with respect to an individual or entity if such individual's or
entity's proposed ownership will not then or in the future jeopardize the
Company's
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status as a REIT. The transfer of any shares of Preferred Stock, including
Series A Preferred Shares (including the occurrence of events other than actual
transfers of Preferred Stock that result in changes in constructive ownership of
Preferred Stock), in violation of such Ownership Limit will cause the shares of
any class or series of Preferred Stock owned, or deemed to be owned, by or
transferred to a stockholder in excess of the Ownership Limit, including any
such shares which have been transferred pursuant to a waiver of the Ownership
Limit (the "Excess Shares"), to be automatically transferred to a trust for the
exclusive benefit of a charity to be named by the Company. All rights to
dividends to such Excess Shares will be held by such trust.
The capital stock of the Company must also be beneficially owned by 100 or
more persons during at least 335 days of a taxable year or during a
proportionate part of a shorter taxable year (the "One Hundred Persons Test").
The Articles of Incorporation of the Company contains restrictions on the
acquisition of Preferred Stock intended to ensure compliance with the One
Hundred Persons Test. Such provisions include a restriction that if any transfer
of shares of Preferred Stock of the Company would cause the Company to be
beneficially owned by fewer than 100 persons, such transfer shall be null and
void and the intended transferee will acquire no rights to the stock.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by one individual or entity to be
deemed to be constructively owned by other related individuals and/or entities.
Similarly, under the constructive ownership rules, an individual or entity that
owns stock of SOCAL will be deemed to own a proportionate share of the Common
Stock of the Company owned by the Bank. As a result, the acquisition by an
individual or entity of stock of the Company in amounts below the Ownership
Limit (or the acquisition of an entity that owns such shares) may cause that
individual or entity (or another individual or entity) to violate the Ownership
Limit.
The Articles of Incorporation provide that any Excess Shares will
automatically be transferred, by operation of law, to a trust for the benefit of
a charity to be named by the Company as of the day prior to the day the
prohibited transfer took place. Any dividends paid on the Series A Preferred
Shares prior to the discovery of the prohibited transfer are to be repaid by the
original transferee to the Company and by the Company to the trustee; subject to
applicable law, any vote of the shares while the shares were held by the
original transferee prior to the Company's discovery thereof shall be void ab
initio and the original transferee shall be deemed to have given its proxy to
the trustee. Any unpaid distributions with respect to the original transferee
will be rescinded as void ab initio. In liquidation, the original transferee
stockholder's ratable share of the Company's assets would be limited to the
price paid by the original transferee for the Excess Shares or, if no value was
given, the price per share equal to the closing market price on the date of the
purported transfer. The trustee of the trust shall promptly sell the shares to
any person whose ownership is not prohibited, whereupon the interest of the
trust shall terminate. Proceeds of the sale shall be paid to the original
transferee up to its purchase price (or, if the original transferee did not
purchase the shares, the value on its date of acquisition) and any remaining
proceeds shall be paid to a charity to be named by the Company.
All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even if the
REIT Provisions (as defined herein) are changed so as to eliminate any ownership
concentration limitation or if the ownership concentration limitation is
increased. The Articles of Incorporation may not be amended to alter, change,
repeal or amend any of the Ownership Limit provisions without the prior approval
of a majority of the Independent Directors. The foregoing restrictions on
transferability and ownership will not apply, however, if the Board of
Directors, including a majority of Independent Directors, determines that it is
no longer in the best interests of the Company and its stockholders to attempt
to qualify, or continue to qualify, as a REIT. See "Business and
Strategy--Management Policies and Programs."
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The Articles of Incorporation require that any person who beneficially owns
1% (or such lower percentage as may be required by the Code or the Treasury
Regulations) of the outstanding shares of any class or series of Preferred Stock
of the Company must provide certain information to the Company within 30 days of
June 30 and December 31 of each year. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Limit.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then-outstanding voting stock of
the corporation (an "Interested Stockholder") or an affiliate of such an
Interested Stockholder are prohibited for five years after the most recent date
on which the Interested Stockholder became an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(a) 80% of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation and (b) two-thirds of the votes entitled to be
cast by holders of voting stock of the corporation other than shares held by the
Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the corporation's
common stockholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder. The Bank beneficially
owns more than 10% of the Company's voting shares and would, therefore, together
with its affiliates (including SOCAL) be subject to the business combination
provision of the MGCL. However, pursuant to the statute, the Company has
exempted any business combinations involving the Bank and any present or future
affiliate thereof and, consequently, the five-year prohibition and the
super-majority vote requirements will not apply to business combinations between
any of them and the Company. As a result, the Bank and any present or future
affiliate thereof may be able to enter into business combinations with the
Company that may not be in the best interest of its stockholders without
compliance by the Company with the super-majority vote requirements and the
other provisions of the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights, except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
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A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholder meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation. The Articles of Incorporation contain a provision
exempting from the control share acquisition statute any and all acquisitions of
the Company's shares of stock by the Bank and any present or future affiliates
thereof (including SOCAL). Consequently, the prohibition on voting control
shares will not apply to the Bank or to any present or future affiliates thereof
(including SOCAL).
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The information set forth below, to the extent that
it constitutes summaries of legal matters or legal conclusions, has been
reviewed by Elias, Matz, Tiernan & Herrick L.L.P., and it is their opinion that
such information insofar as it relates to matters of law or legal conclusions is
accurate in all material respects. The discussion below is based on existing
federal income tax law, which is subject to change, with possible retroactive
effect. The discussion below does not address all aspects of taxation that may
be relevant in the particular circumstances of each stockholder or to certain
types of stockholders (including insurance companies, tax-exempt entities,
financial institutions or broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States, except to the extent
discussed) subject to special treatment under the federal income tax laws.
EACH PROSPECTIVE INVESTOR IS ENCOURAGED TO CONSULT HIS TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE SHARES
AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP,
SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company believes that, commencing with its taxable year ending
December 31, 1997, it will be owned and organized and will operate in such a
manner as to qualify for taxation as a REIT under the Code, and the Company
intends to continue to operate in such a manner, but no assurance can be given
that it will operate in a manner so as to qualify or remain qualified. The
Company will elect to be taxed as a REIT under Sections 856 through 860 of the
Code and the applicable Treasury Regulations (the "REIT Requirements" or the
"REIT Provisions"), which are the requirements for qualifying as a REIT,
commencing with its taxable year ending December 31, 1997. The REIT Requirements
are technical and complex. The following discussion sets forth only a summary of
the material aspects of those requirements.
In the opinion of Elias, Matz, Tiernan & Herrick L.L.P., commencing with the
Company's taxable year ending December 31, 1997, the Company will be organized
in conformity with the requirements for qualification as a REIT, and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on certain factual assumptions relating to the
organization and operation of the Company and is conditioned upon certain
representations made by the Company as to factual matters, such as the
organization and expected manner of operation of the Company. In addition, this
opinion is based upon factual assumptions and representations of the Company
concerning its business and the composition of its assets. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet,
through actual annual operating results, distribution levels and diversity of
stock ownership, the various qualification tests imposed under the Code
discussed below, the results of which will not be reviewed by Elias, Matz,
Tiernan & Herrick L.L.P. on a continuing basis. No assurance can be given that
the actual results of the Company's operations for any particular taxable year
will satisfy such requirements. See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary income
or capital gain that is currently distributed to stockholders. Such treatment
substantially eliminates the federal "double taxation" on earnings (at the
corporate and the stockholder levels) that generally results from investment in
a corporation.
Despite the REIT election, the Company may be subject to federal income and
excise tax as follows:
First, the Company will be taxed at regular corporate rates on any REIT
taxable income, including net capital gains, less distributions to
stockholders.
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Second, if the REIT has a net capital gain, the applicable tax will be
the lower of: (i) the tax imposed on REIT taxable income computed without
regard to net capital gain and the deduction for capital gain dividends, and
(ii) a tax on undistributed net capital gains at the rate provided in
Section 1201(a) of the Code.
Third, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on certain of its items of tax preferences, if
any.
Fourth, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying net
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income.
Fifth, if the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business, other
than sales of foreclosure property and sales that qualify for a statutory
safe harbor), such income will be subject to a 100% tax.
Sixth, if the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75%
or 95% test, multiplied by a fraction intended to reflect the Company's
profitability.
Seventh, if the Company should fail to distribute, or fail to be treated
as having distributed, with respect to each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed.
The Company does not now intend to acquire any appreciated assets from a
corporation generally subject to full corporate-level tax in a transaction in
which any gain on the transfer is not fully recognized. However, in the event of
such an acquisition, the Company could, under certain circumstances, be subject
to tax upon disposition of such assets.
ORGANIZATIONAL REQUIREMENTS. The Code defines a REIT as a corporation,
trust, or association (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (iii) that would be taxable as
a domestic corporation, but for the REIT Requirements; (iv) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include private foundations and certain pension trusts and other entities) at
any time during the last half of each taxable year; and (vii) meets certain
other tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (i) through (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a taxable
year of less than 12 months. Conditions (v) and (vi) will not apply until after
the first taxable year for which an election is made to be taxed as a REIT. For
purposes of condition (vi), certain tax-exempt entities described in Sections
501(c)(17) and 509(a) of the code or a portion of a trust permanently set aside
or used for purposes described in Section 642(c) of the code, are generally
treated as individuals, and the beneficiaries of a pension trust that qualifies
under Section 401(a) of the Code and that holds shares of a REIT will generally
be treated as holding shares of the REIT in proportion to their actuarial
interests in the pension trust. See "--Taxation of United States Stockholders--
Treatment of Tax-Exempt Stockholders."
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In the opinion of Elias, Matz, Tiernan & Herrick L.L.P., preferred stock is
taken into account for purposes of determining whether a REIT satisfies
conditions (v) and (vi) above. The Company believes that it will issue
sufficient shares pursuant to the Offering to allow it to satisfy conditions (v)
and (vi) above. In addition, the Company's Articles of Incorporation include
certain restrictions regarding transfer of its shares, which restrictions are
intended to reduce the likelihood that the Company will fail to satisfy the
share ownership requirements described in (v) and (vi) above. Such transfer and
ownership restrictions are described under "Description of Capital
Stock--Restrictions on Ownership and Transfer." Elias, Matz, Tiernan & Herrick
L.L.P. is also of the opinion that the Company will not be treated as a bank for
federal income tax purposes by reason of the activities of any stockholder.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company satisfies this requirement.
INCOME TESTS. In order to maintain qualification as a REIT, the Company
must annually satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including interest on
obligations secured by mortgages on real property, certain "rents from real
property" or as gain on the sale or exchange of such property and certain fees
with respect to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross income. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments as aforesaid and from dividends, interest and gain from the
sale or other disposition of stock or securities and certain other types of
gross income (or from any combination of the foregoing). Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition of real property (apart
from involuntary conversions and sales of foreclosure property) held for less
than four years from the date of acquisition must represent less than 30% of the
Company's gross income (including gross income from prohibited transactions) for
each taxable year. The Taxpayer Relief Act of 1997 repealed the 30 percent gross
income test requirement for tax years beginning after August 5, 1997.
For interest to qualify as "interest on obligations secured by mortgages on
real property or on interests in real property," the obligation must be secured
by real property having a fair market value at the time of acquisition at least
equal to the principal amount of the loan. The term "interest" includes only an
amount that constitutes compensation for the use or forbearance of money. For
example, a fee received or accrued by a lender which is in fact a charge for
services performed for a borrower rather than a charge for the use of borrowed
money is not includible as interest; amounts earned as consideration for
entering into agreements to make loans secured by real property, although not
interest, are otherwise treated as within the 75% and 95% classes of gross
income so long as the determination of those amounts does not depend on the
income or profits of any person. By statute, the term interest does not include
any amount based on income or profits of any person except that the Code
provides that (i) interest "based on a fixed percentage or percentages of
receipts or sales" is not excluded and (ii) when the REIT makes a loan that
provides for interest based on the borrower's receipts or sales and the borrower
leases substantially all of its interest in the property securing the loan under
one or more leases based on income or profits, only a portion of the contingent
interest paid by the borrower will be disqualified as interest.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the event
that a REIT acquires by foreclosure property that generates income that does not
qualify as "rents from real property," such income will be treated as qualifying
for two years following foreclosure (which period may be extended by the IRS) so
long as (i) all leases entered into after foreclosure generate only qualifying
rent, (ii) only limited construction takes place and (iii) within 90 days of
foreclosure, any trade or business in which the property is used is conducted by
an independent contractor from which the REIT derives no
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income. In the event the special foreclosure property rule applies to qualify
otherwise unqualified income, the net income that qualifies only under the
special rule for foreclosure property may be subject to tax, as described above.
The Company expects to satisfy these requirements.
RELIEF PROVISIONS. If the Company fails to satisfy one or both of the 75%
or 95% gross income tests for any taxable year, it may nevertheless qualify as a
REIT for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions will be generally available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--Taxation of the Company--General," even if
these relief provisions were to apply, a tax would be imposed based upon the
greater of the amount by which the Company failed either the 75% or 95% gross
income test for that year.
ASSET TESTS. At the close of each quarter of each taxable year, the Company
must satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year that were purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests and to take such action
within 30 days after the close of any quarter as may be required to cure any
noncompliance but no assurance can be given that such asset tests will be met.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to be treated as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) plus (ii) 95% of the net income,
if any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (B) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute (or
is not treated as having distributed) all of its net capital gain or distributes
(or is treated as having distributed) at least 95%, but less than 100% of its
"REIT taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates, as the case may be. For tax
years beginning after August 5, 1997, if the Company elects to retain, rather
than distribute, its net long-term capital gains and to pay the tax on such
gains, then each stockholder must treat a designated amount of undistributed
capital gains as long-term capital gains for his tax year in which the last day
of the Company's tax year falls. The stockholder, however, is also treated as
having paid the capital gains tax imposed on the Company on the designated
amounts included in their long-term capital gains and is allowed a credit or
refund for the tax deemed paid. The Code permits a stockholder, in certain
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circumstances, to be treated for tax purposes as having (i) received a
distribution in the amount specified in the election and (ii) contributed the
amount thereof to the capital of a REIT. In the event the Company fails to
distribute 100% of its income and capital gains, the Bank may, but is not
obligated to, elect to be so treated. Moreover, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. The Company intends to make
timely distributions sufficient to satisfy the annual distribution requirement.
"REIT taxable income" is the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded and (iv)
certain other adjustments are made.
It is possible that, from time to time, the Company may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in calculating the taxable income of the Company. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement the Company may find it necessary to arrange
for borrowings or to pay dividends in the form of taxable stock dividends if it
is practicable to do so.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions described above do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost, and will not be
permitted to requalify unless it distributes any earnings and profits
attributable to the period when it failed to qualify. In addition, it would be
subject to tax on any built-in gains on property held during the period during
which it did not qualify if it sold such property within 10 years of
requalification. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
TAX TREATMENT OF AUTOMATIC EXCHANGE
Upon the occurrence of an Exchange Event, the outstanding Series A Preferred
Shares will be automatically exchanged on a one-for-one basis for Bank Preferred
Shares. See "Description of Series A Preferred Shares--Automatic Exchange." The
Automatic Exchange will be a taxable exchange with respect to which each holder
of the Series A Preferred Shares will have a gain or loss, as the case may be,
measured by the difference between the basis of such holder in the Series A
Preferred Shares and the fair market value of the Bank Preferred Shares received
in the Automatic Exchange. Provided that such holder's Series A Preferred Shares
were held as capital assets for more than 18 months prior to the
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Automatic Exchange, any gain or loss will be long-term capital gain or loss.
Long-term capital losses are deductible, subject to certain limitations. In
certain circumstances, holders that are individuals may be entitled, as a result
of recently enacted legislation, to preferential treatment for net capital gains
in the case of a capital asset that has been held for more than 18 months. The
basis of the holder in the Bank Preferred Shares will be their fair market value
at the time of the Automatic Exchange.
TAXATION OF UNITED STATES STOCKHOLDERS
DISTRIBUTIONS GENERALLY. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital gains
dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gain dividends will be treated as
long-term capital gain (to the extent they do not exceed the Company's actual
net capital gain) for the taxable year without regard to the period for which
the stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gains dividends as ordinary
income, pursuant to Section 291(d) of the Code. A distribution in excess of
current or accumulated earnings and profits will first be treated as a tax-free
return of capital, reducing the tax basis in the United States Stockholder's
Series A Preferred Shares, and a distribution in excess of the United States
Stockholder's tax basis in its Series A Preferred Shares will be taxable gain
realized from the sale of such shares. Dividends declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year. Stockholders may not claim the benefit of any tax losses of the
Company on their own income tax returns.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed under
"--Taxation of the Company--General" and "--Taxation of the Company--Annual
Distribution Requirements" above. As a result, stockholders may be required to
treat as taxable dividends certain distributions that would otherwise result in
tax-free returns of capital. Moreover, any "deficiency dividend" will be treated
as a "dividend" (an ordinary dividend or a capital gain dividend, as the case
may be), regardless of the Company's earnings and profits.
Losses incurred on the sale or exchange of Series A Preferred Shares held
for less than six months will be deemed a long-term capital loss to the extent
of any capital gain dividends received by the selling stockholder with respect
to such stock.
TREATMENT OF TAX-EXEMPT STOCKHOLDERS. Distributions from the Company to a
tax-exempt employee pension trust or other domestic tax-exempt stockholder
generally will not constitute "unrelated business taxable income" ("UBTI")
unless the stockholder has borrowed to acquire or carry its Common Stock.
Qualified trusts that hold more than 10% (by value) of the shares of certain
REITs, however, may be required to treat a certain percentage of such REIT's
distributions as UBTI. This requirement will apply only if (i) the REIT would
not qualify as such for federal income tax purposes but for the application of
the "look-through" exception to the Five or Fewer Test applicable to shares held
by qualified trusts and (ii) the REIT is "predominantly held" by qualified
trusts. A REIT is predominantly held by qualified trusts if either (i) a single
qualified trust holds more than 25% by value of the interests in the REIT or
(ii) one or more qualified trusts, each owning more than 10% by value of the
interests in the REIT, hold in the aggregate more than 50% of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (a) the UBTI earned by the REIT (treating the REIT as if it were
qualified trust and therefore subject to tax on UBTI) to (b) the total gross
income (less certain associated expenses) of the REIT. If the Company were to
incur indebtedness to acquire property, the percentage of any REIT dividend
treated as UBTI would be increased to reflect any UBTI earned by the Company
from "debt-financed property." A DE MINIMIS exception applies where the ratio
set forth above is less than 5% for any
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year. For these purposes, a qualified trust is any trust described in Section
401(a) of the Code and exempt from tax under Section 501(a) of the Code. The
provisions requiring qualified trusts to treat a portion of REIT distributions
as UBTI will not apply if the REIT is able to satisfy the Five or Fewer Test
without relying upon the "look-through" exception.
TAXATION OF FOREIGN STOCKHOLDERS
The following is a discussion of certain anticipated U.S. federal income tax
consequences of the ownership and disposition of the Company's stock applicable
to Non-U.S. Holders of such stock. The discussion is based on current law and is
for general information only. The discussion addresses only certain and not all
aspects of U.S. federal income taxation.
ORDINARY DIVIDENDS. The portion of dividends received by Non-United States
Holders payable out of the Company's earnings and profits (which are not
attributable to capital gains of the Company and which are not effectively
connected with a U.S. trade or business of the Non-United States Holder) will be
subject to U.S. withholding tax at the rate of 30% (unless reduced by treaty).
In general, Non-United States Holders will not be considered engaged in a U.S.
trade or business solely as a result of their ownership of stock of the Company.
In cases where the dividend income from a Non-United States Holder's investment
in stock of the Company is (or is treated as) effectively connected with the
Non-United States Holder's conduct of a U.S. trade or business, the Non-United
States Holder generally will be subject to U.S. tax at graduated rates, in the
same manner as a United Sates Stockholder with respect to such dividends (and
may also be subject to the 30% branch profits tax in the case of a Non-United
States Holder that is a foreign corporation).
NON-DIVIDEND DISTRIBUTIONS. Distributions by the Company which are not
dividends out of the earnings and profits of the Company will not be subject to
U.S. income or withholding tax. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the distribution will be subject
to withholding at the rate applicable to dividends. However, the Non-United
States Holder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
CAPITAL GAIN DIVIDENDS. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-United
States Holder, to the extent attributable to gains from dispositions of United
States Real Property Interests ("USRPIs") will be considered effectively
connected with a U.S. trade or business of the Non-United States Holder and
subject to U.S. income tax at the rate applicable to U.S. individuals or
corporations, without regard to whether such distribution is designated as a
capital gain dividend. Shares of a corporation are treated as a USRPI only if
the fair market value of the USRPIs owned by the corporation equals or exceeds
50% of the fair market value of its total assets. If at no time during the five
years preceding the sale or exchange of shares in the Company, the Series A
Preferred Shares constituted a USRPI, gain or loss on the sale or exchange will
not be treated as effectively connected with a U.S. trade or business by reason
of FIRPTA. While ownership of real property in the U.S. is always a USRPI, a
loan secured by a mortgage on U.S. real property does not constitute a USRPI
unless the amounts payable by the borrower are contingent on the income or
receipts of the borrower or the property or otherwise based on the property.
Because such contingent interest is not likely to be present in Mortgage Loans
to be owned by the Company that are expected to represent approximately % of
the assets of the Company (although such interest is fairly common in commercial
loans), the Company believes that it is unlikely that its shares will be USRPIs
or that it will derive significant gain from USRPIs, although whether its shares
are USRPIs or it derives from USRPIs will depend on the facts as they ultimately
develop. If the shares do constitute USRPIs, the Company will be required to
withhold tax equal to 35% of the amount of dividends to the extent such
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dividends constitute USRPI Capital Gains. Distributions subject to FIRPTA may
also be subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder that is not entitled to treaty exemption.
DISPOSITION OF STOCK OF THE COMPANY. Unless the Company's stock constitutes
a USRPI, a sale of such stock by a Non-United States Holder generally will not
be subject to U.S. taxation under FIRPTA. The stock will not constitute a USRPI
if the Company is a "domestically controlled REIT." A domestically controlled
REIT is a REIT in which, at all times during a specified testing period, less
than 50% in value of its shares is held directly or indirectly by Non-United
States Holders. The Company believes that it is, and it expects to continue to
be, a domestically controlled REIT, and therefore that the sale of the Company's
stock will not be subject to taxation under FIRPTA. Because the Company's stock
will be publicly traded, however, no assurance can be given the Company will
continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a
Non-United States Holder's sale of stock generally will still not be subject to
tax under FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly
traded" (as defined by applicable Treasury regulations) on an established
securities market (e.g., the Nasdaq National Market, on which the Company
expects to list the Series A Preferred Stock) and (ii) the selling Non-United
States Holder held 5% or less of the Company's outstanding stock at all times
during a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-United States Holder would be subject to the same treatment as a
United States Stockholder with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals) and the purchaser of the stock could be required
to withhold 10% of the purchase price and remit such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-United States Holder in two cases: (i) if the Non-United
States Holder's investment in the stock of the Company is effectively connected
with a U.S. trade or business conducted by such Non-United States Holder, the
Non-United States Holder will be subject to the same treatment as a United
States Stockholder with respect to such gain, or (ii) if the Non-United States
Holder is a nonresident alien individual who was present in the United States
for 183 days or more during the taxable year and has a "tax home" in the United
States, the nonresident alien individual will be subject to a 30% tax on the
individual's capital gain.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
UNITED STATES STOCKHOLDERS. Under certain circumstances, a United States
Stockholder of Series A Preferred Shares may be subject to backup withholding at
a rate of 31% on payments made with respect to, or cash proceeds of a sale or
exchange of, Series A Preferred Shares. Backup withholding will apply only if
the holder (i) fails to furnish the person required to withhold with its
Taxpayer Identification Number ("TIN") which, for an individual, would be his or
her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is notified
by the IRS that it has failed to properly report payments of interest and
dividends, or (iv) under certain circumstances, fails to certify, under penalty
of perjury, that it has furnished a correct TIN and has not been notified by the
IRS that it is subject to backup withholding for failure to report interest and
dividend payments. Backup withholding will not apply with respect to payments
made to certain exempt recipients, such as corporations and tax-exempt
organizations. A United States Stockholder should consult with a tax advisor
regarding qualification for exemption from backup withholding and the procedure
for obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
United States Stockholder will be allowed as a credit against such United States
Stockholder's United States federal income tax liability and may entitle such
United States Stockholder to a refund, provided that the required information is
furnished to the IRS.
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FOREIGN STOCKHOLDERS. Additional issues may arise pertaining to information
reporting and backup withholding with respect to Non-United States Holder, and a
Non-United States Holder should consult with a tax advisor with respect to any
such information reporting and backup withholding requirements. Backup
withholding with respect to a Non-United States Holder is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
Non-United States Holder will be allowed as a credit against any United States
federal income tax liability of such Non-United States Holder. If withholding
results in an overpayment of taxes, a refund may be obtained provided that the
required information is furnished to the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. The tax laws of the State of California apply the provisions of
the Code relating to REITs with certain modifications which will not have a
material beneficial nor adverse effect on the Company's ability to operate as a
REIT. Prospective stockholders should consult their own tax advisors regarding
the effect of state and local tax laws on an investment in the Company. In
addition, the Taxpayer Relief Act of 1997 includes several provisions which will
liberalize certain of the requirements for qualification as a REIT. However,
these provisions will have neither a material beneficial nor adverse effect on
the Company's ability to operate as a REIT.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in which such plans
invest and any other investor using assets that are treated as the assets of an
employee benefit plan subject to ERISA (each, a "Plan" and collectively,
"Plans") should consider (a) whether the ownership of Series A Preferred Shares
is in accordance with the documents and instruments governing such Plan; (b)
whether the ownership of Series A Preferred Shares is solely in the interest of
Plan participants and beneficiaries and otherwise consistent with the
fiduciary's responsibilities and in compliance with the requirements of Part 4
of Title I of ERISA, including, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA and the prohibited transaction
provisions of Section 406 of ERISA and Section 4975 of the Code; (c) whether the
Company's assets are treated as assets of the Plan; and (d) the need to value
the assets of the Plan annually. In addition, the fiduciary of an individual
retirement arrangement under Section 408 of the Code (an "IRA") considering the
purchase of Series A Preferred Shares should consider whether the ownership of
Series A Preferred Shares would result in a non-exempt prohibited transaction
under Section 4975 of the Code.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all of the fiduciary investment considerations
relevant to Plans and, where indicated, IRAs. This summary is based on the
current provisions of ERISA and the Code and regulations and rulings thereunder,
and may be changed (perhaps adversely and with retroactive effect) by future
legislative, administrative or judicial actions. PLANS AND IRAS THAT ARE
PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD CONSULT WITH AND RELY
UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN LIGHT OF THEIR OWN
PARTICULAR CIRCUMSTANCES.
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PLAN ASSET REGULATION
Under Department of Labor regulations governing what constitutes the assets
of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation", 29
C.F.R. Sec.2510.3-101), when a Plan or IRA makes an equity investment in another
entity, the underlying assets of the entity will not be considered Plan Assets
if the equity interest is a "publicly-offered security."
For purposes of the Plan Asset Regulation, a "publicly-offered security" is
a security that is (a) "freely transferable", (b) part of a class of securities
that is "widely held," and (c) sold to the Plan or IRA as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and part of a class of securities that is registered under
the Exchange Act within 120 days (or such later time as may be allowed by the
Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. The Series A Preferred
Shares will be registered under the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act within the time periods specified in the
Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held" only if
it is a part of the class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. The Company expects the Series A Preferred Shares to be "widely
held" upon the completion of the Offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, certain restrictions ordinarily will not, alone or in
combination, affect the finding that such securities are "freely transferable."
The Company believes that any restrictions imposed on the transfer of the Series
A Preferred Shares are limited to the restrictions on transfer generally
permitted under the Plan Asset Regulation and are not likely to result in the
failure of the Series A Preferred Shares to be "freely transferable."
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan. However,
the Company believes that under the Plan Asset Regulation, the Series A
Preferred Shares should be treated as "publicly-offered securities" and,
accordingly, the underlying assets of the Company should not be considered to be
assets of any Plan or IRA investing in the Series A Preferred Shares.
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held in trust and that
the trustee, or an investment manager (within the meaning of Section 3(38) of
ERISA), have exclusive authority and discretion to manage and control the assets
of the Plan. As discussed above, the assets of the Company under current law do
not appear likely to be assets of the Plans receiving Series A Preferred Shares
as a result of the Offering. However, if the assets of the Company were deemed
to be assets of the Plans under ERISA, certain directors and officers of the
Company might be deemed fiduciaries with respect to the Plans that invest in the
Company and the prudence and other fiduciary standards set forth in ERISA would
apply to them and to all investments.
If the assets of the Company were deemed to be Plan Assets, transactions
between the Company and parties in interest or disqualified persons with respect
to the investing Plan or IRA could be prohibited transactions unless a statutory
or administrative exemption is available. In addition, investment authority
would also have been improperly delegated to such fiduciaries, and, under
certain circumstances, Plan fiduciaries who make the decision to invest in the
Series A Preferred Shares could be liable as co-
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fiduciaries for actions taken by the Company that do not conform to the ERISA
standards for investments under Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of Plan assets to, or use of Plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan assets in its own interest or for its own account, from acting
in any capacity in any transaction involving the Plan on behalf of a party (or
representing a party) whose interests are adverse to the interests of the Plan,
and from receiving any consideration for its own account from any party dealing
with the Plan in connection with a transaction involving Plan assets. Similar
provisions in Section 4975 of the Code apply to transactions between
disqualified persons and Plans and IRAs and result in the imposition of excise
taxes on such disqualified persons.
If a prohibited transaction has occurred, Plan fiduciaries involved in the
transaction could be required to (a) undo the transaction, (b) restore to the
Plan any profit realized on the transaction and (c) make good to the Plan any
loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary, the
IRA would lose its tax-exempt status. The other penalties for prohibited
transactions would not apply.
Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if the Underwriters, the Company, the Bank,
SOCAL or any of their affiliates is a party in interest or disqualified person
with respect to the Plan. Any such prohibited transaction could be treated as
exempt under ERISA and the Code if the Series A Preferred Shares were acquired
pursuant to and in accordance with one or more "class exemptions" issued by the
Department of Labor, such as Prohibited Transaction Class Exemption ("PTCE")
75-1 (an exemption for certain transactions involving employee benefit plans and
broker-dealers (such as the Underwriters), reporting dealers and banks), PTCE
84-14 (an exemption for certain transactions determined by an independent
qualified professional asset manager), PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts), PTCE 91-38
(an exemption for certain transactions involving bank collective investment
funds), PTCE 95-60 (an exemption for certain transactions involving an insurance
company's general account) and PTCE 96-23 (an exemption for certain transactions
determined by a qualifying in-house asset manager).
A Plan should not acquire the Series A Preferred Shares pursuant to the
Offering if such acquisition will constitute a non-exempt prohibited
transaction.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more than
10% of the Series A Preferred Shares if the Company is "predominantly held" by
qualified trusts. See "Federal Income Tax Considerations--Taxation of United
States Stockholders--Treatment of Tax-Exempt Stockholders."
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<PAGE>
CERTAIN INFORMATION REGARDING THE BANK
The following is a summary of certain information regarding the Bank. As an
integral part of this Prospectus, a copy of the Bank's Offering Circular filed
with the OTS relating to the Bank Preferred Shares to be issued upon the
occurrence of an Exchange Event, is attached hereto as Annex I and is
incorporated by reference herein. All material information relating to the Bank,
including information relating to the Bank's financial position, can be found in
the Offering Circular. There has been no material change in the Bank's affairs
since the conclusion of the quarter ended June 30, 1997 which has not otherwise
been disclosed by the Bank in the Offering Circular. The information provided
below is a summary of certain information contained in the Offering Circular
attached hereto as Annex I and is qualified in its entirety by the Offering
Circular. Capitalized terms used in the section and not defined in the
Prospectus have the meanings given to them in the Offering Circular.
GENERAL. The Bank is a federally chartered savings bank which was
originally organized in 1887 under California law and which conducts business
from its executive offices located in Los Angeles, California and 19
full-service branch offices located primarily in Los Angeles County as well as
Orange and Ventura Counties in Southern California. At June 30, 1997, the Bank
had total assets of $1.8 billion, total deposits of $1.3 billion and total
stockholder's equity of $84.9 million.
OWNERSHIP STRUCTURE. The Bank is a wholly owned subsidiary of SOCAL, a
Delaware corporation which was organized in 1987 to acquire the Bank in
connection with its conversion from mutual to stock form. The common stock of
SOCAL is currently (i) 60% owned by the Bishop Estate, (ii) 30% owned by BIL
Securities and (iii) 10% owned by Arbur.
The classes of capital stock of SOCAL, which consists of common and three
series of preferred stock, are held by the three stockholders in varying
percentages. The common stock of SOCAL is owned 60% by the Bishop Estate, 30% by
BIL Securities, and 10% by Arbur. The preferred stock is owned approximately 67%
by the Bishop Estate, 24.8% by BIL Securities, and 8.2% by Arbur. (Such
percentages are approximate because they are based on an estimate of the
relative values of the three series of preferred stock.) Since the ownership
percentage for the Five or Fewer Test is based on relative values, the
percentage of the Company that would be attributable to the three stockholders
of SOCAL will vary based upon the relative value of the capital stock of SOCAL.
The following chart sets forth in simplified form the ownership of the
common equity of SOCAL, the Bank and the Company.
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<PAGE>
BASIS FOR 1992 RECAPITALIZATION. In connection with SOCAL's acquisition of
the Bank in April 1987, the Bank was permitted to include in its regulatory
capital $217.5 million of supervisory goodwill which resulted from the
acquisition, as well as $79.7 million of goodwill which was recorded under
generally accepted accounting principles ("GAAP"). In August 1989, Congress
enacted FIRREA which provided, among other things, that savings institutions
such as the Bank were no longer permitted to include goodwill in their
regulatory capital (subject to a gradual phaseout which expired on December 31,
1994). Consequently, the Bank was required to write off all of its supervisory
goodwill, which resulted in the Bank failing to comply with its minimum
regulatory capital requirements during 1990 and 1991. The balance of the Bank's
GAAP goodwill was written off as unrealizable in 1992. The Bank has sued the
U.S. Government with respect to the required write-off of its supervisory
goodwill. See "Business of the Bank-- Legal Proceedings" in the Offering
Circular.
In August 1992, SOCAL issued $48.0 million of senior notes and, after
payment of transaction fees and expenses, contributed $43.5 million of the net
proceeds from such sale to the Bank (the "1992 recapitalization"). As a result
of the 1992 recapitalization, the Bank was able to satisfy its minimum
regulatory capital requirements.
BASIS FOR 1995 RECAPITALIZATION. Notwithstanding the 1992 recapitalization,
the Bank continued to recognize significant credit losses due, in large part, to
the continued deterioration in the Southern California economy which had begun
with the national recession at the start of the decade, together with a decline
in market values of real estate resulting in part from the Northridge earthquake
of 1994. As the real estate that secured the Bank's mortgage loans decreased in
value and as borrowers, particularly developers of, and investors in,
residential and commercial real estate, became less able to meet their debt
service obligations, non-performing assets and troubled debt restructurings
increased dramatically, amounting to $78.7 million or 4.6% of total assets as of
December 31, 1994. The high levels of non-performing assets adversely affected
the Bank's operations in several respects, including a loss of interest income,
increased operating expenses and substantially higher provisions for losses. As
a result of the foregoing, during 1994, the Bank again fell out of compliance
with its regulatory capital requirements. In May 1995, the present stockholders
of SOCAL invested $60.4 million in new debt and equity securities of SOCAL,
substantially all of the proceeds of which were contributed to the Bank in order
to satisfy the Bank's minimum regulatory capital requirements (the "1995
recapitalization"). Beginning September 30,
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<PAGE>
1997, SOCAL intends to begin making quarterly interest payments on its senior
debt issued in the 1995 recapitalization, which is expected to be funded through
dividends from the Bank. See "Use of Proceeds" in the Offering Circular.
NEW MANAGEMENT AND INITIATIVES. In connection with the 1995
recapitalization, the Bank replaced its former senior managers with a new
management team with considerable experience in commercial banking and problem
asset rehabilitation. Such individuals include a new President and Chief
Executive Officer, a new Executive Vice President and Chief Financial Officer
and a new Executive Vice President-- Retail Banking, all of whom worked together
at BancFlorida Financial Corp. Mr. Rudolf P. Guenzel, President and Chief
Executive Officer of the Bank, was hired by BancFlorida at a time when
BancFlorida was experiencing serious financial difficulties with non-performing
assets. Under Mr. Guenzel's leadership, BancFlorida returned to profitability
and was sold to First Union Corp. in 1994. The price of BancFlorida's common
stock increased from a low of $2.375 during the quarter in which Mr. Guenzel
became President and Chief Executive Officer to $30.00 per share, the
acquisition price paid by First Union Corp. See "Management" in the Offering
Circular. The Bank under its new management has changed its name from Southern
California Federal Savings and Loan Association to People's Bank of California,
reflecting a new emphasis on providing full banking services to its customers.
Management has also undertaken a number of initiatives in order to reduce
problem assets, reduce operating expenses and the cost of funds and to maximize
profitability while limiting interest rate and credit risk. With the California
banking market undergoing significant consolidation, management believes that
the Bank is positioned to take advantage of acquisition opportunities that will
occur in its market area. Highlights of the principal elements of the Bank's
business strategy are as follows:
- REDUCTION OF NON-PERFORMING ASSETS. The Bank reorganized its asset review
department, implemented an internal asset review system through the creation of
an internal asset review committee and established a credit review department
and a special assets department in order to focus on the early identification of
potential problem assets and the administration, rehabilitation or liquidation
of the Bank's non-performing assets. As a result, non-performing loans and
troubled debt restructurings have declined from $68.3 million or 4.0% of total
assets at December 31, 1994 to $21.6 million or 1.2% of total assets at June 30,
1997. Because of new management's expertise in resolving problem assets, the
Bank has taken an aggressive approach in resolving its non-performing assets,
including converting non-performing loans into real estate owned whenever such a
strategy, in the opinion of management, provides a more efficient alternative to
avoid further losses. As a result of these actions, real estate owned has
increased during the same period from $10.5 million at December 31, 1994 to
$22.8 million at June 30, 1997. Net charge-offs during this period amounted to
$7.1 million, $12.1 million and $5.4 million during the years ended December 31,
1995 and 1996 and the six months ended June 30, 1997, as management, upon
transfer of loans to real estate owned, charged-off specific valuation
allowances which had previously been established through increased provisions
for loans in prior periods. Total non-performing assets and troubled debt
restructurings have declined from $78.7 million at December 31, 1994 to $44.4
million at June 30, 1997. Decreases in the Bank's non-performing assets have
resulted in reductions in provisions for losses, which have contributed to
improved operating results. During the six months ended June 30, 1997 and the
year ended December 31, 1996, the Bank recognized net earnings of $6.9 million
and $13.6 million, respectively. See "Business of the Bank--Non-Performing
Assets" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -Results of Operations" in the Offering Circular.
- REDUCTION OF OPERATING EXPENSES. The Bank has significantly reduced
operating expenses through staff reductions and the consolidation of certain
operations. From December 31, 1994 through June 30, 1997, the Bank experienced a
net reduction of 60 employees. In addition, due to the high operating expenses
incurred by the Bank in servicing its Residential Mortgage Loans, the sale of a
substantial portion of the Bank's residential loan servicing which was completed
during the first quarter of 1997 is expected to result in further cost savings.
Management believed that such cost savings, coupled with the reinvestment
opportunity associated with the sale proceeds, would be more profitable to the
Bank than retention of such
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<PAGE>
servicing. The ratio of the Bank's operating expenses to average total assets
has steadily decreased, from 2.14% during the year ended December 31, 1994 to
1.61% and 1.56% during the year ended December 31, 1996 and the six months ended
June 30, 1997, respectively. Despite the Bank's recent cost-cutting efforts,
management believes that it has significant operating leverage and, therefore,
continued incremental growth will not cause the Bank's operating expenses to
increase by a corresponding amount. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations.- Results of Operations" in the
Offering Circular.
- REDUCTION OF FUNDING COSTS. Prior to 1995, the Bank relied to a large
extent on wholesale sources of funds, such as non-retail jumbo certificates of
deposits and Federal Home Loan Bank ("FHLB") advances, which resulted in a high
cost of funds and reduced margins. The Bank has reduced its overall cost of
funds by promoting retail deposit growth (particularly transaction accounts) and
by allowing its non-retail jumbo certificates of deposit to run off as they
mature. In addition, new management has replaced higher cost short-term FHLB
advances with lower cost reverse repurchase agreements. As a result of the
foregoing, the Bank's transactional accounts (passbook, NOW and money market
accounts) have increased from $183.2 million or 13.2% of total deposits at
December 31, 1994 to $339.8 million or 25.9% of total deposits at June 30, 1997.
Over such period, non-retail jumbo certificates of deposit declined from $122.2
million to $3.5 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Results of Operations" in the Offering
Circular.
- INCREASED INVESTMENT IN MORTGAGE-BACKED SECURITIES. Since June 1995, the
Bank has significantly increased its investment in adjustable rate U.S.
Government agency mortgage-backed securities. Mortgage-backed securities
increase the credit quality of the Bank's assets by virtue of the insurance or
guarantees of federal agencies that back them, require less capital under
risk-based regulatory capital requirements than non-insured or non-guaranteed
mortgage loans, are more liquid than individual mortgage loans and may be used
to collateralize borrowings or other obligations of the Bank. In addition, the
adjustable rate nature of the loans underlying such securities has assisted the
Bank in managing its interest rate risk exposure. At June 30, 1997, the Bank
held $578.5 million of mortgage-backed securities, $331.4 million of which were
secured by loans with adjustable rates. See "Business of the Bank-- Investment
Activities" in the Offering Circular.
- EXPANSION OF COMMERCIAL AND CONSUMER LENDING. The Bank has hired
individuals with significant expertise in commercial and consumer lending and,
since August 1996, has increased its commercial business and consumer loan
originations. During the six months ended June 30, 1997 and the year ended
December 31, 1996, the Bank originated in the aggregate $10.3 million and $9.8
million of commercial business and consumer loans, which amounted to 23.8%, and
15.8% of total loan originations, respectively. Management intends to continue
to place increased emphasis on building these portfolios. Commercial business
and consumer loans generally have shorter terms and higher interest rates than
single-family residential loans but are generally considered to have a higher
level of credit risk. See "Risk Factors-- Multi-Family Residential, Commercial
Real Estate, Commercial Business and Consumer Lending" and "Business of the Bank
- -Lending Activities" in the Offering Circular.
- ASSET GROWTH AND ACQUISITIONS. The Bank has and will continue to pursue a
policy of utilizing its existing infrastructure to grow its loan and securities
portfolios as well as its retail franchise. The Bank opened a new de novo branch
office in Buena Park, California in November 1995 and a branch office facility
in Los Angeles, California in April 1996. The Bank will also consider
acquisition opportunities when it perceives that they are advantageous to the
Bank.
As a result of the Offering, the Bank expects to receive $ million
in net proceeds which it intends to initially leverage through the purchase of
U.S. Government agency and mortgage-backed securities or wholesale single-family
residential loans funded primarily through securities sold under agreements to
repurchase. See "Use of Proceeds" in the Offering Circular. Management believes
that leveraging the proceeds raised in the Offering will permit the Bank to
accelerate the utilization of its
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existing net operating loss carryforwards on a going forward basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -'Results of Operations" and "Taxation" in the Offering Circular.
The Bank, as a federally chartered savings bank, is subject to comprehensive
regulation and examination by the OTS, as its chartering authority and primary
regulator, and by the FDIC, which administers the Savings Association Insurance
Fund ("SAIF"), which insures the Bank's deposits to the maximum extent permitted
by law. The Bank is a member of the FHLB of San Francisco, which is one of the
12 regional banks which comprise the FHLB System. The Bank is further subject to
regulations of the Federal Reserve Board governing reserves required to be
maintained against deposits and certain other matters. See "Regulation" in the
Offering Circular.
The Bank's principal executive offices are located at 5900 Wilshire
Boulevard, Los Angeles, California 90036, and the telephone number is (213)
938-6300.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
(DOLLARS IN THOUSANDS)
The following selected historical consolidated financial data for the five
years ended December 31, 1996 is derived in part from the audited consolidated
financial statements of the Bank. The historical consolidated financial data for
the six months ended June 30, 1997 and 1996 is derived from unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
which management of the Bank considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for any other interim period or the entire year
ending December 31, 1997. The selected historical consolidated financial data
set forth below should be read in conjunction with, and is qualified in its
entirety by, the historical consolidated financial statements of the Bank,
including the related notes, included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets...................................... $1,820,333 $1,747,871 $1,579,751 $1,720,293 $1,829,228 2,046,644
Cash and cash equivalents......................... 13,388 14,673 7,249 10,960 18,481 13,022
Federal funds sold................................ 3,335 7,200 11,800 -- -- --
Securities purchased under agreements to resell... -- -- 35,000 -- -- --
Securities available-for-sale..................... 617,038 502,301 241,645 7,677 55,477 35,253
Loans held for sale............................... -- -- -- 28,946 5,500 1,396
Mortgage-backed securities held-to-maturity....... 10,375 10,971 -- 304,620 306,530 --
Loans receivable, net............................. 1,102,381 1,141,707 1,228,152 1,306,057 1,346,498 1,442,624
Real estate held for investment and sale, net..... 24,737 22,561 16,288 17,514 36,398 43,854
Deposits.......................................... 1,314,036 1,371,243 1,473,318 1,384,218 1,388,818 1,606,643
Securities sold under agreements to repurchase.... 331,358 192,433 -- -- 46,985 162,218
FHLB advances..................................... 80,000 80,000 31,746 310,000 314,000 187,000
Total non-performing assets and troubled debt
restructurings(1)............................... 44,393 46,218 52,640 78,737 76,951 71,603
Stockholder's equity(2)........................... 84,918 76,610 67,449 17,348 67,740 76,114
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- ----------- ----------- -----------
SELECTED OPERATING DATA:
Interest, fees and dividend
income...................... $61,418 $60,926 $122,896 $122,926 $116,261 $134,923 $164,746
Interest expense.............. 44,578 44,204 89,631 94,994 88,238 100,899 127,106
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net interest income........... 16,840 16,722 33,265 27,932 28,023 34,024 37,640
Provision for losses.......... 655 2,213 2,884 8,823 24,443 13,059 14,032
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for losses........ 16,185 14,509 30,381 19,109 3,580 20,965 23,608
Gain on mortgage-backed
securities sales, net....... 122 3,600 3,638 641 485 901 1,705
Gain (loss)on loan and
servicing sales, net........ 3,413 (53) (53) (166) 2,712 2,537 2,380
Income (loss) from other real
estate operations, net...... 112 (197) 1,946 (2,067) (5,398) (180) 2,056
Other noninterest income...... 1,197 1,257 2,593 2,095 2,328 6,272 3,070
Operating expenses............ 14,110 13,171 27,923 30,906 40,878 41,202 36,666
Goodwill write-off............ -- -- -- -- -- -- 53,105
Earnings (loss) before income
tax provision (benefit)..... 6,919 5,945 10,582 (11,294) (37,171) (10,707) (56,952)
Income tax provision
(benefit)................... -- 5 (3,016) (2,646) 11,356 (1,200) --
Cumulative effect (benefit) of
change in accounting
principle................... -- -- -- -- -- -- (12,570)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss)........... $ 6,919 $ 5,940 $ 13,598 $ (8,648) $(48,527) $ (9,507) $(44,382)
---------- ---------- ----------- ----------- ----------- ----------- -----------
---------- ---------- ----------- ----------- ----------- ----------- -----------
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
PERFORMANCE RATIOS:(3)
Return on assets.............. 0.77% 0.69% 0.78% (0.49)% (2.54)% (0.48)% (2.06)%
Return on equity.............. 17.57 17.66 20.20 (16.73) (89.49) (12.76) (55.20)
Interest-earning assets to
interest-bearing
liabilities................. 101.24 101.21 100.91 100.97 99.69 99.63 99.15
Interest rate spread(4)....... 1.87 1.93 1.94 1.57 1.54 1.81 1.90
Net interest margin(4)........ 1.92 1.99 1.99 1.62 1.53 1.80 1.85
Operating expenses to
assets...................... 1.56 1.53 1.61 1.75 2.14 2.07 1.70
ASSET QUALITY RATIOS:
Non-performing loans as a
percent of loans, net....... 1.27 1.76 1.60 2.90 2.06 2.85 1.98
Non-performing assets as a
percent of total
assets(1)................... 2.03 2.97 2.21 2.94 2.21 3.83 3.29
Non-performing assets and
troubled debt restructurings
as a percent of total
assets(1)................... 2.44 3.38 2.64 3.33 4.58 4.21 3.50
Allowance for loan losses as a
percent of loans, net....... 1.69 2.22 2.04 2.57 2.28 1.52 1.28
Allowance for loan losses as a
percent of non-performing
loans and troubled debt
restructurings(1)........... 86.64 94.41 90.30 75.67 43.66 44.99 56.18
Net charge-offs to average
loans, net.................. 0.47 0.64 0.95 0.55 0.95 0.45 0.56
BANK'S REGULATORY CAPITAL
RATIOS(5):
Core leverage capital ratio... 4.76 4.20 4.57 4.18 1.08 4.21 4.49
Tier 1 capital ratio.......... 9.65 8.14 9.15 7.56 2.01 7.41 8.35
Total risk-based capital
ratio....................... 10.91 9.01 10.38 8.43 2.76 8.58 9.30
</TABLE>
- ------------------------------
(1) Nonperforming assets consist of nonaccrual loans and real estate owned.
Nonaccrual loans are loans that the Bank has removed from accrual status
because the loans are 90 or more days delinquent as to principal and/or
interest or, in management's opinion, full collectibility of the loan is in
doubt. Real estate owned consists of real estate acquired in settlement of
loans. A loan is considered a troubled debt restructuring if, as a result of
the borrower's financial condition, the Bank has agreed to modify the loan
by accepting below market terms either by granting an interest rate
concession or by deferring principal or interest payments. As used in this
table, the term "troubled debt restructurings" means a restructured loan on
accrual status. Troubled debt restructuring on nonaccrual status are
reported in the nonaccrual loan category.
(2) At June 30, 1997 and December 31, 1996 and 1995, stockholder's equity is net
of $4.4 million, $6.1 million and $1.6 million of unrealized losses on
securities available-for-sale, respectively.
(3) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods, except for 1993 and 1992 which
use average monthly balances. Operating data are annualized where
appropriate.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(5) For information on the Bank's regulatory capital requirements, see "--Risk
Factors and Other Considerations--Regulatory Capital Levels" herein and
"Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements" in the Offering Circular.
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<PAGE>
RISK FACTORS AND OTHER CONSIDERATIONS
Because of the potential for the Automatic Exchange, the purchase of the
Series A Preferred Shares involves a high degree of risk with respect to the
performance and capital levels of the Bank. Prospective investors in the Series
A Preferred Shares should carefully consider the following risk factors and the
other information set forth in the Offering Circular relating to the Bank before
deciding whether to invest in such shares.
EFFECT OF AN INCREASE IN INTEREST RATES ON OPERATING RESULTS. The Bank's
operating results depend to a large extent on its net interest income, which is
the difference between the interest the Bank receives from its loans, securities
and other assets and the interest the Bank pays on its deposits and other
liabilities. Interest rates are highly sensitive to many factors, including
governmental monetary policies and domestic and international economic and
political conditions. Conditions such as inflation, recession, unemployment,
money supply, international disorders and other factors beyond the control of
the Bank may affect interest rates. If generally prevailing interest rates
increase, the "net interest spread" of the Bank, which is the difference between
the rates of interest earned and the rates of interest paid by the Bank, is
likely to contract, resulting in less net interest income.
Although the Bank pursues an asset-liability management strategy designed to
control its risk from changes in market interest rates, the Bank's liabilities
have shorter terms and are more interest-sensitive than its assets. At June 30,
1997, the Bank's one-year interest-sensitivity "gap" (the sum of all interest
earning assets to be re-priced within one year minus all interest-bearing
liabilities to be re-priced within one year, as a percentage of total assets)
was a negative 8.01%. As a result of its gap position, the Bank's net interest
spread will narrow, and its operating results will be adversely affected, during
periods of rising market interest rates if the Bank is unable to reduce its gap.
There can be no assurance that the Bank will be able to adjust its gap
sufficiently to offset any negative effect of changing market interest rates.
REGULATORY CAPITAL LEVELS. As a federal savings association, the Bank is
subject to minimum capital requirements prescribed by federal statute and OTS
regulations. At June 30, 1997, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, with core, tier 1 risk-based and
total risk-based regulatory capital ratios of 4.76%, 9.65% and 10.91%,
respectively, compared to the regulatory requirements of 3.00%, 4.00% and 8.00%,
respectively.
The OTS' prompt corrective action regulations establish five capital
categories for thrift institutions: well capitalized, adequately capitalized,
undercapitalized, severely undercapitalized and critically undercapitalized.
These categories are determined for the supervisory purposes of Section 38 of
the Federal Deposit Insurance Act (which establishes a system of mandatory and
discretionary supervisory actions which generally become more severe as capital
levels decline) and may not necessarily constitute an accurate measure of the
Bank's current overall financial condition or its future prospects. A thrift
generally will be considered "well capitalized" if it has a core capital (or
leverage) ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least
6.0% and a total risk-based capital ratio of at least 10.0%. A thrift generally
will be considered "adequately capitalized" if it has a core capital (or
leverage) ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at least
4.0%, and a total risk-based capital ratio of at least 8.0%. The Bank's core (or
leverage), Tier 1 risk-based and total risk-based capital ratios at June 30,
1997 exceeded the capital ratios established for "adequately capitalized"
institutions. The OTS has the discretion to reclassify an institution from "well
capitalized" to "adequately capitalized" and to treat an "adequately
capitalized" institution as an "undercapitalized" institution for purposes of
the prompt corrective action regulations (including imposing restrictions on the
payment of dividends) if, after notice and an opportunity for a hearing, the OTS
determines that the institution (i) is in an unsafe or unsound condition or (ii)
has received and has not corrected a less than satisfactory examination rating
for asset quality, management, earnings or liquidity. See
"Regulation--Regulation of Federal Savings Banks-- Regulatory Capital
Requirements" in the Offering Circular.
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<PAGE>
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS. As of December 31, 1996,
the Bank had federal tax net operating loss carryforwards of approximately
$146.7 million that is available to be carried forward to offset against its
taxable income in future years. However, if the Bank undergoes an "ownership
change" in a future year as a result of transactions unrelated to the Offering,
the Bank would be severely limited in its ability to offset its federal taxable
income and federal tax liability with its net operating losses from the period
prior to the ownership change. See "Taxation" in the Offering Circular.
RISKS RELATING TO ELIMINATION OF THRIFT CHARTER. During the past few years,
Congress has been considering legislation in various forms that would require
federal thrifts, like the Bank, to convert their charters to national or state
bank charters. Recent legislation requires the merger of the Bank Insurance Fund
("BIF") and the SAIF into a single deposit insurance fund on January 1, 1999 but
only if the thrift charter is eliminated by that date. In the absence of
appropriate "grandfather" provisions, legislation eliminating the thrift charter
could have a material adverse effect on the Bank. The Bank cannot determine
whether, or in what form, such legislation will eventually be enacted and there
can be no assurance that any such legislation that is enacted will contain
adequate grandfather rights for the Bank.
On October 16, 1996, the FDIC lowered the rates on SAIF-assessable deposits.
The rule established SAIF rates ranging from 0 to 27 basis points as of October
1, 1996. However, as a result of the Bank's financial condition, the Bank made
application to the FDIC for an exemption from paying a one-time special
assessment, which exemption was approved on October 5, 1996. As a result, the
Bank was exempt from paying this special one-time assessment. Instead, the Bank
will continue to pay future assessments through 1999 at the assessment rate
schedule in effect as of June 30, 1995. Therefore, as of June 30, 1997, the
Bank's annual assessment for deposit insurance was 30 basis points of insured
deposits as opposed to 6.4 basis points of insured deposits (which is the rate
which applies to the highest rated savings institutions). See
"Regulation--Regulation of Federal Savings Banks--FDIC Assessments" in the
Offering Circular.
ABSENCE OF A PUBLIC MARKET FOR BANK PREFERRED SHARES. If Bank Preferred
Shares are issued, the Bank does not intend to apply for listing of the Bank
Preferred Shares on any national securities exchange or for quotation of the
Bank Preferred Shares through the Nasdaq System. There can be no assurance as to
the liquidity of the trading markets for the Bank Preferred Shares or that an
active public market for the Bank Preferred Shares would develop or be
maintained.
RESTRICTIONS ON BANK DIVIDENDS. If the Automatic Exchange occurs and the
Bank has not been placed into conservatorship or receivership, the Bank would
likely be prohibited from paying dividends on the Bank Preferred Shares as long
as the Bank remains "undercapitalized" for purposes of the OTS prompt corrective
action regulations or the OTS anticipates the Bank being "undercapitalized" in
the near term. The prompt corrective action regulations prohibit thrift
institutions such as the Bank from making "capital distributions" (defined to
include a cash distribution) unless the institution is at least "adequately
capitalized" after the distribution.
However, if the Automatic Exchange occurs after the Bank has been placed
into conservatorship or receivership, the claims of the Bank's depositors and of
its secured, senior, general and subordinated creditors would be entitled to a
priority of payment over the claims of holders of equity interests such as the
Bank Preferred Shares issued pursuant to the Automatic Exchange.
87
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated , 1997 (the "Underwriting Agreement") among the Company, the Bank
and Sandler O'Neill & Partners, L.P., as representative (the "Representative")
of the underwriters named herein (the "Underwriters"), the Company has agreed
that the Company will sell to the Underwriters, and the Underwriters have
severally agreed to purchase from the Company, the number of shares set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Sandler O'Neill & Partners, L.P..................................................
----------
1,240,000
----------
----------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Series A Preferred Shares
offered hereby, if any are taken.
The Underwriters propose initially to offer the Series A Preferred Shares
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and to certain securities dealers at such price
less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the Series A Preferred Shares are released
for sale to the public, the offering price and other selling terms may from time
to time be varied by the Underwriters.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 186,000
additional Series A Preferred Shares solely to cover over-allotments, if any.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company which are substantially similar to the
Series A Preferred Shares or which are convertible or exchangeable into
securities which are substantially similar to the Series A Preferred Shares
without the prior written consent of the Representative, except for the Series A
Preferred Shares offered in connection with the Offering.
Prior to the Offering, there has been no public market for the Series A
Preferred Shares. The initial public offering price was determined by
negotiations between the Company and the Representative. Among the factors
considered in determining the initial public offering price of the Series A
Preferred Shares, in addition to prevailing market conditions, were the estimate
of the business potential and earnings prospects of the Company, an assessment
of the Company's management, limitations on the voting rights of the Series A
Preferred Shares, the consideration of the above factors in relation to market
valuation of companies in related businesses and other factors deemed to be
relevant.
The Company has received approval to list the Series A Preferred Shares,
subject to official notice of issuance, on the Nasdaq National Market. The
Representative has advised the Company that it intends to make a market in the
Series A Preferred Shares prior to commencement of trading on the Nasdaq
National Market, but is not obligated to do so and may discontinue any such
market making at any time without notice.
The Company and the Bank have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act.
The Representative has provided from time to time, and expects to provide in
the future, investment banking services to affiliates of the Company, for which
the Representative has received or will receive customary fees and commissions.
88
<PAGE>
EXPERTS
The balance sheet of Peoples Preferred Capital Corporation as of July 3,
1997 has been included herein and in the Registration Statement in reliance upon
the report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
CERTAIN LEGAL MATTERS
The validity of the Series A Preferred Shares offered hereby and certain
other legal and certain tax matters described under "Federal Income Tax
Considerations" will be passed upon for the Company by Elias, Matz, Tiernan &
Herrick, L.L.P., Washington, D.C. Certain legal matters will be passed upon for
the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of which
this Prospectus is a part) on Form S-11 (the "Registration Statement") under the
Securities Act, with respect to the Series A Preferred Shares offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information regarding the Company and the Series A Preferred Shares
offered hereby, reference is made to the Registration Statement and the exhibits
thereto.
The Registration Statement and the exhibits forming a part thereof filed by
the Company with the Commission can be inspected at and copies can be obtained
from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at the following regional offices of the Commission:
7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
The Articles of Incorporation provide that the Company shall maintain its
status as a reporting company under the Exchange Act for so long as any of the
Series A Preferred Shares are outstanding.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. Such documents (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference) are
available, without charge, to any person, including any beneficial owner, to
whom this Prospectus is delivered, on written or oral request to People's Bank
of California, 5900 Wilshire Boulevard, Los Angeles, California 90036,
Attention: Corporate Secretary, telephone number (213) 938-6300.
The Company's Articles of Incorporation provide that the Company shall
maintain its status as a reporting company under the Exchange Act for as long as
the Series A Preferred Shares are outstanding, and pursuant thereto, the Company
intends to furnish its stockholders with annual reports containing audited
financial statements certified by independent auditors and quarterly reports
containing unaudited financial statements for the first three quarters of each
fiscal year.
89
<PAGE>
GLOSSARY
"Administration Action" means any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to adopt such
procedures or regulations) relating to the Tax Event.
"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.
"Advisory Agreement" means the agreement between the Bank and the Company
pursuant to which the Bank will, among other things (i) administer the
day-to-day operations of the Company, (ii) monitor the credit quality of the
Mortgage Assets and Other Authorized Investments held by the Company and (iii)
advise the Company with respect to the acquisition, management, financing and
disposition of the Company's Mortgage Assets and Other Authorized Investments.
"Applicable Premium" means the greater of: (i) $25.00 or (ii) the excess of
(A) the present value of (l) an amount equal to the amount of dividends that
would be payable on the Series A Preferred Shares in respect of the period from
the date fixed for redemption through , 2002 (assuming all such dividends
were to be authorized and declared) plus (2) $ , computed using a
discount rate equal to the Treasury Rate plus [75] basis points, over (B)
$25.00.
"Articles of Incorporation" means the Articles of Incorporation of the
Company.
"Automatic Exchange" means the automatic exchange on a share-for-share basis
of Series A Preferred Shares for Bank Preferred Shares upon the occurrence of
the Exchange Event.
"Bank" means People's Bank of California, a thrift institution organized
under the laws of the United States, and the parent of the Company.
"Bank Preferred Shares" means the newly issued series of preferred stock of
the Bank for which the Series A Preferred Shares will be exchanged automatically
upon the occurrence of an Exchange Event.
"Board of Directors" means the board of directors of the Company.
"Bylaws" means the bylaws of the Company.
"Change of Control" shall have the meaning set forth in "Description of
Series A Preferred Shares-- Redemption."
"Classified" means a loan which, for financial institution regulatory
purposes, is designated as "substandard", "doubtful" or "loss." For such
purposes, a substandard asset is one that is deemed inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any, because the asset has a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt. An asset classified as doubtful has
all the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as loss are considered
uncollectible.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgage Loan" means a whole loan secured by a first mortgage or
deed of trust on a multi-family residential or commercial real estate property.
"Commercial Mortgage Purchase Agreement" means the Commercial Mortgage Loan
Purchase and Warranties Agreement between the Company and the Bank.
"Commercial Servicing Agreement" means the servicing agreement entered into
by the Company and the Bank with respect to the Commercial Mortgage Loans.
"Commission" means the United States Securities and Exchange Commission.
90
<PAGE>
"Common Stock" means the common stock, par value $0.01 per share, of the
Company.
"Company" means People's Preferred Capital Corporation, a Maryland
corporation.
"Directive" means the writing issued by the appropriate regulatory agency
directing the Automatic Exchange.
"Dividend Payment Date" means each quarterly date upon which dividends are
paid by the Company to the holders of the Series A Preferred Shares.
"Dividend Period" means any quarterly dividend period.
"DOL" means the United States Department of Labor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares of any class or series of Preferred Stock
owned, or deemed to be owned, by or transferred to a stockholder in excess of
the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Event" means the appropriate federal regulatory agency directs in
writing an exchange of the Series A Preferred Shares for Bank Preferred Shares
because (i) the Bank becomes "undercapitalized" under prompt corrective action
regulations established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal regulatory
agency, in its sole discretion, anticipates the Bank becoming "undercapitalized"
in the near term.
"FDIC" means the Federal Deposit Insurance Corporation.
"FDICIA" means the Federal Deposit Insurance Corporation Improvement Act of
1991.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Five or Fewer Test" means the Code requirement that not more than 50% in
value of the Company's outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code).
"FNMA" means Fannie Mae.
"HOLA" means the Home Owners' Loan Act, as amended.
"Independent Directors" means the members of the Board of Directors who are
not current directors, officers or employees of the Company, SOCAL, the Bank or
any affiliate of the Bank.
"Initial Dividend Period" means the first Dividend Period.
"Initial Portfolio" means the initial portfolio of Mortgage Loans purchased
by the Company from the Bank.
"Interested Stockholder" means any person who beneficially owns, directly or
indirectly, 10% or more of the aggregate voting power of a Maryland corporation.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"IRA" means an individual retirement arrangement under Section 408 of the
Code.
"IRS" means the United States Internal Revenue Service.
91
<PAGE>
"Junior Stock" means Common Stock and all other classes and series of stock
which rank below the Series A Preferred Shares as to dividend rights and rights
upon liquidation, winding up or dissolution.
"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the mortgaged
property underlying such Mortgage Loan and (ii) if the Mortgage Loan was made to
finance the acquisition of property, the purchase price of the mortgaged
property.
"MGCL" means the Maryland General Corporation Law.
"Mortgage Assets" means real estate mortgage assets.
"Mortgage-Backed Securities" means securities either issued or guaranteed by
agencies of the Federal government or government sponsored agencies or that are
rated by at least one nationally recognized independent rating organization and
that represent interests in or obligations backed by pools of Mortgage Loans.
"Mortgage Loans" means whole loans secured by single-family (one- to
four-unit) residential, multi-family or commercial real estate properties.
"Mortgage Loan Schedule" means the schedule of the Mortgage Loans in the
Initial Portfolio appearing as an exhibit to the Residential Mortgage Purchase
Agreement and the Commercial Mortgage Purchase Agreement.
"Nonaccrual Status" means a loan on which, in the opinion of management,
principal or interest is not likely to be paid in accordance with the terms of
the loan agreement or on which the principal or interest is past due 90 days or
more and collateral, if any, is insufficient to cover principal and interest.
"Non-United States Holder" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii) foreign
trusts and estates.
"Offering" means the offering of Series A Preferred Shares pursuant to the
Prospectus.
"Offering Circular" means the offering circular contained in the
registration statement on Form OC pursuant to which the Bank Preferred Shares
are being registered with the OTS.
"One Hundred Persons Test" means the Code requirement that the capital stock
of the Company be owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year.
"Other Authorized Investments" means non-mortgage-related securities
authorized by Section 856(c)(5)(B) of the Code, in an amount which shall not
exceed 20% of the value of the Company's total assets. Non-mortgage related
security is defined in the Investment Company Act. Under the Investment Company
Act, the term "security" means, in part, any note, stock, treasury stock,
debenture, evidence of indebtedness, or certificate of interest or participation
in any profit sharing agreement or a group or index of securities.
"OTS" means the Office of Thrift Supervision, Department of the Treasury.
"Ownership Limit" means the provisions in the Company's Articles of
Incorporation limiting, subject to certain exceptions, any person from owning
(including shares deemed to be owned by attribution provisions of the Code) more
than 7.5% of the aggregate initial liquidation value of the issued and
outstanding shares of Preferred Stock, including the Series A Preferred Shares.
"Parity Stock" means any class and series of equity securities of the
Company expressly designated at being on a parity with the Series A Preferred
Shares as to dividend rights and rights upon liquidation, winding up or
dissolution.
92
<PAGE>
"Plan" means a pension, profit-sharing, retirement or other employee benefit
plan.
"Plan Asset Regulation" means the DOL regulations determining the assets of
a Plan for purposes of ERISA and the related prohibited transaction excise tax
provisions of the Code.
"Preferred Stock" means preferred stock, par value $.01 per share, of the
Company.
"Prospectus" means this prospectus, as the same may be amended.
"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A Preferred
Shares.
"REIT" means a real estate investment trust as defined pursuant to the REIT
Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through 860 of
the Code and the applicable Treasury Regulations.
"REIT taxable income" means the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded and (iv)
certain other adjustments are made.
"Residential Mortgage Loan" means a whole loan secured by a first mortgage
or deed of trust on a single-family (one-to four-unit) residential real estate
property.
"Residential Mortgage Purchase Agreement" means the Residential Mortgage
Loan Purchase and Warranties Agreement between the Company and the Bank.
"Residential Servicing Agreements" means the Initial Residential Servicing
Agreement and the Forward Production Servicing Purchase and Sale Agreement
entered into by the Bank and the Servicing Agent with respect to the Residential
Mortgage Loans.
"Residential Assumption Servicing Agreement" means the agreement between the
Company, the Bank and the Servicing Agent pursuant to which the Servicing Agent
shall service the Residential Mortgage Loans sold by the Bank to the Company in
the Initial Portfolio as any additional Residential Mortgage Loans sold by The
Bank to the Company in the future where the Servicing Agent services such loans
for The Bank.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Stock" means any class and series of securities of the Company
expressly designated as being senior to the Series A Preferred Shares.
"Series A Preferred Shares" means the shares of Preferred Stock of the
Company offered hereby.
"Servicer" or "Servicers" means the Bank in its role as Servicer of the
Commercial Mortgage Loans under the Commercial Servicing Agreement and the
Servicing Agent in its role as Servicer of the Residential Mortgage Loans under
the Residential Servicing Agreements.
"Servicing Agent" means Temple Inland Mortgage Corporation, a Nevada
corporation.
"Servicing Agreements" means the servicing agreements entered into by the
Company with respect to the Residential Mortgage Loans and the Commercial
Mortgage Loans.
"7/23 step rate loan" means a Residential Mortgage Loan that has an initial
fixed-rate of interest for the first seven years (i.e., 84 monthly payments) and
adjusts once thereafter to a rate which applies for the remaining 23 years
(i.e., 286 monthly payments) equal to 150 basis points above the FNMA 30 year
commitment rate for delivery as of a date specified in the related mortgage
note.
93
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"SOCAL" means SoCal Holdings, Inc., a Delaware corporation and the parent of
the Bank.
"Significant Stockholders" mean the Bishop Estate, BIL Securities and Arbur,
or any entity controlled, directly, or indirectly by the Bishop Estate, BIL
Securities and Arbur, or their respective successors. Furthermore, any Person
which owns or is deemed to own shares of the Company by reason of the
attribution of shares of the Company (under certain attribution provisions of
the Code) to a Significant Stockholder shall be treated as a Significant
Stockholder.
"Tax Event" means the receipt by the Company of an opinion of a law firm
experienced in such matters to the effect that, as a result of (i) any amendment
to, clarification of, or change (including any announced prospective change) in
the laws or treaties (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein affecting taxation,
(ii) any Administrative Action or (iii) any amendment to, clarification of, or
change in the official position or the interpretation of such Administrative
Action or judicial decision or any interpretation or pronouncement that provides
for a position with respect to such Administrative Action or judicial decision
that differs from the theretofore generally accepted position, in each case, by
any legislative body, court, governmental authority or regulatory body,
irrespective of the manner in which such amendment, clarification or change is
made known, which amendment, clarification, or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Series A Preferred Shares, there is more than an insubstantial risk that (a)
dividends payable by the Company with respect to the capital stock of the
Company are not, or will not be, fully deductible for United States federal
income tax purposes or (b) the Company is, or will be, subject to more than a de
minimis amount of other taxes, duties or other governmental charges as a result
of dividends paid or to be paid by the Company.
"TIN" means Taxpayer Identification Number.
"Time of Exchange" means the time at which the Automatic Exchange occurs,
deemed to be as of 8:00 a.m. Eastern Time on the date for such exchange set
forth in the Directive, or, if such date is not set forth in the Directive, as
of 8:00 a.m. Eastern Time on the earliest possible date such exchange could
occur consistent with the Directive.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Underwriters" means underwriter to which the Company will sell the Series A
Preferred Shares pursuant to the terms of the Underwriting Agreement.
"Underwriting Agreement" means the underwriting agreement by and among the
Company, the Bank and the Underwriters.
"United States Stockholders" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) citizens or residents of
the United States, (ii) corporations, partnerships, or other entities created or
organized in or under the laws of the United States or of any political
subdivisions thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source.
"USRPI" means United States real property interest.
94
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
Report of Independent Public Accountants on the financial statements of Southern
California Federal Savings and Loan Association (the Bank) for the year ended
December 31, 1994 and to the reference to our Firm in the Experts section of the
Preliminary Offering Circular of Peoples Bank of California which is included as
Annex I of the Peoples Preferred Capital Corporation Series A Preferred Stock
Form S-11 Registration Statement to be filed with the Securities and Exchange
Commission and the Office of Thrift Supervision. It should be noted that we have
performed no audit procedures subsequent to June 9, 1995, the date of our
report. Furthermore, we have not made an audit of any financial statements of
the Bank as of any date or for any period subsequent to December 31, 1994, the
date of the latest financial statements covered by our report.
Los Angeles, California
September 5, 1997
95
<PAGE>
INDEX TO FINANCIAL STATEMENT
PEOPLE'S PREFERRED CAPITAL CORPORATION
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheet......................................................................... F-3
Note to Financial Statement........................................................... F-4
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
People's Preferred Capital Corporation
We have audited the accompanying balance sheet of People's Preferred Capital
Corporation (the "Company") as of July 3, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of People's Preferred Capital
Corporation as of July 3, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
July 7, 1997
F-2
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
BALANCE SHEET
JULY 3, 1997
<TABLE>
<S> <C>
ASSETS
Cash............................................................................... $ 100
---------
---------
STOCKHOLDER'S EQUITY
Common Stock, par value $0.01 per share,
10,000 shares authorized and issued and outstanding.............................. $ 100
---------
---------
</TABLE>
See accompanying Note to Balance Sheet.
F-3
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTE TO BALANCE SHEET
1. ORGANIZATION
People's Preferred Capital Corporation (the "Company"), a wholly-owned
subsidiary of People's Bank of California (the "Bank"), was incorporated on June
19, 1997 in the State of Maryland.
The Company intends to invest in mortgage-related and other qualified assets
financed by common and preferred stock offerings and expects to generate income
for distribution to its future preferred and common stockholders primarily from
the net interest income derived from its investments in mortgage-related and
other qualified assets. The Company intends to purchase these mortgage-related
and other qualified assets primarily from the Bank and its affiliates at their
estimated fair values. These assets will be recorded in the Company's financial
statements at the Bank's historical cost basis which will approximate their
estimated fair values. The Company intends to operate in a manner that permits
it to elect, and it intends to elect, to be subject to tax as a real estate
investment trust for federal income tax purposes. The Company has not had any
operations as of July 3, 1997.
The Company intends to sell preferred stock in an underwritten public
offering. The cost of this public offering will be paid by the Company out of
additional capital contributions by the Bank. If the public offering is not
consummated, the Bank will pay all offering costs.
F-4
<PAGE>
THIS OFFERING CIRCULAR HAS BEEN FILED WITH THE OFFICE OF THRIFT SUPERVISION, BUT
HAS NOT BEEN AUTHORIZED FOR USE IN FINAL FORM. INFORMATION CONTAINED HEREIN IS
SUBJECT TO COMPLETION OR AMENDMENT. THE SHARES COVERED HEREBY MAY NOT BE SOLD,
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE OFFERING CIRCULAR IS
DECLARED EFFECTIVE BY THE OFFICE OF THRIFT SUPERVISION. THE OFFERING CIRCULAR
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SHARES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
ANNEX I
PRELIMINARY OFFERING CIRCULAR
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1997
OFFERING CIRCULAR
1,240,000 SHARES(1)
PEOPLE'S BANK OF CALIFORNIA
% NONCUMULATIVE (LIQUIDATION PREFERENCE $25.00 PER SHARE) PREFERRED STOCK
People's Bank of California (formerly Southern California Federal Savings
and Loan Association) (the "Bank"), is hereby offering 1,240,000 shares of its %
Noncumulative Preferred Stock, liquidation preference $25.00 per share (the
"Bank Preferred Shares"). The Bank Preferred Shares are to be issued, if ever,
in connection with an exchange of the % Noncumulative Exchangeable Preferred
Stock, Series A (the "Series A Preferred Shares") of People's Preferred Capital
Corporation (the "Company"), all the common stock of which is owned by the Bank.
Any accrued and unpaid dividends on the Series A Preferred Shares at the time of
the exchange will be deemed to be accrued and unpaid dividends on the Bank
Preferred Shares. Dividends on the Bank Preferred Shares are payable at the rate
of % per annum of the initial liquidation preference (an amount equal to
$ per annum per share), if, when and as declared by the Board of
Directors of the Bank. Dividends are not cumulative and, if declared, are
payable quarterly in arrears. If no dividend is declared on the Bank Preferred
Shares by the Bank for a dividend period, holders of the Bank Preferred Shares
will have no right to receive a dividend for that period. The Bank's ability to
pay cash dividends is subject to regulatory and other restrictions.
Except in the case of a Change of Control (as defined herein), the Bank may
not redeem the Bank Preferred Shares prior to , 2002. On and after ,
2002, the Bank Preferred Shares may be redeemed for cash at the option of the
Bank, in whole or in part, at the redemption price of $25.00 per share, plus
declared and unpaid dividends, if any, thereon without interest. Upon a Change
of Control, the Bank Preferred Shares are redeemable on or prior to ,
2002, at the option of the Bank or its successor or any acquiring or resulting
entity with respect to the Bank (including by any parent or subsidiary of the
Bank or any such successor or any such acquiring or resulting entity), as
applicable, in whole, but not in part, at a price per share equal to (i) $25.00,
plus (ii) an amount equal to the declared and unpaid dividends, if any, to the
date fixed for redemption, without interest, and, without duplication, an
additional amount equal to the amount of dividends that would be payable on the
Bank Preferred Shares in respect of the period from the first day of the
dividend period in which the date fixed for redemption occurs to the date fixed
for redemption (assuming all such dividends were to be declared), plus (iii) the
Applicable Premium (as defined herein). Any redemption of Bank Preferred Shares
is subject to the prior approval of the Office of Thrift Supervision ("OTS").
The Bank Preferred Shares are not subject to any sinking fund or mandatory
redemption and is not convertible into any other securities of the Bank.
The Bank Preferred Shares will constitute a new series of preferred shares
of the Bank and will rank, in priority of payment of dividends and rights upon
the voluntary or involuntary dissolution, liquidation or winding up of the Bank,
junior to all existing and future liabilities of the Bank, including deposits,
indebtedness and trade payables. The Bank Preferred Shares rank superior and
prior to the issued and outstanding common stock, par value $.01 per share, of
the Bank (the "Common Stock") with respect to dividend rights and rights upon
voluntary or involuntary dissolution, liquidation or winding up of the Bank, and
to all other classes and series of equity securities of the Bank hereafter
issued, other than any class or series expressly designated as being on parity
with or senior to the Bank Preferred Shares. The Common Stock of the Bank is the
only class of equity securities currently outstanding.
The Series A Preferred Shares have been registered with the Securities and
Exchange Commission (the "SEC") and the Series A Preferred Shares have been
approved for listing on the Nasdaq National Market, under the symbol "PPCCP." In
the event the Series A Preferred Shares are exchanged for Bank Preferred Shares,
the Bank does not intend to apply for listing of the Bank Preferred Shares on
any national securities exchange or for quotation through the Nasdaq System.
- ------------------------------
(1) The Company has granted to the underwriters with respect to the initial
public offering of the Series A Preferred Shares (the "Underwriters") an
option for 30 days to purchase up to an additional 186,000 Series A
Preferred Shares at the initial public offering price thereof, solely to
cover over-allotments, if any. In the event that the Underwriters exercise
such option, in whole or in part, this Offering Circular will cover an
additional number of Bank Preferred Shares which is equal to the number of
Series A Preferred Shares issued upon such exercise.
SEE "RISK FACTORS" COMMENCING ON PAGE OF THIS OFFERING CIRCULAR FOR A
DISCUSSION OF CERTAIN RISKS RELATING TO THE BANK PREFERRED SHARES.
THESE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
DEBT OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION
INSURANCE FUND, ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
THESE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL AGENCY, OR BY ANY
STATE SECURITIES COMMISSION, NOR HAS SUCH OFFICE, OTHER AGENCY OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
THE DATE OF THIS OFFERING CIRCULAR IS , 1997
<PAGE>
AVAILABLE INFORMATION
The Bank has filed this Offering Circular on Form OC (including any
amendments thereto, the "Form OC") with the Office of Thrift Supervision (the
"OTS"). This Offering Circular does not contain all of the information set forth
in the Form OC, certain items of which are contained in exhibits to the Form OC
as permitted by the rules and regulations of the OTS. For further information
with respect to the Bank and the Bank Preferred Shares offered hereby, reference
is made to the Form OC, including the exhibits filed as a part thereof.
Statements contained in this Offering Circular as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
or incorporated by reference as an exhibit to the Form OC, each such statement
being qualified in all respects by such reference. The Form OC and the exhibits
thereto may be inspected without charge at the public reference facilities of
the OTS located at 1700 G Street, N.W., Washington, D.C. 20552, or at the OTS
West Regional Office, located at One Montgomery Street, Suite 400, San
Francisco, California 94104. Copies of such materials may be obtained from the
OTS at prescribed rates.
The Bank has requested [AND RECEIVED A WAIVER FROM THE INFORMATIONAL
REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT") DURING THE PERIOD IN WHICH THE COMPANY'S SERIES A PREFERRED
SHARES ARE OUTSTANDING. THE BANK AGREES TO BECOME SUBJECT TO SUCH INFORMATIONAL
REQUIREMENTS OF THE EXCHANGE ACT IN THE EVENT OF AN AUTOMATIC EXCHANGE OF THE
COMPANY'S SERIES A PREFERRED SHARES FOR THE BANK PREFERRED SHARES.] So long as
the Bank is subject to the periodic reporting requirements of the Exchange Act,
it will furnish the reports and other information required thereby to the OTS.
Such reports and other information can be inspected and copied at the public
reference facilities maintained by the OTS at 1700 G Street, N.W., Washington,
D.C. 20552, or at the OTS West Regional Office located at One Montgomery Street,
Suite 400, San Francisco, California 94104.
OC-2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO CONTAINED ELSEWHERE IN THIS OFFERING CIRCULAR.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS OFFERING CIRCULAR ASSUMES
THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS WITH RESPECT TO THE
SERIES A PREFERRED SHARES IS NOT EXERCISED. AN INDEX OF DEFINED TERMS USED IN
THIS OFFERING CIRCULAR BEGINS ON PAGE 100.
THE BANK
GENERAL. The Bank is a federally chartered savings bank which was
originally organized in 1887 under California law and which conducts business
from its executive offices located in Los Angeles, California and 19
full-service branch offices located primarily in Los Angeles County as well as
Orange and Ventura Counties in Southern California. At June 30, 1997, the Bank
had total assets of $1.8 billion, total deposits of $1.3 billion and total
stockholder's equity of $84.9 million.
OWNERSHIP STRUCTURE. The Bank is a wholly owned subsidiary of SoCal
Holdings, Inc. ("SOCAL"), a Delaware corporation which was organized in 1987 to
acquire the Bank in connection with its conversion from mutual to stock form. At
June 30, 1997, SOCAL had total assets of $1.8 billion and total stockholders'
equity of $72.5 million. The common stock of SOCAL is currently (i) 60% owned by
the Trustees of the Estate of Bernice Pauahi Bishop, also known as Kamehameha
Schools Bernice Pauahi Bishop Estate (the "Bishop Estate"), a charitable
educational trust established under Hawaii law, (ii) 30% owned by BIL Securities
(Offshore) Limited ("BIL Securities"), a wholly owned subsidiary of Brierley
Investments Limited, a New Zealand corporation, and (iii) 10% owned by Arbur,
Inc. ("Arbur"), a Delaware corporation. The preferred stock of SOCAL is owned
(i) 67% by the Bishop Estate, (ii) 24.8% by BIL Securities and (iii) 8.2% by
Arbur.
The following chart sets forth in simplified form the ownership of the
common equity of SOCAL, the Bank and the Company.
[GRAPHIC]
The Bishop Estate operates under the terms of the will (the "Will") of
Bernice Pauahi Bishop, and is one of the largest private landowners in the state
of Hawaii. Under the terms of the Will, revenues in excess of expenses from the
Bishop Estate are used to fund the operations of and maintain The Kamehameha
Schools which are located on the islands of Hawaii.
OC-3
<PAGE>
Brierley Investments Limited is a publicly held investment corporation which
is traded on the New Zealand and Australian stock exchanges. At June 30, 1997,
Brierley Investments Limited had approximately $5.4 billion in total assets,
$2.5 billion in total liabilities and $2.9 billion in total equity (all of which
amounts have been converted into U.S. dollars).
Arbur is a closely held Delaware-chartered corporation which is wholly owned
by William E. Simon and his children. William E. Simon is the former U.S.
Secretary of the Treasury.
BASIS FOR 1992 RECAPITALIZATION. In connection with SOCAL's acquisition of
the Bank in April 1987, the Bank was permitted to include in its regulatory
capital $217.5 million of supervisory goodwill, which resulted from the
acquisition, as well as $79.7 million of goodwill which was recorded under
generally accepted accounting principles ("GAAP"). In August 1989, Congress
enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") which provided, among other things, that savings institutions such as
the Bank were no longer permitted to include goodwill in their regulatory
capital (subject to a gradual phaseout which expired on December 31, 1994).
Consequently, the Bank was required to write-off all of its goodwill, which
resulted in the Bank failing to comply with its minimum regulatory capital
requirements during 1990 and 1991. The balance of the Bank's GAAP goodwill was
written off as unrealizable in 1992. The Bank has sued the U.S. Government with
respect to the required write-off of its supervisory goodwill. See "Business of
the Bank--Legal Proceedings."
In August 1992, SOCAL issued $48.0 million of senior notes and, after
payment of the transaction fees and expenses, contributed $43.5 million of the
net proceeds from such sale to the Bank (the "1992 recapitalization"). As a
result of the 1992 recapitalization, the Bank was able to satisfy its minimum
regulatory capital requirements.
BASIS FOR 1995 RECAPITALIZATION. Notwithstanding the 1992 recapitalization,
the Bank continued to recognize significant credit losses due, in large part, to
the continued deterioration in the Southern California economy which had begun
with the national recession at the start of the decade, together with a decline
in market values of real estate resulting in part from the Northridge earthquake
of 1994. As the real estate that secured the Bank's mortgage loans decreased in
value and as borrowers, particularly developers of, and investors in,
residential and commercial real estate, became less able to meet their debt
service obligations, non-performing assets and troubled debt restructurings
increased dramatically, amounting to $78.7 million or 4.6% of total assets as of
December 31, 1994. The high levels of non-performing assets adversely affected
the Bank's operations in several respects, including a loss of interest income,
increased operating expenses and substantially higher provisions for losses. As
a result of the foregoing, during 1994, the Bank again fell out of compliance
with its regulatory capital requirements. In May 1995, the present stockholders
of SOCAL invested $60.4 million in new debt and equity securities of SOCAL,
substantially all of the proceeds of which were contributed to the Bank in order
to satisfy the Bank's minimum regulatory capital requirements (the "1995
recapitalization"). Beginning on September 30, 1997, SOCAL intends to begin
making quarterly interest payments on its senior debt issued in the 1995
recapitalization, which is expected to be funded through dividends from the
Bank. See "Use of Proceeds."
NEW MANAGEMENT AND INITIATIVES. In connection with the 1995
recapitalization, the Bank replaced its former senior managers with a new
management team with considerable experience in commercial banking and problem
asset rehabilitation. Such individuals include a new President and Chief
Executive Officer, a new Executive Vice President and Chief Financial Officer
and a new Executive Vice President-- Retail Banking, all of whom worked together
at BancFlorida Financial Corp. Mr. Rudolf P. Guenzel, President and Chief
Executive Officer of the Bank, was hired at a time when BancFlorida was
experiencing serious financial difficulties with non-performing assets. Under
Mr. Guenzel's leadership, BancFlorida returned to profitability and was sold to
First Union Corp. in 1994. BancFlorida's common stock increased from a low of
$2.375 during the quarter in which Mr. Guenzel became President and Chief
Executive
OC-4
<PAGE>
Officer to $30.00 per share, the price at which First Union Corp. acquired
BancFlorida. See "Management." The Bank under its new management has changed the
name of the Bank from Southern California Federal Savings and Loan Association
to People's Bank of California, reflecting a new emphasis on providing full
banking services to its customers. Management has also undertaken a number of
initiatives in order to reduce problem assets, reduce its operating expenses and
cost of funds and maximize profitability while limiting interest rate and credit
risk. With the California banking market undergoing significant consolidation,
management believes that the Bank is uniquely positioned to take advantage of
acquisition opportunities that will occur in its market area. Highlights of the
principal elements of the Bank's business strategy are as follows:
- REDUCTION OF NON-PERFORMING ASSETS. The Bank reorganized its asset review
department, implemented an internal asset review system through the creation of
an internal asset review committee and established a credit review department
and a special assets department in order to focus on the early identification of
potential problem assets and the administration, rehabilitation or liquidation
of the Bank's non-performing assets. As a result, non-performing loans and
troubled debt restructurings have declined from $68.3 million or 4.0% of total
assets at December 31, 1994 to $21.6 million or 1.2% of total assets at June 30,
1997. Because of new management's expertise in dealing with problem assets, the
Bank has taken an aggressive approach in dealing with its non-performing assets,
including converting non-performing loans into real estate owned whenever such a
strategy, in the opinion of management, provides a more efficient alternative to
avoid further losses. As a result of these actions, real estate owned has
increased during the same period from $10.5 million at December 31, 1994 to
$22.8 million at June 30, 1997. Net charge-offs during this period amounted to
$7.1 million, $12.1 million and $5.4 million during the years ended December 31,
1995 and 1996 and the six months ended June 30, 1997, as management, upon
transfer of loans to real estate owned, charged-off specific valuation
allowances which had previously been established through increased provisions
for loans in prior periods. Total non-performing assets and troubled debt
restructurings have declined from $78.7 million at December 31, 1994 to $44.4
million at June 30, 1997. Decreases in the Bank's non-performing assets have
resulted in reductions in provisions for losses, which have contributed to
improved operating results. During the six months ended June 30, 1997 and the
year ended December 31, 1996, the Bank recognized net earnings of $6.9 million
and $13.6 million, respectively. See "Business of the Bank--Non-Performing
Assets" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
- REDUCTION OF OPERATING EXPENSES. The Bank has significantly reduced
operating expenses through staff reductions and the consolidation of certain
operations. From December 31, 1994 through June 30, 1997, the Bank experienced a
net reduction of 60 employees. In addition, due to the high operating expenses
incurred by the Bank in servicing its residential mortgage loans, the sale of a
substantial portion of the Bank's residential loan servicing which was completed
during the first quarter of 1997 is expected to result in further cost savings.
Management believed that such cost savings coupled with the reinvestment
opportunity associated with the sale proceeds would be more profitable to the
Bank than retention of such servicing. The ratio of the Bank's operating
expenses to average total assets has steadily decreased, from 2.14% during the
year ended December 31, 1994 to 1.61% and 1.56% during the year ended December
31, 1996 and the six months ended June 30, 1997, respectively. Despite the
Bank's recent cost-cutting efforts, management believes that it has significant
operating leverage and, therefore, continued incremental growth will not cause
the Bank's operating expenses to increase by a corresponding amount. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.- Results of Operations."
- REDUCTION OF FUNDING COSTS. Prior to 1995, the Bank relied to a large
extent on wholesale sources of funds, such as non-retail jumbo certificates of
deposits and FHLB advances, which resulted in a high cost of funds and reduced
margins. The Bank has reduced its overall cost of funds by promoting retail
deposit growth (particularly transaction accounts) and by allowing its
non-retail jumbo certificates of deposit to run off as they mature. In addition,
new management has replaced higher cost short-term FHLB advances
OC-5
<PAGE>
with lower cost reverse repurchase agreements. As a result of the foregoing, the
Bank's transactional accounts (passbook, NOW and money market accounts) have
increased from $183.2 million or 13.2% of total deposits at December 31, 1994 to
$339.8 million or 25.9% of total deposits at June 30, 1997. Over such period,
non-retail jumbo certificates of deposit declined from $122.2 million to $3.5
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
- INCREASED INVESTMENT IN MORTGAGE-BACKED SECURITIES. Since June 1995, the
Bank has significantly increased its investment in adjustable rate U.S.
Government agency mortgage-backed securities. Mortgage-backed securities
increase the credit quality of the Bank's assets by virtue of the insurance or
guarantees of federal agencies that back them, require less capital under
risk-based regulatory capital requirements than non-insured or non-guaranteed
mortgage loans, are more liquid than individual mortgage loans and may be used
to collateralize borrowings or other obligations of the Bank. In addition, the
adjustable rate nature of the loans underlying such securities has assisted the
Bank in managing its interest rate risk exposure. At June 30, 1997, the Bank
held $578.5 million of mortgage-backed securities, $331.4 million of which were
secured by loans with adjustable rates. See "Business of the Bank-- Investment
Activities."
- EXPANSION OF COMMERCIAL AND CONSUMER LENDING. The Bank has hired
individuals with significant expertise in commercial and consumer lending and,
since August 1996, has increased its commercial business and consumer loan
originations. During the six months ended June 30, 1997 and the year ended
December 31, 1996, the Bank originated in the aggregate $10.3 million and $9.8
million of commercial business and consumer loans, which amounted to 23.8%, and
15.8% of total loan originations, respectively. Management intends to continue
to place increased emphasis on building these portfolios. Commercial business
and consumer loans generally have shorter terms and higher interest rates than
single-family residential loans but are generally considered to have a higher
level of credit risk. See "Risk Factors-- Multi-Family Residential, Commercial
Real Estate, Commercial Business and Consumer Lending" and "Business of the
Bank--Lending Activities."
- ASSET GROWTH AND ACQUISITIONS. The Bank has and will continue to pursue a
policy of utilizing its existing infrastructure to grow its loan and securities
portfolios as well as its retail franchise. The Bank opened a new de novo branch
office in Buena Park, California in November 1995 and a branch office facility
in Los Angeles, California in April 1996. The Bank will also consider
acquisition opportunities when it perceives that they are advantageous to the
Bank.
As a result of the Offering, the Bank expects to receive $ million in net
proceeds which it intends to initially leverage through the purchase of U.S.
Government agency and mortgage-backed securities or wholesale single-family
residential loans funded primarily through securities sold under agreements to
repurchase. See "Use of Proceeds." Management believes that leveraging the
proceeds raised in the Offering will permit the Bank to fully realize the
benefit of its existing net operating loss carryforwards on a going forward
basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--"Results of Operations" and "Taxation."
The Bank, as a federally chartered savings bank, is subject to comprehensive
regulation and examination by the Office of Thrift Supervision ("OTS"), as its
chartering authority and primary regulator, and by the Federal Deposit Insurance
Corporation ("FDIC"), which administers the Savings Association Insurance Fund
("SAIF"), which insures the Bank's deposits to the maximum extent permitted by
law. The Bank is a member of the Federal Home Loan Bank ("FHLB") of San
Francisco, which is one of the 12 regional banks which comprise the FHLB System.
The Bank is further subject to regulations of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") governing reserves required to
be maintained against deposits and certain other matters. See "Regulation."
The Bank's principal executive offices are located at 5900 Wilshire
Boulevard, Los Angeles, California 90036, and the telephone number is (213)
938-6300.
OC-6
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
In June 1997, the Bank established the Company for the purpose of acquiring,
holding and managing real estate mortgage assets and other authorized
investments. All of the Company's common stock is owned by the Bank. It is
expected that substantially all of the Company's mortgage assets will be
acquired from the Bank, although the Company may acquire mortgage assets from
unaffiliated third parties.
The Company has filed a registration statement with the SEC with respect to
the Series A Preferred Shares (the "Offering"). Each Series A Preferred Share
will be exchanged automatically for one newly issued Bank Preferred Share being
registered by this Offering Circular if the appropriate federal regulatory
agency directs in writing an exchange of the Series A Preferred Shares for Bank
Preferred Shares because (i) the Bank becomes "undercapitalized" under prompt
corrective action regulations, (ii) the Bank is placed into conservatorship or
receivership or (iii) the appropriate federal regulatory agency, in its sole
discretion, anticipates the Bank becoming "undercapitalized" in the near term.
The exchange feature has been required by the OTS and is intended, in the event
the Bank experiences financial difficulty, to eliminate the prior claim the
holders of the Series A Preferred Shares would otherwise have on the assets of
the Company so that these assets would be available to support the operations of
the Bank on a consolidated basis.
The Company is undertaking the offering of its Series A Preferred Shares and
the Bank is undertaking the offering of its Bank Preferred Shares for three
principal reasons: (i) the Offering will strengthen the Bank's regulatory
capital position as a portion of the Series A Preferred Shares will qualify as
core capital of the Bank under relevant regulatory capital guidelines as a
result of the treatment of the Series A Preferred Shares as a minority interest
in a consolidated subsidiary of the Bank, (ii) the Offering will provide the
Bank with the opportunity to increase its earnings capacity through the
expansion of its current business, thereby accelerating the use of net operating
loss carryforwards, and (iii) the dividends paid on the Series A Preferred
Shares will, as a result of the Company's qualification as a real estate
investment trust ("REIT") for federal income tax purposes, be tax deductible in
computing the Company's taxable income.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.................. 1,240,000 shares of the Bank's % Noncumulative
Preferred Stock, which may be increased by up to an
additional 186,000 shares if the Underwriters of the
Company's Series A Preferred Shares exercise an over-
allotment option granted in connection with the
Company's public offering of Series A Preferred
Shares.
Exchange............................ The Bank Preferred Shares are to be issued, if ever,
in connection with an exchange of Series A Preferred
Shares. See "Exchange."
Ranking............................. The Bank Preferred Shares rank senior to the Bank's
Common Stock and junior to all existing and future
liabilities of the Bank, including deposits,
indebtedness and trade payables. Additional shares of
preferred stock ranking senior to the Bank Preferred
Shares may not be issued without the approval of
holders of at least two-thirds of each series of
Preferred Stock.
</TABLE>
OC-7
<PAGE>
<TABLE>
<S> <C>
Dividends........................... Dividends on the Bank Preferred Shares are payable at
the rate of % per annum of the initial liquidation
preference (an amount equal to $ per annum
per share), if, when and as authorized and declared
by the Board of Directors of the Bank. If authorized
and declared, dividends are payable quarterly in
arrears on March 31, June 30, September 30 and
December 31 in each year. Dividends will accrue in
each quarterly period from the first day of such
period, whether or not dividends are paid with
respect to the preceding period. Dividends on the
Bank Preferred Shares are not cumulative and,
accordingly, if no dividend is declared on the Bank
Preferred Shares by the Bank for a dividend period,
holders of the Bank Preferred Shares will have no
right to receive a dividend for that period, and the
Bank will have no obligation to pay a dividend for
that period, whether or not dividends are declared
and paid for any future period. Upon the exchange of
Series A Preferred Shares for Bank Preferred Shares,
any accrued and unpaid dividends of the Series A
Preferred Shares at the time of the exchange will be
deemed to be accrued and unpaid dividends on the Bank
Preferred Shares. See "Description of the Bank
Preferred Shares--Dividends." The Bank's ability to
pay cash dividends is subject to regulatory and other
restrictions described herein.
Liquidation Preference.............. The liquidation preference for each Bank Preferred
Share is $25.00, plus an amount equal to declared and
unpaid dividends, if any, thereon. See "Description
of the Bank Preferred Shares--Rights Upon
Liquidation."
Redemption.......................... Except in the case of a Change of Control, the Bank
may not redeem the Bank Preferred Shares before
, 2002. After such date, the Bank Preferred
Shares may be redeemed for cash at the option of the
Bank, in whole or in part, at any time and from time
to time, at the redemption price of $25.00 per share,
plus declared and unpaid dividends, if any, thereon.
Upon a Change of Control, the Bank Preferred Shares
are redeemable on or prior to , 2002, at the
option of the Bank or its successor or any acquiring
or resulting entity with respect to the Bank
(including by any parent or subsidiary of the Bank or
any such successor or any such acquiring or resulting
entity), as applicable, in whole, but not in part, at
a price per share equal to (i) $25.00, plus (ii) an
amount equal to the declared and unpaid dividends, if
any, to the date fixed for redemption, without
interest, and, without duplication, an additional
amount equal to the amount of dividends that would be
payable on the Bank Preferred Shares in respect of
the period from the first day of the dividend period
in which the date fixed for redemption occurs to the
date fixed for redemption (assuming all such
dividends were to be declared), plus (iii) the
Applicable Premium. Any redemption of Bank Preferred
Shares is subject to the prior approval of
</TABLE>
OC-8
<PAGE>
<TABLE>
<S> <C>
the OTS. The Bank Preferred Shares will not be
subject to any sinking fund or mandatory redemption
and will not be convertible into any other securities
of the Bank.
Voting Rights....................... Holders of Bank Preferred Shares will not have any
voting rights, except as expressly provided herein.
On any matter on which holders of the Bank Preferred
Shares may vote, each share of Bank Preferred Shares
will be entitled to one vote. See "Description of the
Bank Preferred Shares--Voting Rights."
Use of Proceeds..................... The Bank Preferred Shares will only be issued in
connection with an exchange for the Series A
Preferred Shares. The proceeds from the sale of the
Series A Preferred Shares will be used by the Company
to purchase a portfolio of mortgage assets from the
Bank. The Bank will not receive any proceeds,
directly or indirectly, from the exchange of Series A
Preferred Shares for Bank Preferred Shares. See "Use
of Proceeds."
Absence of a Public Market.......... In the event the Series A Preferred Shares are
exchanged for Bank Preferred Shares, the Bank has no
intention to list the Bank Preferred Shares on a
national securities exchange or national quotation
system.
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of risks relating to the Bank Preferred
Shares.
OC-9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
(DOLLARS IN THOUSANDS)
The following selected historical consolidated financial data for the five
years ended December 31, 1996 is derived in part from the audited consolidated
financial statements of the Bank. The historical consolidated financial data for
the six months ended June 30, 1997 and 1996 is derived from unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
which management of the Bank considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for any other interim period or the entire year
ending December 31, 1997. The selected historical consolidated financial data
set forth below should be read in conjunction with, and is qualified in its
entirety by, the historical consolidated financial statements of the Bank,
including the related notes, included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets...................................... $1,820,333 $1,747,871 $1,579,751 $1,720,293 $1,829,228 2,046,644
Cash and cash equivalents......................... 13,388 14,673 7,249 10,960 18,481 13,022
Federal funds sold................................ 3,335 7,200 11,800 -- -- --
Securities purchased under agreements to resell... -- -- 35,000 -- -- --
Securities available-for-sale..................... 617,038 502,301 241,645 7,677 55,477 35,253
Loans held for sale............................... -- -- -- 28,946 5,500 1,396
Mortgage-backed securities held-to-maturity....... 10,375 10,971 -- 304,620 306,530 --
Loans receivable, net............................. 1,102,381 1,141,707 1,228,152 1,306,057 1,346,498 1,442,624
Real estate held for investment and sale, net..... 24,737 22,561 16,288 17,514 36,398 43,854
Deposits.......................................... 1,314,036 1,371,243 1,473,318 1,384,218 1,388,818 1,606,643
Securities sold under agreements to repurchase.... 331,358 192,433 -- -- 46,985 162,218
FHLB advances..................................... 80,000 80,000 31,746 310,000 314,000 187,000
Total non-performing assets and troubled debt
restructurings(1)............................... 44,393 46,218 52,640 78,737 76,951 71,603
Stockholder's equity(2)........................... 84,918 76,610 67,449 17,348 67,740 76,114
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED
JUNE 30, AT OF FOR THE YEAR ENDED DECEMBER 31,
---------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992
------- ------- -------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA:
Interest, fees and dividend
income.................... $61,418 $60,926 $122,896 $ 122,926 $ 116,261 $ 134,923 $ 164,746
Interest expense............ 44,578 44,204 89,631 94,994 88,238 100,899 127,106
------- ------- -------- ---------- ---------- ---------- ----------
Net interest income......... 16,840 16,722 33,265 27,932 28,023 34,024 37,640
Provision for losses........ 655 2,213 2,884 8,823 24,443 13,059 14,032
------- ------- -------- ---------- ---------- ---------- ----------
Net interest income after
provision for losses...... 16,185 14,509 30,381 19,109 3,580 20,965 23,608
Gain on mortgage-backed
securities sales, net..... 122 3,600 3,638 641 485 901 1,705
Gain (loss)on loan and
servicing sales, net...... 3,413 (53) (53) (166) 2,712 2,537 2,380
Income (loss) from other
real estate operations,
net....................... 112 (197) 1,946 (2,067) (5,398) (180) 2,056
Other noninterest income.... 1,197 1,257 2,593 2,095 2,328 6,272 3,070
Operating expenses.......... 14,110 13,171 27,923 30,906 40,878 41,202 36,666
Goodwill write-off.......... -- -- -- -- -- -- 53,105
Earnings (loss) before
income tax provision
(benefit)................. 6,919 5,945 10,582 (11,294) (37,171) (10,707) (56,952)
Income tax provision
(benefit)................. -- 5 (3,016) (2,646) 11,356 (1,200) --
Cumulative effect (benefit)
of change in accounting
principle................. -- -- -- -- -- -- (12,570)
------- ------- -------- ---------- ---------- ---------- ----------
Net earnings (loss)......... $ 6,919 $ 5,940 $ 13,598 $ (8,648) $ (48,527) $ (9,507) $ (44,382)
------- ------- -------- ---------- ---------- ---------- ----------
------- ------- -------- ---------- ---------- ---------- ----------
</TABLE>
OC-10
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED
JUNE 30, AT OF FOR THE YEAR ENDED DECEMBER 31,
---------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
PERFORMANCE RATIOS:(3)
Return on assets............ 0.77% 0.69% 0.78% (0.49)% (2.54)% (0.48)% (2.06)%
Return on equity............ 17.57 17.66 20.20 (16.73) (89.49) (12.76) (55.20)
Interest-earning assets to
interest-bearing
liabilities............... 101.24 101.21 100.91 100.97 99.69 99.63 99.15
Interest rate spread(4)..... 1.87 1.93 1.94 1.57 1.54 1.81 1.90
Net interest margin(4)...... 1.92 1.99 1.99 1.62 1.53 1.80 1.85
Operating expenses to
assets.................... 1.56 1.53 1.61 1.75 2.14 2.07 1.70
ASSET QUALITY RATIOS:
Non-performing loans as a
percent of loans, net..... 1.27 1.76 1.60 2.90 2.06 2.85 1.98
Non-performing assets as a
percent of total
assets(1)................. 2.03 2.97 2.21 2.94 2.21 3.83 3.29
Non-performing assets and
troubled debt
restructurings as a
percent of total
assets(1)................. 2.44 3.38 2.64 3.33 4.58 4.21 3.50
Allowance for loan losses as
a percent of loans, net... 1.69 2.22 2.04 2.57 2.28 1.52 1.28
Allowance for loan losses as
a percent of non-
performing loans and
troubled debt
restructurings(1)......... 86.64 94.41 90.30 75.67 43.66 44.99 56.18
Net charge-offs to average
loans, net................ 0.47 0.64 0.95 0.55 0.95 0.45 0.56
BANK'S REGULATORY CAPITAL
RATIOS(5):
Core leverage capital
ratio..................... 4.76 4.20 4.57 4.18 1.08 4.21 4.49
Tier 1 capital ratio........ 9.65 8.14 9.15 7.56 2.01 7.41 8.35
Total risk-based capital
ratio..................... 10.91 9.01 10.38 8.43 2.76 8.58 9.30
</TABLE>
- ------------------------------
(1) Nonperforming assets consist of nonaccrual loans and real estate owned.
Nonaccrual loans are loans that the Bank has removed from accrual status
because the loans are 90 or more days delinquent as to principal and/or
interest or, in management's opinion, full collectibility of the loan is in
doubt. Real estate owned consists of real estate acquired in settlement of
loans. A loan is considered a troubled debt restructuring if, as a result of
the borrower's financial condition, the Bank has agreed to modify the loan
by accepting below market terms either by granting an interest rate
concession or by deferring principal or interest payments. As used in this
table, the term "troubled debt restructurings" means a restructured loan on
accrual status. Troubled debt restructuring on nonaccrual status are
reported in the nonaccrual loan category.
(2) At June 30, 1997 and December 31, 1996 and 1995, stockholder's equity is net
of $4.4 million, $6.1 million and $1.6 million of unrealized losses on
securities available-for-sale, respectively.
(3) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods, except for 1993 and 1992 which
use average monthly balances. Operating data are annualized where
appropriate.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(5) For information on the Bank's regulatory capital requirements, see "--Risk
Factors and Other Considerations--Regulatory Capital Levels" herein and
"Regulation -Regulation of Federal Savings Banks--Regulatory Capital
Requirements" in the Offering Circular.
OC-11
<PAGE>
RISK FACTORS
PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE HOLDERS OF BANK
PREFERRED SHARES SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION SET FORTH IN
THIS OFFERING CIRCULAR AND, IN PARTICULAR, SHOULD EVALUATE THE FOLLOWING RISKS.
THIS OFFERING CIRCULAR CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND
INFORMATION RELATING TO THE BANK THAT ARE BASED ON THE BELIEFS OF MANAGEMENT AS
WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT.
SUCH FORWARD LOOKING STATEMENTS ARE PRINCIPALLY CONTAINED IN THE SECTIONS
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." IN ADDITION, IN THOSE AND OTHER PORTIONS OF THIS DOCUMENT, THE
WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTENDS," "SHOULD" AND
SIMILAR EXPRESSIONS, OR THE NEGATIVE THEREOF, AS THEY RELATE TO THE BANK OR THE
BANK'S MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS REFLECT THE CURRENT VIEWS OF THE BANK WITH RESPECT TO FUTURE EVENTS
AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE
RISK FACTORS DESCRIBED IN THIS OFFERING CIRCULAR. SHOULD ONE OR MORE OF THESE
RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS
ANTICIPATED, BELIEVED, ESTIMATED OR EXPECTED. THE BANK DOES NOT INTEND TO UPDATE
THESE FORWARD-LOOKING STATEMENTS.
THE AUTOMATIC EXCHANGE
The Bank Preferred Shares will be issued in an automatic exchange for the
Series A Preferred Shares, only if directed in writing by the appropriate
regulatory agency because (i) the Bank becomes "undercapitalized" under prompt
corrective action regulations, (ii) the Bank is placed into conservatorship or
receivership or (iii) the appropriate federal regulatory agency, in its sole
discretion, anticipates the Bank
becoming "undercapitalized" in the near term. As a result, holders of Series A
Preferred Shares would become holders of Bank Preferred Shares at a time when
the Bank's financial condition was deteriorating or when the Bank had been
placed into conservatorship or receivership. In the event of liquidation of the
Bank, the claims of depositors and secured, senior, general and subordinated
creditors of the Bank would be entitled to a priority of payment over the claims
of holders of equity interests such as the Bank Preferred Shares. Furthermore,
there can be no assurance that the Bank would be in a financial position, after
the occurrence of an automatic exchange, to make any dividend payments on the
Bank Preferred Shares. As a result, the holders of the Bank Preferred Shares
likely would receive, if anything, substantially less than the holders of the
Series A Preferred Shares would have received had the Series A Preferred Shares
not been exchanged for Bank Preferred Shares.
PAYMENT OF DIVIDENDS
There is no obligation to declare dividends on the Bank Preferred Shares.
Because dividends on the Bank Preferred Shares are noncumulative, if the Board
of Directors of the Bank does not declare the quarterly dividend payable on the
Bank Preferred Shares, the holders of the Bank Preferred Shares will have no
right to receive a dividend for such period, whether or not dividends on the
Bank Preferred Shares are declared by the Board of Directors for any future
period. The Bank's ability to pay dividends on Bank Preferred Shares would also
be subject to the prior and superior rights, if any, of holders of other classes
or series of equity securities of the Bank issued in the future.
The federal thrift laws, including the regulations of the OTS, limit the
Bank's ability to pay dividends on its capital stock including the Bank
Preferred Shares. The Bank generally may not declare dividends or make any other
capital distribution if, after the payment of such dividend or other
distribution, it would fall within any of the three undercapitalized categories
under the prompt corrective action standards of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). Other limitations apply to the
Bank's ability to pay dividends, the magnitude of which depends upon the extent
to which the Bank meets its regulatory capital requirements. In addition, the
HOLA requires every savings association subsidiary of a savings and loan holding
company to give the OTS at least 30 days' advance notice of any proposed
dividends to be made on its guarantee, permanent or other non-withdrawable stock
or else such
OC-12
<PAGE>
dividend will be invalid. Further the OTS may prohibit any capital distribution
that it determines would constitute an unsafe or unsound practice.
As of June 30, 1997, the Bank met the capital requirements of an "adequately
capitalized" institution under the FDICIA prompt corrective action standards.
Although management expects the Bank to become "well capitalized" as a result of
the sale of the Series A Preferred Shares, there can be no assurance that the
Bank will become or continue to be "well capitalized" under applicable OTS
regulations.
BANK PREFERRED SHARES WILL NOT BE LISTED ON THE NASDAQ SYSTEM
Although the Company has received approval to list the Series A Preferred
Shares on the Nasdaq System, the Bank does not intend to apply for listing of
the Bank Preferred Shares, for which the Series A Preferred Shares will be
exchanged automatically on a one-for-one basis upon the occurrence of an
Exchange Event, on any national securities exchange or for quotation through the
Nasdaq System. Consequently, there can be no assurance as to the liquidity of
the trading markets for the Bank Preferred Shares, if issued, or that an active
public market for the Bank Preferred Shares would develop or be maintained.
ECONOMIC CONDITIONS
The Bank's loan portfolio is concentrated in California. As a result, the
financial condition of the Bank will be subject to general economic conditions
and, in particular, to conditions in the California residential real estate
market. Due to the slow recovery of the economy, particularly in California's
market for real estate, the Bank may find it difficult to originate a sufficient
volume of high-quality residential mortgage loans or maintain its asset quality,
either of which could negatively impact future performance. In addition, any
downturn in the economy generally, and in California in particular, could
further reduce real estate values and the volume of mortgages originated. Real
estate values in California could also be affected by earthquakes.
INTEREST RATE AND CREDIT CONCERNS
It is expected that the Bank will continue to realize income primarily from
the differential or "spread" between the interest earned on loans, securities
and other interest-earnings assets, and interest paid on deposits, borrowings
and other interest-bearing liabilities. Net interest spreads are affected by the
difference between the maturities and repricing characteristics of
interest-earning assets and interest-bearing liabilities. In addition, loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with a lower volume of loan
originations. It is expected that a substantial majority of the Bank's assets
will continue to be indexed to changes in market interest rates and a
substantial majority of its liabilities will continue to be short term, which
will mitigate the negative effect of a decline in yield on its assets. At June
30, 1997, the Bank had $1.2 billion in assets maturing or repricing within one
year and $1.4 billion in liabilities maturing or repricing within one year. In
addition, the lag in implementation of repricing terms on the Bank's adjustable
rate assets may result in a decline in net interest income in a rising interest
rate environment. There can be no assurance that the Bank's interest rate risk
will be minimized or eliminated. In addition, an increase in the general level
of interest rates may adversely affect the ability of certain borrowers to pay
the interest on and principal of their obligations. Accordingly, changes in
levels of market interest rates could materially adversely affect the Bank's net
interest spread, asset quality, loan origination volume and overall results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management."
OC-13
<PAGE>
COMPETITION
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money market
mutual funds and brokerage firms in attracting and retaining deposits.
Competition for deposits from large commercial banks is particularly strong.
Many of the nation's thrift institutions and many large commercial banks have a
significant number of branch offices in the areas in which the Bank operates.
In addition, there is strong competition in originating and purchasing real
estate and consumer loans, principally from other savings and loan associations,
commercial banks, mortgage banking companies, insurance companies, consumer
finance companies, pension funds and commercial finance companies. The primary
factors in competing for loans are the quality and extent of service to
borrowers and brokers, economic factors such as interest rates, interest rate
caps, rate adjustment provisions, loan maturities, loan-to-value ("LTV") ratios,
loan fees, and the amount of time it takes to process a loan from receipt of the
loan application to date of funding. The Bank's future performance is dependent
on its ability to originate a sufficient volume of loans in its local market
areas. There can be no assurance that the Bank will be able to effect such
actions on satisfactory terms.
REGULATION
The financial institutions industry is subject to extensive regulation,
which materially affects the business of the Bank. Statutes and regulations to
which the Bank and its parent companies are subject may be changed at any time,
and the interpretation of these statutes and regulations is also subject to
change. There can be no assurance that future changes in such statutes and
regulations or in their interpretation will not adversely affect the business of
the Bank.
AVAILABILITY OF NET OPERATING LOSS CARRYOVERS
At December 31, 1996, the Bank had federal tax net operating loss
carryforwards of approximately $146.7 million that can be carried forward to and
offset against its taxable income in future years. However, if the Bank
undergoes an "ownership change" in a future year as a result of transactions
unrelated to the Offering, the Bank would be severely limited in its ability to
offset its federal taxable income and federal tax liability with its net
operating losses from the period prior to the ownership change. See "Taxation."
CONTROL BY CERTAIN STOCKHOLDERS
All of the Bank's Common Stock is owned by SOCAL. SOCAL is 100% owned by the
Bishop Estate, BIL Securities and Arbur. As a result, these stockholders will be
able to direct and control the policies of the Bank and its subsidiaries,
including mergers, sales of assets and similar transactions. See "The Bank."
ASSET QUALITY
The Bank experienced serious financial and operational problems in the early
1990s primarily as a result of the economic recession and a decline in real
estate values in the Bank's market area. These conditions had a material adverse
effect on the quality of the Bank's loan portfolio and contributed to
substantial increases in the Bank's problem assets, including non-accrual loans,
real estate acquired by the Bank through foreclosure proceedings and troubled
debt restructurings. Such problem assets reached $78.7 million or 4.6% of total
assets at December 31, 1994. Since the change in senior management during 1995,
the Bank has focused on improving the credit quality of its assets through the
early identification of potential problem loans and the administration,
rehabilitation or liquidation of the Bank's non-performing
OC-14
<PAGE>
assets. Non-performing assets and troubled debt restructurings have since
declined and totaled $44.4 million or 2.4% of total assets at June 30, 1997. In
addition, performing loans delinquent 120 days or less have declined from $8.6
million at June 30, 1996 to $8.3 million at June 30, 1997.
The future success of the Bank is dependent upon the quality of its assets.
Although management of the Bank has devoted substantial time and resources to
the identification, collection and work-out of non-performing assets, the real
estate markets and the overall economy in its market area are likely to be
significant determinants of the quality of the Bank's assets in future periods
and, thus, its financial condition and results of operations. In particular,
although the Bank, through its new management, has been able to reduce the
amount of its non-performing assets and troubled debt restructurings in recent
years, such assets amounted to $44.4 million or 2.4% of total assets at June 30,
1997. The Bank's future results of operations may be adversely affected if the
Bank is unable to work-out or dispose of its non-performing assets on a timely
basis or if the values of such properties decline further. Although management
utilizes its best judgment in providing for losses with respect to its
non-performing assets, there can be no assurance that the Bank will be able to
dispose of such non-performing assets without establishing additional provisions
for losses on loans or further reductions in the carrying value of its real
estate owned.
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE, COMMERCIAL BUSINESS AND
CONSUMER LENDING
At June 30, 1997, the Bank's multi-family residential and commercial real
estate loans amounted to $560.6 million in the aggregate or approximately 50% of
the Bank's total loans receivable. In addition, commercial business and consumer
loans amounted to only $12.5 million in the aggregate at June 30, 1997 (which
represented 1% of the Bank's total loans receivable). However, such loans
represented 20.7% and 15.8% of the Bank's total loan originations for the six
months ended June 30, 1997 and the year ended December 31, 1996, respectively.
During the next several years, the Bank intends to increase its emphasis on
commercial business and consumer lending. Although multi-family residential,
commercial real estate, commercial business and consumer loans generally provide
for higher interest rates and shorter terms than single-family residential real
estate loans, such loans generally have a higher degree of credit risk. At June
30, 1997, an aggregate of $9.4 million and $18.5 million of the Bank's
multi-family residential and commercial real estate loans were classified
non-accrual or included in real estate owned, respectively, which loans were
originated under prior management. See "Business of the Bank--Lending
Activities" for a discussion of the nature of the risks associated with
multi-family residential, commercial real estate, commercial business and
consumer lending.
INCREASED EMPHASIS ON COMMERCIAL BUSINESS AND CONSUMER LENDING
The Bank under its new management team has been placing increased emphasis
on providing customers with increased banking services. Toward this end, the
Bank has made increased expenditures with respect to its infrastructure and has
hired and trained new commercial and consumer lending personnel, reflecting an
increased emphasis being placed in this lending area. While the Bank originated
$10.3 million and $9.8 million of commercial business and consumer loans during
the year ended December 31, 1996 and the six months ended June 30, 1997,
respectively, which amounted to 23.8% and 15.8% of total originations during
such respective periods, no assurance can be made that the Bank will be
successful in building up these portfolios to levels commensurate with its
investment. See "Business of the Bank--Lending Activities."
LEVERAGE
Based on the Bank's ability to include in its regulatory capital a
substantial amount of the proceeds raised in the Company's Offering of Series A
Preferred Shares, see "Pro Forma Regulatory Capital," the Bank intends to
initially purchase U.S. Government agency and mortgage-backed securities funded
primarily through reverse repurchase agreements. Management's leverage strategy
is premised on the
OC-15
<PAGE>
assumption that it will earn a positive spread on the yield generated from its
purchased securities over the rate paid on its incremental borrowings and that
the spread generated from such strategy will assist the Bank in accelerating the
utilization of its existing net operating loss carryforwards. If market rates of
interest fluctuate in such a manner that the Bank is unable to earn a positive
spread as a result of its leverage strategy, the Bank's net interest margin and
net earnings will be adversely affected in future periods.
USE OF PROCEEDS
The Bank Preferred Shares are to be issued, if ever, in connection with an
exchange of the Series A Preferred Shares, which shares were sold pursuant to an
effective registration statement filed with the SEC. The proceeds from the sale
of the Series A Preferred Shares were used by the Company to purchase a
portfolio of mortgage assets from the Bank. The Bank intends to initially
leverage the capital raised in the Offering through the purchase of U.S.
Government agency and mortgage-backed securities funded primarily through
reverse repurchase agreements. The leveraging of such proceeds will provide the
Bank with the opportunity to expand its business and thereby increase its
earnings, which will permit accelerated utilization of existing net operating
loss carryforwards.
In addition, beginning September 30, 1997, SOCAL intends to begin making
quarterly interest payments on its senior debt, which is expected to be funded
through dividends from the Bank. SOCAL is expected to make an initial payment of
$1.8 million (reflecting accruals since the senior debt was issued in 1995) and
quarterly interest payments thereafter beginning with $192,000 for the December
31, 1997 quarter.
The Bank will not receive any proceeds, directly or indirectly, from the
exchange of the Series A Preferred Shares for Bank Preferred Shares.
OC-16
<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of the
Bank at June 30, 1997 and as adjusted to give effect to the issuance of the
Series A Preferred Shares. The following table should be read in conjunction
with the Consolidated Financial Statements of the Bank and the notes thereto
included elsewhere in this Offering Circular.
<TABLE>
<CAPTION>
THE BANK,
THE BANK AS ADJUSTED
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Deposits.............................................................................. $ 1,314,036 $ 1,314,036
------------ ------------
------------ ------------
Borrowings:
Securities sold under agreements to repurchase...................................... $ 331,358 $ 331,358
Other borrowings (primarily FHLB advances).......................................... 80,000 80,000
------------ ------------
Total............................................................................. $ 411,358 $ 411,358
------------ ------------
------------ ------------
Minority interest--Series A Preferred Shares.......................................... $ -- $ 31,000
------------ ------------
------------ ------------
Stockholder's equity:
Preferred Stock (par value, $0.01 per share; 5,000,000 shares authorized, no shares
issued and outstanding)........................................................... -- --
Common Stock (par value, $0.01 per share; 10,000,000 shares authorized, 100,000
shares issued and outstanding).................................................... 1 1
Additional paid-in capital.......................................................... 142,538 142,538
Net unrealized gain (loss) on securities available for sale........................... (4,402) (4,402)
Minimum pension liability, net(1)..................................................... (293) (293)
Accumulated deficit................................................................... (52,926) (52,926)
------------ ------------
Total stockholder's equity........................................................ 84,918 84,918
------------ ------------
Total capitalization.................................................................. $ 1,810,312 $ 1,841,312
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Reference is made to Note 15 of the Notes to Consolidated Financial
Statements.
OC-17
<PAGE>
PRO FORMA REGULATORY CAPITAL
After giving effect to the issuance of the Series A Preferred Shares, at
June 30, 1997, on a pro forma basis, the Bank would have exceeded minimum
regulatory capital requirements and would have qualified for "well-capitalized"
status. The tables reconcile the Bank's pro forma stockholders' equity to
regulatory capital as of June 30, 1997, and illustrate the percentage by which
the Bank will exceed minimum capital requirements. For further information on
the Bank's capital requirements, see "Regulation - Regulation of Federal Savings
Banks -Regulatory Capital Requirements."
<TABLE>
<CAPTION>
TANGIBLE RISK-BASED
CAPITAL CORE CAPITAL CAPITAL
--------------- ------------ -----------------
<S> <C> <C> <C>
(IN THOUSANDS)
Stockholders' equity of the Bank............................... $ 84,918 $ 84,918 $ 84,918
Minority interest--Series A Preferred Shares(1)................ 28,930 28,930 28,930
Unrealized losses on securities available for sale............. 4,402 4,402 4,402
Non-allowable capital:
Direct real estate investments............................... (1,908) (1,908) (1,908)
Intangible assets............................................ (622) (622) (622)
Supplemental capital:
Allowance for loan losses.................................... -- -- 11,257
--------------- ------------ --------
Regulatory capital of the Bank................................. $ 115,720 $ 115,720 $ 126,977
--------------- ------------ --------
--------------- ------------ --------
</TABLE>
- ------------------------
(1) The OTS has indicated that the Series A Preferred Shares cannot exceed 25%
of the Bank's core capital (including the Series A Preferred Shares) and 33
1/3% of the Bank's core capital (excluding the Series A Preferred Shares).
Consequently, $28.9 million of the proceeds of the Offering will constitute
tangible, core and risk-based capital of the Bank.
<TABLE>
<CAPTION>
RISK-BASED
----------------------
<S> <C> <C> <C> <C>
TANGIBLE CORE TOTAL
CAPITAL CAPITAL TIER 1 CAPITAL
RATIO RATIO RATIO RATIO
----------- ----------- --------- -----------
Regulatory capital of the Bank............................................... 4.76% 6.35% 12.88% 14.13%
Well-capitalized ratio....................................................... 1.50 5.00 8.00 10.00
--- --- --------- -----
Excess above well-capitalized ratio.......................................... 3.26% 1.35% 4.88% 4.13%
--- --- --------- -----
--- --- --------- -----
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios was approximately $1.8 billion. Risk-weighted assets used for the
risk-based capital ratios amounted to approximately $899 million.
OC-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE BANK AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS OFFERING CIRCULAR.
GENERAL
The Bank is a community oriented savings bank which emphasizes customer
service and convenience. As part of this strategy, the Bank has sought to
develop a wide variety of products and services which meet the needs of its
retail customers. On the asset side of the Bank's balance sheet, management has
increased its emphasis on commercial business and consumer lending which
compliments the Bank's existing residential and commercial real estate lending
operations. In addition, the Bank has increased its investment in
mortgage-backed securities with the intention of enhancing net interest income
while limiting credit and interest rate risk. On the liability side of the
Bank's balance sheet, the Bank is focused on accessing cost-efficient funding
sources, including retail deposits, securities sold under agreements to
repurchase and FHLB advances. The Bank's overall goal is to enhance stockholder
value.
The Bank's business strategy focuses on achieving attractive returns
consistent with prudent risk management. The Bank has sought to implement this
strategy by (i) reducing its portfolio of non-performing assets; (ii) developing
new business relationships through an increased emphasis on commercial lending;
(iii) diversifying the Bank's retail products and services, including an
increase in consumer loan originations; (iv) expanding its retail banking
franchise; (v) increasing the Bank's securities portfolio as a means of
enhancing net interest income while minimizing the Bank's credit and interest
rate risk exposure; (vi) reducing funding costs through the utilization of
retail deposits and other borrowings; (vii) maintaining a low level of operating
expenses; and (viii) controlled growth and the pursuit of a variety of
acquisition opportunities when appropriate. In addition, the Bank intends to
leverage the proceeds of the Offering as a means of expanding its business and
thereby increasing its earnings, which will permit the Bank to accelerate
utilization of existing net operating loss carryforwards.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets increased by $72.5 million or 4.1% during the six
months ended June 30, 1997 and increased by $168.1 million or 10.6% during the
year ended December 31, 1996. The increase in total assets during the first half
of 1997 and in 1996 primarily reflected an increase in the Bank's investment in
U.S. Government agency mortgage-backed securities and was funded primarily
through the use of securities sold under agreements to repurchase ("reverse
repurchase agreements"). The shift in the composition of the Bank's asset and
liability mix during 1996 reflects the new management's operational philosophy,
discussed above.
CASH, CASH EQUIVALENTS AND OTHER SHORT-TERM INVESTMENTS. Cash, cash
equivalents and other short-term investments (consisting of cash,
interest-bearing deposits in other banks, federal funds sold and securities
purchased under agreement to resell) amounted to $16.7 million, $21.9 million
and $54.0 million at June 30, 1997 and December 31, 1996 and 1995, respectively.
The Bank manages its cash, cash equivalents and other short-term investments
based upon the Bank's operating, investing and financing activities. The Bank
generally attempts to invest its excess liquidity into higher yielding assets
such as loans or securities. At June 30, 1997, the Bank's regulatory liquidity
amounted to 5.15% (which exceeded the minimum OTS requirement of 5.0% by $2.4
million), as compared to 6.66% and 5.14% at December 31, 1996 and 1995,
respectively. See "--Liquidity and Capital Resources."
SECURITIES. The Bank generally emphasizes lending activities (as opposed to
investing activities) in order to enhance the weighted average yield on its
interest-earning assets and, thus, its results of operations. Nevertheless,
since June 1995, the Bank has increased its investment in adjustable rate
mortgage-backed securities which are insured or guaranteed by U.S. Government
agencies or government
OC-19
<PAGE>
sponsored enterprises. At June 30, 1997, the Bank's securities portfolio (both
held-to-maturity and available-for-sale) amounted to $627.4 million or 34.5% of
the Bank's total assets, as compared to $513.3 million or 29.4% and $241.6
million or 15.3% at December 31, 1996 and 1995, respectively. At June 30, 1997,
$578.5 million or 92% of the Bank's securities portfolio consisted of
mortgage-backed securities and $48.9 million or 8% of such portfolio consisted
of U.S. Government agency securities. Although mortgage-backed securities often
carry lower yields than traditional mortgage loans, such securities generally
increase the quality of the Bank's assets by virtue of the securities'
underlying insurance or guarantees, are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations of the
Bank. At June 30, 1997, $10.4 million of the Bank's securities portfolio was
classified as held-to-maturity and reported at historical cost and $617.0
million of such portfolio was classified as available-for-sale and reported at
fair value, with unrealized gains and losses excluded from earnings and instead
reported as a separate component of stockholder's equity. At June 30, 1997, the
Bank's securities classified as available for sale had in the aggregate $4.4
million of unrealized losses. See "Business of the Bank--Investment Activities."
LOANS RECEIVABLE. Net loans receivable decreased by $39.3 million or 3.4%
during the six months ended June 30, 1997 and by $86.4 million or 7.0% during
the year ended December 31, 1996. Several factors contributed to the decrease.
In March 1995, the Bank replaced its former senior management with new
individuals with significant experience in banking and problem asset
rehabilitation. From March 1995 through August 1996, the Bank significantly
reduced its loan origination activity (when compared to 1994 levels) and
discontinued loan purchases. New management took this action in order to focus
on the rehabilitation of the Bank's problem assets, the reorientation of the
Bank's adjustable rate residential and commercial loans to indexes that adjust
more rapidly to changes in market rates of interest (as compared to the FHLB
11th District Cost of Funds Index ("COFI") which had been traditionally utilized
by the Bank), and hiring and training personnel with significant expertise in
commercial and consumer lending. During the six months ended June 30, 1997, the
Bank sold $85.2 million of such COFI-based residential mortgage loans and used
the sale proceeds to purchase $59.0 million of one year adjustable-rate loans
tied to the U.S. Treasury index of comparable maturity. See "Business of the
Bank--Lending Activities-- Origination, Purchase and Sale of Loans." In
addition, the Bank's new management has generally been unwilling to enter into
troubled debt restructurings. In August 1996, the Bank increased its loan
origination activities while increasing its emphasis on commercial and consumer
lending. As a result, management anticipates that the loan portfolio will grow
over the next several years, market conditions permitting. See "The Bank" and
"Business of the Bank--Lending Activities."
NON-PERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS. Non-performing loans
(consisting of non-accrual loans) and troubled debt restructurings (consisting
of loans with respect to which the Bank has agreed to grant an interest rate
concession or defer principal or interest payments) increased dramatically in
the early 1990's and amounted to $68.3 million or 4.0% of total assets at
December 31, 1994. Such increase was to a great extent the result of a
deterioration in the economy within Southern California, in particular a decline
in the market values of real estate which secure the Bank's loans, as well as to
continuing problems associated with the Northridge earthquake of 1994. As a
result of more aggressive steps taken by the Bank's new management which are
described below, non-performing loans and troubled-debt restructurings have been
reduced and amounted to $21.6 million or 1.2% of total assets at June 30, 1997,
as compared to $25.8 million or 1.5% and $41.7 million or 2.6% at December 31,
1996 and 1995, respectively. See "--Real Estate Held for Investment and Sale"
below for a discussion of a related increase in real estate owned.
The Bank's future results of operations will be significantly affected by
its ability to continue to reduce its level of non-performing assets without
incurring additional material losses. During 1995 and 1996, the Bank's new
management reorganized the Bank's asset review departments, implemented an
internal asset review system through the creation of an internal asset review
committee, established a credit review department and a special assets
department and revised its loan underwriting, credit, collection and
OC-20
<PAGE>
monitoring procedures in an effort to reduce the level of non-performing assets.
Since December 31, 1994, total non-performing assets and troubled debt
restructurings have declined from $78.7 million to $44.4 million at June 30,
1997. See "Business of the Bank--Asset Quality."
REAL ESTATE HELD FOR INVESTMENT AND SALE. Net real estate held for
investment and sale consists of real estate acquired through foreclosure (i.e.,
real estate owned) and real estate held for investment. Real estate owned
increased dramatically in the early 1990's as a result of the deterioration in
the Southern California economy and problems resulting from the Northridge
earthquake, as discussed above, and amounted to $38.7 million at December 31,
1992. From 1992 through 1994, real estate owned declined due to a significant
extent to the Bank financing purchases of such real estate owned through loans
to facilitate (which loans generally carry more favorable terms to the borrower
than what is otherwise obtainable in the market). Since 1995, real estate owned
has increased from $10.9 million at December 31, 1995 to $20.4 million at
December 31, 1996 and increased further to $22.8 million at June 30, 1997.
Because of new management's expertise in resolving problem assets, the Bank has
been unwilling to carry non-performing loans and has aggressively taken steps to
foreclose on non-performing loans whenever such a strategy, in the opinion of
management, provides a more efficient alternative to avoid further losses. To
the extent that new management has financed the disposition of real estate
owned, such loans have been made consistent with market terms and conditions and
cash downpayments to qualify the transaction as a sale under applicable
accounting guidelines. During 1996 and the six months ended June 30, 1997, the
Bank had extended an aggregate of $12.9 million and $5.1 million to finance the
disposition of real estate owned, respectively. See "Business of the Bank--Asset
Quality."
Real estate held for investment has historically consisted of the Bank's
investment (indirectly through subsidiaries of the Bank) in limited partnerships
which were engaged in the acquisition, development, construction and sale of
single-family residential developments. Real estate held for investment amounted
to $1.9 million at June 30, 1997, as compared to $2.1 million and $5.4 million
at December 31, 1996 and 1995, respectively. At June 30, 1997, the Bank's real
estate held for investment consisted of 62 acres of vacant land located in
Corona, California and had a net carrying value of $1.9 million. The Bank is
currently marketing the parcel of land for sale. See "Business of the
Bank--Subsidiaries."
DEPOSITS. Total deposits decreased by $57.2 million or 4.2% during the six
months ended June 30, 1997 and by $102.1 million or 6.9% during the year ended
December 31, 1996. Prior management of the Bank operated under a strategy that
was designed to accumulate large deposits in non-transactional accounts (i.e.,
non-retail jumbo certificates of deposits) by offering attractive interest
rates. Since March 1995, new management has attempted to reduce its overall
funding costs by evaluating all potential sources of funds (including retail and
non-retail deposits and short and long-term borrowings) and identifying which
particular source will result in an all-in cost to the Bank that meets its
funding benchmark. At the same time, the Bank has allowed its brokered deposits
to roll off as they mature and has attempted to price the deposits offered
through its branch system in order to promote retail deposit growth and offer a
wide array of deposit products to satisfy its customers. Management's goal is to
attract new customers who are relationship driven, which management believes
will facilitate cross-selling of additional products. As a result of the
foregoing actions by new management, transaction accounts (consisting of
passbook, NOW and money market accounts) increased from $275.5 million or 18.7%
of total deposits at December 31, 1995 to $339.8 million or 25.9% of total
deposits at June 30, 1997. The Bank's aggregate certificates of deposit declined
from $1.2 billion or 81.3% of total deposits to $974 million or 74.1% of total
deposits as of such respective dates. In addition, of the total decline in
certificates of deposit, non-retail jumbo certificates of deposit declined from
$103.4 million to $3.5 million during such period. See "Business of the
Bank--Sources of Funds--Deposits."
BORROWINGS. Other than deposits, the Bank's primary sources of funds
consist of securities sold under agreements to repurchase (consisting of
agreements to purchase on a specified later date the same securities or
substantially identical securities) ("reverse repurchase agreements") and
advances from the
OC-21
<PAGE>
FHLB of San Francisco. At June 30, 1997, reverse repurchase agreements amounted
to $331.4 million, as compared to $192.4 million at December 31, 1996. The Bank
did not utilize reverse repurchase agreements at December 31, 1995. See
"Business of the Bank--Sources of Funds--Borrowings."
Advances from the FHLB of San Francisco amounted to $80.0 million, $80.0
million and $31.7 million at June 30, 1997 and December 31, 1996 and 1995,
respectively. The decrease in borrowings from $310.0 million at December 31,
1994 reflects the actions taken by new management in paying off the Bank's
short-term FHLB advances and utilizing, as needed, reverse repurchase agreements
at more attractive rates. The Bank was able to utilize reverse repurchase
agreements (which were a more cost-efficient source of funds) because of the
increased availability of collateral for such borrowings (i.e., mortgage-backed
securities) and the improvement in the Bank's financial condition. Of the Bank's
$80.0 million of FHLB advances outstanding as of June 30, 1997, $31.0 million
were scheduled to mature during 1997 and $49.0 million were scheduled to mature
during 1998. The Bank's FHLB advances had a weighted average interest rate of
5.91% at June 30, 1997, as compared to 5.91% and 5.84% at December 31, 1996 and
1995, respectively. See "Business--Sources of Funds--Borrowings." At June 30,
1997, the Bank had a collateralized available line of credit of approximately
$330.0 million with the FHLB of San Francisco. See "Liquidity and Capital
Resources."
STOCKHOLDER'S EQUITY. Stockholder's equity increased from $67.4 million at
December 31, 1995 to $76.6 million at December 31, 1996 and further increased to
$84.9 million at June 30, 1997. The $9.2 million or 13.6% increase in
stockholder's equity during the year ended December 31, 1996 reflected the $13.6
million of net earnings recognized during the year, which was partially offset
by a $4.4 million increase in unrealized losses on securities classified as
available for sale. The $8.3 million or 10.8% increase in stockholder's equity
during the six months ended June 30, 1997 reflected a $1.7 million decrease in
unrealized losses on securities classified as available for sale, and the $6.9
million of net earnings recognized during the period.
RESULTS OF OPERATIONS
GENERAL. The Bank's results of operations depend substantially on its net
interest income, which is the difference between interest income on
interest-earning assets, which consist primarily of loans receivable,
mortgage-backed and investment securities and various other short-term
investments, and interest expense on interest-bearing liabilities, which consist
primarily of deposits and borrowings. The Bank's results of operations are also
significantly affected by the net costs of hedging its interest rate exposure;
its provisions for losses on loans resulting from the Bank's assessment of the
adequacy of its allowance for losses on loans; the level of its other income,
including loan service and related fees, net gains on sales of securities, loans
and loan servicing, and net income and losses from real estate operations; the
level of its operating expenses, such as personnel and benefits expense,
occupancy and other office related expense and FDIC insurance premiums; and
income tax expense and benefits.
The Bank reported net earnings (loss) of $6.9 million, $5.9 million, $13.6
million, $(8.6) million and $(48.5) million during the six months ended June 30,
1997 and 1996 and the years ended December 31, 1996, 1995 and 1994,
respectively. Net earnings increased by $979,000 or 16.5% during the six months
ended June 30, 1997, as compared to the same period in the prior year, due to a
$1.6 million decrease in the provision for losses on loans, a $118,000 increase
in net interest income and a $237,000 increase in total other income (primarily
reflecting the sale of servicing rights), which was partially offset by a
$939,000 increase in total operating expenses.
Net earnings increased by $22.2 million during the year ended December 31,
1996 due to a $7.6 million increase in total other income, a $5.9 million
decrease in the provision for losses on loans, a $5.3 million increase in net
interest income, a $3.0 million decrease in total operating expenses and a
$370,000 increase in the income tax benefit recognized during the year.
OC-22
<PAGE>
The Bank recognized a net loss of $8.6 million during the year ended
December 31, 1995, as compared to a net loss of $48.5 million during the year
ended December 31, 1994. The $39.9 million decrease in the Bank's net losses
during 1995 was primarily due to a $15.6 million decrease in the provision for
losses on loans, a $10.0 million decrease in total operating expenses, a
$376,000 increase in total other income and a $2.6 million income tax benefit
recognized during 1995 (as compared to $11.4 million of income tax expense
recognized during 1994).
NET INTEREST INCOME. Net interest income is determined by the Bank's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
Net interest income totaled $16.8 million, $16.7 million, $33.3 million,
$27.9 million and $28.0 million during the six months ended June 30, 1997 and
1996 and the years ended December 31, 1996, 1995 and 1994, respectively. Net
interest income increased by $118,000 or 0.71% during the six months ended June
30, 1997, as compared to the same period in the prior year, due to a $73.6
million increase in interest-earning assets (consisting primarily of a $153.4
million increase in the average balance of mortgage-backed securities, which was
partially offset by an $85.7 million decrease in loans receivable) together with
an decrease in the Bank's interest rate spread of 6 basis points. Net interest
income increased by $5.3 million or 19.1% during the year ended December 31,
1996 due to a 37 basis point increase in the Bank's interest rate spread
(reflecting a 22 basis point increase in the average yield earned on the Bank's
interest-earning assets and a 15 basis point reduction in the average rate paid
on the Bank's interest-bearing liabilities). Net interest income declined
slightly by $91,000 or 0.3% during the year ended December 31, 1995 due to a
$116.7 million decline in interest-earning assets (consisting primarily of a
$86.4 million decrease in the average balance of loans receivable), which was
partially offset by an increase in the Bank's interest rate spread of 3 basis
points.
OC-23
<PAGE>
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Bank from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER
JUNE 30, 31,
------------------------------------------------------------------------ --------------------
1997 1996 1996
----------------------------------- ----------------------------------- --------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST
--------- ----------- ----------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable (1).............. $1,112,787 $ 41,353 7.39% $1,198,511 $ 45,784 7.56% $1,176,944 $ 89,020
Mortgage-backed securities (2).... 493,941 16,197 6.52 340,530 11,552 6.71 387,603 26,136
Other earning assets (3).......... 127,111 3,868 6.05 121,210 3,590 5.86 105,583 7,740
--------- ----------- --------- ----------- --------- ---------
Total interest-earning
assets...................... 1,733,839 61,418 7.05% 1,660,251 60,926 7.26% 1,670,130 122,896
----------- ----------- ----------- ----------- ---------
----------- -----------
Noninterest-earning assets.......... 73,682 60,943 65,179
--------- --------- ---------
Total assets.................. $1,807,521 $1,721,194 $1,735,309
--------- --------- ---------
--------- --------- ---------
Interest-bearing liabilities:
Deposits:
Transaction accounts (4)........ 363,717 6,604 3.61% 327,666 6,140 3.71% $ 352,853 13,484
Term certificates of deposit.... 982,564 27,353 5.54 1,125,398 32,747 5.76 1,069,484 61,652
--------- ----------- ----------- --------- ----------- --------- ---------
Total deposits................ 1,346,281 33,957 1,453,064 38,887 1,422,337 75,136
Total borrowings.................. 366,403 10,471 5.68 187,302 5,098 5.38 232,668 14,108
Hedging costs..................... -- 150 -- 219 -- 387
--------- ----------- --------- ----------- --------- ---------
Total interest-bearing
liabilities................. 1,712,684 44,578 5.18% 1,640,366 44,204 5.33% 1,655,005 89,631
----------- ----------- ----------- ----------- ---------
----------- -----------
Noninterest bearing liabilities..... 16,074 13,571 12,998
--------- --------- ---------
Total liabilities............. 1,728,758 1,653,937 1,668,003
Stockholder's equity................ 78,763 67,257 67,306
--------- --------- ---------
Total liabilities and
stockholder's equity........ $1,807,521 $1,721,194 $1,735,309
--------- --------- ---------
--------- --------- ---------
Net interest-earning assets......... $ 12,155 $ 19,885 $ 15,125
--------- --------- ---------
--------- --------- ---------
Net interest income/interest rate
spread............................ $ 16,840 1.87% $ 16,722 1.93% $ 33,265
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Net interest margin................. 1.92% 1.99%
----------- -----------
----------- -----------
Ratio of average interest-earning
assets to average interest-bearing
liabilities....................... 101.24% 101.21%
----------- -----------
----------- -----------
<CAPTION>
1995 1994
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- --------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).............. 7.56% $1,284,090 $ 94,473 7.36% $1,370,528 $ 89,293 6.52%
Mortgage-backed securities (2).... 6.74 328,446 21,836 6.65 356,260 22,621 6.35
Other earning assets (3).......... 7.33 108,114 6,617 6.12 110,526 4,347 3.93
--------- --------- --------- ---------
Total interest-earning
assets...................... 7.36% 1,720,650 122,926 7.14% 1,837,314 116,261 6.33%
----------- --------- ----------- --------- -----
----------- ----------- -----
Noninterest-earning assets.......... 48,945 76,042
--------- ---------
Total assets.................. $1,769,595 $1,913,356
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Transaction accounts (4)........ 3.82% $ 197,441 5,287 2.68% $ 205,684 $ 3,995 1.94%
Term certificates of deposit.... 5.76 1,212,989 69,579 5.74 1,186,191 54,010 4.55
--------- --------- --------- ---------
Total deposits................ 1,410,430 74,866 1,391,875 58,005
Total borrowings.................. 6.06 293,606 18,443 6.28 451,205 21,623 4.79
Hedging costs..................... -- 1,685 -- 8,610
--------- --------- --------- ---------
Total interest-bearing
liabilities................. 5.42% 1,704,036 94,994 5.57% 1,843,080 88,238 4.79%
----------- --------- ----------- --------- -----
----------- ----------- -----
Noninterest bearing liabilities..... 13,854 16,048
--------- ---------
Total liabilities............. 1,717,890 1,859,128
Stockholder's equity................ 51,705 54,228
--------- ---------
Total liabilities and
stockholder's equity........ $1,769,595 $1,913,356
--------- ---------
--------- ---------
Net interest-earning assets......... $ 16,614 $ (5,766)
--------- ---------
--------- ---------
Net interest income/interest rate
spread............................ 1.94% $ 27,932 1.57% $ 28,023 1.54%
----------- --------- ----------- --------- -----
----------- --------- ----------- --------- -----
Net interest margin................. 1.99% 1.62% 1.53%
----------- ----------- -----
----------- ----------- -----
Ratio of average interest-earning
assets to average interest-bearing
liabilities....................... 100.91% 100.97% 99.69%
----------- ----------- -----
----------- ----------- -----
</TABLE>
- ----------------------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes mortgage-backed securities classified as held to maturity and
available for sale.
(3) Includes short-term investments, securities purchased under agreements to
resell, investment securities and FHLB stock.
(4) Includes passbook, NOW and money market accounts.
OC-24
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income of the Bank. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 YEAR ENDED DECEMBER
COMPARED TO SIX MONTHS ENDED 31, 1996
JUNE 30, 1996 COMPARED TO 1995
---------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
--------------------------------- --------------------
<CAPTION>
TOTAL NET
RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME
--------- --------- ----------- ----------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable................................. $ (1,245) $ (3,257) $ 71 $ (4,431) $ 2,651 $ (7,883)
Mortgage-backed securities....................... (386) 5,176 (145) 4,645 311 3,933
Other earning assets............................. 98 174 6 278 1,310 (155)
--------- --------- ----- ------- --------- ---------
Total net change in income on interest-earning
assets........................................... (1,533) 2,093 (68) 492 4,272 (4,105)
--------- --------- ----- ------- --------- ---------
Interest-bearing liabilities:
Deposits:
Transaction accounts........................... (191) 672 (17) 464 2,258 4,162
Term certificates of deposit................... (1,418) (4,133) 157 (5,394) 346 (8,232)
--------- --------- ----- ------- --------- ---------
Total deposits............................... (1,609) (3,461) 140 (4,930) 2,604 (4,070)
Borrowings....................................... 255 4,848 270 5,373 (640) (3,828)
Hedging costs.................................... -- -- (69) (69) -- --
--------- --------- ----- ------- --------- ---------
Total net change in expense on interest-bearing
liabilities...................................... (1,354) 1,387 341 374 1,964 (7,898)
--------- --------- ----- ------- --------- ---------
Change in net interest income...................... $ (179) $ 706 $ (409) $ 118 $ 2,308 $ 3,793
--------- --------- ----- ------- --------- ---------
--------- --------- ----- ------- --------- ---------
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
COMPARED TO 1994
-------------------------------
<S> <C>
INCREASE (DECREASE) DUE TO
-------------------------------
TOTAL NET
RATE/ INCREASE RATE/
VOLUME (DECREASE) RATE VOLUME VOLUME
--------- ----------------- --------- --------- ---------
<S> <C>
Interest-earning assets:
Loans receivable................................. $ (221) $ (5,453) $ 11,539 $ (5,632) $ (727 )
Mortgage-backed securities....................... 56 4,300 1,064 (1,766) (83 )
Other earning assets............................. (32) 1,123 2,418 (95) (53 )
--------- ------- --------- --------- ---------
Total net change in income on interest-earning
assets........................................... (197) (30) 15,021 (7,493) (863 )
--------- ------- --------- --------- ---------
Interest-bearing liabilities:
Deposits:
Transaction accounts........................... 1,777 8,197 1,513 (160) (61 )
Term certificates of deposit................... (41) (7,927) 14,032 1,220 317
--------- ------- --------- --------- ---------
Total deposits............................... 1,736 270 15,545 1,060 256
Borrowings....................................... 133 (4,335) 6,720 (7,553) (2,347 )
Hedging costs.................................... (1,298) (1,298) -- -- (6,925)
--------- ------- --------- --------- ---------
Total net change in expense on interest-bearing
liabilities...................................... 571 (5,363) 22,265 (6,493) (9,016 )
--------- ------- --------- --------- ---------
Change in net interest income...................... $ (768) $ 5,333 $ (7,244) $ (1,000) $ 8,153
--------- ------- --------- --------- ---------
--------- ------- --------- --------- ---------
<CAPTION>
TOTAL NET
INCREASE
(DECREASE)
-----------------
Interest-earning assets:
Loans receivable................................. $ 5,180
Mortgage-backed securities....................... (785)
Other earning assets............................. 2,270
-------
Total net change in income on interest-earning
assets........................................... 6,665
-------
Interest-bearing liabilities:
Deposits:
Transaction accounts........................... 1,292
Term certificates of deposit................... 15,569
-------
Total deposits............................... 16,861
Borrowings....................................... (3,180)
Hedging costs.................................... (6,925)
-------
Total net change in expense on interest-bearing
liabilities...................................... 6,756
-------
Change in net interest income...................... $ (91)
-------
-------
</TABLE>
OC-25
<PAGE>
INTEREST INCOME. Total interest income increased by $492,000 or 0.8% during
the six months ended June 30, 1997, as compared to the same period in the prior
year, decreased slightly by $30,000 during the year ended December 31, 1996 and
increased by $6.7 million or 5.7% during the year ended December 31, 1995.
Interest income on loans receivable, the largest component of the Bank's
interest-earning assets, decreased by $4.4 million or 9.7% during the six months
ended June 30, 1997, as compared to the same period in the prior year, decreased
by $5.5 million or 5.8% during the year ended December 31, 1996 and increased by
$5.2 million or 5.8% during the year ended December 31, 1995. The decrease in
recent periods in interest income on loans receivable is attributable to a
change in the Bank's orientation with respect to lending. Under the Bank's new
management, the origination of mortgage loans by commissioned loan officers
operating from loan production facilities and purchase of broker originated
loans has been discontinued. The Bank's current emphasis is on providing a full
range of services to customers at all of its branch offices, including the
taking of loan applications. This has necessarily involved hiring and training
sufficient personnel, which has been a contributing factor to the decline in
loan originations from historical levels during the early 1990s. See "Business
of the Bank--Lending Activities."
Interest income on mortgage-backed securities increased by $4.6 million or
40.2% during the six months ended June 30, 1997, as compared to the same period
in the prior year, increased by $4.3 million or 19.7% during the year ended
December 31, 1996 and decreased by $785,000 or 3.5% during the year ended
December 31, 1995. Since June 1995, the Bank has increased its investment in
adjustable rate U.S. Government agency mortgage-backed securities in order to
reduce the Bank's exposure to interest rate risk, limit the Bank's credit risk
and earn a positive interest rate spread. See "Business of the Bank-- Investment
Activities."
Interest income on investment securities and other interest-earning assets
(which consist of U.S. Government agency securities, FHLB stock, securities
purchased under agreements to resell and other short-term investments) increased
by $278,000 or 7.7% during the six months ended June 30, 1997, as compared to
the same period in the prior year, and increased by $1.1 million or 17.0% and
$2.3 million or 52.2% during the years ended December 31, 1996 and 1995,
respectively. The increase in such interest income during the six months ended
June 30, 1997 was primarily due to a $5.9 million increase in the average
balance of such investments and, to a lesser extent, an increase in the average
yield earned thereon of 19 basis points. The increase in such interest income
during 1996 and 1995 was due primarily to increases in the weighted average
yield earned on such investments of 121 and 219 basis points, respectively. See
"Business of the Bank--Investment Activities."
INTEREST EXPENSE. Total interest expense increased by $374,000 or 0.8%
during the six months ended June 30, 1997, as compared to the same period in the
prior year, decreased by $5.4 million or 5.6% during the year ended December 31,
1996 and increased by $6.8 million or 7.7% during the year ended December 31,
1995. One of the primary elements of the Bank's business strategy since the
change in management in March 1995 has been to reduce the Bank's overall funding
costs. Interest expense on deposits, the largest component of the Bank's
interest-bearing liabilities, decreased by $4.9 million or 12.7% during the six
months ended June 30, 1997, as compared to the same period in the prior year,
and marginally increased by $270,000 or 0.4% during the year ended December 31,
1996. Since June 1995, the Bank's new management has emphasized transactional
accounts and has allowed the Bank's non-retail jumbo certificates of deposit to
run off as they mature, which has reduced the average rate paid on the Bank's
deposit accounts. Interest expense on deposits increased by $16.9 million or
29.1% in 1995 over the previous year, which was prior to implementation by new
management of its cost containment program. See "Business of the Bank--Sources
of Funds--Deposits."
Interest expense on borrowings consists of reverse repurchase agreements and
FHLB advances. Interest expense on reverse repurchase agreements increased by
$3.9 million or 94.7% during the six months ended June 30, 1997, as compared to
the same period in the prior year, and increased by $3.8 million or 54.3% and
$955,000 or 15.6% during the years ended December 31, 1996 and 1995,
respectively. Since June 1995, the Bank's new management has utilized reverse
repurchase agreements as a short-term
OC-26
<PAGE>
source of funds when the rates on such borrowings are favorable as compared to
its other funding sources. See "Business--Sources of Funds--Borrowings."
Interest expense on advances from the FHLB of San Francisco increased by
$1.4 million or 152% during the six months ended June 30, 1997, as compared to
the same period in the prior year, and decreased by $8.2 million or 71.8% and
$4.1 million or 26.7% during the years ended December 31, 1996 and 1995,
respectively. Since June 1995, the Bank's new management has allowed its
short-term FHLB advances to mature and has generally utilized reverse repurchase
agreements as an alternative source of short-term funds. See "Business--Sources
of Funds--Borrowings."
The Bank's interest expense during the six months ended June 30, 1997 and
1996 and the years ended December 31, 1996, 1995 and 1994 included the costs of
hedging the Bank's interest rate exposure. Such hedging costs amounted to
$150,000, $219,000, $387,000, $1.7 million and $8.6 million during such
respective periods. The Bank has in the past utilized interest rate swaps,
corridors, caps and floors in order to manage its interest rate risk. However,
since the change in management, the Bank has not entered into any such interest
rate contracts and has allowed its remaining contracts to expire as they mature.
As a result, the Bank's hedging costs have declined significantly since 1994. At
June 30, 1997, the Bank had one remaining interest rate swap contract with a
notional amount of $5.8 million and 9 remaining interest rate corridors with an
aggregate notional amount of $57.0 million. See "--Asset and Liability
Management."
PROVISION FOR LOSSES ON LOANS. Provisions for losses on loans are provided
on both a specific and general basis. Specific and general valuation allowances
are increased by provisions charged to expense and decreased by charge-offs of
loans, net of recoveries. Specific allowances are provided for impaired loans
for which the expected loss is measurable. General valuation allowances are
provided based on a formula which incorporates a number of factors, including
economic trends, industry experience, estimated collateral values, past loss
experience, the Bank's underwriting practices, and management's ongoing
assessment of the credit risk inherent in its portfolio. The Bank periodically
reviews the assumptions and formula by which additions are made to the specific
and general valuation allowances for losses in an effort to refine such
allowances in light of the current status of the factors described above.
While management uses the best information available to make the periodic
evaluations of specific and general valuation allowances, adjustments to both
allowances may be necessary if actual future economic conditions differ
substantially from the assumptions used in making such periodic evaluations. In
addition, regulatory examiners may require the Bank to recognize additions to
the allowance based upon their judgments about information available to them at
the time of their examination.
The Bank established provisions for losses on loans of $655,000, $2.2
million, $2.9 million, $8.8 million and $24.4 million during the six months
ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and
1994, respectively. During such respective periods, loan charge-offs (net of
recoveries) amounted to $5.3 million, $7.6 million, $11.2 million, $7.1 million
and $13.0 million, respectively. The allowance for losses on loans as a
percentage of total non-performing loans and troubled debt restructurings was
86.64%, 94.41%, 90.30%, 75.67% and 43.66% at June 30, 1997 and 1996 and December
31, 1996, 1995 and 1994, respectively. The allowance for losses on loans as a
percentage of total loans, net was 1.69%, 2.22%, 2.04%, 2.57%, and 2.28% at June
30, 1997 and 1996 and December 31, 1996, 1995 and 1994, respectively.
Consequently, the decline in the Bank's provisions for losses on loans since
1994 reflects the decline in the Bank's non-performing loans and troubled debt
restructurings as well as the general decline in loan delinquencies over such
periods. The net charge-offs recognized by the Bank during the six months ended
June 30, 1997 and the years ended December 31, 1996 and 1995 primarily reflected
the transfer of loans (particularly multi-family residential loans) to real
estate owned. Such multi-family loans had specific valuation allowances which
had been established through increased provisions for loans in prior periods. At
the time of transfer of the loans to real estate owned, such specific valuation
allowances were charged off. As a result of the transfer of such loans to real
estate owned, the Bank's non-performing loans have declined since 1995, which
has contributed to the decrease in the Bank's provision for losses on
OC-27
<PAGE>
loans. Management believes that its allowance for losses on loans at June 30,
1997 was adequate. Nevertheless, there can be no assurances that additions to
such allowance will not be necessary in future periods, particularly if the
growth in the Bank's commercial and consumer lending continues. See "Business of
the Bank--Allowance for Loan Losses."
OTHER INCOME. Total other income increased by $237,000 or 5.1% during the
six months ended June 30, 1997, as compared to the same period in the prior
year, and increased by $7.6 million and $376,000 during the years ended December
31, 1996 and 1995, respectively. Loan service and loan related fees amounted to
$402,000, $719,000, $1.4 million, $1.6 million and $2.0 million during the six
months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995
and 1994, respectively. The decline in such fees during the periods presented
primarily reflected the reduction in loan balances outstanding in the loan
servicing portfolio due to normal repayments and prepayments.
The Bank recognized net gains on sales of mortgage-backed and other
securities of $122,000, $3.6 million, $3.6 million, $641,000 and $485,000 during
the six months ended June 30, 1997 and 1996 and the years ended December 31,
1996, 1995 and 1994, respectively. During such respective periods, the Bank sold
$41.9 million, $38.4 million, $158.4 million, $184.3 million and $48.9 million
of mortgage-backed securities.
Net gains (losses) on the sale of loans and loan servicing amounted to $3.4
million, $(53,000), $(53,000), $(166,000) and $2.7 million during the six months
ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and
1994, respectively. The Bank sold $27.5 million and $394.6 million of loans
during the years ended December 31, 1995 and 1994, respectively, and $873.6
million and $230.0 million of loan servicing during the six months ended June
30, 1997 and the year ended December 31, 1994, respectively. The sale of loan
servicing during the six months ended June 30, 1997, which involved the majority
of the Bank's residential loan portfolio, was predicated upon new management's
determination that it was costly and inefficient for the Bank to service a
varied collection of loan products which it no longer offered.
Net income (loss) from real estate operations amounted to $112,000,
$(197,000), $1.9 million, $(2.1) million and $(5.4) million during the six
months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995
and 1994, respectively. Net income (loss) from real estate operations consists
of (i) losses from real estate operations (rental income less operating
expenses), (ii) gains on sales of real estate owned and real estate held for
investment and (iii) provisions for losses on real estate owned and real estate
held for investment. During the six months ended June 30, 1997 and 1996 and the
years ended December 31, 1996, 1995 and 1994, losses from real estate operations
amounted to $(665,000), $(145,000), $(634,000), $(448,000) and $(845,000),
respectively, gains on sales of real estate owned and real estate held for
investment amounted to $1.0 million, $135,000, $3.3 million, $392,000 and
$196,000, respectively, and provisions for losses on real estate owned and real
estate held for investment amounted to $245,000, $187,000, $766,000, $2.0
million and $4.7 million, respectively. The improving economy in southern
California since 1996 has assisted in new management's efforts to promptly
dispose of it real estate holdings, and has facilitated sales well in excess of
carrying values during 1996 and the first quarter of 1997.
Miscellaneous other income (consisting primarily of fees on deposit
accounts) amounted to $795,000, $538,000, $1.2 million, $513,000 and $360,000
during the six months ended June 30, 1997 and 1996 and the years ended December
31, 1996, 1995 and 1994, respectively.
OPERATING EXPENSES. Total operating expenses increased by $939,000 or 7.1%
during the six months ended June 30, 1997, as compared to the same period in the
prior year, and decreased by $3.0 million or 9.7% and $10.0 million or 24.4%
during the years ended December 31, 1996 and 1995, respectively. From the time
of the change in the Bank's management in March 1995 through 1996, the Bank had
aggressively reduced its operating expenses, as described herein. See also "The
Bank." The increase in operating expenses during the June 1997 period over the
comparable period in 1996 is attributable to hirings made by new management to
further the Bank's commercial lending emphasis as well as to leasing expenses
OC-28
<PAGE>
associated with the Bank's new data processing equipment. During the six months
ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and
1994, total operating expenses as a percentage of average total assets amounted
to 1.56%, 1.53%, 1.61%, 1.75% and 2.14%, respectively.
The principal category of the Bank's operating expenses is personnel and
benefits expense, which amounted to $5.5 million, $5.3 million, $10.8 million,
$12.1 million and $19.1 million during the six months ended June 30, 1997 and
1996 and the years ended December 31, 1996, 1995 and 1994, respectively. The
decline in such expense from 1994 through 1996 is due to new management of the
Bank streamlining its operations, which resulted in a 23% reduction in the
number of full-time and part-time employees from 294 at December 31, 1994 to 234
at June 30, 1997. Personnel and benefits expense increased during the six months
ended June 30, 1997, as compared to the same period in the prior year, primarily
as a result of the hiring and training of new commercial and consumer lending
personnel. Management anticipates a much greater emphasis in these lending areas
during the balance of 1997 and in future years. See "Business of the
Bank--Lending Activities."
Occupancy expense amounted to $3.4 million, $3.1 million, $6.4 million, $7.0
million and $8.8 million during the six months ended June 30, 1997 and 1996 and
the years ended December 31, 1996, 1995 and 1994, respectively. The decline in
occupancy expense from 1994 through 1996 reflected the closing of the Bank's
loan production offices and Operations Center as well as the relocation of the
Bank's corporate headquarters. The increase in such expense during the six
months ended June 30, 1997, as compared to the same period in the prior year,
was primarily due to the data processing equipment lease and expenses associated
with security personnel. The general decline in occupancy expense during the
periods presented occurred notwithstanding the Bank opening a new de novo branch
office in Buena Park, California in November 1995 and a branch office facility
in Los Angeles, California in April 1996. Moreover, management expects occupancy
expense to continue to increase over the next year as the Bank intends to
install and operate ten new automated teller machines ("ATMs") within a chain of
health clubs located in Southern California (and the Bank also has an option to
install and operate up to an additional 15 ATMs within such chain of health
clubs).
FDIC insurance premiums totaled $2.5 million, $2.3 million, $4.4 million,
$4.3 million and $4.1 million during the six months ended June 30, 1997 and 1996
and the years ended December 31, 1996, 1995 and 1994, respectively. FDIC
insurance premiums are a function of the size of the Bank's deposit base.
Pursuant to legislation effective September 30, 1996, SAIF member institutions
were required to pay a one-time special assessment equal to 65.7 basis points
for all SAIF-assessable deposits as of June 30, 1995. As a result of the Bank's
financial condition, the Bank applied for and obtained an exemption from paying
such special assessment, which would have amounted to approximately $9.0
million. During the fourth quarter of 1996, the FDIC lowered the assessment
rates for SAIF members so that the highest rated institutions are currently
paying 6.4 basis points in deposit insurance premiums. However, as a result of
the Bank's exemption from paying the one-time special assessment, the Bank will
continue to pay future assessments through 1999 at the assessment rate schedule
in effect as of June 30, 1995 (i.e. 30 basis points). Consequently, the Bank
does not anticipate any material reductions in its deposit insurance premiums
prior to 1999. See "Regulation--FDIC Assessments."
Professional services expense amounted to $292,000, $85,000, $771,000, $2.1
million and $2.0 million during the six months ended June 30, 1997 and 1996 and
the years ended December 31, 1996, 1995 and 1994, respectively. The significant
expense recognized during 1995 and 1994 reflected legal expenses associated with
problem asset resolution.
Office related expenses have remained relatively stable over the periods
presented and amounted to $1.9 million, $1.8 million, $4.0 million, $4.0 million
and $4.4 million during the six months ended June 30, 1997 and 1996 and the
years ended December 31, 1996, 1995 and 1994, respectively.
Miscellaneous other expense (consisting primarily of regulatory assessments
and, in 1994, Board fees and inspection and other expenses associated with the
Northridge earthquake) amounted to $474,000,
OC-29
<PAGE>
$679,000, $1.6 million, $1.5 million and $2.4 million during the six months
ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and
1994, respectively.
INCOME TAX PROVISION (BENEFIT). During the six months ended June 30, 1997
and 1996 and the years ended December 31, 1996, 1995 and 1994, the Bank
recognized $0, $5,000, $(3.0) million, $(2.6) million
and $11.4 million in income tax provisions (benefits). At December 31, 1996, the
Bank had $146.7 million of federal net operating loss carryforwards which expire
between 1997 and 2011 and $8.7 million of state net operating loss carryforwards
which expire between 1997 and 2000. The 1992 recapitalization of the Bank
resulted in an "ownership change" for federal income tax purposes. As a result
of such ownership change and pursuant to Section 382 of the Code, the Bank's
ability to utilize its net operating loss carryforwards to offset federal and
state taxable income is limited to approximately $7.7 million per year. Any
unused limitation is available in subsequent years until expiration. As of
December 31, 1996, the total net operating loss carryforwards which are
available during 1997 amount to approximately $38.7 million. See "The Bank,"
"Risk Factors--Possible Limitation of Tax Benefits," "Taxation" and Note 13 of
the Notes to Consolidated Financial Statements.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Bank to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to match asset and liability balances within maturity
categories to limit the Bank's exposure to earnings variations and variations in
the value of assets and liabilities as interest rates change over time. The
Bank's asset and liability management strategy is formulated and monitored by
the Asset/Liability Management Committee, which is comprised of senior officers
of the Bank, in accordance with policies approved by the Board of Directors of
the Bank. The Asset/Liability Management Committee meets weekly to review, among
other things, the sensitivity of the Bank's assets and liabilities to interest
rate changes, the book and market values of assets and liabilities, unrealized
gains and losses, including those attributable to hedging transactions, purchase
and sale activity, and maturities of investments and borrowings. The
Asset/Liability Management Committee also approves and establishes pricing and
funding decisions with respect to overall asset and liability composition and
reports regularly to the full Board of Directors.
One of the primary goals of the Bank's Asset/Liability Management Committee
is to effectively increase the duration of the Bank's liabilities and/or
effectively contract the duration of the Bank's assets so that the respective
durations are matched as closely as possible. This duration adjustment can be
accomplished either internally by restructuring the Bank's balance sheet, or
externally by adjusting the duration of the Bank's assets and/or liabilities
through the use of interest rate contracts, such as interest rate swaps,
corridors, caps and floors. Although the Bank has in the past hedged its
interest rate exposure externally through the use of various interest rate
contracts, the Bank's current strategy is to hedge internally through the use of
core transaction deposit accounts which are not as rate sensitive as other
deposit instruments and FHLB advances together with an emphasis on investing in
shorter-term or adjustable rate assets which are more responsive to changes in
interest rates, such as adjustable rate U.S. Government agency mortgage-backed
securities, short-term U.S. Government agency securities and commercial business
and consumer loans. The foregoing strategies are more fully described below.
Internal hedging through balance sheet restructuring generally involves
either the attraction of longer-term or less rate sensitive funds (i.e., core
transaction deposit accounts which are not as rate sensitive as other deposit
instruments or FHLB advances) or the investment in certain types of shorter-term
or adjustable rate assets such as adjustable rate mortgage-backed securities,
shorter-term U.S. Government agency securities and commercial business and
consumer loans. On the asset side of the balance sheet, the Bank's new
management has discontinued the use of adjustable rate mortgage products tied to
a COFI based index, which tends to react more slowly to changes in interest
rates, and has emphasized loan products tied to a U.S. Treasury based index
(which reacts much more quickly to changes in interest rates).
OC-30
<PAGE>
During the six months ended June 30, 1997, the Bank sold $85.2 million of such
COFI-based residential mortgage loans and used the sale proceeds to purchase
$59.0 million of one year adjustable-rate loans tied to the U.S. Treasury index
of comparable maturity. See "Business of the Bank--Lending Activities--
Origination, Purchase and Sale of Loans."
The Bank has also significantly increased aggregate purchases of both
short-term or adjustable rate securities in recent periods, as purchases were
$176.9 million, $216.8 million and $49.7 million during the six months ended
June 30, 1997 and the years ended December 31, 1996 and 1995. At June 30, 1997,
$331.4 million or 57.3% of the Bank's mortgage-backed securities were secured by
adjustable rate loans. In addition, during the six months ended June 30, 1997
and the years ended December 31, 1996 and 1995, the Bank originated in the
aggregate $10.3 million, $9.8 million and $4.5 million of commercial business
and consumer loans, respectively, which amounted to 23.8%, 15.8% and 16.7% of
total loan originations, respectively. The Bank intends to increase its
origination of commercial business and consumer loans which have adjustable
rates of interest and shorter terms. On the liability side of the balance sheet,
new management has decreased the Bank's reliance on shorter-term brokered
deposits, which carry high interest rates and are a volatile funding source, in
favor of longer-term FHLB advances and retail certificates of deposits.
Non-retail jumbo certificates of deposit have declined from $122.2 million at
December 31, 1994 to $3.5 million at June 30, 1997.
External hedging involves the use of interest rate swaps, collars,
corridors, caps and floors. The notional amount of interest rate contracts
represents the underlying amount on which periodic cash flows are calculated and
exchanged between counterparties. However, this notional amount does not
represent the principal amount of loans or securities which would effectively be
hedged by that interest rate contract. In selecting the type and amount of
interest rate contract to utilize, the Bank compares the duration of a
particular contract, or its change in value for a 100 basis point movement in
interest rates, to that of the loans or securities to be hedged. An interest
rate contract with the appropriate offsetting duration may have a notional
amount much greater than the face amount of the securities being hedged.
At June 30, 1997, the Bank was a party to one interest rate swap agreement.
The interest rate swap consists of an agreement whereby the Bank has agreed to
pay a floating-rate of interest on a notional principal amount to a second party
(i.e., a broker) in exchange for receiving from the second party a fixed rate of
interest on the same notional amount for a predetermined period of time. No
actual assets were exchanged and interest payments are netted. This swap
contract was entered into in 1994 in order to limit the interest rate risk
related to the relative repricing characteristics of the Bank's interest-bearing
deposits. The swap agreement has an aggregate notional amount of approximately
$5.8 million and expires in 1999. The Bank pays a floating-rate (based on the
one-month London Interbank Offer Rate ("LIBOR") and receives a fixed rate
amounting to 5.69% at June 30, 1997. At June 30, 1997, one-month LIBOR was
5.69%. The net expense (income) relating to the Bank's interest rate swap
agreements was $(2,900), $35,000, $1.2 million and $8.4 million during the six
months ended June 30, 1997 and the years ended December 31, 1996, 1995 and 1994,
respectively.
At June 30, 1997, the Bank was also a party to nine interest rate corridor
agreements, which agreements expire from 1997 through 2001 and cover an
aggregate notional amount of approximately $57.0 million. An interest rate
corridor consists of an agreement whereby the issuer agrees to pay the
purchaser, in exchange for the payment of a premium, the prevailing rate of
interest in the event interest rates rise above a specified rate on a specified
interest rate index and do not exceed a specified upper rate on the same index.
The Bank entered into interest rate corridors as a means to artificially raise
the interest rate cap on certain loans. As of June 30, 1997, the interest rate
corridors have an average strike price of 6.56% and an average limit rate of
8.21% (the Bank's interest rate corridors are based on either three month LIBOR
or COFI). The aggregate net expense relating to the Bank's interest rate
corridors and floors was $153,000, $352,000, $468,000 and $174,000 during the
six months ended June 30, 1997 and the years ended December 31, 1996, 1995 and
1994, respectively. See Note 14 to the Notes to Consolidated Financial
Statements.
OC-31
<PAGE>
The Asset/Liability Management Committee's methods for evaluating interest
rate risk include an analysis of the Bank's interest rate sensitivity "gap,"
which is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive liabilities exceeds
interest-rate sensitive assets. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Because
different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, changes
in interest rates may affect net interest income positively or negatively even
if an institution were perfectly matched in each maturity category.
The following table summarizes the anticipated maturities or repricing of
the Bank's interest-earning assets and interest-bearing liabilities as of June
30, 1997, based on the information and assumptions set forth in the notes below.
<TABLE>
<CAPTION>
MORE THAN
THREE TO MORE THAN THREE YEARS
WITHIN THREE TWELVE ONE YEAR TO TO FIVE OVER FIVE
MONTHS MONTHS THREE YEARS YEARS YEARS TOTAL
------------ --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets (1):
Loans receivable (2):
Single-family residential loans: Fixed....... $ 6,862 $ 671 $ 805 $ 599 $ 132,711 $ 141,648
Adjustable................................... 252,764 138,739 9,331 -- -- 400,834
Multi-family residential: Fixed.............. 3 174 217 3,513 21,279 25,186
Adjustable................................... 386,706 18,878 306 1,321 1,898 409,109
Commercial, industrial and land: Fixed....... -- 1,107 2,956 117 15,480 19,660
Adjustable................................... 97,860 2,932 3,000 -- -- 103,792
Other loans (3).............................. 950 2,036 2,724 1,685 4,972 12,367
Mortgage-backed and other securities (4)....... 311,140 15,175 -- 20,157 285,386 631,858
Other interest-earning assets (5).............. 3,335 -- -- -- 14,686 18,021
------------ --------- ----------- ----------- ----------- ---------
Total...................................... $1,059,620 $ 179,712 $ 19,339 $ 27,392 $ 476,412 $1,762,475
------------ --------- ----------- ----------- ----------- ---------
------------ --------- ----------- ----------- ----------- ---------
Interest-bearing liabilities:
Deposits:
NOW accounts................................. $ 85,123 $ -- $ -- $ -- $ -- $ 85,123
Passbook accounts............................ 234,935 -- -- -- -- 234,953
Money market accounts........................ 19,766 -- -- -- -- 19,766
Certificates of deposit...................... 198,329 624,651 142,439 8,739 36 974,194
Borrowings..................................... 96,570 125,788 129,000 60,000 -- 411,358
------------ --------- ----------- ----------- ----------- ---------
Total...................................... $ 634,741 $ 750,439 $ 271,439 $ 68,739 $ 36 $1,725,394
------------ --------- ----------- ----------- ----------- ---------
------------ --------- ----------- ----------- ----------- ---------
Excess (deficiency) of interest-earning assets
over interest-bearing........................ $ 424,879 $(570,727) $(252,100) $ (41,347) $ 476,376 $ 37,081
------------ --------- ----------- ----------- ----------- ---------
------------ --------- ----------- ----------- ----------- ---------
Cumulative excess (deficiency) of
interest-earning assets over interest- bearing
liabilities.................................. $ 424,879 $(142,848) $(397,948) $(439,295) $ 37,081
------------ --------- ----------- ----------- -----------
------------ --------- ----------- ----------- -----------
Cumulative excess (deficiency) of
interest-earning assets over interest-bearing
liabilities as a percent of total assets..... 23.34% (8.01)% (21.86 )% (24.13 )% 2.04%
------------ --------- ----------- ----------- -----------
------------ --------- ----------- ----------- -----------
</TABLE>
OC-32
<PAGE>
- ------------------------
(1) Adjustable rate loans are included in the period in which interest rates are
next scheduled to adjust rather than in the period in which they are due,
and fixed rate loans are included in the periods in which they are scheduled
to be repaid, based on scheduled amortization, in each case as adjusted to
take into account estimated prepayments based on assumptions used by the OTS
in assessing the interest rate sensitivity of savings associations in the
Bank's region.
(2) Balances have been reduced for non-performing loans, which amounted to $14.0
million at June 30, 1997.
(3) Comprised of commercial and consumer loans and loans serviced by deposits.
(4) Does not include unrealized loss on securities available for sale of $4.4
million.
(5) Comprised of short-term investments, securities purchased under agreements
to resell, investment securities and FHLB stock.
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the Asset/Liability Management Committee also regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and net portfolio value ("NPV"), which is defined as the net
present value of an institution's existing assets, liabilities and off-balance
sheet instruments, and evaluating such impacts against the maximum potential
changes in net interest income and NPV that is authorized by the Board of
Directors of the Bank.
The following table sets forth as of June 30, 1997 the estimated percentage
change in the Bank's net interest income over a eight-quarter period and NPV
based on the indicated changes in interest rates.
<TABLE>
<CAPTION>
ESTIMATED CHANGE IN
-------------------------------
NET INTEREST INCOME
CHANGE (IN BASIS POINTS) IN (NEXT EIGHT
INTEREST RATES(1) QUARTERS) NPV
- --------------------------------------------------------------------------------- ------------------- ----------
<S> <C> <C>
(IN THOUSANDS)
+400............................................................................. $ 44,490 $ 26,573
+300............................................................................. 56,666 51,769
+200............................................................................. 67,630 71,939
+100............................................................................. 76,333 107,537
0................................................................................ 81,062 116,133
- -100............................................................................. 86,615 120,274
- -200............................................................................. 88,711 140,430
- -300............................................................................. 87,857 168,784
- -400............................................................................. 95,667
</TABLE>
- ------------------------
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
Management of the Bank believes that the assumptions used by it to evaluate
the vulnerability of the Bank's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Bank's assets and liabilities and the estimated
effects of changes in interest rates on the Bank's net interest income and NPV
could vary substantially if different assumptions were used or actual experience
differs from the historical experience on which they are based. See
"Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements" for a discussion of a proposed OTS regulation which would subject
an institution with a greater than "normal" level of interest rate exposure to a
deduction of an interest rate risk ("IRR") component in calculating its total
capital for risk-based capital purposes. Based on the OTS model, at June 30,
1997, the Bank would not have been required to deduct an IRR component in
calculating total risk-based capital had the IRR component of the capital
regulations been in effect.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity refers to the Bank's ability to generate sufficient
cash to meet the funding needs of current loan demand, savings deposit
withdrawals, principal and interest payments with respect to
OC-33
<PAGE>
outstanding borrowings and to pay operating expenses. It is management's policy
to maintain greater liquidity than required in order to be in a position to fund
loan originations, to meet withdrawals from deposit accounts, to make principal
and interest payments with respect to outstanding borrowings and to make
investments that take advantage of interest rate spreads. The Bank monitors its
liquidity in accordance with guidelines established by the Bank and applicable
regulatory requirements. The Bank's need for liquidity is affected by loan
demand, net changes in deposit levels and the scheduled maturities of its
borrowings. The Bank can minimize the cash required during the times of heavy
loan demand by modifying its credit policies or reducing its marketing effort.
Liquidity demand caused by net reductions in deposits are usually caused by
factors over which the Bank has limited control. The Bank derives its liquidity
from both its assets and liabilities. Liquidity is derived from assets by
receipt of interest and principal payments and prepayments, by the ability to
sell assets at market prices and by utilizing unpledged assets as collateral for
borrowings. Liquidity is derived from liabilities by maintaining a variety of
funding sources, including deposits, advances from the FHLB of San Francisco and
other short and long-term borrowings.
The Bank's liquidity management is both a daily and long-term function of
funds management. Liquid assets are generally invested in short-term investments
such as securities purchased under agreements to resell, federal funds sold and
certificates of deposit in other financial institutions. If the Bank requires
funds beyond its ability to generate them internally, various forms of both
short and long-term borrowings provide an additional source of funds. At June
30, 1997, the Bank had $325 million in borrowing capacity under a collateralized
line of credit with the FHLB of San Francisco. Although the Bank has in the past
utilized brokered deposits as a source of liquidity, the Bank does not currently
rely upon brokered deposits as a source of liquidity, and does not anticipate a
change in this practice in the foreseeable future.
At June 30, 1997, the Bank had outstanding commitments (including unused
lines of credit) to originate and/or purchase mortgage and non-mortgage loans of
$46.3 million. Certificates of deposit which are scheduled to mature within one
year totaled $823.0 million at June 30, 1997, and borrowings that are scheduled
to mature within the same period amounted to $222.4 million. The Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments.
Beginning September 30, 1997, SOCAL intends to begin making quarterly
interest payments on its senior debt, which is expected to be funded through
dividends from the Bank. SOCAL is expected to make an initial payment of $1.8
million (reflecting accruals since the senior debt was issued in 1995) and
quarterly interest payments thereafter beginning with $192,000 for the December
31, 1997 quarter.
CAPITAL RESOURCES. Federally insured savings institutions such as the Bank
are required to maintain minimum levels of regulatory capital. See "Regulation -
Regulatory Capital Requirements." The following table reflects the Bank's actual
levels of regulatory capital and applicable regulatory capital requirements at
June 30, 1997.
<TABLE>
<CAPTION>
REQUIRED(4) ACTUAL EXCESS
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
----------- --------- ----------- --------- ----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital....................................... 1.50% $ 27,325 4.76% $ 86,790 3.26% $ 59,465
Core capital(1)........................................ 3.00 54,650 4.76 86,790 1.76 32,140
Risk-based capital(2)(3)............................... 8.00 71,893 10.91 98,047 2.91 26,154
</TABLE>
- ------------------------
(1) Does not reflect amendments which were proposed by the OTS in April 1991,
which would increase this requirement to between 4% and 5%.
(2) Does not reflect the interest-rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
OC-34
<PAGE>
(3) Tangible and core capital are computed as a percentage of adjusted total
assets of $1.8 billion. Risk-based capital is computed as a percentage of
adjusted risk-weighted assets of $899 million.
(4) Does not reflect the requirements to be met in order for an institution to
be deemed "adequately capitalized" under applicable laws and regulations.
See "Regulation--Prompt Corrective Action."
INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars (except with respect to available for sale securities which
are carried at market value), without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, substantially all of the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a more significant impact
on the Bank's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
Set forth below are recent accounting pronouncements which may have a future
effect on the Bank's operations. These pronouncements should be read in
conjunction with the significant accounting policies which the Bank has adopted
that are set forth in the Bank's Notes to Consolidated Financial Statements.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, which was
effective, on a prospective basis, for fiscal years beginning after December 31,
1996. SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities based on
consistent application of a financial-components approach that focuses on
control. SFAS No. 125 extends the "available for sale" and "trading" approach of
SFAS No. 115 to non-security financial assets that can be contractually prepaid
or otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. The extension of the SFAS
No. 115 approach to certain non-security financial assets and the amendment to
SFAS No. 115 are effective for financial assets held on or acquired after
January 1, 1997. The adoption of SFAS No. 125 did not have a material adverse
effect on the Bank's financial statements.
In February 1997, the FASB released SFAS No. 128 "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings Per Share and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the numerator and denominator of the
diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. SFAS No. 128 requires restatement of all prior-period EPS data
presented.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." Statement 129 continues the existing requirements to
disclose the pertinent rights and privileges of all
OC-35
<PAGE>
securities other than ordinary common stock but expands the number of companies
subject to portions of its requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management is in the process of determining
the impact, if any, this statement will have on the Bank.
BUSINESS OF THE BANK
LENDING ACTIVITIES
GENERAL. At June 30, 1997, the Bank's total loan portfolio amounted to $1.1
billion, which represented 60.6% of the Bank's $1.8 billion in total assets at
that date. The Bank has traditionally concentrated its lending activities on
conventional first mortgage loans secured by single-family residential
properties and, to a lesser extent, multi-family residential properties. At June
30, 1997, such loans constituted $547.1 million and $442.7 million, or 48% and
39%, respectively, of the total loan portfolio. Substantially all of the Bank's
loan portfolio consists of conventional loans, which are loans that are neither
insured by the Federal Housing Administration nor partially guaranteed by the
Department of Veterans Affairs. The Bank has also historically originated to a
much lesser extent commercial real estate loans, which amounted to $117.9
million or 10% of the total loan portfolio at June 30, 1997. At June 30, 1997,
commercial business and consumer loans (including loans secured by deposits)
amounted to $7.8 million and $4.7 million, respectively. The Bank's total loan
portfolio also included a small amount of land and other miscellaneous loans,
which amounted to $8.8 million at June 30, 1997.
As a federally chartered savings bank, the Bank has general authority to
originate and purchase loans secured by real estate located throughout the
United States. Notwithstanding this nationwide lending authority, the Bank's
primary market area is Los Angeles County and, to a lesser extent, Orange and
Ventura Counties in Southern California, and the Bank believes that
substantially all of the loans in the Bank's portfolio are secured by properties
located in California.
OC-36
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
JUNE 30,
1997 1996 1995 1994
-------------------------- -------------------------- -------------------------- -----------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
----------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family
residential...... $ 547,110 49% $ 595,915 51% $ 658,412 52% $ 721,801
Multi-family
residential...... 442,712 39 453,064 39 479,100 38 480,547
Commercial and
industrial....... 117,906 10 110,931 10 120,109 10 129,768
Land and other..... 6,630 1 1,639 -- 3,176 -- 7,546
----------- --- ----------- --- ----------- --- -----------
Total mortgage
loans........ 1,114,358 99 1,161,549 100 1,260,797 100 1,339,662
----------- --- ----------- --- ----------- --- -----------
Other loans:
Commercial......... 7,792 1 3,523 -- -- -- --
Consumer........... 4,741 -- 988 -- -- -- --
Secured by
deposits......... 2,145 -- 2,132 -- 1,976 -- 908
----------- --- ----------- --- ----------- --- -----------
Total loans
receivable... 1,129,036 100% 1,168,192 100% 1,262,773 100% 1,340,570
----------- --- ----------- --- ----------- --- -----------
--- --- ---
Less:
Undistributed loan
proceeds......... 2,309 473 28 1,376
Unamortized net
loan discounts
and deferred
origination fees
and deferred gain
on servicing
sold............. 5,663 2,732 3,021 3,336
Allowance for loan
losses........... 18,683 23,280 31,572 29,801
----------- ----------- ----------- -----------
Loans receivable,
net.............. $ 1,102,381 $ 1,141,707 $ 1,228,152 $ 1,306,057
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
1993 1992
-------------------------- --------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL AMOUNT TOTAL AMOUNT TOTAL
------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family
residential...... 54% $ 759,157 55% $ 905,981 62%
Multi-family
residential...... 36 457,740 33 403,725 27
Commercial and
industrial....... 10 142,468 11 144,790 10
Land and other..... -- 11,127 1 10,817 1
--- ----------- --- ----------- ---
Total mortgage
loans........ 100 1,370,492 100 1,465,313 100
--- ----------- --- ----------- ---
Other loans:
Commercial......... -- -- -- -- --
Consumer........... -- -- -- -- --
Secured by
deposits......... -- 724 -- 1,029 --
--- ----------- --- ----------- ---
Total loans
receivable... 100% 1,371,216 100% 1,466,342 100%
--- ----------- --- ----------- ---
--- --- ---
Less:
Undistributed loan
proceeds......... 1,087 335
Unamortized net
loan discounts
and deferred
origination fees
and deferred gain
on servicing
sold............. 3,205 4,874
Allowance for loan
losses........... 20,426 18,509
----------- -----------
Loans receivable,
net.............. $ 1,346,498 $ 1,442,624
----------- -----------
----------- -----------
</TABLE>
OC-37
<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Bank's total loan portfolio
at June 30, 1997, as well as the dollar amount of such loans which are scheduled
to mature after one year which have fixed or adjustable interest rates. Demand
loans, loans having no schedule of repayments and no stated maturity and
overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE OR REPRICING
IN YEAR(S) ENDED JUNE 30,
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL AT
JUNE 30, 2001- 2003- 2009- THERE-
1997 1998 1999 2000 2002 2008 2014 AFTER
------------ --------- --------- --------- --------- ---------- --------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential........ $ 547,110 $ 7,553 $ 726 $ 79 $ 599 $ 672 $ 16,068 $ 511,433
Multi-family residential......... 442,712 269 2,612 1,311 4,618 79,212 28,779 325,913
Commercial, industrial and
land........................... 124,536 6,118 59,810 13,754 2,474 28,960 3,835 9,585
Other loans:
Commercial....................... 6,773 3,489 2 2,341 641 300 -- --
Consumer......................... 3,451 89 -- 96 896 224 1,276 870
Secured by deposits.............. 2,145 1,740 226 60 119 -- -- --
------------ --------- --------- --------- --------- ---------- --------- ----------
Total (1)........................ $ 1,126,727 $ 19,238 $ 63,326 $ 17,641 $ 9,347 $ 119,368 $ 49,956 $ 847,801
------------ --------- --------- --------- --------- ---------- --------- ----------
------------ --------- --------- --------- --------- ---------- --------- ----------
</TABLE>
- ------------------------
(1) Of the $1.1 billion of loan principal repayments contractually due after
June 30, 1998, $188 million have fixed rates of interest and $920 million
have adjustable rates of interest.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the Bank
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to increase
when current mortgage loan rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgages are
substantially lower than current mortgage loan rates (due to refinancings of
adjustable rate and fixed rate loans at lower rates).
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the Bank
are subject to the written, non-discriminatory underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations are obtained by a variety of sources, including
referrals from real estate brokers, existing customers, walk-in customers and
advertising. In its present marketing efforts, the Bank emphasizes its community
ties, customized personal service, competitive rates, and an efficient
underwriting and approval process. With an orientation under new management to
make the branch office network more responsive to customers needs, loan
applications now are taken at all of the Bank's branch offices. The Bank's
centralized underwriting department supervises the obtaining of credit reports,
appraisals and other documentation involved with a loan. Property valuations are
performed by the Bank's staff as well as by independent outside appraisers
approved by the Bank's Board of Directors. The Bank requires title, hazard and,
to the extent applicable, flood insurance on all security property.
Mortgage loan applications are initially processed by loan officers who have
approval authority up to designated limits. Senior officers of the Bank who
serve on the Credit Committee acting together have additional approval
authority. All loans in excess of such designated limits are referred to the
Bank's Credit Committee, comprised of the Bank's Senior Credit Officer, the
Chief Executive Officer, the Chief Financial Officer and the Executive Vice
President of Retail Banking, which has approval authority for all
OC-38
<PAGE>
loans in excess of delegated authority up to $5.0 million. Any loans exceeding
$5.0 million must be approved by the Board of Directors of the Bank.
The single-family residential loans originated by the Bank are generally
made on terms, conditions and documentation which permit the sale of loans to
the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National
Mortgage Association ("FNMA") and other institutional investors in the secondary
market. Prior to new management, the Bank's loan origination program operated
similar to that of a mortgage banking business. The Bank maintained loan
production offices and loans were originated by officers who were partially
compensated on a commissioned basis. A substantial amount of such loans,
primarily fixed rate, were then sold in the secondary market as a means of
generating fee income as well as providing additional funds for lending,
investing and other purposes. During 1995, 1994, 1993 and 1992, the Bank sold
$27.5 million, $394.6 million, $657.5 million and $434.7 million of loans,
respectively, and generated net gains (losses) during such respective years of
($126,000), $95,000, $(878,000) and $2.4 million. In addition, under prior
management, the Bank was an active purchaser of loans secured by single-family,
multi-family and commercial real estate located in both Southern and Northern
California. During 1995, 1994, 1993 and 1992, the Bank purchased $0, $11.9
million, $493,000 and $89.6 million of loans, respectively. New management
discontinued the origination for resale approach which had been employed shortly
after commencing employment in mid-1995. New management also significantly
reduced the Bank's loan purchase activity. The closing of loan production
facilities was completed and the lending orientation was re-directed to the
branches. As a result of this change in emphasis, with the resulting time needed
to effectively train branch personnel, loan originations and purchases declined
significantly between 1994 and 1995, from $595.6 million to $26.8 million, and
loan sales were discontinued.
In order to improve the Bank's balance sheet as well as due to asset and
liability management considerations, during the six months ended June 30, 1997,
the Bank sold $85.2 million of single-family residential mortgage loans tied to
COFI and reinvested $59.0 million of such proceeds in one year adjustable-rate
mortgage loans tied to a U.S. Treasury based index. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Asset and
Liability Management." Management used the balance of the sale proceeds to
purchase $4.8 million and $5.0 million of multi-family residential loans and a
land loan, respectively.
In connection with the loan sales undertaken before the change in the Bank's
management, the Bank would sometimes sell the loans with servicing released,
while sometimes it would retain responsibility for collecting and remitting loan
payments, inspecting the properties, making certain insurance and tax payments
on behalf of borrowers and otherwise servicing the loans it sold, for which it
received a fee for performing these services. During 1994, the Bank sold the
servicing rights with respect to residential loans with an aggregate balance of
$230.0 million, and recognized a $2.7 million gain on such sale. During the
first half of 1997, the Bank sold servicing on a variety of its residential
loans which had been originated over the years with a principal balance of
$873.6 million. The Bank recognized a gain on sale of $3.4 million, a deferred
gain of $5.2 million and received $8.6 million in proceeds. Because of the
varied nature of the loan products, most of which are no longer originated by
the Bank, and the expense associated with servicing such loans, management
determined that it would be more profitable to sell the servicing and leverage
the proceeds in alternative investments.
A savings institution generally may not make loans to any one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. At June 30, 1997, the Bank's regulatory limit on
loans-to-one borrower was $15.3 million and its five largest loans or groups of
loans-to-one borrower, including related entities, aggregated $12.7 million,
$8.3 million, $7.5 million, $6.3 million and $6.1 million. All of these five
largest
OC-39
<PAGE>
loans or loan concentrations were secured by commercial real estate and
multi-family residential properties. All of these loans or loan concentrations
were originated between the late 1980's and early 1990's and were performing in
accordance with their terms at June 30, 1997.
The following table shows the activity in the Bank's loans during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------------------
JUNE 30, 1997 1996 1995 1994
----------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Gross loans held at beginning of period......... $ 1,168,192 $ 1,262,773 $ 1,369,516(1) $ 1,376,716(1)
Originations of loans:
Mortgage loans:
Single-family residential................... 18,383 37,129 19,593 538,703
Multi-family residential.................... 5,321 7,823 1,120 42,746
Commercial and industrial................... 9,230 6,945 878 299
Land........................................ -- -- 746 150
Other loans:
Commercial.................................. 4,660 4,303 -- --
Consumer.................................... 4,272 1,069 -- --
Secured by deposits......................... 1,380 4,389 4,482 1,778
----------------- ------------ -------------- --------------
Total originations........................ 43,246 61,658 26,819 583,676
----------------- ------------ -------------- --------------
Purchases of loans:
Mortgage loans:
Single-family residential................... 62,230 -- -- 11,069
Multi-family residential.................... 4,834 -- -- 868
Land............................................ 5,000 -- -- --
----------------- ------------ -------------- --------------
Total purchases........................... 72,064 -- -- 11,937
----------------- ------------ -------------- --------------
Total originations and purchases.......... 115,310 61,658 26,819 595,613
----------------- ------------ -------------- --------------
Loans sold:
Single-family residential..................... (85,241) -- (27,174) (419,845)
----------------- ------------ -------------- --------------
Total sold................................ (85,241) -- (27,174) (419,845)
Repayments...................................... (48,770) (113,721) (85,957) (161,690)
Transfers to real estate owned.................. (20,455) (42,518) (20,431) (21,278)
Net activity in loans........................... (39,156) (94,581) (106,743) (7,200)
----------------- ------------ -------------- --------------
Gross loans held at end of period............... $ 1,129,036 $ 1,168,192 $ 1,262,773 $ 1,369,516(1)
----------------- ------------ -------------- --------------
----------------- ------------ -------------- --------------
</TABLE>
- ------------------------
(1) Balances include loans held for sale totaling $28,946 and $5,500 at December
31, 1994 and 1993, respectively.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences. At June 30, 1997, $547.1
million or 48% of the Bank's total loan portfolio consisted of such loans. The
Bank currently offers fixed rate single-family residential loans with terms of
15 or 30 years. Such loans are amortized on a monthly basis with principal and
interest due each month. In addition to these traditional products, the Bank
offers a fixed bi-weekly pay option, which results in 26 payments per year,
thereby permitting a customer to pay off the loan faster than would otherwise be
the case. At June 30, 1997, the Bank had $141.6 million or 13% of fixed rate
single-family residential loans in its portfolio. The Bank previously offered
"7/23" and "5/25" loan products, the interest rates on which is fixed at an
initial rate for the first seven and five years, respectively, and adjusts once
thereafter to a rate which applies for the
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<PAGE>
remaining 23 years and 25 years, respectively, equal to a specified amount above
the FNMA 30 year commitment rate for delivery as of a date specified in the
related mortgage note. As of June 30, 1997, the Bank had $53.8 million and $26.1
million of such respective loans in its loan portfolio.
Since the 1980's, the Bank has also offered a variety of adjustable rate
single-family residential mortgage loans. Such loans generally have up to 30
year terms. Presently, the Bank offers a "5/1 Product," in which the loan is
fixed at origination for a five year period, after which the interest rate
adjusts every year in accordance with a designated index (the weekly average
yield on U.S. Treasury securities adjusted to a constant comparable maturity of
one year, as made available by the Federal Reserve Board). Such loans currently
have a 2% cap on the amount of any increase or decrease in the interest rate per
year, and a 6% limit on the amount by which the interest rate can increase or
decrease over the life of the loan. In addition, the Bank's adjustable rate
loans are currently not convertible into fixed rate loans and do not contain
prepayment penalties.
Under prior management, the Bank's adjustable rate loans were tied to COFI,
which does not adjust as rapidly to changes in interest rates as the U.S.
Treasury constant comparable maturity index now utilized by the Bank. The Bank
has discontinued the use of COFI based loans. As discussed under "--Origination,
Purchase and Sale of Loans," during the six months ended June 30, 1997, the Bank
sold $85.2 million of such loans. Approximately 74% of the single-family
residential loans in the Bank's loan portfolio at June 30, 1997 had adjustable
interest rates. At June 30, 1997, 63% of the Bank's adjustable rate single-
family loans were tied to COFI.
Adjustable rate mortgage loans decrease but do not eliminate the risks
associated with changes in interest rates. Because periodic and lifetime caps
limit the interest rate adjustments, the value of adjustable rate mortgage loans
also fluctuates inversely with changes in interest rates. In addition as
interest rates increase, the required payments by the borrower increase, thus
increasing the potential for default.
The Bank previously offered a variety of adjustable rate programs, which
provided for interest rates which adjusted periodically based on COFI.
Adjustments to the monthly payment of principal and interest occur either
semi-annually or annually depending on the loan program selected by the
borrower. However, to protect borrowers from unlimited interest rate and payment
increases, the majority of these adjustable rate loans have a maximum interest
rate change ("interest rate cap") from the initial reduced interest rate period
and/or over the life of the loan. Additionally, the interest rate may change
within a range of a two to six percentage point increase or decrease in any
given period. In certain loan programs, these protections for borrowers can
result in monthly payments which are greater or less than the amount required to
amortize the loan by its maturity at the interest rate in effect in any
particular month. In the event that the monthly payment is not sufficient to pay
the interest accruing during the month, the deficiency is added to the loan's
principal balance ("negative amortization"). In the event that a loan incurs
significant negative amortization, there is an increased risk that the market
value of the underlying collateral on the loan may be insufficient to fully
satisfy the outstanding principal and interest. In the event that the monthly
payment exceeds the amount necessary to pay the interest accruing during the
month, the excess is applied to reduce the loan's principal balance, which would
result in an earlier payoff of the loan.
Negative amortization may result in an increased risk that the value of the
collateral securing the loan may be insufficient to fully satisfy the
outstanding principal and interest in the case of a default by the borrower.
However, negative amortization also serves to reduce the amount of payment
increase during periods of rising rates. In periods of rapidly rising interest
rates, monthly payments on adjustable rate loans may increase sharply, resulting
in a hardship for borrowers. Negative amortization reduces the increase in the
payments for borrowers. While the outstanding balance of the loan may increase
because of negative amortization, the risk of default may be decreased as
borrowers have a lower debt service burden or a debt service requirement that
increases more slowly than fully amortizing loans. At June 30, 1997, the Bank
had approximately $191.2 million of single-family residential loans with
negative amortization features.
OC-41
<PAGE>
The Bank is permitted under applicable law to lend up to 100% of the
appraised value of the real property securing a residential loan (referred to as
the loan-to-value ratio); however, if the amount of a residential loan
originated or refinanced exceeds 90% of the appraised value, the Bank is
required by federal regulations to obtain private mortgage insurance on the
portion of the principal amount that exceeds 80% of the appraised value of the
security property. Pursuant to underwriting guidelines adopted by the Board of
Directors, the Bank will generally lend up to 90% of the appraised value of the
property securing a single-family residential loan. However, the Bank generally
obtains private mortgage insurance on the principal amount that exceeds 80% of
the appraised value of the security property. For properties with an appraised
value in excess of $400,000, the Bank will not lend in excess of 80%. At June
30, 1997, $20.1 million or 3.7% of the Bank's single-family residential loans
had loan-to-value ratios in excess of 80% and did not have private mortgage
insurance.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. At June 30, 1997, the Bank
had an aggregate of $442.7 million and $117.9 million invested in multi-family
and commercial real estate loans, respectively, or 39% and 10% of the total loan
portfolio, respectively. The Bank's multi-family loans are secured by multi-
family properties of five units or more, while the Bank's commercial real estate
loans are secured by industrial, warehouse and self-storage properties, office
buildings, office and industrial condominiums, retail space and strip shopping
centers, mixed-use commercial properties, mobile home parks, nursing homes,
hotels and motels. Substantially all of these properties are located in
California. The Bank will presently originate these loans for terms of up to 10
years based upon a 20 to 25 year loan amortization period and up to 15 years for
loans amortized over a period of 15 years or less. The Bank will originate these
loans on both a fixed rate or adjustable rate basis, with the later based on the
one year U.S. Treasury index of constant comparable maturities. Adjustable rate
loans may have an established ceiling and floor, and the maximum loan-to-value
for these loan products is 75%. As part of the criteria for underwriting
commercial real estate loans, the Bank generally requires a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of 1.20:1 or more. It is also the Bank's general policy to seek
additional protection to mitigate any weaknesses identified in the underwriting
process. Additional coverage may be provided through secondary collateral and
personal guarantees from the principals of the borrowers.
Commercial real estate lending entails different and significant risks when
compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Bank attempts to minimize its
risk exposure by limiting the extent of its commercial real estate lending
generally. In addition, the Bank imposes stringent loan-to-value ratios,
requires conservative debt coverage ratios, and continually monitors the
operation and physical condition of the collateral.
Origination of multi-family loans declined from $42.7 million in 1994 to
$1.1 million in 1995 as new management sought to deal aggressively with the
non-performing credits in its portfolio. As shown in the schedules included
under "--Asset Quality," an aggregate of $16.8 million and $8.2 million of
multi-family residential loans and commercial loans, respectively, were
classified as non-accrual as of December 31, 1995. Management is moving promptly
to foreclose on such properties so that they may be disposed of, which has
contributed to the increase in real estate owned since 1995. At June 30, 1997,
an aggregate of $19.6 million and $8.3 million of such loans were on a
non-accrual status and in real estate owned, respectively, which constituted 76%
of total non-performing assets at such date. Management has established new
credit policies and underwriting procedures and in 1996 began to increase loan
originations in this area. See "--Asset Quality."
COMMERCIAL BUSINESS AND CONSUMER LOANS. The Bank is placing increased
emphasis on the development of a commercial business and consumer lending
program within the areas serviced by its branches. Toward that end, the Bank has
hired eight individuals with significant expertise in commercial and
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<PAGE>
consumer credit administration and lending. Except for loans secured by
deposits, the Bank during the 1990s did not engage in this type of lending
activity. Both lending programs were initiated in August 1996. During the six
months ended June 30, 1997 and the year ended December 31, 1996, the Bank
originated $10.3 million and $9.8 million, respectively, of commercial business
and consumer loans, which amounted to 23.8% and 15.8% of total originations
during such respective periods.
The Bank is making and intends to make commercial business loans including
working capital lines of credit, inventory and accounts receivable loans,
equipment financing (including equipment leases), term loans and loans
guaranteed by the Small Business Administration ("SBA"). Depending on the
collateral pledged to secure the extension of credit, maximum loan-to-value
ratios are 75% or less. Loan terms may vary from one to 7 years. The interest
rates on such loans are generally variable and are indexed to the WALL STREET
JOURNAL Prime Rate, plus a margin.
The Bank intends to actively grow its SBA lending business, on which loans
are guaranteed up to certain levels by the SBA. The SBA-guaranteed loans bear
adjustable rates tied to the lowest published New York prime rate, adjusted
monthly, plus a margin, which depends on the term of the loan. The loans
generally have amortization schedules of seven to 25 years, depending on the
purpose of the loan. Each loan is reviewed by the SBA and depending on the size
of the loan and the proposed use of proceeds, the SBA establishes what
percentage of the loan it will guarantee. The guarantee cannot exceed 80% of the
loan or $750,000, whichever is less. The guarantee applies not only to the
principal, but also covers accrued interest, foreclosure costs, legal fees and
other expenses. The Bank has established two Small Business Development Centers
within its branches and plans to obtain preferred lender status, which will
permit it to underwrite and close such loans much more promptly. At June 30,
1997, approximately $2.2 million of the Bank's $7.8 million in commercial
business loans were comprised of SBA loans.
The Bank is authorized to make loans for a wide variety of personal or
consumer purposes but has not engaged in any lending other than loans secured by
deposits for most of the 1990s. The Bank began originating home equity loans and
lines of credit and automobile loans in August 1996 in order to provide a wide
range of products and services to its customers. The Bank also offers overdraft
protection and unsecured lines of credit.
At June 30, 1997, home equity loans and lines amounted to $2.3 million. On
owner-occupied homes, these loans and lines are originated by the Bank for up to
80% of the first $350,000 of appraised value plus up to 50% of the remainder,
less the amount of any prior liens on the property. For non-owner occupied
properties, the Bank will lend up to 75% of the first $250,000 of appraised
value plus 50% of the remainder, less the amount of existing liens on the
property. Home equity loans and lines of credit have a maximum term of 25 years
and carry variable interest rates. The Bank will secure each of these types of
loans with a mortgage on the property (generally a second mortgage).
The Bank also originates loans secured by new and used automobiles. The
maximum term for the Bank's automobile loans is 72 months for a new car loan and
60 months with respect to a used car loan. The Bank will lend up to 100% of the
purchase price on new car loans with a purchase price of $25,000 or more, and up
to 80% for new and used vehicles (up to five years). On used vehicles, the Bank
will finance up to 80% of the lower of the total purchase price or 100% of the
National Automobile Dealers' Association Wholesale Blue Book Value. The Bank
requires all borrowers to maintain automobile insurance with the Bank named as
loss payee. At June 30, 1997, the Bank had $1.0 million of automobile loans in
portfolio.
Commercial business and consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more credit risk
than mortgage loans because of the type and nature of the collateral. In
addition, consumer lending collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness and personal bankruptcy. The Bank
believes that the generally higher yields earned on commercial business and
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<PAGE>
consumer loans compensate for the increased credit risk associated with such
loans and the Bank intends to continue to offer such loans in order to provide a
full range of services to its customers.
ASSET QUALITY
LOAN DELINQUENCIES. When a borrower fails to make a required payment on a
loan, the Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made following the grace period after a
payment is due, which is generally ten days on commercial loans and 15 days on
residential loans. At such time, a late payment fee is assessed. In most cases,
deficiencies are cured promptly. If a delinquency extends past the applicable
grace period, the loan file and payment history are reviewed and continued
efforts are made to collect the loan. In the event that no contact with the
borrower is made, or no payment is received by the end of the grace period, a
Notice of Intent to Foreclose ("Notice") is sent. Depending upon the scheduled
payment date, this Notice is sent no later than 30 days after the due date; for
residential loans and no later than fifteen days after the due date for
commercial loans.
Under the Bank's new management team, the accounts are monitored on a weekly
basis by the servicing department. With respect to Commercial Loans, a trial
balance is updated weekly, and those accounts that are identified as being past
the due date are assigned to staff to begin the collection process. With respect
to Commercial Loans, delinquent reports and a listing of those accounts for
which a Notice has been issued are sent to senior management and the Special
Assets Department to provide advance information as to potential problems which
may fall under their Department in the coming quarter. No later than when an
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss. Performing loans
delinquent 120 days or less have declined from $8.6 million at June 30, 1996 to
$8.3 million at June 30, 1997.
In March 1997, the Bank sold the servicing rights with respect to
substantially all of its residential mortgage loans to Temple-Inland Mortgage
Corporation (the "Residential Servicing Agent"), a wholly owned subsidiary of
Guaranty Federal Bank, F.S.B., which is wholly owned by Temple-Inland Inc., an
unrelated third party. In connection with the Bank's sale of servicing, the Bank
in March 1997 entered into a servicing agreement with the Residential Servicing
Agent (the "Residential Servicing Agreement"), pursuant to which the Servicing
Agent will service substantially all of the Bank's Residential Mortgage Loans.
The Bank also entered into a Forward Production Servicing Purchase and Sale
Agreement in July 1997 ("Forward Production Agreement"), pursuant to which the
Bank will sell to the Residential Servicing Agent the servicing rights
associated with (i) Residential Mortgage Loans owned by the Bank and closed and
funded subsequent to the closing of the Residential Servicing Agreement, and
(ii) Residential Mortgage Loans owned by the Bank prior to such date which were
serviced by others and as to which the Bank has reacquired such servicing
rights. The Bank's Residential Servicing Agreement with the Servicing Agent
provides that the Bank can direct the Residential Servicing Agent to transfer
the servicing and disposition functions with respect to all Residential Mortgage
Loans which become nonaccrual back to the Bank. All of such properties which
become REO will automatically be transferred back to the Bank for the same
purpose.
NON-PERFORMING ASSETS. As described under "Asset Quality--Loan
Delinquencies," the Bank's residential mortgage loans are handled by the
Residential Service Agent unless and until residential loans which go into
non-accrual status are requested to be transferred back to the Bank and loans
which become real estate owned are so transferred.
All commercial loans held in portfolio are reviewed on a regular basis to
determine any potential problems. Monthly committee meetings are held to
identify problem assets and to set forth a strategy for the mitigation of loss
and the resolution of the problem. Loans are placed on a non-accrual status if
management has substantive doubts about payment in full of both principal and
interest, or if principal and interest is contractually in default for a period
of 90 days or more. The Bank provides an allowance for the
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loss of previously accrued but uncollected interest on all non-accrual loans.
Typically, after a collection problem has necessitated the issuance of a Notice,
the Special Assets Department will review and recommend a selection and an
appointment of a receiver. The Bank's current policy is to have a receiver
appointed at the expiration of the Notice, which is 10 days after issuance,
unless some type of formal, written agreement with the borrower has been
arranged.
The receiver has specific criteria to fulfill with respect to commercial
loans of the property on behalf of the Bank. The first responsibility is to gain
control of the cash generated from the property. The receiver is responsible for
all collection activity. In addition, the receiver is required to prepare
forward forecasting with respect to occupancy and potential rent collections.
Approximately 30 to 60 days after a receiver is appointed, the Bank will order a
third party appraisal report. The information pertaining to the property
operations will be supplied to the appraiser by the receiver. The in-house
appraisal department reviews the third party appraisal report for accuracy and
reasonableness of assumptions.
The receiver and the Bank work together in preparing a budget for potential
repairs and maintenance, as well as capital expenditure items needed at the
property. It is the policy of the Bank to instruct the receiver to utilize all
net operating income available to restore the property or units of current
vacancy to "lease ready" condition.
A review of the collateral value is performed to determine if sufficient
equity exists to repay the indebtedness in the event of a foreclosure and
subsequent sale of the property. The valuation is prepared by the account
officer assigned to review the credit facility. The valuation is performed under
two scenarios. First, a review of the current market conditions of similar
properties within the collateral property's market is completed to ascertain
comparable rent and sale data. Second, a discounted cash flow analysis is
prepared, utilizing current investor return requirements and capitalization
rates. Once a value for the property has been estimated based upon its ability
to generate cash flow, expenses associated with the sale of the property, such
as broker commissions and closing costs are deducted from the estimated value. A
comparison of this amount is made to the loan balance to determine whether a
specific reserve or a write-off is appropriate.
During this on-going process, the Bank and the receiver will identify and
catalogue any potential purchasers who call and express an interest in the
property prior to the Bank taking title. Once title is transferred, the Bank
will then begin the process of contacting those entities that previously
expressed an interest to confirm that interest and proceed with the
qualification stage.
REAL ESTATE OWNED. Real estate acquired through foreclosure is carried at
the lower of the loan's unpaid principal balance (cost) or estimated fair value
less estimated selling expenses at the date of transfer. A loan charge-off is
recorded for any writedown in the loan's carrying value to fair value at the
date of transfer. Real estate loss provisions are recorded if the properties'
estimated fair value subsequently declines below the value determined at the
recording date. In determining the lower of cost or fair value at acquisition,
costs relating to development and improvement of property are considered. Costs
relating to holding real estate acquired through foreclosure, net of rental
income, are charged against earnings as incurred.
In preparing a real estate owned property to be marketed for sale certain
repairs are undertaken and other repair items are left as negotiating points
pertaining to the sale contract. The Bank may offer to adjust the sale price for
such minor repair items, or may offer to deliver the property in a repaired
stated. As part of the disposition strategy, the Bank may offer financing at
current market terms to qualified buyers of the real estate owned. It is a
requirement that the purchaser/borrowing entity provide a minimum of 20% cash
toward the purchase of the property. Terms offered are similar to terms being
offered on other new originations and at comparable rates. The Special Assets
Department makes great efforts to ensure that the underwriting for a loan to
facilitate is comparable to other new loan production, and that the transactions
are viewed as arms-length and fair market.
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<PAGE>
TROUBLED DEBT RESTRUCTURING. A loan constitutes a troubled debt
restructuring ("TDR") if the Bank, for economic or legal reasons related to the
borrower's financial difficulties, grants a concession to the borrower that it
would not otherwise consider. Among other things, a TDR involves the
modification of terms of the Bank's loan, including a reduction of the interest
rate, an extension of the maturity date at a stated interest rate lower than the
current market for new loans with similar risk, a reduction of the face amount
of the loan or a reduction of accrued interest. The Bank provides an allowance
for the loss of previously accrued but uncollected interest on these, as well as
non-accrual loans. Currently, the Bank's TDR's consist of loans collateralized
by single- and multi-family residential properties. The majority of these
restructures were entered into during the early 1990's when economic conditions
in California were severely depressed or in conjunction with the Northridge
earthquake damage to the collateral properties. Management has indicated that
the decision to provide such restructures was based upon both an internal
assessment of the situation and a consensus of lenders in California who
believed that this resolution would be the most effective mitigating measure.
Management considers all loans formerly treated as TDRs to be impaired loans in
the year of restructuring. Generally, such loans, as well as those previously
placed on non-accrual, are returned to accrual status when the borrower has had
a period of sustained repayment performance for twelve consecutive months.
Under the Bank's new management, the Bank has aggressively focused on
problem asset rehabilitation, and has undertaken a number of initiatives in this
area. The Bank has established an Internal Asset Review Committee, which is
comprised of the Chief Executive Officer, the Chief Financial Officer, the
Senior Vice President in charge of Real Estate, the Senior Credit Officer, the
Assistant Vice President of Internal Assets and the Commercial Loan Officer. The
Committee meets approximately every three weeks and monitors the Bank's assets
to ensure proper classification. All multi-family and commercial assets in
excess of $500,000, regardless of performance, are reviewed at least once each
year. Assets that are classified as special mention are reviewed every six
months and those assets classified as substandard are reviewed every three
months and, if collateral dependent, a market value analysis is performed on the
property to determine whether valuation allowances are required. Loans that are
non-performing, subject to workout or forbearance or classified substandard are
monitored and managed through the Special Assets Department. Assets that are
foreclosed and become real estate owned continue to be managed by the Special
Assets department through its respective resolution.
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The following table sets forth information with respect to non-performing
assets identified by the Bank, including non-accrual loans, real estate owned
and troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AT JUNE 30,
1997 1996 1995 1994 1993 1992
----------- --------- ---------- ----------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans, net:
Mortgage loans:
Single-family residential.................... $ 4,629 $ 7,947 $ 10,467 $ 14,780 $ 27,310 $ 26,764
Multi-family residential..................... 8,324 9,198 16,840(1) -- 4,138 1,159
Commercial and industrial.................... 1,082 1,093 8,173 8,446 2,001 710
Land......................................... -- -- 112 4,232 5,050 --
----------- --------- ---------- ----------- --------- ---------
Total non-performing loans, net.............. 14,035 18,238 35,592 27,458 38,499 28,633
----------- --------- ---------- ----------- --------- ---------
Real estate owned, net:
Single-family residential.................... 4,046 3,268 6,387 5,322 16,568 19,856
Multi-family residential..................... 11,299 8,310 901 3,999 10,213 7,189
Commercial and industrial.................... 7,240 8,614 3,506 1,095 4,769 11,610
Land......................................... 244 244 121 69 -- --
----------- --------- ---------- ----------- --------- ---------
Total real estate owned, net................. 22,829 20,436 10,915 10,485 31,550 38,655
----------- --------- ---------- ----------- --------- ---------
Total non-performing assets.................. $ 36,864 $ 38,674 $ 46,507 $ 37,943 $ 70,049 $ 67,288
----------- --------- ---------- ----------- --------- ---------
----------- --------- ---------- ----------- --------- ---------
Troubled debt restructurings................. $ 7,529 $ 7,544 $ 6,133 $ 40,794(1) $ 6,902 $ 4,315
----------- --------- ---------- ----------- --------- ---------
----------- --------- ---------- ----------- --------- ---------
Total non-performing assets and troubled debt
restructurings............................. $ 44,393 $ 46,218 $ 52,640 $ 78,737 $ 76,951 $ 71,603
----------- --------- ---------- ----------- --------- ---------
----------- --------- ---------- ----------- --------- ---------
Non-performing loans to total loans, net..... 1.27% 1.60% 2.90% 2.06% 2.85% 1.98%
Non-performing loans to total assets......... 0.77 1.04 2.25 1.60 2.11 1.40
Non-performing assets to total assets........ 2.03 2.21 .94 2.21 3.83 3.29
Total non-performing assets and troubled debt
restructurings to total assets............. 2.44 2.64 3.33 4.58 4.21 3.50
</TABLE>
- ------------------------
(1) Reflects to a large extent problems associated with 1994 Northridge,
California earthquake.
The interest income that would have been recorded during the six months
ended June 30, 1997 and the years ended December 31, 1996, 1995 and 1994 if the
Bank's non-accrual loans at the end of such periods had been current in
accordance with their terms during such periods was $641,000, $1.4 million, $3.2
million and $2.3 million, respectively.
As shown in the table above, the Bank recognized significant credit losses
in the early 1990's due, in large part, to the continued deterioration in the
Southern California economy which had begun with the national recession at the
start of the decade, together with a decline in market values of real estate
resulting from the Northridge earthquake of 1994. As the real estate that
secured the Bank's mortgage loans decreased in value and as borrowers,
particularly developers of, and investors in, residential and commercial real
estate, became less able to meet their debt service obligations, non-performing
assets and troubled debt restructurings increased dramatically, amounting to
$78.7 million or 4.6% of total assets as of December 31, 1994. As a result of
the focus given by new management to rehabilitate or liquidate the Bank's
problem assets, nonperforming assets and troubled debt restructurings have
declined to $44.4 million or 2.4% of total assets at June 30, 1997.
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<PAGE>
Of the Bank's $14.0 million of non-performing loans at June 30, 1997, the
largest concentration consisted of four loans on apartment buildings, with a
current carrying value of $5.1 million. These loans have been classified as
collateral dependent, and as of June 30, 1997 were carried at fair value. Based
on recent appraisals, the Bank charged against the allowance for loan losses
$655,000 during the June 1997 quarter. The Bank's $22.8 million of real estate
owned at June 30, 1997 was comprised of 11 multi-family and commercial
properties aggregating $18.8 million and various residential properties
aggregating $4.0 million. The Bank's largest property was a shopping center with
a net book value as of June 30, 1997 of $6.6 million. The second largest
property had a net book value as of June 30, 1997 of $2.1 million.
With the downturn in the California economy experienced during the early
1990s and the problems associated with the Northridge, California earthquake in
1994, prior management entered into a significant number of troubled debt
restructurings. Since the change in the Bank's management, the Bank has not
entered into troubled debt restructurings. In addition, as shown in the table
above, as of December 31, 1995, an aggregate of $16.8 million and $8.2 million
of multi-family residential loans and commercial real estate loans,
respectively, were classified as non-accrual. Management is moving promptly to
foreclose on such properties so that they may be disposed of, which has
contributed to the increase in real estate owned since 1995. At June 30, 1997,
an aggregate of $9.4 million and $18.5 million of such loans were on a non-
accrual status and in real estate owned, respectively, which constituted 75.8%
of total non-performing assets at such date.
ALLOWANCE FOR LOSSES ON LOANS. It is management's policy to maintain an
allowance for estimated losses on loans based on a number of factors, including
economic trends, industry experience, estimated collateral values, past loss
experience, the Bank's underwriting practices, and management's ongoing
assessment of the credit risk inherent in its portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance may be necessary, and net
income could be significantly affected, if circumstances differ substantially
from the assumptions used in making the initial determinations. The Bank's
Internal Asset Review Committee undertakes a quarterly evaluation of the
adequacy of the allowance for loan losses as well as the allowance with respect
to real estate owned. The Committee will provide allowances to absorb losses
that are both probable and reasonably quantifiable as well as for those that are
not specifically identified but can be reasonably estimated.
Effective December 21, 1993, the OTS, in conjunction with the Office of
Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued an
Interagency Policy Statement on the Allowance for Loan and Lease Losses ("Policy
Statement"). The Policy Statement, which effectively supersedes the proposed
guidance issued in September 1992, includes guidance (i) on the responsibilities
of management for the assessment and establishment of an adequate allowance and
(ii) for the agencies' examiners to use in evaluating the adequacy of such
allowance and the policies utilized to determine such allowance. The Policy
Statement also sets forth quantitative measures for the allowance with respect
to assets classified substandard and doubtful and with respect to the remaining
portion of an institution's loan portfolio. Specifically, the Policy Statement
sets forth the following quantitative measures which examiners may use to
determine the reasonableness of an allowance: (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is classified substandard;
and (iii) for the portions of the portfolio that have not been classified
(including loans designated special mention), estimated credit losses over the
upcoming twelve months based on facts and circumstances available on the
evaluation date. While the Policy Statement sets forth this quantitative
measure, such guidance is not intended as a "floor" or "ceiling."
OC-48
<PAGE>
The following table sets forth the activity in the Bank's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance at beginning of period............... $ 23,280 $ 31,572 $ 31,572 $ 29,801 $ 20,426 $ 18,509 $ 19,499
--------- --------- --------- --------- --------- --------- ---------
Provision for loan losses...................... 655 2,213 2,884 8,823 22,330 8,393 8,482
--------- --------- --------- --------- --------- --------- ---------
Charge-offs:
Mortgage loans:
Single-family residential.................... (1,243) (1,400) (2,213) (3,416) (5,428) (3,507) (2,177)
Multi-family residential..................... (9) (2,305) (5,039) (1,854) (1,787) (817) (377)
Commercial and industrial.................... (4,126) (3,373) (3,371) (860) (5,813) (2,392) (5,214)
Land......................................... -- (1,448) (1,478) (956) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total charge-offs.......................... (5,378) (8,526) (12,101) (7,086) (13,028) (6,716) (7,768)
--------- --------- --------- --------- --------- --------- ---------
Recoveries:
Mortgage loans:
Single-family residential.................... 126 2 16 34 73 235 --
Multi-family residential..................... -- -- 22 -- -- -- --
Commercial and industrial.................... -- 22 2 -- -- 5 --
Land......................................... -- 885 885 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total recoveries........................... 126 909 925 34 73 240 --
Recoveries credited to income.................. -- -- -- -- -- -- (1,704)
--------- --------- --------- --------- --------- --------- ---------
Allowance at end of period..................... $ 18,683 $ 26,168 $ 23,280 $ 31,572 $ 29,801 $ 20,426 $ 18,509
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Allowance for loan losses to total
nonperforming loans at end of period......... 133.12% 143.48% 127.65% 88.71% 108.53% 53.06% 64.64%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Allowance for loan losses to total
nonperforming loans and restructured loans at
end of period................................ 86.64% 94.41% 90.30% 75.67% 43.66% 44.99% 56.18%
Allowance for loan losses to total loans, net
at end of period............................. 1.69% 2.22% 2.04% 2.57% 2.28% 1.52% 1.28%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
As shown in the table above, loan charge-offs (net of recoveries) amounted
to $5.3 million, $7.6 million, $11.2 million, $7.1 million and $13.0 million,
during the six months ended June 30, 1997 and 1996 and the years ended December
31, 1996, 1995 and 1994, respectively. The net charge-offs recognized by the
Bank during the six months ended June 30, 1997 and the years ended December 31,
1996 and 1995 primarily reflected the transfer of loans (particularly
multi-family residential loans) to real estate owned, as shown in the preceding
non-performing assets table. Such multi-family loans had specific valuation
allowances which had been established through increased provisions for loans in
prior periods. At the time of transfer of the loans to real estate owned, such
specific valuation allowances were charged off. As a result of the transfer of
such loans to real estate owned, the Bank's non-performing loans have declined
since 1995, which has contributed to the decrease in the Bank's provision for
losses on loans. Management believes that its allowance for losses on loans at
June 30, 1997 was adequate. Nevertheless, there can be no assurances that
additions to such allowance will not be necessary in future periods,
particularly if the growth in the Bank's commercial and consumer lending
continues.
OC-49
<PAGE>
The following table sets forth information concerning the allocation of the
Bank's allowance for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JUNE 30, 1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
<CAPTION>
PERCENT TO PERCENT TO PERCENT TO PERCENT TO
TOTAL TOTAL TOTAL TOTAL
AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate........... $ 3,611 19.3% $ 4,051 17.4% $ 5,109 16.2% $ 7,809 26.2%
Multi-family residential.......... 11,374 60.9 15,753 67.7 18,509 58.6 11,396 38.2
Commercial, industrial and land... 3,527 18.9 3,361 14.4 7,954 25.2 10,084 33.9
Other loans....................... 171 0.9 115 0.5 -- -- 512 1.7
--------- ----- --------- ----- --------- ----- --------- -----
Total............................. $ 18,683 100.0% $ 23,280 100.0% $ 31,572 100.0% $ 29,801 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
</TABLE>
INVESTMENT ACTIVITIES
The Bank's securities portfolio is managed by the Executive Vice President
and Chief Financial Officer in accordance with a comprehensive written
Investment Policy which addresses strategies, types and levels of allowable
investments and which is reviewed and approved annually by the Board of
Directors of the Bank. The management of the securities portfolio is set in
accordance with strategies developed by the Bank's Asset/Liability Management
Committee.
The Bank's Investment Policy authorizes the Bank to invest in U.S. Treasury
obligations (with a maturity of up to five years), U.S. agency obligations (with
a maturity of up to five years), U.S. Government agency mortgage-backed
securities (limited to no more than 50% of the Bank's total assets), bankers'
acceptances (with a maturity of 180 days or less), FHLB overnight deposits,
investment grade commercial paper (with a maturity of up to nine months),
federal funds (with a maturity of one month or less), certificates of deposit in
other financial institutions (with a maturity of one year or less), repurchase
agreements (with a maturity of six months or less), reverse repurchase
agreements (with a maturity of two years or less) and certain collateralized
mortgage obligations (with a weighted average life of less than ten years).
At June 30, 1997, the Bank's securities portfolio consisted of $578.5
million of mortgage-backed securities, $568.1 million of which were classified
as available for sale and $10.4 million of which were classified as held to
maturity, and $48.9 million of U.S. Government agency obligations. Of the Bank's
total investment in mortgage-backed securities at June 30, 1997, $106.4 million
consisted of Government National Mortgage Association ("GNMA") certificates,
$197.5 million consisted of FNMA certificates, $42.8 million consisted of
non-agency certificates and $231.8 million consisted of FHLMC certificates. Of
this $578.5 million of mortgage-backed securities at June 30, 1997, $247.1
million consisted of fixed rate securities and $331.4 million consisted of
adjustable rate securities. Under new management, the Bank has significantly
increased its purchases of primarily adjustable rate mortgage-backed securities
with interest rate adjustments tied to the U.S. Treasury index of constant
comparable maturity. The Bank's aggregate securities portfolio, net of
repayments and prepayments and sales, increased by $271.6 million or 112.4%
between 1995 and 1996, and amounted to $627.4 million at June 30, 1997. The Bank
anticipates significantly leveraging the proceeds of the Offering with similar
investments in mortgage-backed securities. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) represent a participation interest in
a pool of single-family or multi-family mortgages, the principal and interest
payments on which are passed from the mortgage originators, through
OC-50
<PAGE>
intermediaries (generally U.S. Government agencies and government sponsored
enterprises) that pool and repackage the participation interests in the form of
securities, to investors such as the Bank. Such U.S. Government agencies and
government sponsored enterprises, which guarantee the payment of principal and
interest to investors, primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and owned
by the 12 Federal Home Loan Banks and federally insured savings institutions.
The FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal within one year. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency which is intended to help finance
government-assisted housing programs. GNMA securities are backed by FHA-insured
and VA-guaranteed loans, and the timely payment of principal and interest on
GNMA securities are guaranteed by the GNMA and backed by the full faith and
credit of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were
established to provide support for low- and middle-income housing, there are
limits to the maximum size of loans that qualify for these programs. For
example, the FNMA and the FHLMC currently limit their loans secured by a
single-family, owner-occupied residence to $214,600. To accommodate larger-sized
loans, and loans that, for other reasons, do not conform to the agency programs,
a number of private institutions have established their own home-loan
origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgage, i.e., fixed rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.
The following table sets forth information regarding the carrying and market
value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JUNE 30,
<CAPTION>
1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
(IN THOUSANDS)
CARRYING MARKET CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale (at
market):
U.S. Government and
federal agency
obligations............ $ 48,945 $ 48,945 $ 38,714 $ 38,714 $ 9,994 $ 9,994 $ -- $ --
Mortgage-backed
securities............. 568,093 568,093 463,587 463,587 231,651 231,651 7,677 7,677
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 617,038 $ 617,038 $ 502,301 $ 502,301 $ 241,645 $ 241,645 $ 7,677 $ 7,677
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Held to maturity:
Mortgage-backed
securities............. $ 10,375 $ 10,324 $ 10,971 $ 10,899 -- -- $ 304,620 $ 289,737
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 10,375 $ 10,324 $ 10,971 $ 10,899 -- -- $ 304,620 $ 289,737
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
OC-51
<PAGE>
The following table sets forth the activity in the Bank's aggregate
securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C> <C>
SIX MONTHS
ENDED JUNE 30, 1997 1996 1995 1994
------------------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities at beginning of period....................... $ 513,272 $ 241,645 $ 312,297 $ 362,007
Purchases............................................... 199,531 487,719 212,155 150,985
Sales................................................... (41,761) (158,448) (222,947) (81,620)
Repayments and prepayments.............................. (45,311) (53,207) (58,245) (115,097)
Decrease (increase) in unrealized losses on
available-for-sale securities(1)...................... 1,682 (4,437) (1,615) (1,865)
Charge-offs............................................. -- -- -- (2,113)
-------- ---------- ---------- ----------
Securities at end of period(2)(3)....................... $ 627,413 $ 513,272 $ 241,645 $ 312,297
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) At June 30, 1997, the cumulative unrealized losses on securities classified
as available-for-sale amounted to $4.4 million, which reduces stockholder's
equity.
(2) At June 30, 1997, the book value and market value of the Bank's securities
(including held-to-maturity and available for sale securities) amounted to
$627.4 million and $627.4 million, respectively.
(3) At June 30, 1997, $331.4 million or 52.8% of the Bank's securities portfolio
consisted of adjustable rate securities, as compared to $222.4 million or
43.3%, $115.8 million or 47.9% and $75.9 million or 24.3% at December 31,
1996, 1995 and 1994, respectively.
SOURCES OF FUNDS
GENERAL. The Bank will consider various sources of funds to fund its
investing and lending activities and evaluates the available sources of funds in
order to reduce the Bank's overall funding costs. Deposits, reverse repurchase
agreements, advances from the FHLB of San Francisco, and sales, maturities and
principal repayments on loans and securities have been the major sources of
funds for use in the Bank's lending and investing activities, and for other
general business purposes. Management of the Bank closely monitors rates and
terms of competing sources of funds on a daily basis and utilizes the source
which it believes to be the most cost effective. Products are priced each week
through the Bank's Asset Liability Management Committee.
DEPOSITS. The Bank attempts to price its deposits in order to promote
deposit growth and offers a wide array of deposit products in order to satisfy
its customers' needs. The Bank's current deposit products include passbook
accounts, negotiable order of withdrawal ("NOW") accounts, money market deposit
accounts, fixed rate, fixed-maturity retail certificates of deposit ranging in
terms from 90 days to five years, individual retirement accounts, and non-retail
certificates of deposit consisting of jumbo (generally greater than $100,000)
certificates and public deposits.
The Bank's retail deposits are generally obtained from residents in its
primary market area. The principal methods currently used by the Bank to attract
deposit accounts include offering a wide variety of products and services and
competitive interest rates. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including various forms of
advertising. Although the Bank has in the past utilized the services of deposit
brokers to attract non-retail certificates of deposit, the Bank is currently
allowing its brokered deposits to run off as they mature and is not accepting
any new brokered deposits. The Bank has installed ATMs at all of its branch
offices and intends to install between ten to fifteen new ATMs within a chain of
health clubs located in southern California.
OC-52
<PAGE>
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
JUNE 30, 1997 1996 1995 1994
--------------------------- --------------------------- --------------------------- ------------
<CAPTION>
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID BALANCE
------------ ------------- ------------ ------------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts...... $ 261,050 4.42% $ 264,677 4.64% $ 95,335 3.67% $ 68,518
NOW accounts........... 77,555 1.57 58,511 0.77 54,837 0.84 59,427
Money market
accounts............. 22,073 2.60 29,665 2.52 47,269 3.01 77,739
Term certificates...... 982,564 5.61 1,069,484 5.76 1,212,989 5.73 1,186,191
------------ ------------ ------------ ------------
Total deposits..... $ 1,343,242 5.10% $ 1,422,337 5.28% $ 1,410,430 5.31% $ 1,391,875
------------ --- ------------ --- ------------ --- ------------
------------ --- ------------ --- ------------ --- ------------
<CAPTION>
<S> <C>
AVERAGE
RATE PAID
-------------
<S> <C>
Passbook accounts...... 2.32%
NOW accounts........... 0.90
Money market
accounts............. 2.41
Term certificates...... 4.55
Total deposits..... 4.17%
---
---
</TABLE>
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------
1997 1996 1995 1994
----------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Beginning balance................................... $ 1,371,243 $ 1,473,318 $ 1,384,218 $ 1,333,818
Net increase (decrease) before interest............. (68,684) (160,804) 35,836 12,093
Interest credited................................... 11,477 58,729 53,264 38,307
----------------- ------------ ------------ ------------
Net increase (decrease) in deposits................. (57,207) (102,075) 89,100 50,400
----------------- ------------ ------------ ------------
Ending balance...................................... $ 1,314,036 $ 1,371,243 $ 1,473,318 $ 1,384,218
----------------- ------------ ------------ ------------
----------------- ------------ ------------ ------------
</TABLE>
The following table sets forth by various interest rate categories the term
certificates with the Bank at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1997 1996 1995 1994
------------- ------------ ------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
0.00% to 2.99%........................................... $ 3,481 $ 4,299 $ 3,964 $ 1,637
3.00% to 3.99%........................................... 3,182 3,833 4,900 126,533
4.00% to 4.99%........................................... 34,643 46,771 49,037 459,920
5.00% to 6.99%........................................... 931,538 909,895 1,092,316 597,046
7.00% to 8.99%........................................... 1,350 36,244 47,613 15,898
------------- ------------ ------------ ------------
$ 974,194 $ 1,001,042 $ 1,197,830 $ 1,201,034
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
OC-53
<PAGE>
The following table sets forth the amount and remaining maturities of the
Bank's term certificates at June 30, 1997.
<TABLE>
<CAPTION>
OVER SIX
MONTHS OVER ONE OVER TWO
SIX MONTHS THROUGH ONE YEAR THROUGH YEARS THROUGH OVER THREE
AND LESS YEAR TWO YEARS THREE YEARS YEARS
----------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
0.00% to 1.99%............................. $ 501 $ -- $ 100 $ -- $ --
2.00% to 2.99%............................. 2,226 405 115 -- 134
3.00% to 3.99%............................. 3,160 -- 17 -- 5
4.00% to 4.99%............................. 32,837 1,103 703 -- --
5.00% to 6.99%............................. 434,854 347,003 134,491 6,554 8,636
7.00% to 8.99%............................. 159 732 177 282 --
----------- ------------ ------------ ------ -----------
Total...................................... $ 473,737 $ 349,243 $ 135,603 $ 6,836 $ 8,775
----------- ------------ ------------ ------ -----------
----------- ------------ ------------ ------ -----------
</TABLE>
As of June 30, 1997, the aggregate amount of outstanding time certificates
of deposit in amounts greater than or equal to $100,000, was approximately
$227.6 million. The following table presents the maturity of these time
certificates of deposit at such dates.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------
<S> <C>
(IN THOUSANDS)
3 months or less.......................................................... $ 50,812
Over 3 months through 6 months............................................ 64,753
Over 6 months through 12 months........................................... 83,318
Over 12 months............................................................ 28,734
--------------
$ 227,617
--------------
--------------
</TABLE>
The following table sets forth certain information regarding the short-term
borrowings of the Bank at or for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS
ENDED AT OR FOR THE YEAR ENDED DECEMBER
JUNE 30, 31,
---------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB OF SAN FRANCISCO ADVANCES:
Average balance outstanding.................... $ 80,000 $ 35,304 $ 53,666 $ 193,535 $ 310,262
Maximum amount outstanding at any month-end
during the period............................ 80,000 31,746 80,000 310,000 316,000
Balance outstanding at end of period........... 80,000 31,746 80,000 31,746 310,000
Average interest rate during the period........ 5.91% 5.80% 5.49% 6.37% 5.00%
Average interest rate at end of period......... 5.91% 5.84% 5.91% 5.84% 4.99%
SECURITIES SOLD UNDER AGREEMENTS TO PURCHASE:
Average balance outstanding.................... $ 286,410 $ 151,366 $ 179,002 $ 100,071 $ 140,943
Maximum amount outstanding at any month-end
during the period............................ 331,358 177,597 219,229 151,626 154,210
Balance outstanding at end of period........... 331,358 177,597 192,433 -- --
Average interest rate during the period........ 5.62% 5.31% 6.09% 6.25% 4.34%
Average interest rate at end of period......... 5.78% 5.27% 5.49% -- --
</TABLE>
The Bank obtains both fixed and variable rate long- and short-term advances
from the FHLB of San Francisco upon the security of certain of its residential
first mortgage loans and other assets, provided
OC-54
<PAGE>
certain standards related to creditworthiness of the Bank have been met. FHLB of
San Francisco advances are available for general business purposes to expand
lending and investing activities. Borrowings have generally been used to fund
the purchase of mortgage-backed and investment securities or lending activities
and have been collateralized with a pledge of loans, securities in the Bank's
portfolio or any mortgage-backed or investment securities purchased.
Advances from the FHLB of San Francisco are made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At June 30, 1997, the Bank had two fixed rate advances from the FHLB
of San Francisco. At June 30, 1997, the Bank had total FHLB of San Francisco
advances of $80.0 million at a weighted average interest rate of 5.91%, $31.0
million of which matures in 1997 and $49.0 million of which matures in 1998.
Since 1996, the Bank has increasingly relied on obtaining funds from the
sales of securities to investment dealers under agreements to repurchase
("reverse repurchase agreements"). In a reverse repurchase agreement
transaction, the Bank will generally sell a mortgage-backed security agreeing to
repurchase either the same or a substantially identical security on a specified
later date (generally not more than 90 days) at a price greater than the
original sales price. The difference in the sale price and purchase price is the
cost of the use of the proceeds. The mortgage-backed securities underlying the
agreements are delivered to the dealers who arrange the transactions. For
agreements in which the Bank has agreed to repurchase substantially identical
securities, the dealers may sell, loan or otherwise dispose of the Bank's
securities in the normal course of their operations; however, such dealers or
third party custodians safe-keep the securities which are to be specifically
repurchased by the Bank. Reverse repurchase agreements represent a competitive
cost short-term funding source for the Bank. Nevertheless, the Bank is subject
to the risk that the lender may default at maturity and not return the
collateral. The amount at risk is the value of the collateral which exceeds the
balance of the borrowing. In order to minimize this potential risk, the Bank
only deals with large, established investment brokerage firms when entering into
these transactions. Reverse repurchase transactions are accounted for as
financing arrangements rather than sales of securities, and the obligation to
repurchase such securities is reflected as a liability in the Bank's
Consolidated Financial Statements.
SUBSIDIARIES
The Bank is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
primarily for community development purposes. In addition, the Bank is permitted
to make an unlimited investment in one or more operating subsidiaries, which are
permitted to engage only in activities that the Bank may undertake directly. As
of June 30, 1997, the Bank maintained four direct subsidiaries and one indirect
subsidiary consisting of SoCal Mortgage Corporation ("SMC"), Direct Investment
Company of Southern California ("DIC"), SCP Investments, Inc. ("SCP"),
Continental Development of California, Inc. ("CDC") and SCS Insurance Services,
Inc. ("SCS"). At June 30, 1997, the Bank's investment in its service corporation
subsidiaries amounted to $2.6 million in the aggregate.
SMC is an inactive corporation which was formed in 1987 to originate
mortgage loans. However, SMC has never conducted any business since it was
organized. DIC was formed in 1987 to acquire, develop, construct and sell real
estate developments and is currently inactive. DIC owns 100% of the capital
stock of SCP which was formed in 1989 to invest in various real estate
development projects. SCP currently holds the Bank's last remaining real estate
development project consisting of 62 acres of vacant land located in Corona,
California. At June 30, 1997, the land had a net carrying value of $1.9 million
and the Bank is currently marketing the property for sale.
CDC was formed in 1969 for the purpose of acquiring, developing,
constructing and selling real estate developments. CDC does not currently hold
any real estate and CDC's sole operation consists of acting as trustee under the
Bank's deeds of trust with respect to its mortgage lending.
OC-55
<PAGE>
SCS was formed in 1984 in order to sell, through the Bank's branch offices,
annuities and various other investments as well as other insurance products to
the Bank's account holders and members of the general public. During the six
months ended June 30, 1997 and the years ended December 31, 1996 and 1995, SCS
recognized net earnings of $99,000, $336,000 and $40,000, respectively.
LEGAL PROCEEDINGS
On January 28, 1993, SOCAL, the Bank and certain current and former
stockholders of SOCAL filed a complaint against the United States in the United
States Court of Federal Claims seeking damages for breach of contract and for
deprivation of property without just compensation and without due process of the
law. The allegations in the complaint arise out of the abrogation of certain
contractual promises made to SOCAL, to certain of its current and former common
stockholders, and to the Bank, by the Federal Home Loan Bank Board and the
Federal Savings and Loan Insurance Corporation in exchange for SOCAL's agreement
to acquire and to operate the Bank which was then a failed thrift institution.
One of the current stockholders of SOCAL (Arbur, Inc.) is also a plaintiff in
the case, entitled Southern California Federal Savings and Loan Association, et
al. v. United States, No. 93-52C (the "SOCAL Goodwill Litigation"). The
plaintiffs' claims arose from changes, mandated by FIRREA, with respect to the
rules for computing the Bank's regulatory capital. The SOCAL Goodwill Litigation
was stayed pending the resolution on appeal of the Winstar Cases (defined
below), which present issues similar to those presented by the SOCAL Goodwill
Litigation.
On July 1, 1996, the United States Supreme Court issued its opinion for
United States v. Winstar Corporation, No. 95-865, which affirmed the decisions
of the United States Court of Appeals for the Fourth Circuit and the United
States Court of Federal Claims in various consolidated cases (the "Winstar
Cases") granting summary judgment to the plaintiff thrift institutions on the
liability portion of their breach of contract claims against the United States.
The Supreme Court held that the government breached certain express contracts
when Congress enacted FIRREA, and the Supreme Court remanded the proceedings for
a determination of the appropriate measure and amount of damages, which as of
the date of this Offering Circular have not been finally litigated.
The United States Court of Federal Claims issued a Case Management Order
("CMO") in all of the Winstar Cases, including the Bank's. The CMO sets forth
procedures for all of the plaintiffs and the defendant, the United States, to
follow relating to the exchange of documents, filing of partial summary judgment
motions with respect to liability only, discovery on damages issues and the
timing of all of the Winstar Cases being set for trial. Pursuant to the CMO, the
Bank filed a motion for partial summary judgment as to the government's
liability to the Bank for breach of contract. Pursuant to the CMO, the
government filed its response to the Bank's motion. Based upon the status of the
proceedings in the Winstar Cases and the CMO, the SOCAL Goodwill Litigation is
not expected to be set for trial for at least two years. The amount of damages
the Bank and SOCAL have suffered as a result of the government's breach of
contract has not yet been determined. In addition, although the decision of the
Supreme Court in the Winstar Cases has been rendered, there can be no assurance
that the court will not reach a different conclusion in the SOCAL Goodwill
Litigation.
OC-56
<PAGE>
OFFICE LOCATIONS
The following table set forth certain information with respect to the Bank's
offices at June 30, 1997.
<TABLE>
<CAPTION>
NET BOOK VALUE TOTAL DEPOSITS
LEASE/OWNED OF PROPERTY AT AT
OFFICE LOCATION LEASE EXPIRATION DATE JUNE 30, 1997 JUNE 30, 1997
- ---------------------------------------------------- ------------------------- --------------- ---------------
<S> <C> <C> <C>
(IN THOUSANDS)
EXECUTIVE OFFICE (AND BRANCH):
Los Angeles Leased $ 2,254 $ 3,790
5900 Wilshire Boulevard 04/2006
15th Floor Option: 1 - 5 years
Los Angeles, CA 90036
BRANCH OFFICE:
Beverly Hills Leased 218 128,158
9100 Wilshire Boulevard 03/2000
Beverly Hills, CA 90212 Option: 2 - 10 years
Orange Leased 149 53,960
216 E. Chapman Avenue 01/2001
Orange, CA 92866-1506 Option: 2 - 5 years
Pacific Palisades Leased 112 56,098
15305 Sunset Boulevard 12/2006
Pacific Palisades, CA 90272 Option: 1 - 10 years
Montebello Leased 125 91,496
1300 W. Beverly Boulevard 08/2003
Montebello, CA 90640 Option: 1 - 10 years
Garden Grove Owned 105 79,919
12112 Valley View
Garden Grove, CA 92845-1796
Simi Valley Leased 59 95,617
1445 Los Angeles Avenue 07/1999
Simi Valley, CA 93065 Option: 2 - 30 months
followed by 3 - 5 years
Sylmar Leased 82 45,442
13831 Foothill Boulevard 09/2002
Sylmar, CA 91342 Option: 2 - 10 years
Buena Park Leased 93 10,528
5470 Beach Boulevard 12/2004
Buena Park, CA 90621 Option: 3--5 years
North Hollywood Leased $ 63 $ 86,966
12848 Victory Boulevard 05/2000
North Hollywood, CA 91606
Beverly/Serrano Leased 124 36,209
4500 W. Beverly Boulevard 01/2006
Los Angeles, CA 90004 Option: 2 - 5 years
Woodland Hills Leased 146 59,022
20259 Ventura Boulevard 11/2009
Woodland Hills 91364 Option: 1 - 10 years
</TABLE>
OC-57
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE TOTAL DEPOSITS
LEASE/OWNED OF PROPERTY AT AT
OFFICE LOCATION LEASE EXPIRATION DATE JUNE 30, 1997 JUNE 30, 1997
- ---------------------------------------------------- ------------------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Burbank Leased 373 161,002
240 North San Fernando Road 06/2000
Burbank, CA 91502 Option: 2 - 5 years
Santa Clarita Owned 178 63,214
26425 Sierra Highway
Santa Clarita, CA 91321
Ventura Leased 46 66,867
996 South Seaward Avenue 10/1998
Ventura, CA 93001 Option: 2 - 3 years
Calabasas23642 Calabasas Road, Bldg. 2 Leased 89 59,104
Calabasas, CA 91302 03/2007
Irvine Leased 182 60,024
15475 Jeffrey Road 10/2005
Irvine, CA 92620-4102
Fairfax Leased 78 68,008
145 South Fairfax Avenue 01/2003
Los Angeles, CA 90036 Option: 1 - 5 years
San Pedro Owned 725 88,612
28110 South Western Avenue
San Pedro, CA 80732
------ ---------------
$ 5,201 $ 1,314,036
------ ---------------
------ ---------------
</TABLE>
OC-58
<PAGE>
BENEFICIAL OWNERSHIP OF THE BANK
As of June 30, 1997, there were 100,000 shares of Common Stock of the Bank
issued and outstanding, all of which were owned by SOCAL. The following table
set forth certain information concerning the ownership of the Company's
outstanding Common Stock as of that date.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ ------------------------------------ -------------------- -------------------
<S> <C> <C> <C>
Common Stock........................ SoCal Holdings, Inc. 100,000 100%
5900 Wilshire Boulevard
Los Angeles, California 90036
</TABLE>
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank. While the Bank's Bylaws authorize five directors, one
position has remained vacant since December 1995.
<TABLE>
<CAPTION>
POSITIONS HELD WITH
NAME AGE(1) THE BANK DIRECTOR SINCE TERM EXPIRES
- --------------------------------------------- ----------- ----------------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Rudolf P. Guenzel............................ 57 President, Chief Executive 1995 1999
Officer and Director
Henry Peters................................. 56 Chairman of the Board, 1995 1998
Director
Gerard Jervis................................ 49 Director 1995 2000
Robert W. MacDonald.......................... 50 Director 1992 2000
</TABLE>
- ------------------------
(1) As of June 30, 1997.
Set forth below is information with respect to the principal occupations
during at least the last five years for the directors of the Bank.
RUDOLF P. GUENZEL. Mr. Guenzel has served as President of SOCAL and
President, Chief Executive Officer and Director of the Bank since March 1995.
From September 1994 through March 1995, Mr. Guenzel worked as a consultant in
the area of bank profitability analysis. Mr. Guenzel formerly was the President
and Chief Executive Officer and a director of BancFlorida Financial Corp., which
was a New York Stock Exchange listed company, and its subsidiary, Banc Florida,
FSB. He joined the BancFlorida Group in March 1991 when the company was
experiencing serious financial difficulties associated with high non-performing
assets attributable to the national recession and local economic conditions. Mr.
Guenzel directed the Company's attention to problem asset resolution and
returned BancFlorida Financial to profitability. The price of BancFlorida
Financial's common stock increased from a low of $2.375 per share during the
first quarter to $30.00 per share, the price at which the shares were acquired
by First Union Corp. in August 1994. Mr. Guenzel served as Chief Executive
Officer through BancFlorida Financial's merger with First Union Corp. Prior to
BancFlorida Financial, Mr. Guenzel was employed by European American Bank from
1971 until 1989. Mr. Guenzel started as head of the Credit Division, worked in
problem loans resolutions and eventually as responsible for the Bank's
Operations and Systems Division.
HENRY PETERS. Mr. Peters has served as a trustee of the Bishop Estate,
which owns 60% of the common equity of SOCAL, since 1984. In addition, he is
chairman of the board of the Bishop Estate's property and investment management
subsidiary, Royal Hawaiian Shopping Center, Inc. From 1978 through 1984, Mr.
Peters served as Industrial Division Manager of Dura Constructors, a
construction firm
OC-59
<PAGE>
located in Honolulu, Hawaii. From 1974 through 1994, Mr. Peters served as a
Representative to the House of Representatives of the State of Hawaii and from
1981 through 1986, Mr. Peters served as Speaker of the House.
GERARD JERVIS. Mr. Jervis has served as a trustee of the Bishop Estate
since 1994. From 1986 through 1994, Mr. Jervis was partner in the law firm of
Jervis, Winer & Meheula located in Kailua, Hawaii.
ROBERT W. MACDONALD. Mr. MacDonald is Managing Director of William E. Simon
& Sons, a merchant banking firm, where he has been employed since 1991. William
E. Simon & Sons has an indirect ownership in SOCAL through Arbur, Inc. Mr.
MacDonald was with Salomon Brothers between 1971 and 1979 where he eventually
headed the tax-exempt mortgage-backed financing group. In 1980 he left Salomon
Brothers to start a financial advisory firm and Catalyst Energy Corporation, a
leading developer of independent power facilities. The company went public in
1984 and was sold to an investor group in 1988. Between 1988 and 1991, Mr.
MacDonald co-founded a merchant banking corporation, East Rock Partners, which
invested in alternative energy projects.
SENIOR EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information with respect to the principal occupations
during the last five years for the four senior executive officers who are not
directors.
J. MICHAEL HOLMES. Mr. Holmes has served as Executive Vice President and
Chief Financial Officer of the Bank since March 1995. Mr. Holmes also serves as
Secretary and Treasurer of SOCAL. Prior to SOCAL, Mr. Holmes joined BancFlorida,
FSB in 1974 as Controller and served in various capacities, culminating as
Executive Vice President and Chief Financial Officer in 1985, a position he held
through the company's merger with First Union in August 1994. Mr. Holmes also
served as Secretary, Treasurer and Chief Financial Officer of the parent holding
company, BancFlorida Financial Corp., between 1985 and August 1994.
WILLIAM W. FLADER. Mr. Flader has served as Executive Vice President of
Retail Banking for the Bank since March 1995. Before joining the Bank, Mr.
Flader was employed by Banc Florida, FSB from October 1980 to August 1994 in
various capacities. Mr. Flader served as Senior Vice President of Retail Banking
for BancFlorida from December 1989 to August 1994.
DOREEN J. BLAUSCHILD. Ms. Blauschild came to the Bank as Associate Counsel
in 1988 and was promoted to Vice President, General Counsel in 1989. In 1991,
Ms. Blauschild was promoted to Senior Vice President, General Counsel. Ms.
Blauschild also has served as the Secretary since 1989.
JOHN T. WASLEY. Mr. Wasley is Senior Vice President of the Bank and manages
the Loan Servicing, Commercial Real Estate Lending, Special Assets, Corporate
Real Estate and General Services Departments of the Bank. Mr. Wasley joined the
Bank in 1992 to establish the Special Assets Department. During his tenure at
the Bank, Mr. Wasley has managed the liquidation of $112 million in
non-performing assets. Between 1988 and 1992, Mr. Wasley was President of
Wedgewood Development Company, which was a Los Angeles-based real estate
development company. Between 1984 and 1988, Mr. Wasley was the Chief Financial
Officer of Wedgewood Investment Corporation, which is a Los Angeles-based real
estate investment firm.
SUMMARY COMPENSATION TABLE
The following table includes individual compensation information with
respect to the Chief Executive Officer of the Bank and the other four most
highly compensated officers of the Bank whose total
OC-60
<PAGE>
compensation exceeded $100,000 for services rendered in all capacities during
the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION ALL OTHER
NAME AND PRINCIPLE POSITION SALARY(1) BONUS AWARDS COMPENSATION (2)
- ---------------------------------------------------------- --------- --------- --------------- -------------------
<S> <C> <C> <C> <C>
Rudolf P. Guenzel......................................... 325,000 243,750(3) N/A 4,750
Director, President & Chief
Executive Officer
J. Michael Holmes......................................... 200,000 150,000(3) N/A 3,250
Executive Vice President, Chief
Financial Officer
William W. Flader......................................... 170,000 127,500(3) N/A 3,825
Executive Vice President, Retail
Banking
Doreen J. Blauschild...................................... 150,000 5,000 N/A 2,900
Senior Vice President, General
Counsel
John T. Wasley............................................ 105,000 5,000 N/A 3,150
Senior Vice President,
Real Estate
</TABLE>
- ------------------------
(1) Does not include amounts attributable to miscellaneous benefits received by
the named officers. The costs to the Bank of providing such benefits to the
named officers during the year ended December 31, 1996 did not exceed the
lesser of $50,000 or 10% of the total of annual salary and bonus reported.
(2) Represents the employers' contribution on behalf of the employee to the
401(k) Plan. See "Benefit Plans."
(3) Amounts were accrued in 1996 and paid in 1997.
EMPLOYMENT AGREEMENTS
On October 21, 1996, the Bank entered into employment agreements with
Messrs. Guenzel, Holmes, and Flader, the President and Chief Executive Officer,
Executive Vice President and Chief Financial Officer and Executive Vice
President, Retail Banking, respectively (individually, the "Executive" and
collectively, the "Executives"). The Bank has agreed to employ the Executives
for a term of three years in their respective positions. The employment
agreements are reviewed annually by the Board of Directors of the Bank, and the
term of the Executives' employment agreements may be extended each year for a
successive additional one-year period on the second anniversary of the
Agreements and on each annual anniversary thereafter, upon approval of the
Bank's Board of Directors, unless either party elects, not less than 30 days
prior to the annual anniversary date, not to extend the employment term. In
addition to a base salary, which amounts to $325,000, $200,000 and $170,000 for
Messrs. Guenzel, Holmes and Flader, respectively, and is reviewed annually, the
Executives are entitled to receive an annual bonus based upon the net income of
the Bank, which begins at 25% of base salary if earnings range from $1.0 million
to $4.9 million, and increases to 100% of base salary if net income equals or
exceeds $15.0 million. In the event that SoCal or the Bank is a party to a
"Capital Transaction," the Executives are also eligible to receive a long-term
bonus based on the gross sales proceeds received pursuant to such a transaction.
A "Capital Transaction" is generally defined to include any one of the
following: (a) the sale of more than 50% of the outstanding voting securities of
SoCal or the Bank; (b) certain mergers or consolidations of SoCal or the Bank in
which more than 50% of the combined voting power of the voting securities of
SoCal or the Bank
OC-61
<PAGE>
change hands; (c) the sale of substantially all of the assets of SoCal or the
Bank; and (d) the liquidation of SoCal or the Bank. Under such circumstances,
the Executives will receive a long term bonus ranging from 3.5% (4.5% in the
case of Mr. Guenzel) of the amount by which gross sales proceeds (as defined)
exceeds between $73.0 million and $138.0 million and 5% (6% in the case of Mr.
Guenzel) of the amount by which gross sales proceeds exceed $138.0 million.
Each of the employment agreements is terminable with or without cause by the
Bank. The Executive shall have no right to compensation or other benefits
pursuant to the employment agreement for any period after voluntary termination
or termination by the Bank for cause, disability, retirement or death, or if the
employment agreement is not continued following a Capital Transaction. In the
event (i) the Executive terminates his employment because of failure of the Bank
to comply with any material provision of the employment agreement, (ii) the
employment agreement is terminated by the Bank other than for cause, disability,
retirement, death, or upon the consummation of a Capital Transaction, or (iii)
the employment agreement is terminated by the Executive for "Good Reason," the
Executive will be entitled to a cash severance amount equal to the Executive's
base salary times the number of years remaining in the term of the employment
agreement up to a maximum of two years. Executives are also entitled to receive
a long-term bonus in the event that a Capital Transaction is consummated within
twelve months of termination. In such an event, any severance amount to which an
Executive is entitled will offset any amount due under the long-term bonus.
"Good Reason" means, without the Executive's express consent, the failure to
reappoint the Executive to his position at the Bank, a material reduction in
base salary, the relocation of the Executive to an office which is more than 50
miles from the current principal executive office of the Bank or a purported
termination which is not effected under the notice provisions of the employment
agreement.
Each employment agreement recognizes that the long-term bonus could
constitute an "excess parachute payment" within the meaning of Section 280G of
the Code if at any time the stock issued by SoCal and/or the Bank becomes
publicly traded or because of some other event, SoCal or the Bank is no longer
entitled to rely upon the exception in Section 280G(d)(5) of the Code for
non-publicly traded corporations. In this event, the employment agreements
provide that the Board of Directors of the Bank will negotiate with the
Executives the granting of a stock option or similar equity based plan of
equivalent value to replace the long-term bonus.
On April 11, 1995, the Bank entered into an employment agreement with Doreen
J. Blauschild ("Blauschild"). In the event the Bank terminates Ms. Blauschild's
employment after September 11, 1995 without cause or following her resignation
due to an unauthorized reduction in compensation, the employment agreement
provides that Ms. Blauschild shall be entitled to certain benefits including (i)
four months base salary and payment of accrued and unpaid vacation, (ii) a
$25,000 lump sum payment; and (iii) continued coverage under the Bank's group
health, dental, life and disability plans for a period of six months from
termination or until Ms. Blauschild becomes eligible for comparable group
benefit coverages, whichever is earlier. In addition, Ms. Blauschild is also
entitled to a payment equal to 0.25% of the amount by which any net recovery
(i.e., gross amount less attorneys' fees) by and payable to SoCal relating to
the SoCal Goodwill Litigation, whether by judgment or settlement, exceeds $150.0
million. See "Business of the Bank--Legal Proceedings." The employment agreement
generally defines "cause" as termination because of personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order or material breach of any provision of the
employment agreement.
BENEFIT PLANS
SAVINGS PLUS PLAN. The Bank maintains a 401(k) profit sharing plan (the
"Savings Plan"). The Savings Plus Plan is designed to promote the future
economic welfare of the employees of the Bank and to encourage employee savings.
Employee deferrals of salary and employer contributions made under the
OC-62
<PAGE>
Savings Plus Plan, together with the income thereon, are accumulated in
individual accounts maintained in trust on behalf of the employee participants,
and is made available to the employee participants upon retirement and under
certain other circumstances as provided in the Savings Plus Plan. Since employee
deferrals of salary and employer contributions made under the Saving Plus Plan
are made on a tax deferred basis, employee participants are able to enjoy
significant income tax savings by participating in the Savings Plus Plan.
Employees are also permitted to direct the investment of their accounts among
six separate funds, including various fixed income and equity investment funds.
An employee of the Bank becomes eligible to participate in the Savings Plus
Plan on the entry date (January 1, April 1, July 1 or October 1) nearest the
date he or she completes a year of service. A year of service is a 12
consecutive month period in which the employee works at least 1,000 hours for
the Bank. Participants may elect to defer amounts up to 15% of their annual
compensation under the Saving Plus Plan, subject to certain limits imposed by
law. The Bank matches 50% of compensation deferred up to 6% and may make
additional discretionary matching contributions. During the years ended December
31, 1996, 1995 and 1994, the Bank contributed $155,000, $159,000 and $245,000,
respectively, to the Savings Plus Plan on behalf of its employees.
PENSION PLAN. The Bank maintains a defined benefit pension plan ("Pension
Plan") covering all employees who were Pension Plan participants as of December
31, 1990. All Pension Plan benefits were frozen as of December 31, 1990. In
general, the Pension Plan provides for annual benefits payable monthly upon
retirement at age 65 in an amount equal to 4.1% of an employee's average annual
salary for the five consecutive years as of December 31, 1990 ("Five Year
Average Compensation") plus 0.65% of Five Year Average Compensation multiplied
by his number of years of service, not in excess of 10 years. Under the Pension
Plan, an employee's benefits are 20% vested after three years of service and
fully vested after seven years of service. A year of service is any year in
which an employee works a minimum of 1,000 hours. Benefits under the Pension
Plan are payable for ten years certain and life thereafter commencing at age 65
and are not subject to Social Security offsets. There was no net periodic
pension cost for 1995 (as the Bank was entitled to a credit of $36,000). The
Bank incurred a net periodic pension cost of $24,000 in 1994. For the year ended
December 31, 1996, there was a net periodic pension cost of approximately
$9,000.
The following table illustrates annual pension benefits for retirement at
age 65 under various levels of compensation and years of service. The figures in
the table assume that the Pension Plan continues in its present form and that
the participant elect a straight life annuity form of benefit.
<TABLE>
<CAPTION>
5 YEARS OF 10 YEARS OF OVER 10 YEARS
FIVE YEAR AVERAGE COMPENSATION SERVICE SERVICE OF SERVICE
- --------------------------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
$80,000.................................................................... $ 18,610 $ 37,220 $ 37,220
100,000.................................................................... 23,360 46,720 46,720
120,000.................................................................... 28,110 56,220 56,220
140,000.................................................................... 32,860 65,720 65,720
160,000.................................................................... 37,610 75,220 75,220
180,000.................................................................... 42,360 84,720 84,720
200,000.................................................................... 47,110 94,220 94,220
Over 200,000............................................................... 47,110 94,220 94,220
</TABLE>
The maximum annual compensation which may be taken into account under the
Code (as adjusted from time to time by the Internal Revenue Service) for
calculating contributions under qualified defined benefit plans currently is
$160,000 and the maximum annual benefit permitted under such plans currently is
$125,000.
Ms. Blauschild has 3 years of credited service and her final compensation
earned under such plan as of December 31, 1990 was $95,000. Messrs. Guenzel,
Holmes, Flader, and Wasley are not participants in the Pension Plan and have no
credited service or plan benefits.
OC-63
<PAGE>
REGULATION
GENERAL
The Bank is a federally chartered and insured stock savings bank subject to
extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on SOCAL or the Bank, is qualified in its
entirety by reference to the particular statutory or regulatory provisions or
proposals.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
HOLDING COMPANY ACQUISITIONS. SOCAL is a registered savings and loan
holding company. The HOLA and OTS regulations generally prohibit a savings and
loan holding company, without prior OTS approval, from acquiring, directly or
indirectly, the ownership or control of any other savings association or savings
and loan holding company, or all, or substantially all, of the assets or more
than 5% of the voting shares thereof. These provisions also prohibit, among
other things, any director or officer of a savings and loan holding company, or
any individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition is
approved by the OTS.
HOLDING COMPANY ACTIVITIES. SOCAL currently operates as a unitary savings
and loan holding company. Generally, there are limited restrictions on the
activities of a unitary savings and loan holding company and its non-savings
association subsidiaries. If SOCAL ceases to be a unitary savings and loan
holding company, the activities of SOCAL and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and loan
holding company to give the OTS at least 30 days' advance notice of any proposed
dividends to be made on its guarantee, permanent or other non-withdrawable
stock, or else such dividend will be invalid. See "--Regulation of Federal
Savings Banks--Capital Distribution Regulation."
AFFILIATE RESTRICTIONS. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make a
loan or extension of credit to an affiliate unless the affiliate is engaged only
in activities permissible for bank holding
OC-64
<PAGE>
companies; a savings association may not purchase or invest in securities of an
affiliate other than shares of a subsidiary; a savings association and its
subsidiaries may not purchase a low-quality asset from an affiliate; and covered
transactions and certain other transactions between a savings association or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions, each
loan or extension of credit by a savings association to an affiliate must be
secured by collateral with a market value ranging from 100% to 130% (depending
on the type of collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.
REGULATION OF FEDERAL SAVINGS BANKS
REGULATORY SYSTEM. As a federally insured savings bank, lending activities
and other investments of the Bank must comply with various statutory and
regulatory requirements. The Bank is regularly examined by the OTS and must file
periodic reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
FEDERAL HOME LOAN BANKS. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal to the greater of: (i) 1% of its aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of
its FHLB advances (borrowings).
LIQUID ASSETS. Under OTS regulations, for each calendar month, a savings
bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at
5.0%, may be changed from time to time by the OTS to any amount between 4.0% to
10.0%, depending upon certain factors. OTS regulations also require each savings
association to maintain an average daily balance of short-term liquid assets
equal to not less than 1.0% of the average daily balance of its net withdrawable
accounts and short-term borrowings during the preceding calendar month. The Bank
maintains liquid assets in compliance with these regulations.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require savings
banks to satisfy minimum capital standards: risk-based capital requirements, a
leverage requirement and a tangible capital requirement. Savings banks must meet
each of these standards in order to be deemed in compliance with OTS capital
requirements. In addition, the OTS may require a savings association to maintain
capital above the minimum capital levels. See "--REIT Subsidiary Preferred
Stock."
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings bank is required to maintain
core capital equal to a minimum of 3% of adjusted total assets. (In addition,
under the prompt corrective action provisions of the OTS regulations, all but
the most highly-rated institutions must maintain a minimum leverage ratio of 4%
in order to be adequately
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capitalized. See "--Prompt Corrective Action.") A savings bank is also required
to maintain tangible capital in an amount at least equal to 1.5% of its adjusted
total assets.
Under OTS regulations, a savings bank with a greater than "normal" level of
interest rate exposure must deduct an interest rate risk ("IRR") component in
calculating its total capital for purposes of determining whether it meets its
risk-based capital requirement. Interest rate exposure is measured, generally,
as the decline in an institution's net portfolio value that would result from a
200 basis point increase or decrease in market interest rates (whichever would
result in lower net portfolio value), divided by the estimated economic value of
the savings association's assets. The interest rate risk component to be
deducted from total capital is equal to one-half of the difference between an
institution's measured exposure and "normal" IRR exposure (which is defined as
2%), multiplied by the estimated economic value of the institution's assets. In
August 1995, the OTS indefinitely delayed implementation of its IRR regulation.
Based on internal measures of interest rate risk at June 30, 1997, the Bank
would not have been required to deduct an IRR component in calculating total
risk-based capital had the IRR component of the capital regulations been in
effect.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings associations with
which it has significant business relationships. The Bank is not subject to any
such individual minimum regulatory capital requirement.
The Bank's core capital to risk-based assets ratio was 9.65%, its leverage
capital ratio was 4.76% and its total risk-based capital ratio was 10.91% at
June 30, 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Capital Resources."
CERTAIN CONSEQUENCES OF FAILURE TO COMPLY WITH REGULATORY CAPITAL
REQUIREMENTS. A savings bank's failure to maintain capital at or above the
minimum capital requirements may be deemed an unsafe and unsound practice and
may subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is required
to submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that it
will not, without the approval of its appropriate OTS Regional Director, grow
beyond net interest credited or make capital distributions. If a savings bank's
capital plan is not approved, the bank will become subject to additional growth
and other restrictions. In addition, the OTS, through a capital directive or
otherwise, may restrict the ability of a savings bank not in compliance with the
capital requirements to pay dividends and compensation, and may require such a
bank to take one or more of certain corrective actions, including, without
limitation: (i) increasing its capital to specified levels, (ii) reducing the
rate of interest that may be paid on savings accounts, (iii) limiting receipt of
deposits to those made to existing accounts, (iv) ceasing issuance of new
accounts of any or all classes or categories except in exchange for existing
accounts, (v) ceasing or limiting the purchase of loans or the making of other
specified investments, and (vi) limiting operational expenditures to specified
levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only
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if certain strict requirements are met, and must be denied under certain
circumstances. If an exemption is granted by the OTS, the savings bank still may
be subject to enforcement actions for other violations of law or unsafe or
unsound practices or conditions.
PROMPT CORRECTIVE ACTION. The prompt corrective action regulation of the
OTS, promulgated under FDICIA, requires certain mandatory actions and authorizes
certain other discretionary actions to be taken by the OTS against a savings
bank that falls within certain undercapitalized capital categories specified in
the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. At June 30, 1997, the Bank met the capital requirements of an
"adequately capitalized" institution under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept brokered deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew or roll-over brokered
deposits.
Institutions that are classified as undercapitalized are subject to certain
mandatory supervisory actions, including: (i) increased monitoring by the
appropriate federal banking agency for the institution and periodic review of
the institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the institution into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the institution's ability to make any acquisition, open any new branch
offices, or engage in any new line of business without the prior approval of the
appropriate federal banking agency for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain additional
supervisory actions against an undercapitalized institution if the agency
determines that such actions are necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance fund.
These supervisory actions include: (i) requiring the institution to raise
additional capital or be acquired by another institution or holding company if
certain grounds exist, (ii) restricting transactions between the institution and
its affiliates, (iii) restricting interest rates paid by the institution on
deposits, (iv) restricting the institution's asset growth or requiring the
institution to reduce its assets, (v) requiring replacement of senior executive
officers and directors, (vi) requiring the institution to alter or terminate any
activity deemed to pose excessive risk to the institution, (vii) prohibiting
capital distributions by bank holding companies without prior approval by the
FRB, (viii) requiring the institution to divest certain subsidiaries, or
requiring the institution's holding company to divest the institution or certain
affiliates of the institution, and (ix) taking any other supervisory action that
the agency believes would better carry out the purposes of the prompt corrective
action provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a timely,
acceptable capital restoration plan or fail to implement such a plan are subject
to the same supervisory actions as significantly undercapitalized institutions.
Significantly undercapitalized institutions are subject to the mandatory
provisions applicable to undercapitalized institutions. The regulation also
makes mandatory for significantly undercapitalized institutions certain of the
supervisory actions that are discretionary for institutions classified as
undercapitalized, creates a presumption in favor of certain discretionary
supervisory actions,
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and subjects significantly undercapitalized institutions to additional
restrictions, including a prohibition on paying bonuses or raises to senior
executive officers without the prior written approval of the appropriate federal
bank regulatory agency. In addition, significantly undercapitalized institutions
may be subjected to certain of the restrictions applicable to critically
undercapitalized institutions.
The regulation requires that an institution be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with concurrence of the FDIC, determines that other action would
better achieve the purposes of the prompt corrective action provisions of
FDICIA. Any such determination must be renewed every 90 days. A depository
institution also must be placed into receivership if the institution continues
to be critically undercapitalized on average during the fourth quarter after the
institution initially became critically undercapitalized, unless the
institution's federal bank regulatory agency, with concurrence of the FDIC,
makes certain positive determinations with respect to the institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized institutions
and to a number of other severe restrictions. For example, beginning 60 days
after becoming critically undercapitalized, such institutions may not pay
principal or interest on subordinated debt without the prior approval of the
FDIC. (However, the regulation does not prevent unpaid interest from accruing on
subordinated debt under the terms of the debt instrument, to the extent
otherwise permitted by law.) In addition, critically undercapitalized
institutions may be prohibited from engaging in a number of activities,
including entering into certain transactions or paying interest above a certain
rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
CONSERVATORSHIP/RECEIVERSHIP. In addition to the grounds discussed under
"--Prompt Corrective Action," the OTS (and, under certain circumstances, the
FDIC) may appoint a conservator or receiver for a savings association if any one
or more of a number of circumstances exist, including, without limitation, the
following: (i) the institution's assets are less than its obligations to
creditors and others, (ii) a substantial dissipation of assets or earnings due
to any violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books, papers,
records or assets or refusal to submit such items for inspection to any examiner
or lawful agent of the appropriate federal banking agency or state bank or
savings association supervisor, (vi) the institution is likely to be unable to
pay its obligations or meet its depositors' demands in the normal course of
business, (vii) the institution has incurred, or is likely to incur, losses that
will deplete all or substantially all of its capital, and there is no reasonable
prospect for the institution to become adequately capitalized without federal
assistance, (viii) any violation of law or unsafe or unsound practice that is
likely to cause insolvency or substantial dissipation of assets or earnings,
weaken the institution's condition, or otherwise seriously prejudice the
interests of the institution's depositors or the federal deposit insurance fund,
(ix) the institution is undercapitalized and the institution has no reasonable
prospect of becoming adequately capitalized, fails to become adequately
capitalized when required to do so, fails to submit a timely and acceptable
capital restoration plan, or materially fails to implement an accepted capital
restoration plan, (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital, or (xi) the institution is
found guilty of certain criminal offenses related to money laundering.
ENFORCEMENT POWERS. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
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include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss; restrict the growth of
the institution; and rescind agreements and contracts.
CAPITAL DISTRIBUTION REGULATION. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings associations. Capital distributions are
defined to include, in part, dividends and payments for stock repurchases and
cash-out mergers.
Under the regulation, an association that meets its fully phased-in capital
requirements both before and after a proposed distribution and has not been
notified by the OTS that it is in need of more than normal supervision (a "Tier
1 association") may, after prior notice to but without the approval of the OTS,
make capital distributions during a calendar year up to the higher of: (i) 100%
of its net income to date during the calendar year plus the amount that would
reduce by one-half its surplus capital ratio at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four-quarter period. A
Tier 1 association may make capital distributions in excess of the above amount
if it gives notice to the OTS and the OTS does not object to the distribution. A
savings association that meets its regulatory capital requirements both before
and after a proposed distribution but does not meet its fully phased-in capital
requirement (a "Tier 2 association") is authorized, after prior notice to the
OTS but without OTS approval, to make capital distributions in an amount up to
75% of its net income over the most recent four-quarter period, taking into
account all prior distributions during the same period. Any distribution in
excess of this amount must be approved in advance by the OTS. A savings
association that does not meet its current regulatory capital requirements (a
"Tier 3 association") cannot make any capital distribution without prior
approval from the OTS, unless the capital distribution is consistent with the
terms of a capital plan approved by the OTS.
At June 30, 1997, the Bank qualified as a Tier 1 association for purposes of
the capital distribution rule. The OTS may prohibit a proposed capital
distribution that would otherwise be permitted if the OTS determines that the
distribution would constitute an unsafe or unsound practice. The requirements of
the capital distribution regulation supersede less stringent capital
distribution restrictions in earlier agreements or conditions.
The OTS has proposed to amend its capital distribution regulation to conform
its requirements to the OTS prompt corrective action regulation. Under the
proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a holding
company, would be required to provide notice to the OTS prior to making a
capital distribution. "Troubled" associations and undercapitalized associations
would be allowed to make capital distributions only by filing an application and
receiving OTS approval, and such applications would be approved under certain
limited circumstances.
QUALIFIED THRIFT LENDER TEST. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the
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alternative, by qualifying under the Internal Revenue Code as a "domestic
building and loan association." The Bank is a domestic building and loan
association as defined in the Internal Revenue Code.
Recent legislation also expands the QTL test to provide savings associations
with greater authority to lend and diversify their portfolios. In particular,
credit card and educational loans may now be made by savings associations
without regard to any percentage-of-assets limit, and commercial loans may be
made in an amount up to 10 percent of total assets, plus an additional 10
percent for small business loans. Loans for personal, family and household
purposes (other than credit card, small business and educational loans) are now
included without limit with other assets that, in the aggregate, may account for
up to 20% of total assets. At June 30, 1997, under the expanded QTL test,
approximately 89.0% of the Bank's portfolio assets were qualified thrift
investments.
FDIC ASSESSMENTS. The deposits of the Bank are insured by the SAIF of the
FDIC, up to applicable limits, and are subject to deposit premium assessments by
the SAIF. Under the FDIC's risk-based insurance system, SAIF-assessed deposits
have been subject to premiums of between 23 and 31 basis points, depending upon
the institution's capital position and other supervisory factors.
Under legislation enacted in 1996, SAIF-assessable deposits held as of June
30, 1995 were subject to a tax-deductible one-time special assessment at a rate
sufficient to achieve the 1.25% designated reserve ratio of the SAIF as of
October 1, 1996. This special SAIF assessment generally was payable no later
than November 29, 1996. The special assessment amounted to 65.7 cents per $100
of SAIF-assessable deposits and was collected on November 27, 1996. However, as
a result of the Bank's financial condition, the Bank made application to the
FDIC for an exemption from this one-time special assessment, which exemption was
approved on October 5, 1996. As a result, the Bank was exempt from paying the
special one-time assessment (which would have amounted to $9.0 million).
Instead, the Bank will continue to pay future assessments through 1999 at the
assessment rate schedule in effect as of June 30, 1995.
Under the new legislation, institutions with Bank Insurance Fund ("BIF")
deposits are required to share the cost of funding debt obligations issued by
the Financing Corporation ("FICO"), a corporation established by the federal
government in 1987 to finance the recapitalization of FSLIC. However, until the
earlier of December 31, 1999 or the date of elimination of the thrift charter,
the FICO assessment rate for BIF deposits is only 1/5 of the rate applicable to
SAIF deposits. Consequently, the annual FICO assessments to be added to deposit
insurance premiums are expected to equal approximately 6.4 basis points for SAIF
deposits and 1.3 basis points for BIF deposits from January 1, 1997 through
December 31, 1999, and approximately 2.4 basis points for both BIF and SAIF
deposits thereafter. From January 1, 1997, FICO payments will be paid directly
by SAIF and BIF institutions in addition to deposit insurance assessments.
On October 16, 1996, the FDIC lowered the rates on SAIF-assessable deposits.
The rule established SAIF rates ranging from 0 to 27 basis points as of October
1, 1996. However, as a result of the Bank's exemption from paying the one-time
special assessment, the Bank will continue to pay future assessments through
1999 at the assessment rate schedule in effect as of June 30, 1995. Therefore,
as of June 30, 1997, the Bank's annual assessment for deposit insurance was 30.0
basis points of insured deposits as opposed to 6.4 basis points of insured
deposits (which is the rate which applies to the highest rated savings
institutions).
Following the special assessment and the new FICO funding mechanism
effective January 1, 1997, future SAIF assessment rates are expected to depend
primarily on the rate of any new losses from the SAIF insurance fund. Under the
recent legislation, however, the FDIC is not permitted to establish SAIF
assessment rates that are lower than comparable BIF assessment rates.
THRIFT CHARTER. Congress has been considering legislation in various forms
that would require federal thrifts, such as the Bank, to convert their charters
to national or state bank charters. Recent legislation required the Treasury
Department to prepare for Congress a comprehensive study on development of a
common charter for federal savings associations and commercial banks; and, in
the event that the thrift
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charter was eliminated by January 1, 1999, would require the merger of the BIF
and the SAIF into a single Deposit Insurance Fund on that date. In the absence
of appropriate "grandfather" provisions, legislation eliminating the thrift
charter could have a material adverse effect on the Bank and its parent holding
companies because, among other things, these holding companies engage in
activities that are not permissible for bank holding companies and the
regulatory capital and accounting treatment for banks and thrifts differs in
certain significant respects. The Bank cannot determine whether, or in what
form, such legislation may eventually be enacted and there can be no assurance
that any legislation that is enacted would contain adequate grandfather rights
for the Bank and its parent holding companies.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings associations
have a responsibility under CRA and related regulations of the OTS to help meet
the credit needs of their communities, including low-and moderate-income
neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies and
the Department of Justice.
NEW SAFETY AND SOUNDNESS GUIDELINES. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
CHANGE OF CONTROL. Subject to certain limited exceptions, no company can
acquire control of a savings association without the prior approval of the OTS,
and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding Company Act
that acquire or own savings associations are no longer defined as savings and
loan holding companies under the HOLA and, therefore, are not generally subject
to supervision and regulation by the OTS. OTS approval is no longer required for
a bank holding company to acquire control of a savings association, although the
OTS has a consultative role with the FRB in examination, enforcement and
acquisition matters.
REIT SUBSIDIARY PREFERRED STOCK. The Bank filed a 30-day notice on June 11,
1997 with the OTS regarding the establishment of the Company as an operating
subsidiary of the Bank. The OTS issued a letter dated , 1997
expressing that it will not object to such establishment.
In conjunction with the operating subsidiary notice, the OTS reviewed among
other things the appropriateness of including the minority interest represented
by the Company's Series A Preferred Shares in the regulatory capital of the
Bank. See "--Regulatory Capital Requirements." In general, as a minority
interest in a consolidated subsidiary, the Series A Preferred Shares are
eligible to be treated as core capital of the Bank, but the OTS may have the
authority to exclude such REIT subsidiary preferred stock from core capital. The
OTS has indicated that it will not exclude REIT subsidiary preferred stock from
the core capital of the parent savings association if the following prudential
standards are met: (i) the REIT subsidiary preferred stock meets all of the same
terms and conditions that preferred stock issued by the
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parent savings association must meet in order to be included in core capital;
(ii) the REIT subsidiary preferred stock cannot be redeemed without the prior
written consent of the OTS; (iii) the REIT subsidiary preferred stock must be
converted into or exchanged for a core capital instrument of the parent savings
association if the OTS directs, in writing, that such a conversion or exchange
should occur because (a) the parent savings association becomes undercapitalized
under prompt corrective action regulations, (b) the parent savings association
is placed in bankruptcy, reorganization, conservatorship or receivership, or (c)
the OTS, in its sole discretion, directs in writing such conversion or exchange
in anticipation of the parent savings association becoming undercapitalized in
the near term; (iv) the amount of the savings association's core capital that is
composed of REIT subsidiary preferred stock does not exceed 25% of core capital
including such REIT subsidiary preferred stock (33 1/3% of core capital
excluding REIT subsidiary preferred stock); and (v) the OTS may exclude REIT
subsidiary preferred stock from core capital if it ceases to provide meaningful
capital support and a realistic ability to absorb losses or otherwise raises
supervisory concerns, including OTS concerns about the capital mix or asset
structure of the REIT subsidiary or the parent savings association. The Bank
expects $28.4 million of the Series A Preferred Shares to be included in the
core capital of the Bank.
TAXATION
FEDERAL TAXATION. The Bank is subject to those rules of federal income
taxation generally applicable to corporations under the Code. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to the Bank.
The Bank reports its earnings on a consolidated basis with SOCAL and is
subject to federal income taxation in the same general manner as other
corporations with some exceptions discussed below. The Bank has entered into an
agreement with SOCAL whereby the Bank computes and pays taxes based upon the
Bank's tax position assuming that a separate tax return was filed. However,
while the SOCAL senior debt issued in connection with the 1995 recapitalization
remains outstanding, SOCAL's payment to the Bank is limited to the amount of
consolidated taxes.
METHOD OF ACCOUNTING. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns.
BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 (the "1996
Act") eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995 and provided for recapture of a portion of the reserves existing at the
close of the last taxable year beginning before January 1, 1996 for institutions
such as the Bank. Prior to the 1996 Act, the Bank was permitted to establish a
reserve for bad debts and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at the
Bank's taxable income. For the tax year 1995, the Bank had a bad debt deduction
of $73 million.
As a further result of the 1996 Act, the Bank must use the specific
chargeoff method in computing its bad debt deduction beginning with its 1996
Federal tax return. Under this method, deductions may be claimed only and to the
extent that loans become wholly or partially worthless.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, tax bad debt
reserves were subject to recapture into taxable income should the Bank fail to
meet certain thrift asset definitional tests. New federal legislation eliminated
these thrift related recapture rules. However, under current law, pre-1988
reserves remain subject to recapture should the Bank make certain non-dividend
distributions or cease to maintain a bank charter. The Bank has no pre-1988 bad
debt reserve.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or
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"AMTI"). The AMT is payable to the extent such AMTI is in excess of an exemption
amount. Net operating losses can offset no more than 90% of AMTI. Certain
payments of alternative minimum tax may be used as credits against regular tax
liabilities in future years. As of December 31, 1996, the Bank had an
alternative minimum tax credit carryforward of approximately $1.2 million.
NET OPERATING LOSS CARRYFORWARDS. The Code allows net operating losses for
tax years beginning before August 5, 1997 to be carried back and deducted from
taxable income for the two preceding taxable years and carried forward and
deducted from taxable income for the 20 succeeding taxable years. The Bank has
federal tax net operating loss carryforwards of approximately $146.7 million at
December 31, 1996.
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS. Section 382 of the Code
imposes a limitation on the use of net operating loss carryforwards if there has
been an "ownership change." In general, an ownership change occurs if
immediately after any "owner shift involving a 5% stockholder" or any "equity
structure shift" the percentage of the stock of the corporation owned by one or
more 5% stockholders has increased by more than 50 percentage points over the
lowest percentage of stock of the corporation owned by such stockholders at any
time during the testing period. An "owner shift involving a 5% stockholder" is
defined as any change in the stock ownership of the corporation that affects the
percentage of stock in the corporation owned by any person who is a 5%
stockholder before or after the change. An equity structure shift is defined as
a reorganization other than an "F", divisive "D", or a divisive "G"
reorganization. A 5% stockholder is any stockholder holding 5% or more of the
corporation's stock at any time during the test period. It does not matter
whether that stockholder is a 5% stockholder before the change or after. A 5%
stockholder is defined as any person (or group) holding 5% or more of the
corporation's stock at any time during the testing period. Determinations of
ownership percentages are based upon fair market value. As a general rule,
owners of less than 5% are treated as a single 5% stockholder. All of their
individual stock ownership is aggregated and treated as the ownership percentage
of a single 5% stockholder. The testing period for an ownership change is the
three-year period ending on the day of the owner shift or equity shift.
The 1992 recapitalization resulted in an ownership change as defined by
Section 382 of the Code. As a result, usage of the Bank's net operating loss
carryforwards to offset Federal income tax liability is limited to approximately
$7.7 million per year. Any unused limitation is available in subsequent years
until expiration. The federal tax net operating loss available in 1997 is
approximately $38.7 million.
If the Bank undergoes an "ownership change" in a future year as a result of
transactions unrelated to the Offering, the Bank would be severely limited in
its ability to offset its federal taxable income and federal tax liability with
its net operating losses from the period priors to the ownership change. As of
June 1 ,1995, the Bank had experienced a 47.81% owner shift due to the 1995
recapitalization. Thus, an ownership change would occur if there is an
additional 2.19% owner shift by a 5% stockholder prior to June 1, 1998.
STATE TAXATION. The California franchise tax rate applicable to the Bank
equals the franchise tax rate applicable to corporations generally plus an "in
lieu" rate approximately equal to personal property taxes and business license
taxes paid by such corporation (but generally not paid by banks or financial
corporations such as the Bank); however, the total rate cannot exceed 10.84%.
Under California regulations, bad debt deductions are available in computing
California franchise taxes using a three or six year weighted average loss
experience method. The Bank had state tax net operating loss carryforwards of
approximately $8.7 million at December 31, 1996.
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<PAGE>
DESCRIPTION OF THE BANK PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Bank Preferred Shares, and is qualified in its entirety by reference to the
terms and provisions of the Federal Stock Charter of the Bank (the "Charter")
and the First Supplementary Section to Section 5 of the Charter setting forth
the powers, designations, preferences and rights of the Bank Preferred Shares.
GENERAL
The Bank Preferred Shares form a series of the preferred stock of the Bank,
which preferred stock may be issued from time to time in one or more series with
such rights, preferences and limitations as are determined by the Bank's Board
of Directors or, if then constituted, a duly authorized committee thereof. The
Board of Directors has authorized the Bank to issue the Bank Preferred Shares.
When issued, the Bank Preferred Shares will be validly issued, fully paid
and nonassessable. The holders of the Bank Preferred Shares will have no
preemptive rights with respect to any shares of the capital stock of the Bank or
any other securities of the Bank convertible into or carrying rights or options
to purchase any such shares. The Bank Preferred Shares will not be convertible
into shares of Common Stock or any other class or series of capital stock of the
Bank and will not be subject to any sinking fund or other obligation of the Bank
for their repurchase or retirement.
The registrar for the Bank Preferred Shares will send notices to
stockholders of any meetings at which holders of such shares have the right to
elect directors of the Company.
RANKING
The Bank Preferred Shares will rank prior to the Common Stock and to all
other classes and series of equity securities of the Bank now or hereafter
issued, other than any class or series of equity securities of the Bank
expressly designated as being on a parity with or senior to the Bank Preferred
Shares as to dividend rights and rights upon liquidation, winding up or
dissolution. The Bank has the power to create and issue additional preferred
stock or other classes of stock ranking on a parity with the Bank Preferred
Shares, or that constitute junior stock, without any approval or consent of the
holders of Bank Preferred Shares. The rights of holders of the Bank Preferred
Shares will be subordinate to the rights of the Bank's general creditors,
including its depositors.
DIVIDENDS
Holders of Bank Preferred Shares shall be entitled to receive, if, when and
as authorized and declared by the Board of Directors of the Bank out of funds of
the Bank legally available therefor, noncumulative cash dividends at the rate of
% per annum of the initial liquidation preference (equivalent to $
per share per annum). Dividends on the Bank Preferred Shares will be payable, if
declared, quarterly in arrears on June 30, June 30, September 30 and December 31
(or, if such day is not a business day, on the next business day) of each year.
Each declared dividend shall be payable to holders of record as they appear at
the close of business on the stock register of the Bank on such record dates,
not more than 45 calendar days nor less than 10 calendar days preceding the
payment date thereof, as shall be fixed by the Board of Directors of the Bank
provided, however, that if a redemption date for the Bank Preferred Shares
occurs after a dividend is declared but before it is paid, such dividend shall
be paid as part of the redemption price to the person to whom the redemption
price is paid. Upon the exchange of Series A Preferred Shares for Bank Preferred
Shares, any accrued and unpaid dividends of the Series A Preferred Shares at the
time of the conversion will be deemed to be accrued and unpaid dividends on the
Bank Preferred Shares.
The right of holders of Bank Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors does not declare a
dividend payable in respect of any dividend period, holders of
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<PAGE>
the Bank Preferred Shares will have no right to receive a dividend in respect of
such dividend period, and the Bank will have no obligation to pay a dividend for
such dividend period, whether or not dividends are declared and paid for any
future period.
If any Bank Preferred Shares are outstanding, no full dividends shall be
declared or paid or set apart for payment on any series of capital stock of the
Bank ranking, as to dividends, junior to the Bank Preferred Shares for any
dividend period unless full dividends have been or contemporaneously are
declared and paid or a sum sufficient for the payment thereof is set apart for
such payments on the Bank Preferred Shares for the then-current dividend period.
When dividends are not paid in full (or a sum sufficient for such full payment
is not so set apart) for any dividend period upon the Bank Preferred Shares and
the shares of any parity stock, all dividends declared on the Bank Preferred
Shares and the shares of any other series of capital stock ranking on a parity
as to dividends with the Bank Preferred Shares shall only be declared PRO RATA
based upon the respective amounts that would have been paid on the Bank
Preferred Shares and any shares of parity stock had dividends been paid in full.
In addition to the foregoing restriction, the Bank shall not declare, pay or
set apart funds for any dividends or other distributions (other than in Common
Stock or other junior stock) with respect to any Common Stock or other junior
stock or repurchase, redeem or otherwise acquire, or set apart funds for
repurchase, redemption or other acquisition of, any Common Stock or other junior
stock through a sinking fund or otherwise, unless and until (i) full dividends
on the Bank Preferred Shares for the four (4) most recent preceding dividend
periods (or such lesser number of dividend periods during which shares of Bank
Preferred Shares have been outstanding) are declared and paid or a sum
sufficient for payment has been paid over to the dividend disbursing agent for
payment of such dividends and (ii) the Bank has declared a cash dividend on the
Bank Preferred Shares at the annual dividend rate for the then-current dividend
period, and sufficient funds have been paid over to the dividend disbursing
agent for the payment of such cash dividend for such then-current dividend
period.
No dividend shall be paid or set aside for holders of the Bank Preferred
Shares for any dividend period unless full dividends have been paid or set aside
for the holders of each class or series of equity securities, if any, ranking
senior to the Bank Preferred Shares as to dividends for such dividend period.
REDEMPTION
Except in the case of a Change of Control, the Bank Preferred Shares will
not be redeemable prior to , 2002. On or after such date, the Bank
Preferred Shares will be redeemable in cash by the Bank or its successor or any
acquiring or resulting entity with respect to the Bank (including by any parent
or subsidiary of the Bank, any such successor, or any such acquiring or
resulting entity), as applicable, at its option, in whole or in part, at any
time or from time to time at the redemption price of $25.00 per share, plus
authorized, declared and unpaid dividends to the date of redemption without
interest.
If less than all of the outstanding shares of Bank Preferred Shares are to
be redeemed, the Bank will select those shares to be redeemed pro rata, by lot
or by such other methods as the Board of Directors in its sole discretion
determines to be equitable, provided that such method satisfies any applicable
requirements of any securities exchange on which the Bank Preferred Shares is
then listed.
Upon a Change of Control, the Bank Preferred Shares are redeemable on or
prior to , 2002, at the option of the Bank or its successor or any
acquiring or resulting entity with respect to the Bank (including by any parent
or subsidiary of the Bank or any such successor or any such acquiring or
resulting entity), as applicable, in whole, but not in part, at a price per
share equal to (i) $25.00, plus (ii) an amount equal to the declared and unpaid
dividends, if any, to the date fixed for redemption, without interest, and,
without duplication, an additional amount equal to the amount of dividends that
would be payable on the Bank Preferred Shares in respect of the period from the
first day of the dividend period in which the date fixed for redemption occurs
to the date fixed for redemption (assuming all such dividends were to be
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<PAGE>
declared), plus (iii) the Applicable Premium. Any redemption of Bank Preferred
Shares is subject to the prior approval of the OTS.
"Applicable Premium" means the greater of (i) $ and (ii) the excess
of (A) the present value of (l) an amount equal to the amount of dividends that
would be payable on the Bank Preferred Shares in respect of the period from the
date fixed for redemption through , 2002 (assuming all such dividends were
to be authorized and declared) plus (2) $ , computed using a discount
rate equal to the Treasury Rate plus [75] basis points, over (B) $25.00.
"Change of Control" means the occurrence of any of the following events:
(i) any Person (as defined herein) other than a Permitted Holder (as
defined herein) shall be the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act), directly or indirectly, of a majority in
the aggregate of the total voting power of the voting stock of the Bank or
SOCAL, whether as a result of issuance of securities of the Bank, any
merger, consolidation, liquidation or dissolution of the Bank or SOCAL, any
direct or indirect transfer of securities by a Permitted Holder, or
otherwise; or
(ii) a sale, transfer, conveyance or other disposition, in a single
transaction or in a series of related transactions (other than to an
affiliate of the Bank or any of its subsidiaries), in either case occurring
outside the ordinary course of business, of more than 75% of the assets and
75% of the deposit liabilities of the Bank shown on the consolidated balance
sheet of the Bank as of the end of the most recent fiscal quarter ending at
least 45 days prior to such transaction (or the first in such related series
of transactions).
"Permitted Holder" means the Bishop Estate, BIL Securities or Arbur, or any
Person controlled, directly or indirectly, by the Bishop Estate, BIL Securities
or Arbur.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (510)
which has become publicly available at least two business days prior to the date
fixed for redemption (or, if such Statistical Release is no longer published,
any publicly available source of similar market data)) most nearly equal to the
period of time to , 2002; provided, however, that if such period is
not equal to the constant maturity of a United States Treasury security for
which a weekly average yield is given, the Treasury Rate shall be obtained by
linear interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such yields
are given, except that, if such remaining life is less than one year, the weekly
average yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
Notice of any optional redemption will be mailed at least 30 days, but not
more than 60 days, prior to any redemption date to each holder of shares of Bank
Preferred Shares to be redeemed at its registered address.
If all funds necessary for such redemption are set aside or delivered to the
redemption agent with irrevocable instructions to effect the redemption, then
all shares so called for redemption will be deemed to be no longer outstanding
and all rights with respect to such shares will terminate, except for the right
to receive the funds so deposited, without interest.
The Bank's ability to redeem shares of Bank Preferred Shares is subject to
compliance with applicable regulatory requirements, including those of the OTS,
relating to the redemption of capital instruments.
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<PAGE>
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Bank Preferred Shares will not be entitled to vote. In
the event the holders of Bank Preferred Shares are entitled to vote, each share
of Bank Preferred Shares will be entitled to one vote.
If full dividends on the Bank Preferred Shares have not been paid for six
(6) dividend periods, the maximum authorized number of directors of the Bank
shall thereupon be increased by two (2). Subject to compliance with any
requirement for regulatory approval of (or non-objection to) persons serving as
directors, the holders of the Bank Preferred Shares, voting together as a class
with the holders of any parity stock upon which the same voting rights as those
of the Bank Preferred Shares have been conferred and are irrevocable, will have
the exclusive right to elect the two additional directors at the Bank's next
annual meeting of stockholders and at each subsequent annual meeting until full
dividends have been paid or declared and a sum sufficient for payment thereof is
set apart for payment on the Bank Preferred Shares for four (4) consecutive
dividend periods. The term of such directors elected thereby shall terminate,
and the total number of directors shall be decreased by two (2), upon the first
annual meeting of stockholders after the payment or the declaration and setting
aside for payment of full dividends on the Bank Preferred Shares for four (4)
consecutive dividend periods. Any such director may be removed by, and shall not
be removed except by, the vote of the holders of record of the outstanding Bank
Preferred Shares and parity stock entitled to vote, voting together as a single
class without regard to series, at a meeting of the Bank's stockholders, or of
the holders of Bank Preferred Shares and parity stock so entitled to vote
thereon, called for that purpose. As long as dividends on the Bank Preferred
Shares shall not have been paid for six (6) dividend periods, (i) any vacancy in
the office of any such director may be filled (except as provided in the
following clause (ii)) by an instrument in writing signed by any such remaining
director and filed with the Bank, and (ii) in the case of the removal of any
such director, the vacancy may be filled by the vote of the holders of the
outstanding Bank Preferred Shares and parity stock entitled to vote, voting
together as a single class without regard to series, at the same meeting at
which such removal shall be voted.
So long as any Bank Preferred Share is outstanding, the Bank shall not,
without the consent or vote of the holders of at least two-thirds of the
outstanding Bank Preferred Shares, voting separately as a class, (a) amend,
alter or repeal or otherwise change any provision of the Charter (including the
Supplementary Section establishing the Bank Preferred Shares) if such amendment,
alteration, repeal or change would materially and adversely affect the rights,
preferences, powers or privileges of the Bank Preferred Shares, or (b)
authorize, create or increase the authorized amount of or issue any class or
series of any equity securities of the Bank, or any warrants, options or other
rights convertible or exchangeable into any class or series of any equity
securities of the Bank, ranking prior to the Bank Preferred Shares, either as to
dividend rights or rights on liquidation, dissolution or winding up of the Bank
or (c) merge, consolidate, reorganize or effect any other business combination
involving the Bank, unless the resulting corporation will thereafter have no
class or series of equity securities either authorized or outstanding ranking
prior to the Bank Preferred Shares as to dividends or as to the distribution of
assets upon liquidation, dissolution or winding up, except the same number of
shares of such equity securities with the same rights, preferences, powers and
privileges as the shares of equity securities of the Bank that are authorized
and outstanding immediately prior to such transaction, and each holder of Bank
Preferred Shares immediately prior to such transaction shall receive shares with
the same rights, preferences, powers and privileges of the resulting corporation
as the Bank Preferred Shares held by such holder immediately prior thereto.
The creation or issuance of parity stock or junior stock in respect of the
payment of dividends, or the distribution of assets upon liquidation,
dissolution or winding up of the Bank, or an amendment that increases the number
of authorized shares of Preferred Stock, or Bank Preferred Shares or any junior
stock or parity stock, shall not be deemed to be a material and adverse change
requiring a vote of the holders of the Bank Preferred Shares.
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<PAGE>
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Bank, the holders of the Bank Preferred Shares at the time
outstanding will be entitled to receive out of assets of the Bank legally
available for distribution to its stockholders, before any distribution of
assets is made to holders of Common Stock or any other class of stock ranking
junior to the Bank Preferred Shares upon liquidation, subject to the rights of
holders of any class or series of equity securities having preference with
respect to distributions upon liquidation and the Bank's general creditors,
including its depositors, liquidating distributions in the amount of $25.00 per
share, plus declared and unpaid dividends thereon, if any, to the date of
liquidation.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of the Bank Preferred Shares will have no right
or claim to any of the remaining assets of the Bank. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Bank are insufficient to pay the amount of the
liquidation distributions on all outstanding Bank Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Bank ranking on a parity with the Bank Preferred Shares in
the distribution of assets upon any liquidation, dissolution or winding up of
the affairs of the Bank, then the holders of the Bank Preferred Shares and such
other classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger or other business combination
of the Bank with or into any other Person, or the sale of all or substantially
all of the assets of the Bank, shall not be deemed to constitute liquidation,
dissolution or winding up of the Bank.
CERTAIN DEFINITIONS
"Applicable Premium" shall have the meaning set forth under "Description of
the Bank Preferred Shares--Redemption.
"Bank" means People's Bank of California and any other obligor upon the Bank
Preferred Shares.
"Change of Control" shall have the meaning set forth under "Description of
the Bank Preferred Shares--Redemption."
"FDIC" means the Federal Deposit Insurance Corporation or any successor
thereto.
"FHLB" means any of the regional Federal Home Loan Banks.
"GAAP" means generally accepted accounting principles, consistently applied.
"OTS" means the Office of Thrift Supervision or any successor thereto.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Regulatory Capital Requirements" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
regulation, or such higher amount of capital as the Bank, individually, is
required to maintain in order to meet any individual minimum capital standard
applicable to the Bank pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R.
Section 567.3 (and any amendment to either such Section) or any successor law or
regulation.
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<PAGE>
EXCHANGE
The Bank Preferred Shares are to be issued, if ever, in connection with an
exchange of the Series A Preferred Shares issued by the Company. The Series A
Preferred Shares are subject to an automatic exchange, in whole and not in part,
on a share-for-share basis, into Bank Preferred Shares if the appropriate
federal regulatory agency directs in writing that an exchange occur because (i)
the Bank becomes "undercapitalized" under prompt corrective action regulations,
(ii) the Bank is placed into conservatorship or receivership or (iii) the
appropriate federal regulatory agency, in its sole discretion, anticipates the
Bank becoming "undercapitalized" in the near term. The Bank has registered with
the OTS a total of 1,426,000 shares of the Bank Preferred Shares to cover the
exchange, if necessary, of the 1,240,000 Series A Preferred Shares offered by
the Company and the 186,000 share over-allotment option granted to the
Underwriters of the Series A Preferred Shares.
LEGAL MATTERS
Certain legal matters with respect to the Bank Preferred Shares will be
passed upon for the Bank by Elias, Matz, Tiernan & Herrick L.L.P.
EXPERTS
The Consolidated Financial Statements of the Bank as of December 31, 1996
and 1995, and for each of the years in the two-year period ended December 31,
1996, have been included herein and in the Offering Circular in reliance upon
the report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The Consolidated Statement of Operations, Changes in Shareholders' Equity
and Cash Flows for the year ended December 31, 1994, included in this Offering
Circular, have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report appearing herein and has been included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report............................................................................ F-2
Report of Independent Public Accountants................................................................ F-3
Consolidated Statements of Financial Condition at December 31, 1996 and 1995 and June 30, 1997
(unaudited)........................................................................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 and the six
month periods ended June 30, 1997 and 1996 (unaudited)................................................ F-5
Consolidated Statements of Changes in Stockholder's Equity for the years ended December 31, 1996, 1995
and 1994 and the six month periods ended June 30, 1997 (unaudited).................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and the six
month periods ended June 30, 1997 and 1996 (unaudited)................................................ F-7
Notes to Consolidated Financial Statements.............................................................. F-10
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
People's Bank of California:
We have audited the accompanying consolidated statements of financial
condition of People's Bank of California (formerly Southern California Federal
Savings and Loan Association) (a Federal chartered stock association) and
subsidiaries (the Bank) as of December 31, 1996 and 1995 and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of People's
Bank of California and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 21, 1997, except as to note 20 to the
consolidated financial statements,
which is as of July 1, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
Southern California Federal Savings and Loan Association:
We have audited the consolidated statements of operations, changes in
shareholders' equity and cash flows of Southern California Federal Savings and
Loan Association (a Federal chartered stock association) and subsidiaries (the
Association) for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Southern California Federal Savings and Loan Association and
subsidiaries for the year ended December 31, 1994, in conformity with generally
accepted accounting principles.
As more fully discussed in Note 1 to the financial statements included in
the 1994 Annual Report (not included herein), the Association did not meet the
minimum regulatory capital requirements as of December 31, 1994 as set forth by
the Office of Thrift Supervision (OTS) and was operating under a Prompt
Corrective Action Directive and an Accelerated Resolution Plan Agreement (the
Agreements). On May 31, 1995, the OTS and the Federal Deposit Insurance
Corporation (FDIC) approved the recapitalization of the Association in
accordance with the Plan of Reorganization. The OTS stated that upon
consummation of the recapitalization and receipt of written submission by the
Association showing that it was adequately capitalized, the Agreements would be
rescinded. On June 1, 1995, the Association received additional paid in capital
of approximately $60.4 million. Management submitted a filing as of May 31, 1995
which indicated that the Association was adequately capitalized. In connection
with the recapitalization, the Board of Directors and management have
implemented a new strategic plan to return the Association to profitability and
remain in regulatory capital compliance. The achievement of management's
objectives and the ability of the Association to remain in capital compliance is
dependent upon future economic conditions and events which cannot be assured.
Failure of the Association to maintain minimum capital requirements could
subject the Association to regulatory actions. The financial statement impact,
if any, of any regulatory actions that could result from the failure of the
Association to comply with minimum capital requirements is uncertain.
Accordingly, no adjustment that may result from the ultimate resolution of this
uncertainty has been made in the accompanying financial statements.
Los Angeles, California
June 9, 1996
F-3
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995 AND
JUNE 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents................................................. $ 13,388 14,673 7,249
Federal funds sold........................................................ 3,335 7,200 11,800
Securities purchased under agreements to resell (note 2).................. -- -- 35,000
Securities available-for-sale, at estimated market values (notes 3, 12 and
16)..................................................................... 617,038 502,301 241,645
Mortgage-backed securities held-to-maturity, estimated market values of
$10,324 at June 30, 1997 (unaudited) and $10,899 at December 31, 1996
(notes 5 and 12)........................................................ 10,375 10,971 --
Loans receivable, net (notes 6, 7 and 12)................................. 1,102,381 1,141,707 1,228,152
Real estate held for investment and sale, net (note 8).................... 24,737 22,561 16,288
Premises and equipment, net (note 9)...................................... 5,959 6,262 7,788
Federal Home Loan Bank stock, at cost (note 12)........................... 14,686 15,380 14,527
Accrued interest receivable............................................... 11,829 11,611 9,438
Other assets.............................................................. 16,605 15,205 7,864
------------ ---------- ----------
Total assets........................................................ $ 1,820,333 1,747,871 1,579,751
------------ ---------- ----------
------------ ---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits (note 10)........................................................ $ 1,314,036 1,371,243 1,473,318
Securities sold under agreements to repurchase (note 11).................. 331,358 192,433 --
Advances from the Federal Home Loan Bank (note 12)........................ 80,000 80,000 31,746
Accrued expenses and other liabilities.................................... 10,021 27,585 7,238
------------ ---------- ----------
Total liabilities................................................... 1,735,415 1,671,261 1,512,302
------------ ---------- ----------
Commitments and contingencies (notes 9 and 16)
Stockholder's equity (notes 1 and 19):
Preferred stock, $.01 par value. Authorized 1,000,000 shares; none
issued or outstanding................................................. -- -- --
Common stock, par value $.01 per share.Authorized 1,000,000 shares;
issued and outstanding 100,000 shares................................. 1 1 1
Additional paid-in capital.............................................. 142,538 142,538 142,538
Unrealized losses on securities available-for-sale...................... (4,402) (6,084) (1,647)
Minimum pension liability, net of tax................................... (293) -- --
Accumulated deficit..................................................... (52,926) (59,845) (73,443)
------------ ---------- ----------
Total stockholder's equity.......................................... 84,918 76,610 67,449
------------ ---------- ----------
Total liabilities and stockholder's equity.......................... $ 1,820,333 1,747,871 1,579,751
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE
SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest, fees and dividend income:
Short term investments.................................... $ 524 510 1,195 2,498 2,327
Securities purchased under agreements to resell........... 1,551 1,584 3,257 3,157 1,196
Investment securities..................................... 1,335 1,110 2,374 180 --
Mortgage-backed securities................................ 16,197 11,552 26,136 21,836 22,621
Loans receivable.......................................... 41,353 45,784 89,020 94,473 89,293
Federal Home Loan Bank stock.............................. 458 386 914 782 824
--------- --------- --------- --------- ---------
Total interest, fees and dividend
income................................................ 61,418 60,926 122,896 122,926 116,261
--------- --------- --------- --------- ---------
Interest expense:
Deposits (note 10)........................................ 33,957 38,887 75,136 74,866 58,005
Advances from the Federal Home Loan Bank.................. 2,378 942 3,207 11,376 15,511
Securities sold under agreements to repurchase............ 8,093 4,156 10,901 7,067 6,112
Hedging costs, net (note 14).............................. 150 219 387 1,685 8,610
--------- --------- --------- --------- ---------
Total interest expense.................................. 44,578 44,204 89,631 94,994 88,238
--------- --------- --------- --------- ---------
Net interest income..................................... 16,840 16,722 33,265 27,932 28,023
Provision for losses (note 7)............................... 655 2,213 2,884 8,823 24,443
--------- --------- --------- --------- ---------
Net interest income after provision for
losses................................................ 16,185 14,509 30,381 19,109 3,580
--------- --------- --------- --------- ---------
Other income:
Loan service and loan related fees........................ 402 719 1,378 1,582 1,968
Gain on mortgage-backed securities sales, net............. 122 3,600 3,638 641 485
Gain (loss) on loan and loan servicing sales, net
(note 4)................................................ 3,413 (53) (53) (166) 2,712
Income (loss) from real estate operations, net
(note 8)................................................ 112 (197) 1,946 (2,067) (5,398)
Other income.............................................. 795 538 1,215 513 360
--------- --------- --------- --------- ---------
Total other income...................................... 4,844 4,607 8,124 503 127
--------- --------- --------- --------- ---------
Operating expenses:
Personnel and benefits.................................... $ 5,546 5,259 10,763 12,108 19,059
Occupancy................................................. 3,387 3,080 6,389 7,022 8,807
FDIC insurance............................................ 2,499 2,266 4,415 4,290 4,121
Professional services..................................... 292 85 771 2,050 2,007
Office related expenses................................... 1,912 1,802 3,992 3,958 4,441
Other..................................................... 474 679 1,593 1,478 2,443
--------- --------- --------- --------- ---------
Total operating expenses................................ 14,110 13,171 27,923 30,906 40,878
--------- --------- --------- --------- ---------
Earnings (loss) before income tax provision
(benefit)............................................. 6,919 5,945 10,582 (11,294) (37,171)
Income tax provision (benefit) (note 13).................... -- 5 (3,016) (2,646) 11,356
--------- --------- --------- --------- ---------
Net earnings (loss)..................................... $ 6,919 5,940 13,598 (8,648) (48,527)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
SERIES B (LOSSES)
SENIOR SERIES A ADDITIONAL ON SECURITIES MINIMUM
PREFERRED PREFERRED COMMON PAID-IN AVAILABLE- PENSION ACCUMULATED
STOCK STOCK STOCK CAPITAL FOR-SALE LIABILITY DEFICIT
----------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993......... $ 4 1 1 82,169 1,833 -- (16,268)
Net loss......................... -- -- -- -- -- -- (48,527)
Change in unrealized gains (losses)
on securities
available-for-sale............... -- -- -- -- (1,865) -- --
----------- ----------- ----------- ----------- ------------- ----------- -------------
Balance, December 31, 1994......... 4 1 1 82,169 (32) -- (64,795)
Net loss......................... -- -- -- -- -- -- (8,648)
Redemption of preferred stock and
capital contributions............ (4) (1) -- 60,369 -- -- --
Change in unrealized gains (losses)
on securities
available-for-sale............... -- -- -- (1,615) -- --
----------- ----------- ----------- ----------- ------------- ----------- -------------
Balance, December 31, 1995......... -- -- 1 142,538 (1,647) -- (73,443)
Net earnings....................... -- -- -- -- -- -- 13,598
Change in unrealized gains (losses)
on securities
available-for-sale............... -- -- -- -- (4,437) -- --
----------- ----------- ----------- ----------- ------------- ----------- -------------
Balance, December 31, 1996......... -- -- 1 142,538 (6,084) -- (59,845)
Net earnings (Unaudited)........... -- -- -- -- -- -- 6,919
Change in unrealized gains (losses)
on securities available-for-sale
(Unaudited)...................... -- -- -- -- 1,682 -- --
Minimum pension liability, net of
tax (Unaudited).................. -- -- -- -- -- (293) --
----------- ----------- ----------- ----------- ------------- ----------- -------------
Balance, June 30, 1997
(Unaudited)...................... $ -- -- 1 142,538 (4,402) (293) (52,926)
----------- ----------- ----------- ----------- ------------- ----------- -------------
----------- ----------- ----------- ----------- ------------- ----------- -------------
<CAPTION>
TOTAL
---------
<S> <C>
Balance, December 31, 1993......... 67,740
Net loss......................... (48,527)
Change in unrealized gains (losses)
on securities
available-for-sale............... (1,865)
---------
Balance, December 31, 1994......... 17,348
Net loss......................... (8,648)
Redemption of preferred stock and
capital contributions............ 60,364
Change in unrealized gains (losses)
on securities
available-for-sale............... (1,615)
---------
Balance, December 31, 1995......... 67,449
Net earnings....................... 13,598
Change in unrealized gains (losses)
on securities
available-for-sale............... (4,437)
---------
Balance, December 31, 1996......... 76,610
Net earnings (Unaudited)........... 6,919
Change in unrealized gains (losses)
on securities available-for-sale
(Unaudited)...................... 1,682
Minimum pension liability, net of
tax (Unaudited).................. (293)
---------
Balance, June 30, 1997
(Unaudited)...................... 84,918
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
----------- ---------- ---------- ------------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................... $ 6,919 5,940 13,598 (8,648) (48,527)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization............... 617 1,011 1,837 1,770 1,772
Provisions for loan and real estate
losses.................................... 900 2,400 3,650 10,834 29,192
Decrease (increase) in valuation allowance
on net deferred tax asset................. -- -- 10,807 (5,230) (24,394)
(Amortization) write-down for discontinued
lease operations.......................... (57) (62) (150) (309) 1,229
(Decrease) increase in net deferred tax
asset..................................... 280 -- (7,770) 7,880 13,071
Amortization and accretion of premiums,
discounts and deferred fees............... 655 105 515 158 1,354
Amortization of purchase accounting
intangible assets, premiums and discounts,
net....................................... 110 124 (185) (234) (214)
Gain on sale of investment and
mortgage-backed securities................ (122) (3,600) (3,638) (641) (470)
Loss (gain) on sale of loans and loan
servicing................................. (3,413) 53 53 166 (2,712)
Gain on real estate sales................... (1,022) (135) (2,710) (391) (196)
Federal Home Loan Bank stock dividend....... (477) (390) (853) (803) (1,305)
(Increase) decrease in accrued interest
receivable................................ (218) (1,123) (2,173) (176) 815
Increase (decrease) in accrued interest
payable................................... (2,568) 1,515 5,543 (771) (4,025)
Decrease (increase) in other assets......... (1,204) (3,321) (10,317) (1,796) 24,355
Increase (decrease) in accrued expenses..... (15,354) (520) 14,954 (409) (162)
----------- ---------- ---------- ------------- -----------
Net cash provided by (used in) operating
activities.............................. (14,954) 1,997 23,161 1,400 (10,217)
----------- ---------- ---------- ------------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
----------- ---------- ---------- ------------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Increase (decrease) in securities purchased under
agreements to resell............................. $ -- 35,000 35,000 (35,000) --
Proceeds from sales of investment and
mortgage-backed securities available-for-sale.... 41,883 51,952 162,087 184,877 49,837
Proceeds from sales of investment and
mortgage-backed securities held-to-maturity...... -- -- -- 38,713 32,253
Proceeds from loan sales including hedging
proceeds......................................... 85,213 -- -- 27,541 394,565
Investment and mortgage-backed security principal
repayments and maturities........................ 43,968 24,395 52,380 58,020 115,156
Loan originations, net of repayments............... 5,411 21,704 41,610 50,391 (439,091)
Purchases of investments and mortgage-backed
securities available-for-sale.................... (199,409) (286,185) (476,748) (212,155) (19,641)
Purchase of mortgage-backed securities
held-to-maturity................................. -- -- (10,971) -- (99,395)
Purchases of loans................................. (68,801) -- -- -- (11,937)
Costs capitalized on real estate................... (546) (1,610) (2,228) (262) (1,026)
Proceeds from sale of real estate.................. 19,602 13,669 40,217 20,299 36,637
Additions to premises and equipment................ (406) (633) (1,081) (866) (1,671)
Sales of premises and equipment.................... -- 559 785 1,027 15
Redemption of FHLB stock........................... 1,171 -- -- 2,914 2,899
----------- ---------- ---------- ------------- -----------
Net cash (used in) provided by investing
activities................................... (71,914) (141,149) (158,949) 135,479 58,601
----------- ---------- ---------- ------------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
----------- ---------- ---------- ------------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------- --------------------------------------
1997 1996 1996 1995 1994
--------- -------- -------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from capital infusion, net................................. $ -- -- -- 60,384 --
Redemption of preferred stock....................................... -- -- -- (20) --
Net increase (decrease) in deposits................................. (57,207) (42,332) (102,075) 89,100 (4,920)
Net increase (decrease) in securities sold under agreements to
repurchase........................................................ 138,925 177,597 192,433 -- (46,985)
Issuance of FHLB advances........................................... -- 33,900 113,900 12,188,746 2,451,000
Repayment of FHLB advances.......................................... -- (33,900) (65,646) (12,467,000) (2,455,000)
--------- -------- -------- ----------- ----------
Net cash provided by (used in) financing activities............. 81,718 135,265 138,612 (128,790) (55,905)
--------- -------- -------- ----------- ----------
Net increase (decrease) in cash and cash equivalents............ (5,150) (3,887) 2,824 8,089 (7,521)
Cash and cash equivalents at beginning of period...................... 21,873 19,049 19,049 10,960 18,481
--------- -------- -------- ----------- ----------
Cash and cash equivalents at end of period............................ $ 16,723 15,162 21,873 19,049 10,960
--------- -------- -------- ----------- ----------
--------- -------- -------- ----------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.......................................................... $ 46,995 42,511 83,691 95,698 83,653
Income taxes...................................................... -- 5 246 4 39
--------- -------- -------- ----------- ----------
--------- -------- -------- ----------- ----------
Supplemental schedule of non cash investing and financing activities:
Securitization of mortgage loans.................................... $ -- -- -- -- 31,997
Foreclosed real estate.............................................. 20,455 28,007 42,518 20,431 21,278
Loans originated in connection with sale of foreclosed real
estate............................................................ 5,078 2,494 12,608 6,412 7,360
--------- -------- -------- ----------- ----------
--------- -------- -------- ----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
On May 22, 1995, a plan of reorganization of SoCal Holdings, Inc. (SCH), the
parent company, was adopted by the shareholders of SCH, under which existing
shareholders of SCH agreed to invest an aggregate of $58.5 million in new debt
and equity securities of SCH. Under an existing commitment, one of the
shareholders agreed to purchase from SCH for $1.9 million a Senior Note due 2002
which was also contributed to the capital of SCH. The shareholders also
contributed the SCH Senior Notes due 2002 (including all accrued and unpaid
interest thereon) acquired by them in 1992 to the capital of SCH.
The gross proceeds from the sale of such debt and equity securities less
$36,572 used by SCH to redeem all of the Series A and Series B Preferred Stock
of SCH, or $60.4 million, was contributed by SCH to the capital of People's Bank
of California (the "Bank") on June 1, 1995. Pursuant to a related Plan of
Reorganization of the Bank adopted on May 16, 1995 by the shareholders of the
Bank, the Bank redeemed all outstanding shares of the Bank Series A and Series B
Preferred Stock for an aggregate of $19,688. The remaining net proceeds totaling
$60.4 million were utilized to increase the Bank's capital level. Upon
consummation of the recapitalization of SCH and the Bank, the Bank was
"adequately capitalized."
On May 31, 1995, the Office of Thrift Supervision (OTS) and the Federal
Deposit Insurance Corporation (FDIC) had approved the recapitalization of SCH
and the Bank in accordance with the plans of reorganizations of SCH and the
Bank. Upon written submission to the OTS that the Bank became adequately
capitalized upon consummation of the recapitalization, effective June 1, 1995,
certain regulatory sanctions against the Bank were removed and the Bank was
deemed not subject to 12 C.F.R. Section 565.5 relating to the filing of and
compliance with capital restoration plans.
The following is a description of significant accounting and reporting
policies which the Bank follows in preparing and presenting its consolidated
financial statements.
BASIS OF ACCOUNTING
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles which conform to general practice
within the savings and loan industry. The preparation of these consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from these estimates. The consolidated financial
statements as of and for the six-month periods ended June 30, 1997 and 1996 are
unaudited, but in the opinion of management, reflect all necessary adjustments,
consisting only of normal recurring items necessary for fair representation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Bank and
its subsidiaries, all of which are wholly owned. All significant intercompany
accounts and transactions have been eliminated in consolidation.
F-10
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fees on Loans and Mortgage-Backed and Investment Securities
The Bank defers origination and related fees on loans and certain direct
loan origination costs. Deferred fees, net of any deferred costs, are recognized
over the life of the related asset as an adjustment of the asset's yield using
the interest method.
Calculation of the yield is done on the aggregate method, and prepayments
are anticipated where there are a large number of similar loans, or similar
loans collateralizing a security, for which prepayments are probable and the
timing and amount of prepayments can be reasonably estimated based on market
consensus prepayment rates. Otherwise, a loan-by-loan or security-by-security
rather than an aggregate approach is used. The yield on adjustable rate loans
and securities is calculated based upon the fully adjusted rate in effect when
the loan or security is originated or purchased, and is not adjusted for
subsequent changes in rates. Initial estimates of prepayment rates are evaluated
periodically against actual prepayment experience and current market consensus
prepayment forecasts, and if significantly different from the original estimate,
the yield is recalculated.
COMMITMENT FEES
Commitment fees received in connection with the origination or purchase of
loans are deferred and recognized over the life of the resulting loans as an
adjustment of yield. If the commitment, or a portion thereof, expires
unexercised, deferred commitment fees are recognized in income upon expiration
of the commitment. There were no expired commitment fees recognized during the
six months ended June 30, 1997 and June 30, 1996 (unaudited) and the years ended
December 31, 1996, 1995 and 1994. Direct costs, if any, to originate a
commitment are expensed as incurred.
Commitment fees paid to an investor in connection with the sale of loans are
expensed and reduce the net sales proceeds at the time of sale.
INVESTMENT SECURITIES AND LOANS
Management determines the appropriate classification of its securities
(mortgage-backed and investment securities) and loans at the time of purchase or
origination.
SECURITIES AVAILABLE-FOR-SALE--Securities to be held for indefinite periods
of time and not intended to be held-to-maturity are classified as
available-for-sale. Assets included in this category are those assets that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates, resultant prepayment
risk and other factors related to interest rate and resultant prepayment risk
changes. Securities available-for-sale are recorded at fair value. Both
unrealized gains and losses on securities available-for-sale, net of taxes, are
included as a separate component of stockholders' equity in the consolidated
statements of financial condition until these gains or losses are realized.
Gains or losses on sales of securities were based on the specific-valuation
method. If a security has a decline in fair value that is other than temporary,
then the security will be written down to its fair value by recording a loss in
the consolidated statements of operations.
SECURITIES HELD-TO-MATURITY--Securities that management has the intent and
the Bank has the ability at the time of purchase or origination to hold until
maturity are classified as securities held-to-maturity. Securities in this
category are carried at amortized cost adjusted for accretion of discounts and
amortization of premiums using the interest method over the estimated life of
the securities. If a security has a
F-11
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
decline in fair value below its amortized cost that is other than temporary,
then the security will be written down to its new cost basis by recording a loss
in the consolidated statements of operations.
LOANS HELD-FOR-SALE--Loans held-for-sale in connection with the Bank's
secondary marketing activities are recorded at the lower of amortized cost or
fair value. Unrealized losses are included in the consolidated statements of
operations.
FEDERAL HOME LOAN BANK (FHLB) STOCK--This asset is owned due to regulatory
requirements and is carried at cost. This stock is pledged as collateral to
secure FHLB advances.
IMPAIRED LOANS
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the impaired
loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized by
recording a valuation allowance.
Interest income on impaired loans is recognized on a cash basis if it is
determined that collection of principal is probable. Loans that are 90 days or
more past due, or when full collection of principal and interest is not
probable, are placed on nonaccrual status and interest income that has been
earned but not collected is reversed. Loans are returned to accrual status when
the borrower has had a period of sustained repayment performance. Management
considers all loans formally treated as troubled debt restructurings to be
impaired loans in the year of restructuring. Impaired loans are valued based
upon the fair value of underlying collateral, if collateral-dependent or
alternatively, the present value of expected cash flows using the loan's
original implicit loan interest rate.
ALLOWANCE FOR LOSSES
Valuation allowances for losses on loans and real estate are provided on
both a specific and general basis. Specific and general valuation allowances are
increased by provisions charged to expense and decreased by charge-offs of loans
and real estate, net of recoveries. Specific allowances are provided for
impaired loans for which the expected loss is measurable. General valuation
allowances are provided based on a formula which incorporates a number of
factors, including economic trends, industry experience, estimated collateral
values, past loss experience, the Bank's underwriting practices, and
management's ongoing assessment of the credit risk inherent in the asset
portfolio. The Bank periodically reviews the assumptions and formula by which
additions are made to the specific and general valuation allowances for losses
in an effort to refine such allowance in light of the current status of the
factors described above.
While management uses the best information available to make the periodic
evaluations of specific and general valuation allowances, adjustments to both
allowances may be necessary if actual future economic conditions differ
substantially from the assumptions used in making such periodic evaluations.
Regulatory examiners may require the Bank to recognize additions to the
allowance based upon their judgments about information available to them at the
time of their examination.
F-12
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE HELD FOR INVESTMENT AND FOR SALE
Real estate held for investment consists of investments in limited
partnerships which were acquired for development and sale. Real estate
held-for-sale consists of property acquired in settlement of loans. Real estate
held for investment and for sale is carried at fair value, net of anticipated
selling costs. Fair value is determined based on recent appraisals or discounted
cash flow calculations. Gains or losses on sales of real estate, net of selling
and other costs, are recognized at the time of sale.
Real estate acquired in settlement of loans is recorded at the date of
acquisition at the lower of the related principal balance upon foreclosure, or
at its fair value, less estimated disposition costs. The excess of the loan
balance over fair value of the asset acquired, if any, is charged to the
allowance for loan losses upon foreclosure. Subsequent to foreclosure,
additional decreases in the carrying value of foreclosed properties are
recognized through a provision charged to operations. An allowance for losses
equal to the excess of the book value over the fair value of the property, less
estimated selling costs is maintained. The allowance for losses is increased or
decreased for subsequent changes in estimated fair market value. Costs of
developing and improving such property to facilitate sale are capitalized.
Expenses related to holding such real estate, net of rental and other income,
are charged against operations as incurred.
GAINS ON THE SALE OF LOANS AND LOAN SERVICING
The Bank services real estate loans for investors that are not included in
the accompanying consolidated financial statements. Fees earned for servicing
loans owned by investors are reported as income when the related mortgage loan
payments are collected. Loan servicing costs are charged to expense as incurred.
Loans or participating interests in loans are sold to others without
recourse. The servicing rights of loans sold may be retained by the Bank, or may
be sold with the loan or sold separately to a third party. Gains or losses from
loan and loan servicing sales are recognized at the time of sale of the loans
and/or the servicing rights.
Gains or losses on sales of loans are recognized at the time of sale and are
determined by the difference between the net sales proceeds and the carrying
value of the loans sold. When servicing is retained, an additional gain or loss
may be recognized based upon the relative fair values of the loan sold and the
present value of expected amounts to be received or paid resulting from the
difference between the contractual interest rates received from the borrowers
and the rates paid to the buyers excluding a normal loan servicing fee,
securitization fees and costs, and considering estimated prepayments on such
loans. The present value of such future receipts creates an asset, the "excess
servicing fee receivable."
The excess servicing fees are amortized using the interest method.
Periodically the excess servicing receivable is evaluated for realizability by
coupon ranges based on current balances of the loans serviced, current market
consensus prepayment rates, and the discount rate used in the original gain
calculation. Amounts determined to be unrealizable are expensed.
DEPRECIATION AND AMORTIZATION
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which ranges from 3 to 25 years. Leasehold
improvements are amortized using the straight-line method
F-13
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
over the lives of the assets or term of the lease, whichever is shorter.
Maintenance and repairs are expensed as incurred.
TAXES ON INCOME
The Bank uses the asset and liability method for measurement and recognition
of income taxes. The balance sheet amounts of net deferred tax assets or
liabilities are recognized on the temporary differences between the basis of
assets and liabilities as measured by tax laws and their financial statement
basis, plus available tax operating loss carryforwards and tax credit
carryforwards, reduced by a valuation allowance for that portion of tax assets
not considered more likely than not to be realized. Deferred income tax
(benefit) is recognized for the change in net deferred tax assets or
liabilities, plus the valuation allowance change. Current income tax is the
amount of total taxes currently payable.
DERIVATIVES AND HEDGING ACTIVITIES
The Bank uses interest rate swap (swaps), interest rate cap (caps), interest
rate floor (floors), and interest rate corridor (corridors) contracts in the
management of its interest rate risk. The objective of these financial
instruments is to more closely match the estimated repricing duration and/or
repricing characteristics of specifically identified interest-sensitive assets
and liabilities to reduce interest rate exposure. Such contracts are used to
reduce interest rate risk and are not used for speculative purposes, and
therefore are not marked-to-market. The net interest income or expense, net of
amortization of premiums, discounts and fees, from these contracts is recognized
currently on an accrual basis over their term in interest expense in "hedging
costs, net" in the consolidated statements of operations.
Premiums paid for and discounts associated with, and costs and fees of
interest rate swap, cap, floor and corridor contracts are amortized or accreted
into interest expense on a straight-line basis over the life of the contracts.
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated statements of cash flows, the Bank
considers all highly liquid debt instruments (investments) purchased with a
maturity of three months or less to be cash equivalents. This currently includes
cash and amounts due from banks, Federal funds sold, and time certificates of
deposit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, which was
effective, on a prospective basis, for fiscal years beginning after December 31,
1996. SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities based on
consistent application of a financial-components approach that focuses on
control. SFAS No. 125 extends the "available for sale" and "trading" approach of
SFAS No. 115 to non-security financial assets that can be contractually prepaid
or otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. The extension of the SFAS
No. 115 approach to certain non-security financial assets and the amendment to
SFAS No. 115 are effective for financial assets held on or acquired after
January 1,
F-14
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1997. The adoption of SFAS No. 125 did not have a material adverse effect on the
Bank's financial statements.
In February 1997, the FASB released SFAS No. 128 "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings Per Share and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the numerator and denominator of the
diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. SFAS No. 128 requires restatement of all prior-period EPS data
presented.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." Statement 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management is in the process of determining
the impact, if any, this statement will have on the Bank.
RECLASSIFICATION
Certain amounts in prior years' financial statements have been reclassified
to conform to the current financial statement presentation.
F-15
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(2) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank purchases securities under agreements to resell at a later date at
a set price, generally collateralized by AA or higher rated mortgaged-backed
securities. The average outstanding balance was approximately $55,916,000,
$58,919,000 and $51,847,000 during the six months ended June 30, 1997
(unaudited), and the years ended December 31, 1996 and 1995, respectively. The
maximum outstanding balance at any month-end was $25,000,000 and $40,000,000
during 1996 and 1995, respectively. There was no balance outstanding at any
month-end during the six months ended June 30, 1997 (unaudited). The weighted
average interest rate on such agreements was approximately 5.55%, 5.53%, 6.17%
and 4.41% during the six months ended June 30, 1997 (unaudited), and the years
ended December 31, 1996, 1995 and 1994, respectively. The securities pledged are
held by a third-party institution.
(3) SECURITIES AVAILABLE-FOR-SALE
The Bank holds certain securities available-for-sale. The amortized cost,
unrealized gains and losses, and estimated fair value of securities
available-for-sale at June 30, 1997 (unaudited), December 31, 1996 and 1995 were
as follows (dollars in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
June 30, 1997 (unaudited):
Debt securities issued by government agency -- due after one
year through five years...................................... $ 50,022 62 (1,139) 48,945
Mortgage-backed securities..................................... 571,418 1,765 (5,090) 568,093
---------- ----------- ----------- -----------
Total securities available-for-sale.......................... $ 621,440 1,827 (6,229) 617,038
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
December 31, 1996:
Debt securities issued by government agency -- due after one
year through five years...................................... $ 40,023 -- (1,309) 38,714
Mortgage-backed securities..................................... 468,362 170 (4,945) 463,587
---------- ----------- ----------- -----------
Total securities available-for-sale.......................... $ 508,385 170 (6,254) 502,301
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
December 31, 1995:
Debt securities issued by government agency -- due after five
year through ten years....................................... $ 9,985 9 -- 9,994
Mortgage-backed securities..................................... 233,298 320 (1,967) 231,651
---------- ----------- ----------- -----------
Total securities available-for-sale.......................... $ 243,283 329 (1,967) 241,645
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
In November 1995, the Financial Accounting Standards Board issued guidance
to the implementation of SFAS 115, which among other things, allowed for a
one-time reclassification of securities from held-to-maturity to
available-for-sale. In conformity with this guidance, the Bank reclassified
mortgage-backed securities with a book value of approximately $322 million and a
fair value of approximately $321 million to available-for-sale in December 1995.
Additionally, at December 31, 1995, the Bank reclassified mortgage-backed
securities with a book value of approximately $101 million from held-to-maturity
to available-for-sale.
F-16
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(3) SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
Proceeds from sales of mortgage-backed securities available-for-sale, were
approximately $41,883,000, $51,952,000, $162,087,000, $184,877,000 and
$49,837,000 for the six months ended June 30, 1997 and 1996 (unaudited) and in
each of the years ended December 31, 1996, 1995 and 1994, respectively, and
resulted in gross realized gains of approximately $261,000, $3,657,000,
$3,860,000, $551,000 and $898,000, respectively, and gross realized losses of
approximately $139,000, $57,000, $222,000 and $18,000 for the six months ended
June 30, 1997 and 1996 (unaudited) and in the years ended December 31, 1996 and
1995, respectively. There were no gross realized losses in the year ended
December 31, 1994.
At June 30, 1997 (unaudited), December 31, 1996 and 1995, the amortized cost
and estimated fair value of mortgage-backed securities available-for-sale
pledged to secure borrowings and swap agreements are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995
----------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Pledged against:
Securities sold under agreements to repurchase.... $ 355,705 353,801 209,328 206,264 -- --
Advances from Federal Home Loan Bank.............. 87,518 86,542 94,824 93,795 37,503 37,150
Swap and corridor agreements...................... 7,995 7,811 8,442 8,259 6,141 5,987
Treasury tax and loan account..................... 4,822 4,682 5,056 4,874 -- --
Loan servicing custodial deposit accounts......... -- -- 4,614 4,554 5,826 5,812
---------- ----------- ----------- ----------- ----------- -----------
$ 456,040 452,836 322,264 317,746 49,470 48,949
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
</TABLE>
(4) LOANS HELD-FOR-SALE
In connection with its secondary marketing activities, the Bank originates
and holds for short time periods certain loans for sale rather than held for
investment. There were no loans held-for-sale at June 30, 1997 (unaudited) and
December 31, 1996 and 1995.
There were no loans sold in 1996. Proceeds from sales of loans held-for-sale
were approximately $85,213,000, $27,541,000 and $394,565,000 in the six months
ended June 30, 1997 and 1996 (unaudited) and in each of the years ended December
31, 1995 and 1994, respectively, excluding sales of loan servicing rights and
resulted in gross realized gains of approximately $165,000, $0, $170,000 and
$1,270,000 and gross realized losses of approximately $0, $53,000, $296,000 and
$1,175,000 in the six months ended June 30, 1997 and 1996 (unaudited) and in
each of the years ended December 31, 1995 and 1994, respectively. Gains from
sales of servicing rights, including flow through and bulk sales of servicing,
were approximately $3,248,000 and $2,951,000 for the six months ended June 30,
1997 (unaudited) and in the year ended December 31, 1994, respectively. There
were no sales of servicing during the years ended December 31, 1996 and 1995.
In the six months ended June 30, 1997 and 1996 (unaudited) and the years
ended December 31, 1996, 1995 and 1994, write-offs of excess servicing fees
receivable totaled approximately $0, $18,000, $18,000,
F-17
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(4) LOANS HELD-FOR-SALE (CONTINUED)
$40,000 and $45,000, respectively, and are included in (loss) gain on loan and
loan servicing sales in the accompanying consolidated statements of operations.
(5) MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
The amortized cost, unrealized gains and losses, and estimated fair value of
mortgage-backed securities at June 30, 1997 (unaudited) and December 31, 1996
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
June 30, 1997 (unaudited)..................................... $ 10,375 -- (51) 10,324
------- ----- ----- -----------
------- ----- ----- -----------
December 31, 1996............................................. $ 10,971 -- (72) 10,899
------- ----- ----- -----------
------- ----- ----- -----------
</TABLE>
Substantially all mortgage-backed securities are collateralized by
single-family residence secured loans.
There were no sales of mortgage-backed securities in 1996 and for the six
months ended June 30, 1997 (unaudited). Proceeds from sales of mortgage-backed
securities totaled approximately $38,713,000 and $32,253,000 in each of the
years ended December 31, 1995 and 1994, respectively. Such sales resulted in
gross realized gains of approximately $405,000 and $46,000 and gross realized
losses of $297,000 and $459,000 in each of the years ended December 31, 1995 and
1994, respectively.
F-18
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(6) LOANS RECEIVABLE:
A summary of loans receivable at June 30, 1997 (unaudited) and December 31,
1996 and 1995 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Real estate loans
Single-family residential:
Fixed rate............................................................ $ 141,645 134,971 122,149
Variable rate......................................................... 405,465 460,944 536,263
Multifamily, primarily variable rate.................................... 442,712 453,064 479,100
Commercial and industrial, primary variable rate........................ 117,906 110,931 120,109
Land, primarily fixed rate.............................................. 6,630 1,639 3,176
------------ ---------- ----------
Real estate loans................................................... 1,114,358 1,161,549 1,260,797
Commercial loans.......................................................... 7,792 3,523 --
Consumer loans............................................................ 4,741 988 --
Secured by deposits....................................................... 2,145 2,132 1,976
------------ ---------- ----------
All loans........................................................... 1,129,036 1,168,192 1,262,773
Less:
Undistributed loan proceeds............................................. 2,309 473 28
Unamortized net loan discounts and deferred origination fees............ 1,545 2,732 3,021
Deferred gain on servicing sold......................................... 4,118 -- --
Allowance for losses.................................................... 18,683 23,280 31,572
------------ ---------- ----------
$ 1,102,381 1,141,707 1,228,152
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Nonaccrual loans were $14,035,000, $18,238,000, $35,592,000 and $27,458,000
at June 30, 1997 (unaudited) and December 31, 1996, 1995 and 1994, respectively.
If loans which were on nonaccrual at June 30, 1997 and June 30, 1996 (unaudited)
and December 31, 1996, 1995 and 1994 had performed in accordance with their
terms for the period or since origination, if shorter, interest income from
these loans would have been $641,000, $703,000, $1,405,000, $3,154,000 and
$2,257,000, respectively. Interest collected on these loans for these periods
was $175,000, $341,000, $846,000, $1,046,000 and $391,000, respectively.
The Bank's variable rate loans are indexed primarily to the Federal Home
Loan Bank Eleventh District Cost of Funds Index (COFI).
Substantially all real estate collateralized loans are secured by first
trust deeds. The Bank's loan portfolio is concentrated primarily in the state of
California. The commercial real estate secured portfolio is diversified with no
significant industry concentrations of credit risk. Single-family residence,
multifamily, and commercial real estate secured loans are diversified
geographically across the state and by size.
At June 30, 1997 (unaudited) and December 31, 1996, the Bank had loan
applications pending to originate loans of approximately $14,942,000 and
$5,562,000. In addition, the Bank had an outstanding commitment to purchase
$28,900,000 of variable rate single-family residential real estate loans and
F-19
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(6) LOANS RECEIVABLE: (CONTINUED)
$2,446,000 of committed but unused consumer and commercial lines of credit at
June 30, 1997. There were no other outstanding commitments to originate or
purchase loans at December 31, 1996.
(7) ALLOWANCE FOR LOSSES AND PROVISION FOR LOSSES
An analysis of the activity in the allowance for losses for loans and
mortgage-backed securities for the six months ended June 30, 1997 (unaudited)
and each of the years ended December 31, 1996, 1995 and 1994 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
MORTGAGE-
BACKED
LOANS SECURITIES TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Balance, December 31, 1993....................................................... $ 20,426 -- 20,426
Provision for losses............................................................. 22,330 2,113 24,443
Charge-offs, net................................................................. (12,955) (2,113) (15,068)
--------- ----------- ---------
Balance, December 31, 1994....................................................... 29,801 -- 29,801
Provision for losses............................................................. 8,823 -- 8,823
Charge-offs, net................................................................. (7,052) -- (7,052)
--------- ----------- ---------
Balance, December 31, 1995....................................................... 31,572 -- 31,572
Provision for losses............................................................. 2,884 -- 2,884
Charge-offs, net................................................................. (11,176) -- (11,176)
--------- ----------- ---------
Balance, December 31, 1996....................................................... 23,280 -- 23,280
Provision for losses (unaudited)................................................. 655 -- 655
Charge-offs, net (unaudited)..................................................... (5,252) -- (5,252)
--------- ----------- ---------
Balance, June 30, 1997 (unaudited)............................................... $ 18,683 -- 18,683
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The Bank's gross impaired loans were $27,016,000, $31,149,000 and
$44,915,000 as of June 30, 1997 (unaudited) and December 31, 1996 and 1995,
respectively. The average impaired loans for the periods then ended were
$25,438,000, $36,897,000 and $32,386,000. Gross impaired loans with a valuation
allowance totaled $21,082,000 and $23,779,000 and gross impaired loans without a
valuation allowance totaled $5,934,000 and $7,370,000 at June 30, 1997
(unaudited) and December 31, 1996 respectively. Interest income recognized
related to these loans was $1,752,000 and $270,000 for 1996 and 1995,
respectively.
The valuation allowance related to impaired loans was $3,545,000, $6,652,000
and $12,537,000 at June 30, 1997 (unaudited) and December 31, 1996 and 1995,
respectively, and is included in the schedule of the allowance for loan losses
described above.
Troubled debt restructurings totaled $7,529,000, $11,430,000 and $14,729,000
as of June 30, 1997 (unaudited) and December 31, 1996 and 1995, respectively.
The Bank has no commitments to lend additional funds to borrowers whose loans
were classified as troubled debt restructurings at June 30, 1997 and December
31, 1996.
F-20
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(8) REAL ESTATE HELD FOR INVESTMENT AND FOR SALE
Real estate at June 30, 1997 (unaudited) and December 31, 1996 and 1995,
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Acquired for sale or development................................................ $ 8,054 8,641 11,899
Less allowance for losses..................................................... (6,146) (6,516) (6,526)
----------- --------- ---------
Acquired for sale or development............................................ 1,908 2,125 5,373
----------- --------- ---------
Acquired in settlement of loans
Single-family residential..................................................... 4,046 3,309 6,415
Multifamily................................................................... 11,330 8,341 1,274
Commercial and industrial..................................................... 7,457 8,614 4,004
Land.......................................................................... 244 244 682
----------- --------- ---------
23,077 20,508 12,375
Less allowance for losses..................................................... (248) (72) (1,460)
----------- --------- ---------
Acquired in settlement of loans............................................. 22,829 20,436 10,915
----------- --------- ---------
$ 24,737 22,561 16,288
----------- --------- ---------
----------- --------- ---------
</TABLE>
A summary of the components of the income from real estate operations for
the six months ended June 30, 1997 and 1996 (unaudited) and in each of the years
ended December 31, 1996, 1995 and 1994 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
------------------------ -------------------------------
<S> <C> <C> <C> <C> <C>
JUNE 1997 JUNE 1996 1996 1995 1994
----------- ----------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross income from real estate operations....................... $ 1,521 2,105 4,761 2,536 3,559
Operating expenses............................................. 2,186 2,250 5,395 2,984 4,404
----------- ----- --------- --------- ---------
Loss from operations......................................... (665) (145) (634) (448) (845)
Gain on real estate sales...................................... 1,022 135 3,346 392 196
----------- ----- --------- --------- ---------
Gain (loss) from real estate operations...................... 357 (10) 2,712 (56) (649)
Provision for losses........................................... (245) (187) (766) (2,011) (4,749)
----------- ----- --------- --------- ---------
Total income (loss) from real estate operations.............. $ 112 (197) 1,946 (2,067) (5,398)
----------- ----- --------- --------- ---------
----------- ----- --------- --------- ---------
</TABLE>
F-21
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(8) REAL ESTATE HELD FOR INVESTMENT AND FOR SALE (CONTINUED)
An analysis of the activity in the allowance for losses for real estate
acquired and direct real estate investments for the six months ended June 30,
1997 (unaudited) and for each of the years ended December 31, 1996, 1995 and
1994, respectively, is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DIRECT REAL
REAL ESTATE ESTATE
ACQUIRED INVESTMENTS TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Balance, December 31, 1993...................................................... $ 2,788 13,260 16,048
Provision for losses............................................................ 4,435 314 4,749
Charge-offs, net................................................................ (2,997) (314) (3,311)
----------- ----------- ---------
Balance, December 31, 1994...................................................... 4,226 13,260 17,486
Provision for losses............................................................ 1,387 624 2,011
Charge-offs, net................................................................ (4,153) (7,358) (11,511)
----------- ----------- ---------
Balance, December 31, 1995...................................................... 1,460 6,526 7,986
Provision for losses............................................................ 396 370 766
Charge-offs, net................................................................ (1,784) (380) (2,164)
----------- ----------- ---------
Balance, December 31, 1996...................................................... 72 6,516 6,588
Provision for losses (unaudited)................................................ 245 -- 245
Charge-offs, net (unaudited).................................................... (69) (370) (439)
----------- ----------- ---------
Balance, June 30, 1997 (unaudited).............................................. $ 248 6,146 6,394
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
F-22
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(9) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 1997 (unaudited), December 31, 1996 and
1995, consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
JUNE 30, --------- ---------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Land....................................................... $ 521 521 521
Buildings.................................................. 837 837 746
Furniture, fixtures and equipment.......................... 11,755 11,405 11,594
Leasehold improvements..................................... 4,869 4,906 5,240
----------- --------- ---------
17,982 17,669 18,101
Less accumulated depreciation and amortization............. (12,023) (11,407) (10,313)
----------- --------- ---------
$ 5,959 6,262 7,788
----------- --------- ---------
----------- --------- ---------
</TABLE>
The Bank is committed to operating leases on certain premises. Certain of
these leases require the Bank to pay property taxes and insurance. Some are
subject to annual inflation adjustments, and have renewal options of various
periods at various rates. Lease expense on all property totaled approximately
$1,049,000, $1,127,000, $2,144,000, $3,515,000 and $4,712,000, net of sublease
income of approximately $198,000, $220,000, $452,000, $331,000 and $107,000, in
the six months ended June 30, 1997 and 1996 (unaudited) and in each of the years
ended December 31, 1996, 1995 and 1994, respectively. Included in 1995 lease
expense was a charge of $730,000 for early termination of the lease for the Van
Nuys facilities.
Approximate minimum lease commitments before consideration of the charge for
unused lease property referred to above under noncancelable operating leases at
December 31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR GROSS SUBLEASE NET
- ----------------------------------------------------------------- --------- ----------- ---------
<S> <C> <C> <C>
1997............................................................. $ 2,265 424 1,841
1998............................................................. 2,080 249 1,831
1999............................................................. 2,035 158 1,877
2000............................................................. 1,895 152 1,743
2001............................................................. 5,183 76 5,107
Thereafter....................................................... 2,921 -- 2,921
</TABLE>
F-23
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(10) DEPOSITS
Deposits at June 30, 1997 (unaudited) and December 31, 1996 and 1995
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Transaction accounts:
NOW accounts.............. $ 85,123 1.95% 63,776 0.80% 53,866 0.60%
Passbook accounts......... 234,953 4.25 281,907 4.52 185,795 4.49
Money market accounts..... 19,766 2.57 24,518 2.62 35,827 2.32
------------ --- ------------ --- ------------ ---
Transaction accounts.... 339,842 3.57 370,201 3.75 275,488 3.45
------------ --- ------------ --- ------------ ---
Term certificates:
3-month................... 4,353 4.26 5,428 4.05 4,741 4.00
6-month................... 53,290 5.02 75,479 5.02 90,969 5.16
12-month.................. 374,098 5.72 384,211 5.51 226,387 5.78
18-month.................. 145,580 5.63 205,659 5.62 364,970 6.19
24-month.................. 132,578 5.61 108,359 5.99 217,177 5.78
36-month.................. 9,962 6.03 11,409 5.93 15,381 5.44
48-month.................. 1,311 5.76 1,924 5.54 3,265 5.65
60-month.................. 22,466 5.84 44,183 6.23 53,893 6.45
Public funds.............. 2,939 5.87 5,704 6.07 1,671 6.28
$100,000 and over......... 227,617 5.81 158,686 5.70 219,376 6.12
------------ --- ------------ --- ------------ ---
Term certificates....... 974,194 5.67 1,001,042 5.61 1,197,830 5.94
------------ --- ------------ --- ------------ ---
$ 1,314,036 5.13% 1,371,243 5.11% 1,473,318 5.47%
------------ --- ------------ --- ------------ ---
------------ --- ------------ --- ------------ ---
</TABLE>
Term certificates of deposit outstanding by scheduled maturity date at June
30, 1997 (unaudited) and December 31, 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997 DECEMBER 31, 1996
----------------------- -----------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------- ----------- ---------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Due within 3 months............................ $ 198,329 5.48% 225,614 5.60%
Due within 3 to 6 months....................... 275,408 5.71 262,321 5.44
Due within 6 to 9 months....................... 146,816 5.65 170,454 5.63
Due within 9 to 12 months...................... 202,427 5.83 232,362 5.80
Due within 12 to 24 months..................... 135,603 5.64 78,377 5.69
Due within 24 to 36 months..................... 6,836 6.05 26,705 5.16
Due after 36 months............................ 8,775 5.90 5,209 6.02
---------- --- ---------- ---
Total...................................... $ 974,194 5.67% 1,001,042 5.61%
---------- --- ---------- ---
---------- --- ---------- ---
</TABLE>
F-24
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(10) DEPOSITS (CONTINUED)
The components of deposit interest expense for the six months ended June 30,
1997 and 1996 (unaudited) and in each of the years ended December 31, 1996, 1995
and 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
---------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
JUNE 30, JUNE 30,
1997 1996 1996 1995 1994
--------- ----------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NOW accounts................................................... $ 602 217 449 461 534
Passbook and money market accounts............................. 6,001 5,922 13,035 4,826 3,461
Term certificates--under $100,000.............................. 22,603 27,320 51,809 57,657 43,469
Term certificates--$100,000 and over........................... 4,856 5,531 10,030 12,156 10,759
--------- ----------- --------- --------- ---------
34,062 38,990 75,323 75,100 58,223
Interest forfeitures on early withdrawals...................... (105) (103) (187) (234) (218)
--------- ----------- --------- --------- ---------
$ 33,957 38,887 75,136 74,866 58,005
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
</TABLE>
(11) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into sales of agency and AA rated mortgage-backed securities
under agreements to repurchase (reverse repurchase agreements) which obligate
the Bank to repurchase the identical securities as those which were sold. Such
transactions are treated as a financing, with the obligations to repurchase
securities sold reflected as a liability and the carrying amount of securities
collateralizing the liability included in mortgage-backed securities in the
consolidated statements of financial condition. There were $331,358,000 and
$192,433,000 outstanding reverse repurchase agreements at June 30, 1997 and
December 31, 1996, respectively.
The maximum repurchase liability balances outstanding at any month-end
during the six months ended June 30, 1997 (unaudited) and years ended December
31, 1996 and 1995 were approximately $331,358,000, $219,229,000 and
$151,626,000, respectively. The average balances outstanding during each of the
six months ended June 30, 1997 (unaudited) and years ended December 31, 1996 and
1995 were approximately $286,410,000, $179,002,000 and $100,071,000,
respectively.
The securities sold under agreements to repurchase identical securities are
held in safekeeping by broker/dealers. It is management's policy to enter into
repurchase agreements only with broker/dealers who are regarded as primary
dealers in these securities and meet satisfactory standards of capitalization
and creditworthiness.
(12) ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of San Francisco at June 30, 1997
(unaudited), December 31, 1996 and 1995 were collateralized by mortgage-backed
agency securities and mortgage loans with a current principal balance of
approximately $86,543,000, $93,795,000 and $37,503,000, respectively, and by the
investment in the stock of the Federal Home Loan Bank of San Francisco with a
carrying value
F-25
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(12) ADVANCES FROM THE FEDERAL HOME LOAN BANK (CONTINUED)
at June 30, 1997 (unaudited), December 31, 1996 and 1995 of approximately
$14,686,000, $15,380,000 and $14,527,000, respectively.
At June 30, 1997 (unaudited) and December 31, 1996, the Bank had a
collateralized available line of credit of approximately $325 million and $352
million with the Federal Home Loan Bank of San Francisco.
The scheduled maturities and weighted average interest rates of advances at
June 30, 1997 (unaudited), December 31, 1996 and 1995 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
YEAR OF MATURITY AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
- ------------------------------------------------------------ ------- ------------ ------ ------------ ------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
1996........................................................ $ -- -- -- -- % 31,746 5.85%
1997........................................................ 31,000 5.76% 31,000 5.76 -- --
1998........................................................ 49,000 6.01 49,000 6.01 -- --
------- --- ------ --- ------ ---
$80,000 5.91% 80,000 5.91% 31,746 5.84%
------- --- ------ --- ------ ---
------- --- ------ --- ------ ---
</TABLE>
(13) INCOME TAXES
The Bank and its subsidiaries file a consolidated tax return with SCH. The
Bank entered into a tax sharing agreement with SCH whereby the Bank computes and
pays taxes based upon the Bank's tax position assuming that a separate tax
return was filed. However, while the senior debt is outstanding at SCH, the
payment to the Bank is limited to the amount of consolidated taxes.
The income tax provision (benefit) for the six months ended June 30, 1997
and 1996 (unaudited) and the years ended December 31, 1996, 1995, and 1994
consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
------------- ----------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.................................. $ 95 -- 16 -- --
State.................................... 187 5 5 4 --
----- ----- --------- --------- ---------
Total current.......................... 282 5 21 4 --
----- ----- --------- --------- ---------
Deferred:
Federal.................................. (95) -- (3,037) (2,650) 10,204
State.................................... (187) -- -- -- 1,152
----- ----- --------- --------- ---------
Total deferred......................... (282) -- (3,037) (2,650) 11,356
----- ----- --------- --------- ---------
Total tax.............................. $ -- 5 (3,016) (2,646) 11,356
----- ----- --------- --------- ---------
----- ----- --------- --------- ---------
</TABLE>
F-26
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(13) INCOME TAXES (CONTINUED)
The differences between the effective income tax rates and the Federal
statutory rates were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
------------- ----------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory Federal income tax
rate........................... 34.0% 34.0% 34.0% (34.0%) (34.0%)
Increase (decrease) in taxes:
State franchise tax, net of
Federal benefit................ 7.2% 7.5% 7.5% (7.5%) (7.5%)
Change in deferred tax asset
valuation allowance............ (42.4%) (41.5%) (70.0%) 18.1% 72.1%
Other, net..................... 1.2% -- -- -- --
----- ----- --------- --------- ---------
Effective tax rate............... 0.0% 0.0% (28.5%) (23.4%) 30.6%
----- ----- --------- --------- ---------
----- ----- --------- --------- ---------
</TABLE>
Deferred taxes result from "temporary differences" caused by differences in
the periods in which financial statement income and taxable income are reported.
Deferred taxes also result from recognition of future benefits from available
net operating loss carryforwards (NOLs) and tax credit carryforwards whose
probability of realization is determined to be more likely than not.
The realization of tax benefits of deductible temporary differences and NOL
carryforwards depends on whether the Bank has sufficient taxable income within
the carryforward periods as permitted by the tax law to allow for utilization of
the deductible amounts. As of any period-end, the amount of deferred tax asset
that is considered realizable could be reduced if estimates of future taxable
income are reduced. Based on the Bank's projected taxable earnings, management
believes it is more likely than not that the Bank will realize the benefit of
the existing net deferred tax asset at December 31, 1996.
The Bank had the following total Federal and state deferred tax assets and
liabilities computed at the Federal statutory income tax rate and the California
statutory franchise tax rate as of June 30, 1997 (unaudited) and December 31,
1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 FEDERAL STATE TOTAL
- ------------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Deductible temporary differences............................. $ 20,666 11,732 32,398
Available NOL carryforwards.................................. 48,268 -- 48,268
AMT tax credit carryforwards................................. 1,296 187 1,483
---------- --------- ---------
Total deferred tax assets.................................. 70,230 11,919 82,149
---------- --------- ---------
Taxable temporary differences................................ (6,804) (797) (7,601)
---------- --------- ---------
Total deferred tax liabilities............................. (6,804) (797) (7,601)
---------- --------- ---------
Deferred tax assets, net of deferred tax liabilities......... 63,426 11,112 74,548
Less deferred tax asset valuation allowances................. (57,739) (11,112) (68,861)
---------- --------- ---------
Net deferred tax assets.................................... $ 5,687 -- 5,687
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-27
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(13) INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 FEDERAL STATE TOTAL
- ------------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
Deductible temporary differences............................. $ 21,322 11,504 32,826
Available NOL carryforwards.................................. 49,876 940 50,816
AMT tax credit carryforwards................................. 1,201 -- 1,201
---------- --------- ---------
Total deferred tax assets.................................. 72,399 12,444 84,843
---------- --------- ---------
Taxable temporary differences................................ (6,614) (746) (7,360)
---------- --------- ---------
Total deferred tax liabilities............................. (6,614) (746) (7,360)
---------- --------- ---------
Deferred tax assets, net of deferred tax liabilities....... 65,785 11,698 77,483
Less deferred tax asset valuation allowances................. (60,098) (11,698) (71,796)
---------- --------- ---------
Net deferred tax assets.................................... $ 5,687 -- 5,687
---------- --------- ---------
---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 FEDERAL STATE TOTAL
- ------------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
Deductible temporary differences............................. $ 50,337 12,551 62,888
Available NOL carryforwards.................................. 25,591 2,238 27,829
AMT tax credit carryforwards................................. 1,201 -- 1,201
---------- --------- ---------
Total deferred tax assets.................................. 77,129 14,789 91,918
---------- --------- ---------
Taxable temporary differences................................ (6,054) (611) (6,665)
---------- --------- ---------
Total deferred tax liabilities............................. (6,054) (611) (6,665)
---------- --------- ---------
Deferred tax assets, net of deferred tax liabilities....... 71,075 14,178 85,253
Less deferred tax asset valuation allowances................. (68,425) (14,178) (82,603)
---------- --------- ---------
Net deferred tax assets.................................... $ 2,650 -- 2,650
---------- --------- ---------
---------- --------- ---------
</TABLE>
The major components of deferred deductible and taxable temporary
differences before valuation allowances, as of June 30, 1997 (unaudited) and
December 31, 1996 and 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Deductible temporary differences:
Provision for losses on loans and real estate.............. $ 16,722 18,744 52,548
Tax gains on sales of loans, net of deferred gains......... 2,314 1,882 2,506
Recognition of interest on nonperforming loans for tax in
excess of book........................................... 3,564 3,122 2,518
Accrued interest on deposits recognized for book but
deferred for tax......................................... 1,499 1,614 1,845
Miscellaneous temporary deductible differences............. 8,299 7,464 3,471
---------- --------- ---------
Total deductible temporary differences................... 32,398 32,826 62,888
</TABLE>
F-28
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(13) INCOME TAXES (CONTINUED)
<TABLE>
<S> <C> <C> <C>
---------- --------- ---------
Taxable temporary differences:
Stock dividends from FHLB.................................. (2,771) (2,557) (2,169)
Real estate partnership tax losses......................... (253) (253) (256)
Miscellaneous temporary taxable differences................ (859) (892) (181)
Federal tax effect of state temporary differences, net..... (3,718) (3,658) (4,059)
---------- --------- ---------
Total taxable temporary differences...................... (7,601) (7,360) (6,665)
---------- --------- ---------
Total net deductible temporary differences............... $ 24,797 25,466 56,223
---------- --------- ---------
---------- --------- ---------
</TABLE>
The Federal and state tax net operating loss carryforwards December 31, 1996
expire as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
YEAR FEDERAL STATE TOTAL
- ---------------------------------------------------- ---------- --------- ---------
1997................................................ 1,903 16 1,919
1998................................................ 984 2,282 3,266
1999................................................ 1,113 6,256 7,369
2000 -- 117 117
2001................................................ 510 -- 510
2002................................................ 21,984 -- 21,984
2003................................................ 24,444 -- 24,444
2004................................................ 26 -- 26
2008................................................ 1,946 -- 1,946
2009................................................ 10,650 -- 10,650
2010................................................ 80,307 -- 80,307
2011................................................ 2,828 -- 2,828
---------- --------- ---------
$ 146,695 8,671 155,366
---------- --------- ---------
---------- --------- ---------
</TABLE>
The Bank had Federal alternative minimum tax credit carryforwards of
approximately $1,201,000 at December 31, 1996 and 1995.
In 1992, issuance of preferred stock resulted in a change of control as
defined under Internal Revenue Code Section 382. As a result, usage of the tax
net operating loss carryforwards to offset Federal and state tax return taxable
income is limited to approximately $7.7 million per year. Any unused limitation
is available in subsequent years until expiration. The net operating loss
available in 1997 is approximately $38.7 million.
The Bank is subject to examination by Federal and state taxing authorities
for tax returns filed in previous periods. The results and effects of these
examinations on individual assets and liabilities may require adjustment to the
tax assets and liabilities based on the results of their examinations.
Management believes that the effects of such examinations will not have a
material effect on the Bank.
F-29
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(14) DERIVATIVES AND HEDGING ACTIVITIES
Hedging costs, net, for the six months ended June 30, 1997 and 1996
(unaudited) and each of the years ended December 31, 1996, 1995 and 1994
consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
-------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
JUNE 1997 JUNE 1996 1996 1995 1994
----------- ------------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest paid on swaps, net of interest received................. $ (3) 40 35 1,217 8,436
Amortization of cost of swaps, caps, floors and corridors, net of
interest received.............................................. 153 179 352 468 174
----- --- --------- --------- ---------
$ 150 219 387 1,685 8,610
----- --- --------- --------- ---------
----- --- --------- --------- ---------
</TABLE>
Interest rate swaps are contracts where the parties agree to exchange fixed
rate for floating rate interest payments, or to exchange floating rate interest
payments upon two different rate indices (basis swap), for a specified period of
time on a specified (notional) amount. The notional amount is used only to
calculate the amount of interest payments to be exchanged and does not represent
credit risk. The notional amount and weighted average pay and receive rates are
shown below in accordance with their contractual dates. The variable repricing
indexes associated with the contracts are three-month London Inter-Bank Offered
Rate (LIBOR), one-month LIBOR and COFI which was 5.78%, 5.69% and 4.86%,
respectively, at June 30, 1997 and 5.56%, 5.5%, and 4.83%, respectively, at
December 31, 1996.
A summary of the swap contract, scheduled maturity date and weighted average
rate received and paid at June 30, 1997 (unaudited) and December 31, 1996 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 YEAR OF NOTIONAL AVERAGE RATE AVERAGE
(UNAUDITED) MATURITY AMOUNT PAID RATE RECEIVED
- ------------------------ ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Pay floating and receive
fixed................. 1999 $ 5,829 5.69% 5.69%
----------- --- ---
----------- --- ---
</TABLE>
<TABLE>
<CAPTION>
YEAR OF NOTIONAL AVERAGE RATE AVERAGE
DECEMBER 31, 1996 MATURITY AMOUNT PAID RATE RECEIVED
- ------------------------ ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Pay floating and receive
fixed................. 1999 $ 5,829 5.69% 5.69%
----------- --- ---
----------- --- ---
</TABLE>
Swap contracts were entered into to limit the interest rate risk related to
the relative repricing characteristics of the Bank's interest-bearing deposits.
The floating rate on swap contracts re-prices at intervals of one to three
months based on the current index in effect at that time. If all contracts were
repriced at the current index in effect at each year-end, the weighted average
rate paid and received would be 5.69% and 5.69% at June 30, 1997 (unaudited) and
5.50% and 5.69% at December 31, 1996.
The notional amount of the swap amortizes monthly based upon the performance
of a specific index. The swap is used to reduce interest rate risk associated
with fixed rate term liabilities. The performance of the swap is based upon
interest rates in general. The above table does not include anticipated
amortization
F-30
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(14) DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
relating to the swap. Excluding this transaction, the Bank does not have any
other positions in complex derivative transactions.
Mortgage-backed securities with book values of approximately $7,995,000,
$8,442,000 and $6,141,000 and market values of approximately $7,811,000,
$8,259,000 and $5,987,000 at June 30, 1997 (unaudited) and December 31, 1996 and
1995, respectively, are pledged as collateral for certain swap agreements.
The Bank has only limited involvement in derivative financial instruments
and does not use them for trading purposes. The instruments are used to manage
interest rate risk.
The Bank has entered into corridor contracts to artificially raise the
interest rate cap on certain loans. The corridor contracts provide for the
payment of interest on the outstanding principal contract amount. Under such
contracts, the Bank receives interest if an interest rate that varies according
to a specified index exceeds a pre-set level (the strike rate) up to an upper
limit (the limit) beyond which additional interest is not received if the rate
increases. The index on the Bank's corridors is COFI or three-month LIBOR. A
summary of corridor contracts and average interest rate ranges at December 31,
1996 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR OF CONTRACT AVERAGE STRIKE AVERAGE LIMIT
MATURITY AMOUNT PRICE RATE
- ----------- --------- ----------------- ---------------
<S> <C> <C> <C>
1997 $ 20,000 6.64% 8.23%
1998 5,000 6.38 8.13
1999 20,000 6.64 8.23
2000 12,000 6.38 8.13
2001 20,000 6.64 8.23
--------- --- ---
$ 77,000 6.58% 8.21%
--------- --- ---
--------- --- ---
</TABLE>
(15) BENEFIT PLANS
The Bank has had a noncontributory defined benefit pension plan covering
substantially all of its employees (the Plan) hired before 1990. The benefits
are based on years of service and the employee's highest compensation during the
last five consecutive years of employment prior to 1991. The Plan was frozen
effective December 31, 1990, and consequently, employees will no longer earn
additional defined benefits for future services; however, future service may be
counted toward vesting of benefits accumulated based on past service. The Bank's
funding policy has been to contribute annually the minimum amount that can be
deducted for Federal income tax purposes.
F-31
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(15) BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the Plan and amounts
recognized in the Bank's consolidated statements of financial condition at
December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits............................................................................. $ (4,804) (4,638)
Nonvested benefits.......................................................................... (255) (368)
--------- ---------
Accumulated benefit obligations........................................................... $ (5,059) (5,006)
--------- ---------
--------- ---------
Projected benefit obligation for services rendered to date.................................... $ (5,059) (5,006)
Plan assets at fair value, primarily cash and cash equivalents, listed stocks and U.S.
bonds....................................................................................... 4,492 4,386
--------- ---------
Projected benefit obligation (in excess of) or less than plan assets...................... (567) (620)
Prior service cost not yet recognized in net periodic cost.................................... -- --
Additional minimum liability.................................................................. (1,117) (1,133)
Unrecognized net loss......................................................................... 1,117 1,133
--------- ---------
Pension liability recognized in the consolidated statement of financial condition......... $ (567) (620)
--------- ---------
--------- ---------
</TABLE>
Net periodic cost included the following components (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service costs/benefits earned during the period........................................... $ -- -- --
Interest cost on projected benefit obligation............................................. 367 332 356
Actual return on plan assets.............................................................. (203) (293) (164)
Net amortization and deferral............................................................. (155) (75) (168)
--------- --- ---
Net periodic pension cost............................................................. $ 9 (36) 24
--------- --- ---
--------- --- ---
Assumptions used:
Discount rate........................................................................... 7.50% 7.25% 8.50%
Expected long-term rate of return....................................................... 9.00 9.00 9.00
--------- --- ---
--------- --- ---
</TABLE>
The Bank adopted a 401(k) plan, effective January 1, 1991. The 401(k) plan
covers employees with one year or more of service, and allows participants to
contribute a portion of their covered compensation, which amount is 100% vested
at the time of contribution. The Bank shall contribute an amount equal to 50% of
the participant's contribution up to 6% of the participant's covered
compensation, which amount vests over a period of five years. The Bank may elect
to make additional contributions on a discretionary basis. The contributions as
directed by the participants are invested by the 401(k) plan's trustee in one or
more of five investment alternatives in trust for the benefit of the
participants. The Bank incurred approximately $117,000, $131,000, $155,000,
$159,000 and $245,000 of expense related to the 401(k) plan, including a
discretionary contribution of approximately $0, $0, $0, $0 and $0, in the six
months ended
F-32
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(15) BENEFIT PLANS (CONTINUED)
June 30, 1997 and 1996 (unaudited) and in each of the years ended December 31,
1996, 1995 and 1994, respectively.
The Bank established a Supplemental Executive Retirement Plan for certain
senior officers (the SERP), effective January 1, 1991 to supplement retirement
income provided by the Plan. The SERP was a fully funded, non-qualified defined
benefit plan. The Bank incurred approximately $186,000 of expense related to the
SERP in 1994. The SERP was terminated in 1995 and the SERP assets were
distributed to participants at no additional cost to the Bank.
(16) COMMITMENTS AND CONTINGENCIES
The Bank is involved in litigation arising in the normal course of business.
Based on information from internal and external legal counsel, and review of the
facts and circumstances of such litigation, management is of the opinion that
the ultimate resolution of all pending litigation proceedings will not have an
adverse material effect on the Bank.
(17) FAIR VALUE OF ASSETS AND LIABILITIES
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statements of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent market and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
F-33
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(17) FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)
The carrying amounts and fair values of the Bank's financial instruments
consisted of the following December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents................................... $ 21,873 21,873 19,049 19,049
Securities purchased under agreement to resell.............. -- -- 35,000 35,000
Securities available-for-sale............................... 502,301 502,301 241,645 241,645
Mortgage-backed securities held-to-maturity................. 10,971 10,899 -- --
Loans receivable............................................ 1,141,707 1,130,593 1,228,152 1,235,195
Federal Home Loan Bank stock................................ 15,380 15,380 14,527 14,527
Financial liabilities:
Deposits.................................................... 1,371,243 1,387,867 1,473,318 1,479,422
Securities sold under agreements to repurchase.............. 192,433 192,433 -- --
Advances from the Federal Home Loan Bank.................... 80,000 80,000 31,746 31,746
Financial instruments:
Interest rate swaps......................................... -- (5) -- (131)
Interest rate floors........................................ 26 (2) 90 37
Interest rate corridors..................................... 719 458 1,008 510
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each type of financial instrument:
- Cash and Cash Equivalents--The carrying amount approximates the fair value
for cash and short-term investments.
- Securities Purchased under Agreements to Resell--The carrying amount
approximates the fair value.
- Securities Available-for-Sale--Fair value is based on quoted market prices
or dealer quotes.
- Mortgage-Backed Securities--Fair value is based on quoted market prices or
dealer quotes.
- Loans Receivable--For residential real estate loans, fair value is
estimated by discounting projected future cash flows at the current market
interest rates for mortgage-backed securities collateralized by loans of
similar coupon, duration and credit risk, adjusted for differences in
market interest rates between loans and securities. The fair value of
multifamily and commercial real estate loans is estimated by discounting
the future cash flows using the current interest rates at which loans with
similar terms would be made on property and to borrowers with similar
credit and other characteristics and with similar remaining terms to
maturity. Impaired loans are valued based upon the fair value of
underlying collateral, if collateral dependent or alternatively, the
present value of expected cash flows using the loan's original implicit
loan interest rate.
F-34
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(17) FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)
- Federal Home Loan Bank Stock--The carrying amount of Federal Home Loan
Bank Stock approximates its fair value.
- Deposit--The fair values of NOW accounts, passbook accounts and money
market accounts withdrawable on demand without penalty are, by definition,
equal to the amount withdrawable on demand at the reporting date, which is
their carrying amount. The fair value of term certificates of deposit, all
of which are fixed maturity bearing a fixed rate of interest, is estimated
by discounting future projected cash flows at interest rates approximating
interest rates currently offered by the Bank for similar types of
certificates of deposit for similar remaining terms to maturity.
- Securities Sold under Agreements to Repurchase--The carrying amount of
securities sold under agreements to repurchase approximates their fair
value.
- Advances From the Federal Home Loan Bank--The fair value is estimated by
discounting projected future cash flows at the current advance interest
rates available to the Bank for Federal Home Loan Bank advances with
similar terms for similar remaining terms to maturity.
- Interest Rate Swaps, Caps, Floors and Corridors--The fair value of
interest rate swaps is based upon dealer quotes or are estimated by
discounting projected future cash flows at the current market interest
rates for interest rate swaps of similar terms and counter party credit
risk for the same remaining terms to maturity. The fair values of interest
rate caps, floors and corridors are also based upon dealer quotes or
estimated using option pricing models utilizing current market consensus
assumptions for interest rate caps, floors and corridors of similar terms
and strike or floor prices for the same remaining term to maturity.
(18) REQUIRED REGULATORY FINANCIAL INFORMATION
Reconciliation to Regulatory Reports filed with the Office of Thrift
Supervision (dollars in thousands):
<TABLE>
<CAPTION>
NET WORTH NET EARNINGS
----------- -------------
<S> <C> <C>
Balance per quarterly OTS financial report at
December 31, 1996.................................................. $ 76,610 13,598
As reported herein................................................... 76,610 13,598
----------- ------
$ -- --
----------- ------
----------- ------
</TABLE>
(19) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Bank'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
F-35
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(19) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
of the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and tangible capital (as defined in the regulations) to adjusted
tangible assets (as defined) and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I leverage capital (as
defined) to adjusted tangible assets (as defined). Management believes, as of
December 31, 1996, that the Bank meets all capital adequacy requirements to
which it is subject.
As of June 30, 1997 (unaudited) and December 31, 1996, the Bank was
adequately capitalized under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized the Bank must maintain
minimum total risk-based ratio of 8%, Tier I risk-based ratio of 4% and Tier I
leverage ratio of 4%. There are no conditions or events since that notification
that management believes have changed the institution's category.
Under the framework, the Bank's capital levels do not allow the Bank to
accept brokered deposits without prior approval from regulators. The Bank does
not plan to solicit for such deposits.
While all insured institutions are required by OTS regulations to meet these
minimum regulatory capital requirements, the Bank has regulatory Assistance
Agreements which were entered into with the Federal Savings and Loan Insurance
Corporation (FSLIC) as part of SCH's purchase of the Bank in 1987, and which
provides for an additional $133,400,000 of regulatory capital at December 31,
1996. Until the passage of the Financial Institution Reform Recovery and
Enforcement Act (FIRREA), the Bank met all capital requirements by including the
additional Assistance Agreement capital amount in regulatory capital.
The position of the OTS was and continues to be that under FIRREA,
Assistance Agreements which provide additional regulatory capital, and/or
capital forbearances are no longer in effect as of December 7, 1989. The OTS
notified the Bank in 1990 that the additional Assistance Agreement capital
amounts cannot be included in meeting the FIRREA capital requirements, and as a
result thereof the OTS believed the Bank did not meet minimum FIRREA capital
requirements. Management disagreed, and still disagrees, with the OTS, and
attempted to preserve all of its rights and remedies under the Assistance
Agreements. At June 30, 1997 and December 31, 1996, the Bank met all minimum
FIRREA regulatory capital requirements.
To preserve its rights under the Assistance Agreement, in 1994 SCH and the
Bank commenced a lawsuit against the United States Government for breach of
contract and deprivation of property without just compensation or due process of
law. The lawsuit seeks unspecified monetary compensation for damages sustained
in meeting FIRREA mandated capital requirements and for the fair value of
property taken, but does not seek reinstatement of the Assistance Agreement
capital forbearance. While the outcome of the lawsuit cannot be determined at
this time, it is management's opinion, based on the advice of external legal
counsel, that the Bank's position has substantial legal merit.
F-36
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(19) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Bank's ability to pay dividends is dependent upon its earnings from
operations and the adequacy of its regulatory capital. As an adequately
capitalized institution, the maximum dividend allowable under statute is 75% of
the previous four quarters of net earnings less dividends paid in such quarters.
The OTS director must be notified of the proposed distribution.
At June 30, 1997 (unaudited) and December 31, 1996, the Bank's regulatory
capital calculations, computed by management both with and without inclusion of
the additional capital provided for in the Bank's Assistance Agreements were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
REGULATORY CAPITAL/STANDARD AS OF JUNE 30, 1997
------------------------------------------------
WITHOUT TOTAL RISK-
ADDITIONAL ASSISTANCE TANGIBLE TIER 1 TIER 1 BASED
AGREEMENT CAPITAL CAPITAL LEVERAGE RISK- BASED CAPITAL
- ------------------------------------------ ---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Stockholders' equity/GAAP capital......... $ 84,918 84,918 84,918 84,918
Adjustment for unrealized losses on
securities available-for-sale........... 4,402 4,402 4,402 4,402
Deduction for direct real estate
investments............................. (1,908) (1,908) (1,908) (1,908)
Deduction for other intangible assets..... (622) (622) (622) (622)
---------- --------- ----------- ------------
Total Tier I capital................ 86,790 86,790 86,790 86,790
Includable allowance for loan losses...... -- -- -- 11,257
Deduction for real estate held for
investment.............................. -- -- -- --
---------- --------- ----------- ------------
Total capital....................... 86,790 86,790 86,790 98,047
Minimum capital requirement............... 27,325 54,650 -- 71,893
---------- --------- ----------- ------------
Regulatory capital excess........... $ 59,465 32,140 86,790 26,154
---------- --------- ----------- ------------
---------- --------- ----------- ------------
Capital ratios:
Regulatory as reported.................. 4.76% 4.76% 9.65% 10.91%
Minimum capital ratio................... 1.50 3.00 3.00 8.00
---------- --------- ----------- ------------
Regulatory capital excess............... 3.26% 1.76% 6.65% 2.91%
---------- --------- ----------- ------------
---------- --------- ----------- ------------
Regulatory capital as adjusted............ $ 220,190 220,190 220,190 231,447
Minimum capital requirement (per above)... 27,325 54,650 -- 71,893
---------- --------- ----------- ------------
Regulatory capital excess........... $ 247,515 165,540 220,190 159,554
---------- --------- ----------- ------------
---------- --------- ----------- ------------
</TABLE>
F-37
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
(19) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
REGULATORY CAPITAL/STANDARD AS OF DECEMBER 31,
1996
------------------------------------------------
WITHOUT TOTAL RISK-
ADDITIONAL ASSISTANCE TANGIBLE TIER 1 TIER 1 BASED
AGREEMENT CAPITAL CAPITAL LEVERAGE RISK- BASED CAPITAL
- ------------------------------------------ ---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Stockholders' equity/GAAP capital......... $ 76,610 76,610 76,610 76,610
Adjustment for unrealized losses on
securities available-for-sale........... 6,084 6,084 6,084 6,084
Deduction for direct real estate
investments............................. (1,908) (1,908) (1,908) (1,908)
Deduction for other intangible assets..... (714) (714) (714) (714)
---------- --------- ----------- ------------
Total Tier I capital................ 80,072 80,072 80,072 80,072
Includable allowance for loan losses...... -- -- -- 10,986
Deduction for real estate held for
investment.............................. -- -- -- (217)
---------- --------- ----------- ------------
Total capital....................... 80,072 80,072 80,072 90,841
Minimum capital requirement............... 26,270 70,053 35,017 70,034
---------- --------- ----------- ------------
Regulatory capital excess........... $ 53,802 10,019 45,055 20,807
---------- --------- ----------- ------------
---------- --------- ----------- ------------
Capital ratios:
Regulatory as reported.................. 4.57% 4.57% 9.15% 10.38%
Minimum capital ratio................... 1.50 4.00 4.00 8.00
---------- --------- ----------- ------------
Regulatory capital excess............... 3.07% 0.57% 5.15% 2.38%
---------- --------- ----------- ------------
---------- --------- ----------- ------------
Regulatory capital as adjusted............ $ 213,472 213,472 213,472 224,241
Minimum capital requirement (per above)... 26,270 70,053 35,017 70,034
---------- --------- ----------- ------------
Regulatory capital excess........... $ 187,202 143,419 178,455 154,207
---------- --------- ----------- ------------
---------- --------- ----------- ------------
</TABLE>
(20) SUBSEQUENT EVENT
Effective July 1, 1997, Southern California Federal Savings and Loan
Association changed its name to People's Bank of California. The Bank is a
Federal-chartered savings bank regulated by the OTS.
F-38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary....................................
Risk Factors..........................................
The Company...........................................
Use of Proceeds.......................................
Capitalization........................................
Business and Strategy.................................
Beneficial Ownership of the Company...................
Management............................................
Certain Transactions Constituting The Formation.......
Description of Series A Preferred Shares..............
Description of Capital Stock..........................
Federal Income Tax Considerations.....................
ERISA Considerations..................................
Certain Information Regarding the Bank................
Experts...............................................
Underwriting..........................................
Ratings...............................................
Certain Legal Matters.................................
Additional Information................................
Glossary..............................................
Index to Financial Statement..........................
Annex I--Offering Circular for Bank Preferred
Shares..............................................
</TABLE>
------------------------
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,240,000 SHARES
PEOPLE'S PREFERRED
CAPITAL CORPORATION
% NONCUMULATIVE
EXCHANGEABLE
PREFERRED STOCK, SERIES A
------------------
PROSPECTUS
, 1997
------------------------
SANDLER O'NEILL & PARTNERS, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 10,800
Printing expenses................................................. 125,000
Legal fees and expenses........................................... 300,000
Accounting fees and expenses...................................... 150,000
Investment banking legal fees and expenses........................ 200,000
Miscellaneous expenses............................................ 39,200
---------
Total....................................................... $ 825,000
---------
---------
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES.
See response to Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of People's Preferred Capital Corporation
(the "Company" or the "Registrant"), the Company issued 10,000 shares of Common
Stock, par value $.01 per share, to People's Bank of California (the "Bank").
The description of these transactions in the Prospectus under the heading
"Certain Transactions Constituting The Formation" is incorporated herein by
reference. These shares of Common Stock will be issued in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933
(the "Securities Act").
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Articles of
Incorporation contain such a provision which eliminates such liability to the
maximum extent permitted by Maryland law.
The Articles of Incorporation authorize the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her status as
a present or former director or officer of the Company. The Bylaws of the
Company obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of the final
disposition of a proceeding to (a) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity or
(b) any individual who, while a director of the Company and at the request of
the Company, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Articles of
Incorporation and Bylaws also permit the Company to indemnify
II-1
<PAGE>
and advance expenses to any person who served a predecessor of the Company in
any of the capacities described above and to any employee or agent of the
Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Articles of Incorporation do not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the MGCL requires the Company, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company as authorized by the Bylaws
and (b) a written statement by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met.
The Underwriting Agreement to be filed as Exhibit 1 to this Registration
Statement will provide for reciprocal indemnification by the Underwriters of the
Company, the Bank and their respective directors, officers and controlling
persons, and by the Company and the Bank of the Underwriters, and its directors,
officers and controlling persons, against certain liabilities under the
Securities Act.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See F-1 of the Prospectus for an index to financial statements included as
part of the Prospectus.
II-2
<PAGE>
(b) Exhibits
<TABLE>
<S> <C>
EXHIBIT
- ---------
1 Form of Underwriting Agreement between the Company, the Bank and the
Underwriters
3(a)(i)* Articles of Incorporation of the Company
3(a)(ii) Form of Amended and Restated Articles of Incorporation
3(b)* Bylaws of the Company
4* Specimen of certificate representing Series A Preferred Shares
5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel to the Company,
relating to Series A Preferred Shares
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel to the Company,
relating to certain tax matters
10(a) Form of Residential Mortgage Loan Purchase and Warranties Agreement between the
Company and the Bank
10(b) Form of Commercial Mortgage Loan Purchase and Warranties Agreement between the
Company and the Bank
10(c) Residential Mortgage Loan Servicing Agreements between the Bank and the
Servicing Agent
10(d) Form of Commercial Mortgage Loan Servicing Agreement between the Company and the
Bank
10(e)* Form of Advisory Agreement between the Company and the Bank
10(f) Form of Assignment, Assumption and Recognition Agreement between the Company,
the Bank and the Servicing Agent
23(a) Consent of KPMG Peat Marwick LLP.
23(b) Consent of Elias, Matz, Tiernan & Herrick, L.L.P. (included in Exhibit 5)
23(c) Consent of Arthur Andersen LPP
24 Power of Attorney (included in Registration Statement signature page)
</TABLE>
- ------------------------
* Previously filed
ITEM 36. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 33 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of
II-3
<PAGE>
the Registrant in the successful defense of any action, suit or proceeding), is
asserted by such director, officer, or controlling person in connection with the
securities registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-11 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Los
Angeles, California, on the fifth day of September, 1997.
PEOPLE'S PREFERRED CAPITAL CORPORATION
By: /s/ RUDOLF P. GUENZEL*
-----------------------------------------
Rudolf P. Guenzel
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ RUDOLF P. GUENZEL* Officer and Director
- ------------------------------ (Principal Executive September 5, 1997
Rudolf P. Guenzel* Officer)
Executive Vice President,
/s/ J. MICHAEL HOLMES Chief Financial Officer,
- ------------------------------ Secretary and Director September 5, 1997
J. Michael Holmes (Principal Accounting
Officer)
/s/ HENRY PETERS*
- ------------------------------ Chairman of the Board of September 5, 1997
Henry Peters* Directors
/s/ GERARD JERVIS*
- ------------------------------ Director September 5, 1997
Gerard Jervis*
/s/ ROBERT W. MACDONALD*
- ------------------------------ Director September 5, 1997
Robert W. MacDonald*
- ------------------------
* By J. Michael Holmes pursuant to a Power of Attorney.
II-5
<PAGE>
Each person whose signature appears below hereby makes, constitutes and
appoints Rudolf P. Guenzel and J. Michael Holmes his true and lawful attorney,
with the full power of either such person to sign for such person and in such
person's name and capacity indicated below, and with full power of substitution,
any and all amendments to this Registration Statement, hereby ratifying and
confirming either of such person's signature as it may be signed by said
attorney to any and all amendments.
/s/ JOHN F. DAVIS
- ------------------------------ Director September 5, 1997
John F. Davis
/s/ DAVID S. HONDA
- ------------------------------ Director September 5, 1997
David S. Honda
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-11 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Los
Angeles, California, on the day of September, 1997.
PEOPLE'S PREFERRED CAPITAL CORPORATION
By: *
-----------------------------------------
Rudolf P. Guenzel
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
* Officer and Director
- ------------------------------ (Principal Executive September , 1997
Rudolf P. Guenzel Officer)
Executive Vice President,
Chief Financial Officer,
- ------------------------------ Secretary and Director September , 1997
J. Michael Holmes (Principal Accounting
Officer)
*
- ------------------------------ Chairman of the Board of September , 1997
Henry Peters Directors
*
- ------------------------------ Director September , 1997
Gerard Jervis
*
- ------------------------------ Director September , 1997
Robert W. MacDonald
- ------------------------
* By J. Michael Holmes pursuant to a Power of Attorney.
II-7
<PAGE>
Each person whose signature appears below hereby makes, constitutes and
appoints Rudolf P. Guenzel and J. Michael Holmes his true and lawful attorney,
with the full power of either such person to sign for such person and in such
person's name and capacity indicated below, and with full power of substitution,
any and all amendments to this Registration Statement, hereby ratifying and
confirming either of such person's signature as it may be signed by said
attorney to any and all amendments.
- ------------------------------ Director September , 1997
John F. Davis
- ------------------------------ Director September , 1997
David S. Honda
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement between the Company, the Bank and the Underwriters
3(a)(i)* Articles of Incorporation of the Company
3(a)(ii) Form of Amended and Restated Articles of Incorporation
3(b)* Bylaws of the Company
4* Specimen of certificate representing Series A Preferred Shares
5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel to the Company, relating to Series A
Preferred Shares
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel to the Company, relating to certain tax
matters
10(a) Form of Residential Mortgage Loan Purchase and Warranties Agreement between the Company and the Bank
10(b) Form of Commercial Mortgage Loan Purchase and Warranties Agreement between the Company and the Bank
10(c) Residential Mortgage Loan Servicing Agreements between the Bank and the Servicing Agent
10(d) Form of Commercial Mortgage Loan Servicing Agreement between the Company and the Bank
10(e)* Form of Advisory Agreement between the Company and the Bank
10(f) Form of Assignment, Assumption and Recognition Agreement between the Company, the Bank and the
Servicing Agent
23(a) Consent of KPMG Peat Marwick LLP.
23(b) Consent of Elias, Matz, Tiernan & Herrick, L.L.P. (included in Exhibit 5)
23(c) Consent of Arthur Andersen LLP
24 Power of Attorney (included in Registration Statement signature page)
</TABLE>
- ------------------------
* Previously filed
<PAGE>
Draft of August 28, 1997
PEOPLE'S PREFERRED CAPITAL CORPORATION
(a Maryland corporation)
1,240,000 Shares
___% Noncumulative Exchangeable Preferred Stock, Series A, par value $0.01
per share
UNDERWRITING AGREEMENT
September __, 1997
SANDLER O'NEILL & PARTNERS, L.P.
as Representative of the several Underwriters
c/o Sandler O'Neill & Partners, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
People's Preferred Capital Corporation, a Maryland corporation (the
"Company"), and People's Bank of California, a federally chartered and
insured stock savings bank (the "Bank"), hereby confirm their agreement with
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") and each of the other
Underwriters named in Schedule A hereto (collectively, the "Underwriters,"
which term shall also include any underwriter substituted as hereinafter
provided in Section 10 hereof), for whom Sandler O'Neill is acting as
representative (in such capacity, the "Representative"), with respect to the
issue and sale by the Company and the purchase by the Underwriters, acting
severally and not jointly, of the respective numbers of shares of the
Company's __% Noncumulative Exchangeable Preferred Stock, Series A (the
"Series A Preferred Shares") set forth in said Schedule A, and with respect
to the grant by the Company to the Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or
any part of 186,000 additional shares of such preferred stock to cover
over-allotments, if any. The aforesaid 1,240,000 shares of Series A
Preferred Shares (the "Initial Securities") to be purchased by the
Underwriters and all or any part of the 186,000 shares of Series A Preferred
Shares subject to the option described in Section 2(b) hereof (the "Option
Securities") are hereinafter called, collectively, the "Securities." Each
share of the Series A Preferred Shares is exchangeable, on the terms set
forth in the certificate of designation for the Series A Preferred Shares
(the "Certificate of Designation"), into one share of the Bank's __%
Noncumulative Preferred Stock, Series A (the "Bank Preferred Shares").
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-11 (No. 333-31051) covering
the registration of the Securities under the Securities Act of 1933, as
amended (the "Securities Act"), including the related preliminary prospectus
or prospectuses. Promptly after execution and delivery of this Agreement, the
Company will prepare and file a prospectus in accordance with the provisions
of Rule 430A ("Rule 430A") of the rules and regulations of the Commission
under the Securities Act (the "Securities Act Regulations") and paragraph (b)
of Rule 424 ("Rule 424(b)") of the Securities Act Regulations. The
information included in such prospectus that was omitted from such
registration statement at the time it became effective but that is deemed to
be part of such registration statement at the time it became effective
pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A
Information". Each prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information, is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein
referred to as the "Rule 462(b) Registration Statement," and after such
filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to
the Underwriters for use in connection with the offering of the Securities is
herein called the "Prospectus." For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the
Prospectus or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
The Bank has prepared and filed on July __, 1997 with the Office of
Thrift Supervision (the "OTS") a preliminary offering circular under cover of
Form OC (Docket No. ____), also filed with the Commission as an attachment to
the Registration Statement, for the registration of the Bank Preferred Shares
pursuant to 12 C.F.R. Section 563g of the rules and regulations of the OTS
(all of the rules and regulations of the OTS set forth in Chapter V of Title
12 of the Code of Federal Regulations, including, without limitation, 12
C.F.R. Section 563g, and the rules and regulations of the Commission made
applicable to the offering circular by the rules and regulations of the OTS,
are hereinafter collectively referred to as the "OTS Rules and Regulations").
The Bank will promptly prepare and file an offering circular (which includes
the information (the "Pricing Information") excluded from the preliminary
offering circular in reliance upon 12 C.F.R. S 563g.2(c)(2) of the OTS Rules
and Regulations and 17 C.F.R. Section 230-430A of the Securities Act
Regulations) in accordance with the provisions of Rule 424(b). Each offering
circular used before the time such offering circular is declared effective by
the OTS and any offering circular that omits the Pricing Information that is
used after such effectiveness and prior to the execution and delivery of this
Agreement is herein called a "preliminary offering circular." Such filing
under cover of Form OC, and the offering circular constituting a part
thereof, as amended at the time the offering circular becomes effective under
the OTS Rules and Regulations (and including the Pricing Information),
including all documents incorporated by reference therein, are hereinafter
referred to as the "Form OC" and the "Offering Circular," respectively,
except that
2
<PAGE>
if any amended or supplemented offering circular shall be provided to the
Underwriters by the Bank for use in connection with the offering of the Bank
Preferred Shares which differs from the Offering Circular at the time it
becomes effective (whether or not such revised offering circular is required
to be filed by the Bank pursuant to the OTS Rules and Regulations (including
Rule 424(b))), the term "Offering Circular" shall refer to such newly amended
or supplemented offering circular from and after the time it is first
provided to the Underwriters for such use.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties regarding the Company. The Company
and the Bank jointly and severally represent and warrant to each Underwriter
as of the date hereof, as of the Closing Time referred to in Section 2(c)
hereof, and as of each Date of Delivery (if any) referred to in Section 2(b)
hereof, and agree with each Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the Securities Act and no stop order suspending
the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the Securities Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements
of the Securities Act and the Securities Act Regulations and did not and
will not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading. Neither the Prospectus nor any
amendments or supplements thereto, at the time the Prospectus or any such
amendment or supplement was issued and at the Closing Time (and, if any
Option Securities are purchased, at the Date of Delivery), included or
will include an untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. The representations and warranties in this subsection
shall not apply to statements in or omissions from the Registration
Statement or Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by any Underwriter
through Sandler O'Neill expressly for use in the Registration Statement
or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act, complied
when so filed in all material respects with
3
<PAGE>
the Securities Act Regulations and each preliminary prospectus and the
Prospectus delivered to the Underwriters for use in connection with this
offering was identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) Independent Accountants. KPMG Peat Marwick LLP, the
accountants who certified the financial statements included in the
Registration Statement, are independent public accountants as required by
the Securities Act and the Securities Act Regulations.
(iii) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change or any development or
developments involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business affairs
or business prospects, in each case whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), of the
Company, (B) there have been no transactions entered into by the Company,
other than those in the ordinary course of business, which are material
with respect to the Company, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.
(iv) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Maryland and is in good standing with the State
Department of Assessments and Taxation of Maryland ("SDAT") and has
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and to enter
into and perform its obligations under this Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in
good standing in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to be
in good standing would not result in a Material Adverse Effect on the
Company.
(v) No Subsidiaries. The Company has no subsidiaries.
(vi) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus under the
caption "Capitalization". The shares of issued and outstanding capital
stock of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; none of the outstanding shares of capital
stock of the Company was issued in violation of the preemptive or other
similar rights of any securityholder of the Company.
(vii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
4
<PAGE>
(viii) Authorization and Description of Common Stock. The common
stock of the Company, par value $0.01 per share (the "Common Stock"),
conforms to all statements relating thereto contained or incorporated by
reference in the Prospectus and such description conforms to the rights
set forth in the instruments defining the same. All of the outstanding
shares of Common Stock have been duly authorized and validly issued, are
fully paid and nonassessable, and are owned by the Bank free and clear of
any liens, charges or encumbrances.
(ix) Authorization and Description of Securities. The Securities
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set forth
herein, will be validly issued and fully paid and non-assessable; the
Securities conform to the statements relating thereto contained in the
Prospectus and such description conforms to the provisions of the
Certificate of Designation; the relative rights, preferences, interests
and powers of the Securities are as set forth in the Certificate of
Designation relating thereto; no holder of the Securities will be subject
to personal liability by reason of being such a holder; and the issuance
of the Securities is not subject to the preemptive or other similar
rights of any securityholder of the Company.
(x) No Other Securities Outstanding. Except as described in the
Prospectus, there are no outstanding rights, warrants or options to
acquire, or instruments convertible into or exchangeable for, or
agreements or understandings with respect to the sale or issuance of, any
shares of capital stock of or other equity interest in the Company.
(xi) Absence of Defaults and Conflicts. The Company is not in
violation of its charter or by-laws or any other similar constituent
agreement or in default in the performance or observance of any
obligation, agreement (including without limitation the agreements listed
in Schedule C hereto), covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease
or other agreement or instrument (collectively, "Agreements and
Instruments") to which the Company or any of its subsidiaries is a party
or by which it or any of them may be bound, or to which any of the
property or assets of the Company is subject except for such defaults
that would not, singly or in the aggregate, result in a Material Adverse
Effect on the Company; and the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
herein and in the Registration Statement (including the issuance and sale
of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectus under the caption "Use of
Proceeds") and compliance by the Company with its obligations hereunder
have been duly authorized by all necessary corporate action and do not
and will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default or
Repayment Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any subsidiary pursuant to, such Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not
5
<PAGE>
result in a Material Adverse Effect on the Company), nor will such action
result in any violation of the provisions of the charter or by-laws of
the Company or any subsidiary or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
the Company or any of its assets, properties or operations. As used
herein, a "Repayment Event" means, with respect to a particular company
or its affiliates, any event or condition which gives the holder of any
note, debenture or other evidence of indebtedness (or any person acting
on such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by such company or
its affiliates.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company,
which is required to be disclosed in the Registration Statement (other
than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect on the Company, or which might
reasonably be expected to materially and adversely affect the properties
or assets thereof or the consummation of the transactions contemplated in
this Agreement or the agreements listed in Annex C hereto or the
performance by the Company of its obligations hereunder or thereunder;
the aggregate of all pending legal or governmental proceedings to which
the Company is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect on the Company.
(xiii) Authorization of Other Agreements; Absence of Defaults and
Conflicts. Each of the agreements listed in Schedule C hereto has been
duly authorized, executed and delivered by the Company and constitutes a
valid and legally binding obligation of the Company and is enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and similar laws of general applicability
relating to or affecting the enforcement of creditors' rights. The
execution, delivery and performance of each of the agreements listed in
Schedule C hereto and the consummation of the transactions contemplated
therein and compliance by the Company with its obligations thereunder
have been duly authorized by all necessary corporate action and do not
and will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default or
Repayment Event under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any subsidiary pursuant to, the Agreements and Instruments to which the
Company or any of its subsidiaries is a party or by which it or any of
them may be bound, or to which any of the property or assets of the
Company is subject (except for such conflicts, breaches or defaults or
liens, charges or encumbrances that would not result in a Material
Adverse Effect on the Company), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or
any subsidiary or
6
<PAGE>
any applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any of its assets,
properties or operations.
(xiv) Mortgage Purchase and Servicing Agreements. The
representations and warranties of the Company contained in or made
pursuant to each of (w) the Residential Mortgage Loan Purchase and
Warranties Agreement between the Company and the Bank, of even date
herewith (the "Residential Purchase Agreement"), (x) the Commercial
Mortgage Loan Purchase and Warranties Agreement between the Company and
the Bank, of even date herewith (the "Commercial Purchase Agreement"),
(y) the Assignment, Assumption and Recognition Agreement among the Bank,
the Company and Temple-Inland Mortgage Corporation (the "Residential
Servicing Agreement"), and (z) the Commercial Servicing Agreement between
the Company and the Bank, of even date herewith (the "Commercial
Servicing Agreement"), are as of the date hereof and will be as of
Closing Time (and, if any Option Securities are purchased, as of the Date
of Delivery), true and correct.
(xv) Statements in the Prospectus. The statements set forth in the
Prospectus under the caption (i) "Description of Series A Preferred
Shares," insofar as they purport to constitute a summary of the terms of
the Preferred Stock, (ii) "Description of Capital Stock", insofar as they
purport to constitute a summary of the terms of the stock of the Company,
and (iii) "-Certain Transactions Constituting the Formation", "Risk
Factors", "Federal Income Tax Considerations", "ERISA Considerations",
"Business and Strategy", insofar as they purport to describe provisions
of the laws and documents referred to therein, are accurate, complete and
fair.
(xvi) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xvii) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement and the agreements listed in Schedule C
hereto and the use of proceeds from the sale of the Shares as
contemplated by the Prospectus, except such as have been already obtained
or as may be required under the Securities Act or the Securities Act
Regulations or state securities laws or the OTS approval referred to in
Section 1(b)(xv) hereof and the filing of the Certificate of Designation
in the State of Maryland.
(xviii) Possession of Licenses and Permits. The Company possesses
such permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate
federal, state, local or foreign regulatory agencies or
7
<PAGE>
bodies necessary to conduct the business now operated by it; the Company
is in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in
the aggregate, have a Material Adverse Effect on the Company; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect on the Company; and neither the Company nor any
of its subsidiaries has received any notice of proceedings relating to
the revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a Material Adverse Effect on the
Company.
(xix) Environmental Laws. The Company is in compliance in all
material respects with all applicable federal, state and local
environmental laws and regulations, including, without limitation, those
applicable to emissions to the environment, waste management, and waste
disposal (collectively, the "Environmental Laws"), except where such
noncompliance would not be reasonably likely to have a Material Adverse
Effect on the Company, or except as disclosed in the Prospectus, and to
the knowledge of the Company, there are no circumstances that would
prevent, interfere with or materially increase the cost of such
compliance in the future.
(xx) Environmental Claims. Except as disclosed in the Prospectus,
there is no claim under any Environmental Law, including common law,
pending or, to the best knowledge of the Company, threatened against the
Company (an "Environmental Claim"), which would be reasonably likely to
have a Material Adverse Effect on the Company and under applicable law,
there are no past or present actions, activities, circumstances, events
or incidents, including, without limitation, releases of any material
into the environment, that are reasonably likely to form the basis of any
Environmental Claim against the Company which would be reasonably likely
to have a Material Adverse Effect on the Company.
(xxi) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xxii) Registration Rights. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the Securities Act.
(xxiii) REIT Status. The Company is organized and carries on its
business so as to qualify as a "real estate investment trust" (a "REIT")
under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"), and no transaction or other event has occurred
which would cause the Company not to qualify as a REIT for
8
<PAGE>
its current taxable year or for future taxable years.
(xxiv) Financial Statements. The consolidated financial
statements and the related notes thereto included in the Prospectus
present fairly the financial position of the Company as of the latest
respective dates of such financial statements, and the results of
operations of the Company for the respective periods covered thereby.
Such statements and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved. The tables included in the Prospectus
present fairly the information purported to be shown thereby at the
respective dates thereof and for the respective periods covered thereby
and conform in all material respects with the Securities Act and the
Securities Act Regulations.
(b) Representations and Warranties regarding the Bank. The Company
and the Bank jointly and severally represent and warrant to each Underwriter
as of the date hereof, as of the Closing Time referred to in Section 2(c)
hereof, and as of each Date of Delivery (if any) referred to in Section 2(b)
hereof, and agree with each Underwriter, as follows:
(i) Compliance with Requirements. The Form OC and the
Offering Circular, at the respective times the Form OC and any
post-effective amendments thereto became effective, at the date hereof
and at all times subsequent thereto up to the Closing Time (and, if any
Option Securities are purchased, at the Date of Delivery), complied and
will comply in all material respects with the requirements of the OTS
Rules and Regulations. The Form OC, at the respective times the Form OC
and any post-effective amendments thereto became effective, and at the
date hereof, did not or will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Offering
Circular, at the respective times the Form OC and any post-effective
amendments thereto became effective, at the date hereof and at all times
subsequent thereto up to the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), did not and will not include an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this paragraph (b)(i)
shall not apply to statements in or omissions from the Form OC or the
Offering Circular made in reliance upon and in conformity with
information furnished to the Bank in writing by any Underwriter through
Sandler O'Neill expressly for use therein.
(ii) Incorporated Documents. The documents incorporated or
deemed to be incorporated by reference in the Form OC and the Offering
Circular, at the time they were or hereafter are filed with the OTS,
complied and will comply in all material respects with the requirements
of the OTS Rules and Regulations, and, when read together with the other
information in the Offering Circular, at the time the Form OC became
effective, at the time the Offering Circular was issued and at the
Closing Time (and if any Option Securities are purchased, at the Date of
Delivery), did not and will not contain an untrue
9
<PAGE>
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading.
(iii) Independent Accountants. KPMG Peat Marwick LLP, the
accountants who have certified the financial statements included in the
Offering Circular, are and were at all relevant times, with respect to
the Bank and its subsidiaries, independent public accountants within the
meaning of Rule 1.01 of the Code of Professional Ethics of the American
Institute of Certified Public Accountants.
(iv) Financial Statements. The consolidated financial
statements and the related notes thereto included in the Offering
Circular present fairly the financial position of the Bank and its
subsidiaries as of the latest respective dates of such financial
statements, and the results of operations of the Bank and its
subsidiaries for the respective periods covered thereby. Such statements
and related notes have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout
the periods involved. The tables included in the Offering Circular
present fairly the information purported to be shown thereby at the
respective dates thereof and for the respective periods covered thereby
and conform in all material respects with the OTS Rules and Regulations.
(v) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Form OC and the
Offering Circular, except as otherwise stated therein, (A) there has been
no material adverse change or any development or developments involving a
prospective material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of
the Bank and its subsidiaries considered as one enterprise, whether or
not arising in the ordinary course of business, (B) there have been no
transactions entered into by the Bank or any of its subsidiaries, other
than those in the ordinary course of business, which are material with
respect to the Bank and its subsidiaries considered as one enterprise and
(C) there has been no dividend or distribution of any kind declared, paid
or made by the Bank on any class of its capital stock except as described
in the Offering Circular.
(vi) Good Standing of the Bank. The Bank has been duly
organized and is validly existing as a federally chartered savings bank
organized under the laws of the United States of America with full
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Offering Circular and to
enter into and perform its obligations under this Agreement and the
agreements listed in Annex C hereto. The Bank is duly qualified and is
in good standing as a foreign corporation to transact business in all
places where such qualification is necessary or, to the extent not so
qualified, where the failure to obtain such qualification would not have
a Material Adverse Effect on the Bank and its subsidiaries, considered as
one enterprise. The Bank is a member in good standing of the Federal
Home Loan Bank of San Francisco, and the Bank's deposit accounts are
insured by the Federal Deposit Insurance Corporation (the "FDIC") to the
fullest extent provided under applicable law and the OTS
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Rules and Regulations, and no proceedings for the termination or
revocation of such insurance are pending or, to the knowledge of the
Bank, threatened.
(vii) Good Standing of the Subsidiaries. Each subsidiary of the
Bank that is a significant subsidiary (as defined in Section 1-02 of
Regulation S-X of the Commission) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority
to own, lease and operate its properties and conduct its business as
described in the Offering Circular (or, if not so described, as presently
conducted), and is duly qualified as a foreign corporation to transact
business and is in good standing in all places where such qualification
or good standing is necessary or to the extent not so qualified or not in
good standing, where the failure to obtain such qualification or to be in
good standing would not have a Material Adverse Effect on the Bank and
its subsidiaries, considered as one enterprise; no proceeding has been
instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or
qualification; the activities of the subsidiaries of the Bank are
permitted to subsidiaries of a federally chartered savings bank under
applicable law and the OTS Rules and Regulations; all of the issued and
outstanding capital stock of each subsidiary of the Bank has been duly
authorized and validly issued and is fully paid and nonassessable and is
owned, directly or through other subsidiaries of the Bank, by the Bank;
and all of the capital stock of each subsidiary of the Bank that is owned
by the Bank, directly or through other subsidiaries of the Bank, is owned
free and clear of any pledge, lien, encumbrance, claim or equity.
(viii) Capitalization. All of the outstanding shares of common
stock of the Bank have been duly authorized and validly issued, are fully
paid and nonassessable, are owned as indicated in the Offering Circular
under the caption "Ownership of Capital Stock " and are subject only to
such pledges, liens, security interests, charges, claims, equities and
encumbrances of any kind to the extent set forth in the Offering Circular
under the caption "Ownership of Capital Stock " The authorized, issued
and outstanding capital stock and any outstanding short-term debt,
long-term debt and capital lease obligations of the Bank at June 30, 1997
are as set forth in the Offering Circular under the caption
"Capitalization," and any subsequent borrowings and issuances have been
made in the ordinary course of business.
(ix) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Bank.
(x) Authorization of Other Agreements; Absence of Defaults and
Conflicts. Each of the agreements listed in Schedule C hereto has been
duly authorized, executed and delivered by the Bank and constitutes a
valid and legally binding obligation of the Bank and is enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and similar laws of
general applicability relating to or affecting the enforcement of
creditors' rights. The execution,
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delivery and performance of each of the agreements listed in Schedule C
hereto and the consummation of the transactions contemplated therein and
compliance by the Bank with its obligations thereunder have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Bank or any subsidiary
pursuant to, the Agreements and Instruments to which the Bank or any of
its subsidiaries is a party or by which it or any of them may be bound,
or to which any of the properties or assets of any of them is subject
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not result in a Material Adverse Effect on the
Bank or its subsidiaries, considered as one enterprise), nor will such
action result in any violation of the provisions of the charter or
by-laws of the Company or any subsidiary or any applicable law, statute,
rule, regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any of its assets, properties or
operations.
(xi) Absence of Defaults and Conflicts. Neither the Bank nor
any of its subsidiaries is in violation of its federal stock charter or
certificate of incorporation, as the case may be, or by-laws; nor is the
Bank or any of its subsidiaries in default in the performance or
observance of any obligation, agreement (including without limitation the
agreements listed in Schedule C hereto), covenant or condition contained
in any Agreement and Instrument to which the Bank or any of its
subsidiaries is a party or by which it or any of them may be bound or to
which any of the property or assets of any of them is subject, except for
such defaults that would not, singly or in the aggregate, result in a
Material Adverse Effect on the Bank and its subsidiaries, considered as
one enterprise; and the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein,
in the Registration Statement and the Form OC, and compliance by the Bank
with its obligations hereunder have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute
a breach of, or default or Repayment Event under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Bank or any subsidiary pursuant to, such
Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect on the Bank and its Subsidiaries, considered as
one enterprise), nor will such action result in any violation of the
provisions of the charter or by-laws of the Bank or any subsidiary or any
applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Bank or any of its assets,
properties or operations.
(xii) Regulatory Compliance. Except as disclosed in the
Offering Circular, the Bank and its subsidiaries are conducting their
respective businesses in compliance in all material respects with all
laws, rules, regulations, decisions, directives and orders
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(including, without limitation, all regulations and orders of, or
agreements with, the OTS and the FDIC) applicable to them. There is no
action, suit, investigation or proceeding before or by any government,
governmental instrumentality or court, domestic or foreign, now pending
or, to the knowledge of the Bank, threatened against or affecting the
Bank or any of its subsidiaries (A) that is required to be disclosed in
the Offering Circular and not disclosed therein, (B) that could result in
any material adverse change in the condition (financial or otherwise),
earnings, business affairs or business prospects of the Bank and its
subsidiaries, considered as one enterprise, (C) that could materially and
adversely affect the properties, assets or leasehold interests thereof or
(D) that could adversely affect the consummation of the transactions
contemplated in this Agreement. All pending legal or governmental
proceedings to which the Bank or any of its subsidiaries is a party or of
which any of their property is the subject, which are not described in
the Offering Circular, including ordinary routine litigation incidental
to their respective businesses, would not have a Material Adverse Effect
on the Bank and its subsidiaries, considered as one enterprise.
(xiii) Absence of Labor Dispute. No labor dispute with the
employees of the Bank or any subsidiary exists or, to the knowledge of
the Bank, is imminent, and the Bank is not aware of any existing or
imminent labor disturbance by the employees of any of its or any
subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to have a
Material Adverse Effect on the Bank and its subsidiaries, considered as
one enterprise.
(xiv) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement, the
Form OC, the Prospectus or the Offering Circular or to be filed as
exhibits thereto which have not been so described and filed as required.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Bank of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except such as have been already obtained
or as may be required under applicable law or the OTS Rules and
Regulations or state securities laws or the OTS approval referred to in
the next sentence. Without limiting the foregoing, (A) the Bank has
submitted an application to the OTS for approval by the OTS for the
inclusion of the minority interest represented by the Securities in the
Bank's regulatory capital pursuant to 12 C.F.R. Section 563.81, which
application and notice, as originally filed and at the time of the filing
of any supplement or amendment to either thereto, were true and accurate
in all material respects and did not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading and (B) the Bank will comply with the
conditions set forth in any approval of the OTS related to such
application or
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notice at the times required thereby. At or prior to the Closing Time,
the Bank will have received from the OTS approval for inclusion of the
minority interest represented by the Securities in the Bank's regulatory
capital pursuant to 12 C.F.R. Section 563.81 and at the Closing Time
(and, if any Option Securities are purchased, at the Date of Delivery)
such approval shall continue to be in full force and effect.
(xvi) Possession of Licenses and Permits. The Bank and its
subsidiaries possess such Governmental Licenses issued by the appropriate
federal, state, local or foreign regulatory agencies or bodies necessary
to conduct the business now operated by each of them; the Bank and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect on the Bank
and its subsidiaries, considered as one enterprise; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect on the Bank and its subsidiaries, considered as
one enterprise; and neither the Bank nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a Material Adverse Effect on the Bank and its subsidiaries,
considered as one enterprise.
(xvii) Title to Property. The Bank and its subsidiaries have good
and marketable title to all real property owned by each of them and good
title to all other properties owned by them, in each case, free and clear
of all mortgages, pledges, liens, security interests, claims,
restrictions or encumbrances of any kind except such as do not, singly or
in the aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by
the Bank or any of its subsidiaries; and all of the leases and subleases
material to the business of the Bank and its subsidiaries, considered as
one enterprise, and under which the Bank or any of its subsidiaries holds
properties described in the Prospectus or the Offering Circular, are in
full force and effect, and neither the Bank nor any subsidiary has any
notice of any material claim of any sort that has been asserted by anyone
adverse to the rights of the Bank or any subsidiary under any of the
leases or subleases mentioned above, or affecting or questioning the
rights of the Bank or such subsidiary to the continued possession of the
leased or subleased premises under any such lease or sublease.
(xviii) Compliance with Cuba Act. The Bank has complied with, and
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as
Section 517.075 of the Florida statutes, and the rules and regulations
thereunder (collectively, the "Cuba Act") or is exempt therefrom.
(xix) Registration Rights. There are no holders of securities
of the Bank who by reason of the filing of the Offering Circular with the
OTS or otherwise have the right to request the Bank to register under the
Rules and Regulations securities held by them.
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(xx) No Rights to Acquire Securities. Except as disclosed in
the Offering Circular, there are no outstanding rights, warrants or
options to acquire, or instruments convertible into or exchangeable for,
or agreements or understandings with respect to the sale or issuance of,
any shares of capital stock of or other equity interest in the Bank or
any of its Subsidiaries.
(xxi) Exemption. The Bank Preferred Shares are exempt securities
under Section 3(a)(5) of the Securities Act, and registration of the Bank
Preferred Shares under the Securities Act is not required in connection
with the offer, sale, issuance or delivery of the Bank Preferred Shares
as contemplated herein.
(xxii) Certificate of Designation. Prior to the Closing Time,
the Bank shall have filed a certificate of designation with the OTS
providing for the issuance of the Bank Preferred Shares.
(xxiii) Authorization and Description of Bank Preferred Shares.
The Bank Preferred Shares have been duly authorized and, if and when
issued and delivered by the Bank pursuant to the terms and conditions set
forth in the Certificate of Designation, will be validly issued and fully
paid and non-assessable; the Bank Preferred Shares conform to the
statements relating thereto contained in the Offering Circular and such
description conforms to the rights set forth in the instruments defining
the same; no holder of the Bank Preferred Shares will be subject to
personal liability by reason of being such a holder; and the issuance of
the Bank Preferred Shares is not subject to the preemptive or other
similar rights of any securityholder of the Bank.
(xxiv) Mortgage Purchase and Servicing Agreements. The
representations and warranties of the Bank contained in or made pursuant
to each of (w) the Residential Purchase Agreement, (x) the Commercial
Purchase Agreement, (y) the Residential Servicing Agreement, and (z) the
Commercial Servicing Agreement are, as of the date hereof and will be as
of Closing Time (and, if any Option Securities are purchased, as of the
Date of Delivery), true and correct.
(xxv) Environmental Laws. Each of the Bank and its Subsidiaries is
in compliance in all material respects with all applicable Environmental
Laws, except where such noncompliance would not be reasonably likely to
have a Material Adverse Effect on the Bank and its subsidiaries,
considered as one enterprise, or except as disclosed in the Offering
Circular, and to the knowledge of the Bank, there are no circumstances
that would prevent, interfere with or materially increase the cost of
such compliance in the future.
(xxvi) Environmental Claims. Except as disclosed in the Offering
Circular, there is no claim under any Environmental Law, including common
law, pending or, to the best knowledge of the Bank, threatened against
the Bank or its Subsidiaries ( a "Bank Environmental Claim"), which would
be reasonably likely to have a Material Adverse Effect on the Bank and
its subsidiaries, considered as one enterprise and, to the knowledge of
the Bank, under applicable law, there are no past or present actions,
activities, circumstances,
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events or incidents, including, without limitation, releases of any
material into the environment, that are reasonably likely to form the
basis of any Environmental Claim against the Bank or its Subsidiaries
which would be reasonably likely to have a Material Adverse Effect on the
Bank and its subsidiaries, considered as one enterprise.
(xxvii) Investment Company Act. The Bank is not, and the Bank does
not own or control, an open-end investment company, unit investment trust
or face-amount certificate company that is or is required to be
registered under Section 8 of the 1940 Act, and the Bank does not own or
control, a closed-end investment company required to be registered, but
not registered, thereunder.
(c) Officer's Certificates. Any certificate signed by any officer of the
Company or the Bank or any of its subsidiaries delivered to the
Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company or the Bank, as applicable, to
each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein
set forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number
of Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions
herein set forth, the Company hereby grants an option to the Underwriters,
severally and not jointly, to purchase up to an additional 186,000 shares of
the Company's Series A Preferred Shares at the price per share set forth in
Schedule B. The option hereby granted will expire 30 days after the date
hereof and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with
the offering and distribution of the Initial Securities upon notice by the
Representative to the Company setting forth the number of Option Securities
as to which the Underwriters are then exercising the option and the time and
date of payment and delivery for such Option Securities. Any such time and
date of delivery (a "Date of Delivery") shall be determined by the
Representative, but shall not be later than ten full business days after the
exercise of said option. If the option is exercised as to all or any portion
of the Option Securities, each of the Underwriters, acting severally and not
jointly, will purchase that proportion of the total number of Option
Securities then being purchased which the number of Initial Securities set
forth in Schedule A opposite the name of such Underwriter bears to the total
number of Initial Securities, subject in each case to such adjustments as the
Representative in its discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Payment and Delivery. The Initial Securities to be purchased by each
Underwriter
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hereunder will be represented by one or more definitive certificates
registered in the name of Cede & Co. which will be deposited by or on behalf
of the Company with the Depository Trust Company ("DTC") or its designated
custodian. The Company will deliver the Initial Securities to Sandler
O'Neill for the account of each Underwriter, against payment by or on behalf
of such Underwriter of the purchase price therefor by wire transfer in
Federal (same day) funds, by causing DTC to credit the Shares to the account
of Sandler O'Neill. The Company will cause the certificates representing the
Initial Securities to be made available to Sandler O'Neill for checking at
least twenty-four hours prior to the Time of Delivery at the office of DTC or
its designated custodian (the "Designated Office"). Payment of the purchase
price for, and delivery of certificates for, the Initial Securities shall be
made at the offices of Skadden, Arps, Slate, Meagher & Flom LLP at 919 Third
Avenue, New York, New York, or at such other place as shall be agreed upon by
the Representative and the Company, at 9:00 A.M. (Eastern time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given
day) business day after the date hereof (unless postponed in accordance with
the provisions of Section 10), or such other time not later than ten business
days after such date as shall be agreed upon by the Representative and the
Company (such time and date of payment and delivery being herein called
"Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and
delivery of certificates for, such Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by
the Representative and the Company, on each Date of Delivery as specified in
the notice from the Representative to the Company. Payment shall be made to
the Company by wire transfer of immediately available funds to a bank account
designated by the Company, against delivery to the Representative for the
respective accounts of the Underwriters of certificates for the Securities to
be purchased by them. It is understood that each Underwriter has authorized
the Representative, for such Underwriter's account, to accept delivery of,
receipt for, and make payment of the purchase price for, the Initial
Securities and the Option Securities, if any, which such Underwriter has
agreed to purchase. Sandler O'Neill, individually and not as representative
of the Underwriters, may (but shall not be obligated to) make payment of the
purchase price for the Initial Securities or the Option Securities, if any,
to be purchased by any Underwriter whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such Underwriter from its obligations hereunder.
SECTION 3. Covenants.
(a) Company and Bank Covenants. The Company and the Bank covenant with
each Underwriter as follows:
(i) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(a)(ii), will comply with the
requirements of Rule 430A and will notify the Representative immediately,
and confirm the notice in writing, (w) when any post-effective amendment
to the Registration Statement shall become effective, or any supplement
to the Prospectus or any amended Prospectus shall have been filed, (x) of
the receipt of any
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comments from the Commission, (y) of any request by the Commission for
any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, and (z) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of
the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for
any of such purposes. The Company will promptly effect the filings
necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain
the lifting thereof at the earliest possible moment.
(ii) Filing of Amendments. The Company will give the Representative
notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), or any
amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the
Prospectus, will furnish the Representative with copies of any such
documents a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file or use any such document to
which the Representative or counsel for the Underwriters shall object.
(iii) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representative and counsel for the
Underwriters, without charge, signed copies of the Registration Statement
as originally filed and of each amendment thereto (including exhibits
filed therewith or incorporated by reference therein) and signed copies
of all consents and certificates of experts, and will also deliver to the
Representative, without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without
exhibits) for each of the Underwriters. The copies of the Registration
Statement and each amendment thereto furnished to the Underwriters will
be identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(iv) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
Securities Act. The Company will furnish to each Underwriter, without
charge, during the period when the Prospectus is required to be delivered
under the Securities Act or the Securities Exchange Act of 1934, as
amended, (the "Exchange Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request.
The Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(v) Continued Compliance with Securities Laws. The Company will
comply with the
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Securities Act and the Securities Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is
required by the Securities Act to be delivered in connection with sales
of the Securities, any event shall occur or condition shall exist as a
result of which it is necessary, in the opinion of counsel for the
Underwriters or for the Company, to amend the Registration Statement or
amend or supplement the Prospectus in order that the Prospectus will not
include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of
such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the
requirements of the Securities Act or the Securities Act Regulations, the
Company will promptly prepare and file with the Commission, subject to
Section 3(a)(ii), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement
or the Prospectus comply with such requirements, and the Company will
furnish to the Underwriters such number of copies of such amendment or
supplement as the Underwriters may reasonably request.
(vi) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the Securities
for offering and sale under the applicable securities laws of such states
and other jurisdictions as the Representatives may designate and to
maintain such qualifications in effect for a period of not less than one
year from the later of the effective date of the Registration Statement
and any Rule 462(b) Registration Statement; provided, however, that the
Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company
will file such statements and reports as may be required by the laws of
such jurisdiction to continue such qualification in effect for a period
of not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(vii) Rule 158. The Company will make generally available to the
Company's security holders as soon as practicable, but in no event later
than eighteen months after the effective date of the Registration
Statement (as defined in Rule 158(c) under the Securities Act), an
earnings statement of the Company complying with Section 11(a) of the
Securities Act and the rules and regulations thereunder (including Rule
158).
(viii) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in
the Prospectus under "Use of Proceeds".
(ix) Listing. The Company will use its best efforts to effect the
listing of the Securities on the Nasdaq Stock Market's National Market
(the "Nasdaq National Market"); and to the extent necessary to comply
with Nasdaq National Market rules and regulations or the
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rules and regulations of any other exchange on which the Securities are
listed, to furnish holders of the Securities as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet
and statements of income, stockholders equity and cash flows of the
Company certified by independent public accountants) and, as soon as
practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), consolidated summary financial
information of the Company for each quarter in reasonable detail.
(x) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the Securities Act or the
Exchange Act, will file all documents required to be filed with the
Commission pursuant to the Exchange Act within the time periods required
by the Exchange Act and the rules and regulations of the Commission
thereunder.
(xi) Delivery of Reports. During a period of three years from the
effective date of the Registration Statement, the Company will furnish to
the Representative copies of all reports or other communications
(financial or other) furnished to stockholders of the Company, and will
deliver to the Representative (x) as soon as they are available, copies
of any reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed; and (y) such additional information
concerning the business and financial condition of the Company as the
Representative may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of
the Company and its subsidiaries are consolidated in reports furnished to
their stockholders generally or to the Commission).
(xii) REIT Qualification. Except to the extent that a Tax Event (as
defined in the Prospectus) shall have occurred, the Company will, in a
timely manner, make the elections and take the procedural steps described
in the Prospectus under the heading "Federal Income Tax Considerations"
to meet the requirements to qualify, for its taxable year ending December
31, 1997, as a REIT under the Code, as is in effect on the date hereof
and use every reasonable effort to do so.
(b) Bank Covenants. The Bank covenants with each Underwriter as follows:
(i) Compliance with Regulations and OTS Requests. The Bank will
notify the Underwriters immediately, and confirm the notice in writing,
(w) of the effectiveness of the Offering Circular and any amendment
thereto, (x) of the receipt by the Bank or its counsel of any comments
from the OTS with respect to the offering of the Securities, (y) of any
request to the Bank or its counsel by the OTS for any amendment or
supplement to the Offering Circular or for additional information and (z)
of the issuance or initiation by the OTS or by any other state or federal
banking or securities regulatory authority of any stop order or
cease-and-desist proceeding to suspend the effectiveness of the Offering
Circular or interfering with the offering of the Securities, or of the
suspension of the qualification of the Securities for offering or sale in
any jurisdiction, or the initiation or threat of any other orders or
proceedings for any of such
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purposes. The Bank will make every reasonable effort to prevent the
issuance or initiation of any such stop orders or cease-and-desist
proceedings and, if any such stop orders or cease-and-desist proceedings
are issued or initiated, to obtain the lifting or dismissal thereof at
the earliest possible moment.
(ii) Filing of Amendments. The Bank will give the Representative
notice of its intention to file or prepare any amendment to the Offering
Circular (or to any preliminary offering circular, as the case may be)
or any amendment, supplement or revision to the Offering Circular, will
furnish the Representative with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be,
and will not file or use any such document to which the Representative or
counsel for the Underwriters shall object.
(iii) Delivery of Form OC. The Bank has furnished or will deliver
to the Representative and counsel for the Underwriters, without charge,
signed copies of the Form OC, as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by reference
therein) and signed copies of all consents and certificates of experts,
and will also deliver to the Representative, without charge, a conformed
copy of the Form OC, as originally filed and of each amendment thereto
(without exhibits) for each of the Underwriters.
(iv) Continued Compliance with Laws. If any event shall occur as a
result of which it is necessary, in the opinion of counsel for the
Underwriters, to amend or supplement the Offering Circular in order to
make the Offering Circular not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, the
Bank will forthwith amend or supplement the Offering Circular by
preparing and furnishing to the Underwriters a reasonable number of
copies of an amendment or amendments of, or a supplement or supplements
to, the Offering Circular (in form and substance reasonably satisfactory
to such counsel) so that, as so amended or supplemented, the Offering
Circular will not contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time the
Offering Circular is delivered to a purchaser, not misleading, and the
Bank will furnish to each Underwriter such number of copies of such
amendment or supplement as such Underwriter shall reasonably request.
For the purposes of this subsection, the Bank shall furnish such
information with respect to itself to the Representative, counsel for the
Underwriters and counsel for the Bank, as may be necessary for counsel
for the Underwriters and counsel for the Bank to be aware of and to
consult with the Representative and the Bank with respect to the need to
amend or supplement the Offering Circular and shall furnish such further
information as may from time to time be reasonably requested.
(v) Earnings Reports. The Bank will timely file such reports in
connection with the Securities as are necessary in order to make
generally available as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, 12 C.F.R.
Section 563.81 or 12 C.F.R. Section 563g.12.
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(vi) Reporting Requirements. The Bank, during the period when the
Offering Circular is required to be delivered under 12 C.F.R. Section
563g, will file all documents required to be filed with the OTS within
the time periods required by 12 C.F.R. Section 563g and the rules and
regulations of the OTS thereunder.
SECTION 4. Payment of Expenses. (a) Expenses. The Company and the
Bank, jointly and severally, covenant and agree with the several Underwriters
to pay or cause to be paid all expenses incident to the performance of their
obligations under this Agreement, including (i) the preparation, printing and
filing of the Registration Statement and the Form OC (including financial
statements and exhibits) as originally filed and of each amendment thereto,
(ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may
be required in connection with the offering, purchase, sale, issuance or
delivery of the Securities and the Bank Preferred Shares,(iii) the
preparation, issuance and delivery of the certificates for the Securities to
the Underwriters, including any stock or other transfer taxes and any stamp
or other duties payable upon the sale, issuance or delivery of the Securities
to the Underwriters, (iv) the fees and disbursements of the Company's and the
Bank's counsel, accountants and other advisors, (v) the qualification of the
Securities under securities laws in accordance with the provisions of Section
3(a)(vi) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, preliminary offering circular, and of the Prospectus
and the Offering Circular and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the
Blue Sky Survey and any supplement thereto,(viii) the fees and expenses of
any transfer agent or registrar for the Securities or the Bank Preferred
Shares (ix) the costs and charges of DTC,(x) the filing fees incident to, and
the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. (the "NASD") of the terms of the sale of the Securities, (xi)
the out-of pocket expenses of the Underwriters, including without limitation,
the Underwriters legal fees and expenses, (xii) the fees and expenses
incurred in connection with the listing of the Securities on the Nasdaq
National Market, and (xiii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this section.
(b) Termination of Agreement. If this Agreement is terminated by the
Representative in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the fees and disbursements of counsel for
the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Bank contained in
Section 1 hereof or in certificates of any officer of the Company or the Bank
delivered pursuant to the provisions hereof, to the performance by each of
the Company and the Bank of their respective covenants and other obligations
hereunder, and to the following further conditions:
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(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, shall have
become effective and at Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery) no stop order suspending the
effectiveness of the Registration Statement shall have been issued under
the Securities Act or proceedings therefor initiated or threatened by the
Commission, and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction
of counsel to the Underwriters. A prospectus containing the Rule 430A
Information shall have been filed with the Commission in accordance with
Rule 424(b) (or a post-effective amendment providing such information
shall have been filed and declared effective in accordance with the
requirements of Rule 430A).
(b) Effectiveness of Offering Circular. The Offering Circular shall
have become effective and at Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), no stop order or
cease-and-desist proceeding suspending the effectiveness of the Offering
Circular or interfering with the offering of the Securities or the Bank
Preferred Shares shall have been issued and no proceedings for purposes
of issuing a stop order or cease-and-desist proceedings shall have been
instituted or shall be pending or shall be contemplated by the OTS or by
any other state or federal banking or securities regulatory authority.
Any request on the part of the OTS for additional information or for
inclusion of additional information in the Form OC shall have been
complied with to the reasonable satisfaction of counsel for the
Underwriters.
(c) Opinion of Counsel for Company. At Closing Time, the
Representative shall have received the favorable opinions, dated as of
Closing Time, of Elias, Matz, Tiernan & Herrick, counsel for the Company,
in form and substance satisfactory to counsel for the Underwriters,
together with signed or reproduced copies of each such letter for each of
the other Underwriters to the effect set forth in Exhibits A-1 and A-2
hereto and to such further effect as counsel to the Underwriters may
reasonably request.
(d) Opinions of Counsel for Bank. At Closing Time, the
Representative shall have received the favorable opinions, dated as of
Closing Time, of Elias, Matz, Tiernan & Herrick, counsel for the Bank to
the effect set forth in Exhibits B-1 and B-2 hereto, in form and
substance satisfactory to counsel for the Underwriters together with
signed or reproduced copies of each such opinion for each of the other
Underwriters. Such opinions shall be to such further effect with respect
to other legal matters relating to this Agreement and the sale of the
Securities pursuant to this Agreement as counsel for the Underwriters may
reasonably request.
In giving such opinions, such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the laws of the State of New
York, the State of Maryland and the District of Columbia and the federal law
of the United States, upon opinions of other counsel, who shall be counsel
satisfactory to counsel for the Underwriters, in which case each applicable
opinion shall state that they believe the Underwriters and they are entitled
to so rely.
(e) Opinion of Counsel for Underwriters. At Closing Time, the
Representative shall
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have received the favorable opinion, dated as of Closing Time, of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the
other Underwriters with respect to the matters set forth in clauses
[ ] of Exhibits A and B-1 hereto. In giving such opinion such
counsel may rely, as to all matters governed by the laws of jurisdictions
other than the law of the State of New York and the federal law of the
United States, upon the opinions of counsel satisfactory to the
Representative. Such counsel may also state that, insofar as such
opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(f) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus or the Offering Circular, any
material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company or
the Bank and its subsidiaries considered as one enterprise, whether or
not arising in the ordinary course of business, and the Representatives
shall have received a certificate of the President or a Vice President of
each of the Company and the Bank and of the chief financial or chief
accounting officer of each of the Company and the Bank, dated as of
Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and warranties in Sections 1(a)
and 1(b) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time, (iii) each of the
Company and the Bank has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to
Closing Time, (iv) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are contemplated by the
Commission, and (v) no stop order suspending the effectiveness of the
Offering Circular has been issued and no proceedings for that purpose
have been instituted or are pending or are contemplated by the OTS.
(g) Accountants' Comfort Letter. At the time of the execution of
this Agreement, the Representative shall have received from KPMG Peat
Marwick LLP a letter dated such date, in form and substance satisfactory
to the Representative, together with signed or reproduced copies of such
letter for each of the other Underwriters containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectus and the financial statements and certain financial
information contained in the Form OC and the Offering Circular.
(h) Bring-down Comfort Letter. At Closing Time, the Representative
shall have received from KPMG Peat Marwick LLP a letter, dated as of
Closing Time, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (g) of this Section, except that
the specified date referred to shall be a date not more than three
business days prior to Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall
have been approved
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for listing on the Nasdaq National Market, subject only to official
notice of issuance.
(j) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(k) Conditions to Purchase of Option Securities. In the event that
the Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of the Option Securities, the representations
and warranties of each of the Company and the Bank contained herein and
the statements in any certificates furnished by each of the Company or
the Bank or any subsidiary hereunder shall be true and correct as of each
Date of Delivery and, at the relevant Date of Delivery, the
Representative shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of each of the
Company and the Bank and of the chief financial or chief
accounting officer of each of the Company and the Bank
confirming that the certificate delivered at the Closing Time
pursuant to Section 5(f) hereof remains true and correct as of
such Date of Delivery.
(ii) Opinions of Counsel for Company. The favorable opinions
of Elias, Matz, Tiernan & Herrick, counsel for the Company, in
form and substance satisfactory to counsel for the
Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section
5(c) hereof.
(iii) Opinions of Counsel for Bank. The favorable opinions
of Elias, Matz, Tiernan & Herrick, counsel for the Bank, in
form and substance satisfactory to counsel for the
Underwriters, each dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinions required by
Section 5(d) hereof.
(iv) Opinion of Counsel for Underwriters. The favorable
opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel
for the Underwriters, dated such Date of Delivery, relating to
the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by
Section 5(e) hereof.
(v) Bring-down Comfort Letter. A letter from KPMG Peat
Marwick LLP, in form and substance satisfactory to the
Representative and dated such Date of Delivery, substantially
in the same form and substance as the letter furnished to the
Representative pursuant to Section 5(h) hereof, except that the
"specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to such
Date of Delivery.
(l) Additional Documents. At Closing Time and at each Date of
Delivery counsel for the Underwriters shall have been furnished with such
documents and opinions as they may
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require for the purpose of enabling them to pass upon the issuance and
sale of the Securities as herein contemplated, or in order to evidence
the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company and the Bank in connection with the
issuance and sale of the Securities as herein contemplated shall be
satisfactory in form and substance to the Representative and counsel for
the Underwriters.
(m) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters to purchase the
relevant Option Securities, may be terminated by the Representative by
notice to the Company at any time at or prior to Closing Time or such
Date of Delivery, as the case may be, and such termination shall be
without liability of any party to any other party except as provided in
Section 4 and except that Sections 1, 6, 7, and 8 shall survive any such
termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company and the Bank,
jointly and severally, agree to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act (each such
person, a "Control Person") and the respective partners, directors, officers,
employees and agents of each Underwriter and any Control Person as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement or the Form OC (or any amendment to any of the foregoing),
including the Rule 430A Information or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading or arising out of any
untrue statement or alleged untrue statement of a material fact included
in any preliminary prospectus, any preliminary offering circular, the
Prospectus or the Offering Circular (or any amendment or supplement to
any of the foregoing), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of
the Company and the Bank; and
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(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Sandler
O'Neill), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Company or the Bank by any Underwriter through Sandler O'Neill expressly for
use in the Registration Statement or the Form OC (or any amendment thereto),
including the Rule 430A Information or any preliminary prospectus, any
preliminary offering circular, the Prospectus or the Offering Circular (or
any amendment or supplement thereto).
(b) Indemnification of Company, Bank, Directors and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Company and
the Bank, their respective directors, each officer of the Company who signed
the Registration Statement, each officer of the Bank who signed the Form OC,
and each person, if any, who controls the Company or the Bank within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in the Registration Statement or the Form OC
(or any amendment to any of the foregoing), including the Rule 430A
Information, or any preliminary prospectus, any preliminary offering
circular, the Prospectus or the Offering Circular (or any amendment or
supplement thereto) in reliance upon and in conformity with written
information furnished to the Company or the Bank by such Underwriter through
Sandler O'Neill expressly for use in the Registration Statement or the Form
OC (or any amendment thereto) or such preliminary prospectus, preliminary
offering circular, the Prospectus or the Offering Circular (or any amendment
or supplement to any of the foregoing).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party
of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it
is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. In the case of parties indemnified pursuant to
Section 6(a) above, counsel to the indemnified parties shall be selected by
Sandler O'Neill, and, in the case of parties indemnified pursuant to Section
6(b) above, counsel to the indemnified parties shall be selected by the
Company or the Bank. An indemnifying party may participate at its own
expense in the defense of any such action or if it so elects within a
reasonable time after receipt of such notice, may assume the defense of any
suit brought to enforce any such claim, but if it so elects to assume the
defense, such defense shall be conducted by counsel chosen by it and approved
by the indemnified parties, which approval shall not be unreasonably
withheld. In the event that an
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indemnifying party elects to assume the defense of any such suit and retain
such counsel, the indemnified party or parties shall bear the fees and
expenses of any additional counsel thereafter retained by such indemnified
party or parties; provided, however, that the indemnified party or parties
shall have the right to employ counsel (in addition to local counsel) to
represent the indemnified party or parties who may be subject to liability
arising out of any action in respect of which indemnity may be sought against
the indemnifying party if, in the reasonable judgement of counsel for the
indemnified party or parties, there may be legal defenses available to such
indemnified person which are different from or in addition to those available
to such indemnifying person, in which event the reasonable fees and expenses
of appropriate separate counsel shall be borne by the indemnifying party.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their
own counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out
of the same general allegations or circumstances. No indemnifying party
shall, without the prior written consent of the indemnified parties, settle
or compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or
Section 7 hereof (whether or not the indemnified parties are actual or
potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim
and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 6(a)(ii) effected without its written consent if (i)
such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party
shall have received notice of the terms of such settlement at least 30 days
prior to such settlement being entered into and (iii) such indemnifying party
shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
SECTION 7. Contribution. In order to provide for just and equitable
contribution in circumstances under which the indemnification provided for in
Section 6 hereof is for any reason unenforceable or unavailable to or
insufficient to hold harmless an indemnified party in respect of any losses,
liabilities, claims, damages or expenses referred to therein, then each
indemnifying party shall contribute to the aggregate amount of such losses,
liabilities, claims, damages and expenses incurred by such indemnified party,
as incurred, (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Bank on the one hand and the
Underwriters on the other hand from the offering of the Securities pursuant
to this Agreement or (ii) if the allocation provided by clause (i) is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company and the Bank on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as
well as any other relevant equitable considerations.
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The relative benefits received by the Company and the Bank on the one
hand and the Underwriters on the other hand in connection with the offering
of the Securities pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of
the Securities pursuant to this Agreement (before deducting expenses)
received by the Company and the total underwriting discount received by the
Underwriters, in each case as set forth on the cover of the Prospectus, bear
to the aggregate initial public offering price of the Securities as set forth
on such cover.
The relative fault of the Company and the Bank on the one hand and the
Underwriters on the other hand shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact
relates to information supplied by the Company or the Bank or by the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Bank and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined
by pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 7.
The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act and the respective partners, directors, officers,
employees and agents of each Underwriter shall have the same rights to
contribution as such Underwriter, and each director of the Company or the
Bank, each officer of the Company who signed the Registration Statement, each
officer of the Bank who signed the Form OC and each person, if any, who
controls the Company or the Bank within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights
to contribution as the Company or the Bank, as applicable. The Underwriters'
respective obligations to contribute pursuant
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to this Section 7 are several in proportion to the number of Initial
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or the Bank or any of
its subsidiaries submitted pursuant hereto, shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf
of any Underwriter or controlling person, or by or on behalf of the Company
or the Bank, and shall survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representative may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Prospectus or
the Offering Circular, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company or the Bank and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or
(ii) if there has occurred any material adverse change in the financial
markets in the United States, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or
economic conditions, in each case the effect of which is such as to make it,
in the judgment of the Representative, impracticable to market the Securities
or to enforce contracts for the sale of the Securities, or (iii) if trading
in any securities of the Company has been suspended or materially limited by
the Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange, the Nasdaq National Market or the New York Stock
Exchange has been suspended or materially limited, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices have been
required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7, and 8 shall survive such termination and remain in full
force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the Representative shall have the
right, within 24 hours thereafter, to make arrangements for one or more of
the non-defaulting Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
30
<PAGE>
(a) if the number of Defaulted Securities does not exceed 10% of
the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the Underwriters to purchase and of the Company to sell the
Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option
Securities, as the case may be, either the Representatives or the Company
shall have the right to postpone Closing Time or the relevant Date of
Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or
in any other documents (including, without limitation, the Form OC and the
Offering Circular) or arrangements. As used herein, the term "Underwriter"
includes any person substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to Sandler O'Neill at Two World Trade Center,
New York, New York 10048, attention of Mr. Thomas W. Killian; notices to the
Company and the Bank shall be directed to it at 5900 Wilshire Boulevard, Los
Angeles, California 90036, attention of Rudy R. Guenzel.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company and the Bank and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Underwriters, the Company and the Bank and their respective
successors and the controlling persons and partners, directors, officers ,
employees and agents referred to in Sections 6 and 7 and their heirs and
legal representatives, any legal or equitable right, remedy or claim under or
in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters, the Company and the Bank and
their respective successors, and said controlling persons and partners,
directors, officers, employees and agents and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Securities from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.
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<PAGE>
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT
AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY
TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
are for convenience only and shall not affect the construction hereof.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to each of the Company and the Bank a
counterpart hereof, whereupon this instrument, along with all counterparts,
will become a binding agreement between the Underwriters and the Company and
the Bank in accordance with its terms.
Very truly yours,
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By____________________________________
Title:
PEOPLE'S BANK OF CALIFORNIA
By____________________________________
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
SANDLER O'NEILL & PARTNERS, L.P.
As representative of the Underwriters
By: SANDLER O'NEILL & PARTNERS CORP.
the sole general partner
By_____________________________________________
32
<PAGE>
Authorized Signatory
SCHEDULE A
Number of
Initial
Underwriters Securities
- ------------ ----------
----------
Total ................................. 10,000,000
----------
----------
1
<PAGE>
SCHEDULE B
PEOPLE'S PREFERRED CAPITAL CORPORATION
1,240,000 Shares
___% Noncumulative Exchangeable Preferred Stock, Series A
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $25.00.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $____, being an amount equal to the initial
public offering price set forth above less $___ per share; provided that the
purchase price per share for any Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be
reduced by an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial Securities but not payable
on the Option Securities.
3. The dividend rate on the Securities will be ___% per annum.
Sch B-1
<PAGE>
SCHEDULE C
[LIST OF OTHER AGREEMENTS ENTERED INTO BY THE COMPANY]
Sch C-1
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: People's Preferred Capital Corporation, a Maryland corporation
(the "Corporation"), desires to amend and restate its Articles of
Incorporation (the "Articles of Incorporation") as currently in effect and as
hereinafter amended.
SECOND: The following provisions are all the provisions of the Articles
of Incorporation currently in effect and as hereinafter amended:
ARTICLE I
INCORPORATOR
The undersigned, Billie Swaboda, whose address is 32 South Street,
Baltimore, Maryland 21202, being at least 18 years of age, does hereby form a
corporation under the general laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation is: People's Preferred Capital Corporation.
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed are to engage in any
lawful act or activity (including, without limitation or obligation, engaging
in business as a real estate investment trust under the Internal Revenue Code
of 1986, as amended, or any successor statute (the "Code")) for which
corporations may be organized under the general laws of the State of Maryland
as now or hereafter in force. For purposes of these Articles, "REIT" means a
real estate investment trust under Sections 856 through 860 of the Code.
ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of
Maryland is 32 South Street, Baltimore, Maryland 21202. The name and address
of the resident agent of
<PAGE>
the Corporation in the State of Maryland is The Corporation Trust
Incorporated, whose post address is 32 South Street, Baltimore, Maryland
21202. The resident agent is a corporation in the State of Maryland.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number of Directors. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors.
The number of directors of the Corporation initially shall be seven, which
number may be increased or decreased pursuant to the Bylaws, but shall never
be less than the minimum number required by the Maryland General Corporation
Law (the "MGCL"). At all times that any shares of Series A Preferred Stock
(as herein defined) are outstanding, at least two of the directors shall be
Independent Directors (as defined herein). The names of the directors who
shall serve until the first annual meeting of stockholders and until their
successors are duly elected and qualify are:
Henry Peters
Rudolf P. Guenzel
J. Michael Holmes
Gerald Jervis
Robert W. MacDonald
David Honda
John F. Davis
These directors may increase the number of directors and may fill any
vacancy, whether resulting from an increase in the number of directors or
otherwise, on the Board of Directors occurring before the first annual
meeting of stockholders in the manner provided in the Bylaws.
Section 5.2 Extraordinary Actions. Except as specifically provided in
Section 6.6, notwithstanding any provision of law permitting or requiring any
action to be taken or authorized by the affirmative vote of the holders of a
greater number of votes, any such action shall be effective and valid if
taken or authorized by the affirmative vote of holders of shares entitled to
cast a majority of all the votes entitled to be cast on the matter.
Section 5.3 Authorization by Board of Stock Issuance. The Board of
Directors may authorize the issuance from time to time of shares of stock of
the Corporation of any class or series, whether now or hereafter authorized,
or securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such
2
<PAGE>
consideration as the Board of Directors may deem advisable (or without
consideration in the case of a stock split or stock dividend), subject to
such restrictions or limitations, if any, as may be set forth in the Articles
of Incorporation or the Bylaws.
Section 5.4 Preemptive Rights. Except as may be provided by the Board
of Directors in setting the terms of classified or reclassified shares of
stock pursuant to Section 6.4, no holder of shares of stock of the
Corporation shall, as such holder, have any preemptive right to purchase or
subscribe for any additional shares of stock of the Corporation, any security
convertible into an additional issue of stock of the Corporation, or any
other security of the Corporation which it may issue or sell.
Section 5.5 Indemnification.
Section 5.5.1 General. The Corporation shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, including actions by or in
the right of the Corporation, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation or any predecessor of the
Corporation, or who, while acting as such, is or was serving at the request
of the Corporation or any predecessor of the Corporation as a director,
officer, partner, trustee, employee or agent of another corporation (foreign
or domestic), partnership, joint venture, trust, other enterprise or employee
benefit plan, against expenses (including attorney's fees), judgments, fines,
excise taxes and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding to the full
extent authorized by the MGCL in effect from time to time, provided that the
Corporation shall not be liable for any amount which may be due to any person
in connection with a settlement of any action, suit or proceeding effected
without its prior written consent or any action, suit or proceeding initiated
by any person seeking indemnification hereunder (other than to enforce the
requirements of this Section 5.5.1) without its prior written consent.
Section 5.5.2 Advancement of Expenses. Reasonable expenses incurred by
a director, officer, employee or agent of the Corporation in defending a
civil, administrative, investigative or criminal action, suit or proceeding
described in Section 5.5.1 of this Section 5.5 shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors only upon receipt by the
Corporation of (i) a written affirmation by the person of such person's good
faith belief that the standard of conduct necessary for indemnification by
the Corporation under Section 5.5.1 of this Section 5.5 has been met and (ii)
a written undertaking by or on behalf of such person to repay such amount if
it shall ultimately be determined that the applicable standard of conduct has
not been met or the person is not otherwise entitled to be indemnified by the
Corporation.
Section 5.5.3 Other Rights and Remedies. The indemnification and
advancement of expenses provided by this Section 5.5 shall not be deemed to
exclude any
3
<PAGE>
other rights to which those seeking indemnification or advancement of
expenses may be entitled under the MGCL in effect from time to time, both as
to actions in their official capacity and as to actions in another capacity
while holding such office, and shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit
of the heirs, executors and administrators of such person, provided that no
indemnification shall be made to or on behalf of an individual if a judgment
or other final adjudication establishes that his acts or omissions relate to
matters for which the liability of directors and officers cannot be
restricted or limited under the MGCL in effect from time to time.
Section 5.5.4 Insurance. Upon resolution passed by the Board of
Directors, the Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or who, while acting as such, is or was serving at the request
of the Corporation as a director, officer, partner, trustee, employee or
agent of another corporation (foreign or domestic), partnership, joint
venture, trust, other enterprise or employee benefit plan, against any
liability asserted against and incurred by him in any such capacity or
arising out of his position, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
Section 5.5 or the Bylaws of the Corporation.
Section 5.5.5 Security Fund; Indemnity Agreements. By action of the
Board of Directors (notwithstanding their interest in the transaction), the
Corporation may create and fund a trust fund or fund of any nature, and may
enter into agreements with its directors, officers, employees and agents for
the purpose of securing or insuring in any manner its obligation to indemnify
or advance expenses provided for in this Section 5.5.
Section 5.5.6 Modification. The duties of the Corporation to indemnify
and to advance expenses to any persons as provided in this Section 5.5 shall
be in the nature of a contract between the Corporation and each such person,
and no amendment or repeal of any provision of this Section 5.5 shall alter,
to the detriment of such person, the right of such person to the advance of
expenses or indemnification related to a claim based on an act or failure to
act which took place prior to such amendment or repeal.
Section 5.6 Determinations by Board. The determination as to any of
the following matters, made in good faith by or pursuant to the direction of
the Board of Directors consistent with the Articles of Incorporation and in
the absence of actual receipt of an improper benefit in money, property or
services or active and deliberate dishonesty established by a court, shall be
final and conclusive and shall be binding upon the Corporation and every
holder of shares of its stock: the amount of the net income of the
Corporation for any period and the amount of assets at any time legally
available for the payment of dividends, redemption of its stock or the
payment of other distributions on its stock; the amount of paid-in surplus,
net assets, other surplus, annual or other net profit, net assets in excess
of capital, undivided profits or excess of profits over losses on sales of
assets; the amount, purpose, time of creation, increase or decrease,
alteration or cancellation of any
4
<PAGE>
reserves or charges and the propriety thereof (whether or not any obligation
or liability for which such reserves or charges shall have been created,
shall have been paid or discharged); the fair value, or any sale, bid or
asked price to be applied in determining the fair value, of any asset owned
or held by the Corporation; and any matters relating to the acquisition,
holding and disposition of any assets by the Corporation.
Section 5.7 REIT Qualification. The Board of Directors shall use its
reasonable best efforts to take such actions as are necessary or appropriate
to qualify and preserve the status of the Corporation as a REIT. If the Board
of Directors determines that it is no longer in the best interests of the
Corporation to continue to be qualified as a REIT, the Board of Directors may
revoke or otherwise terminate the Corporation's REIT election pursuant to
Section 856(g) of the Code; provided, however, that as long as any shares of
Series A Preferred Stock (as defined in Section 6.1) remain outstanding, any
such determination may not be made without the approval of a majority of the
Independent Directors.
Section 5.8 Removal of Directors. Subject to the rights of holders of
one or more classes or series of Preferred Stock to elect one or more
directors, any director, or the entire Board of Directors, may be removed
from office at any time, but only by the affirmative vote of the holders of
at least a majority of the votes entitled to be cast in the election of
directors.
Section 5.9 Advisor Agreements. Subject to such approval of
stockholders and other conditions, if any, as may be required by any
applicable statute, rule or regulation, the Board of Directors may authorize
the execution and performance by the Corporation of one or more agreements
with any person, corporation, association, company, trust, partnership
(limited or general) or other organization whereby, subject to the
supervision and control of the Board of Directors, any such other person,
corporation, association, company, trust, partnership (limited or general) or
other organization shall render or make available to the Corporation
managerial, investment, advisory and/or related services, office space and
other services and facilities (including, if deemed advisable by the Board of
Directors, the management or supervision of the investments of the
Corporation) upon such terms and conditions as may be provided in such
agreement or agreements (including, if deemed fair and equitable by the Board
of Directors, the compensation payable thereunder by the Corporation).
ARTICLE VI
STOCK
Section 6.1 Authorized Shares. The Corporation has authority to issue
4,000,000 shares of Common Stock, $.01 par value per share ("Common Stock")
and 4,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred
Stock"), of which 2,000,000 shares are classified as ___% Series A
Non-Cumulative Preferred Stock, $.01 par value per share ("Series A Preferred
Stock") with the preferences, conversion, exchange or other rights,
5
<PAGE>
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of redemption as set
forth in Section 6.6. The aggregate par value of all authorized shares of
stock having par value is $80,000.
Section 6.2 Common Stock. Subject to the provisions of Article VII,
each share of Common Stock shall entitle the holder thereof to one vote. The
Board of Directors may reclassify any unissued shares of Common Stock from
time to time in one or more classes or series of stock.
Section 6.3 Preferred Stock. The Board of Directors may classify any
unissued shares of Preferred Stock and reclassify any previously classified
but unissued shares of Preferred Stock of any series from time to time, in
one or more series of stock.
Section 6.4 Classified or Reclassified Shares. Prior to issuance of
classified or reclassified shares of any class or series, the Board of
Directors by resolution shall: (a) designate that class or series to
distinguish it from all other classes and series of stock of the Corporation;
(b) specify the number of shares to be included in the class or series; (c)
set or change, subject to the provisions of Article VII and subject to the
express terms of any class or series of stock of the Corporation outstanding
at the time, the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption for each class or
series; and (d) cause the Corporation to file articles supplementary with the
State Department of Assessments and Taxation of Maryland ("SDAT"). Any of the
terms of any class or series of stock set or changed pursuant to clause (c)
of this Section 6.4 may be made dependent upon facts or events ascertainable
outside the Articles of Incorporation (including determinations by the Board
of Directors or other facts or events within the control of the Corporation)
and may vary among holders thereof, provided that the manner in which such
facts, events or variations shall operate upon the terms of such class or
series of stock is clearly and expressly set forth in the articles
supplementary filed with the SDAT.
Section 6.5 Articles of Incorporation and Bylaws. All persons who
shall acquire stock in the Corporation shall acquire the same subject to the
provisions of the Articles of Incorporation and the Bylaws.
Section 6.6 Series A Preferred Stock.
Section 6.6.1 Liquidation Value and Rank. Each Series A Preferred Share
shall have a stated liquidation value of $25.00 per share, plus an amount per
share equal to any dividends authorized and declared but unpaid, without
interest. The Series A Preferred Shares shall rank prior to all classes or
series of Common Stock of the Corporation and to all other classes and series
of equity securities of the Corporation now or hereafter authorized, issued
or outstanding (the Common Stock and such other classes and series of equity
securities of the Corporation are collectively referred to herein as the
"Junior Stock"), other than any class or series of equity securities of the
Corporation expressly designated
6
<PAGE>
as ranking on a parity with (the "Parity Stock") or senior to (the "Senior
Stock") the Series A Preferred Shares as to dividend rights and rights upon
voluntary or involuntary liquidation, winding up or dissolution of the
Corporation. The Series A Preferred Shares shall be junior to the creditors
of the Corporation. The Series A Preferred Shares shall be subject to the
creation of Senior Stock, Parity Stock and Junior Stock to the extent not
expressly prohibited by the Articles of Incorporation.
Section 6.6.2 Dividends.
(a) Payment of Dividends. Holders of Series A Preferred Shares shall
be entitled to receive, if, when and as authorized and declared by the
Board of Directors, out of assets of the Corporation legally available
therefor, noncumulative cash dividends at an annual rate of ____% of the
$25.00 stated liquidation value per share ($_______ per share per annum),
and no more. Such noncumulative cash dividends shall be payable, if
authorized and declared, quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, or, if such day is not a
Business Day (as defined herein), on the next Business Day (each such date,
a "Dividend Payment Date"). Each authorized and declared dividend shall be
payable to holders of record of the Series A Preferred Shares as they
appear on the stock books of the Corporation at the close of business on
such record dates, not more than forty-five (45) calendar days nor less
than ten (10) calendar days preceding the Dividend Payment Date therefor,
as determined by the Board of Directors (each such date, a "Record Date");
provided, however, that if a redemption date for the Series A Preferred
Shares occurs after a dividend is authorized and declared but before it is
paid, such dividend shall be paid as part of the redemption price to the
person to whom the redemption price is paid. Quarterly dividend periods
(each, a "Dividend Period") shall commence on and include the first day,
and shall end on and include the last day, of the calendar quarter in which
the corresponding Dividend Payment Date occurs; provided, however, that the
first Dividend Period (the "Initial Dividend Period") shall commence on
and include the first day upon which a share of Series A Preferred Shares
shall be issued and shall end on and include ________, 1997.
The amount of dividends payable on each share outstanding on a
Record Date of the Series A Preferred Shares for each full Dividend
Period shall be $____________. The amount of dividends payable for the
Initial Dividend Period and for any other Dividend Period which, as to a
share of Series A Preferred Shares (determined by reference to the
issuance date and the redemption or retirement date thereof), is greater
or less than a full Dividend Period shall be computed on the basis of the
number of days elapsed in the period using a 360-day year composed of
twelve (12) thirty (30) day months, provided, however, that in the event
of the Automatic Exchange (as defined herein), any accrued and unpaid
dividends on the Series A Preferred Shares as of the Time of Exchange (as
defined herein) shall be deemed
7
<PAGE>
to be accrued and unpaid dividends on the Bank Preferred Shares (as defined
herein).
Holders of the Series A Preferred Shares shall not be entitled to
any interest, or any sum of money in lieu of interest, in respect of any
dividend payment or payments on the Series A Preferred Shares authorized
and declared by the Board of Directors which may be unpaid. Any dividend
payment made on the Series A Preferred Shares shall first be credited
against the earliest authorized and declared but unpaid cash dividend with
respect to the Series A Preferred Shares.
(b) Dividends Noncumulative. The right of holders of Series A
Preferred Shares to receive dividends is noncumulative. Accordingly, if the
Board of Directors does not authorize or declare a dividend payable in
respect of any Dividend Period, holders of Series A Preferred Shares shall
have no right to receive a dividend in respect of such Dividend Period, and
the Corporation shall have no obligation to pay a dividend in respect of
such Dividend Period, whether or not dividends are authorized and declared
and payable in respect of any future Dividend Period.
(c) Priority as to Dividends. No full dividends or other
distributions shall be authorized, declared or paid or set apart for
payment on any Parity Stock or Junior Stock for any Dividend Period
unless full dividends have been or contemporaneously are authorized,
declared and paid or authorized and declared and a sum sufficient for the
payment thereof set apart for such payment on the Series A Preferred
Shares for (i) the immediately preceding Dividend Period, in the case of
Parity Stock, and (ii) such then-current Dividend Period, in the case of
Junior Stock. When dividends are not paid in full (or a sum sufficient
for such full payment is not so set apart) for any Dividend Period on the
Series A Preferred Shares and any Parity Stock, dividends authorized and
declared on the Series A Preferred Shares and Parity Stock shall only be
authorized and declared pro rata based upon the respective amounts that
would have been paid on the Series A Preferred Shares and such Parity
Stock had dividends been authorized and declared in full.
In addition to the foregoing restriction, the Corporation shall not
authorize, declare, pay or set apart funds for any dividends or other
distributions (other than in Common Stock or other Junior Stock) with
respect to any Common Stock or other Junior Stock of the Corporation or
repurchase, redeem or otherwise acquire, or set apart funds for repurchase,
redemption or other acquisition of, any Common Stock or other Junior Stock
through a sinking fund or otherwise, unless and until (i) the Corporation
shall have authorized, declared and paid full dividends on the Series A
Preferred Shares for the four (4) most recent preceding Dividend Periods
(or such lesser number of Dividend Periods during which Series A Preferred
Shares have been outstanding) or sufficient funds have been paid over to
the dividend disbursing agent of the Corporation for payment of such
dividends and (ii) the Corporation has authorized and declared a cash
dividend on the Series A Preferred Shares at the
8
<PAGE>
annual dividend rate for the then-current Dividend Period, and sufficient
funds have been paid over to the dividend disbursing agent for the
Corporation for the payment of such cash dividend for such then-current
Dividend Period.
No dividend shall be paid or set aside for holders of Series A
Preferred Shares for any Dividend Period unless full dividends have been
paid or set aside for the holders of Senior Stock as to dividends for such
Dividend Period.
(d) Any reference to "dividends" or "distributions" in this Section
6.6.2 shall not be deemed to include any distribution made in connection
with any voluntary or involuntary dissolution, liquidation or winding up of
the Corporation.
Section 6.6.3 Optional Redemption.
(a) General. The Series A Preferred Shares are not subject to
mandatory redemption, and, except as hereinafter provided in Section
6.6.3(b) below, are not subject to optional redemption by the Corporation
prior to _______, 2002. On or after _______, 2002, subject to receipt of
any required regulatory approvals, the Series A Preferred Shares may be
redeemed in cash by the Corporation or any successor or acquiring or resulting
entity at its option, in whole or in part, at any time or from time to
time, upon notice as provided in subsection (d) of this Section 6.6.3, at
the redemption price of $25.00 per share, plus authorized, declared
and unpaid dividends to the date fixed for redemption, without interest.
The aggregate redemption price payable to each holder of record of
Series A Preferred Shares to be redeemed shall be rounded to the nearest
cent ($0.01).
If less than all of the outstanding Series A Preferred Shares are to
be redeemed, the Corporation will select those shares to be redeemed pro
rata, by lot or by such other methods as the Board of Directors in its sole
discretion determines to be equitable, provided that such method satisfies
any applicable requirements of any securities exchange or quotation system on
which the Series A Preferred Shares are then listed or quoted. If redemption
is being effected by the Corporation, on and after the date fixed for
redemption, dividends shall cease to accrue on the Series A
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<PAGE>
Preferred Shares called for redemption, and they shall be deemed to cease to
be outstanding, provided that the redemption price (including any authorized
and declared but unpaid dividends to the date fixed for redemption, without
interest) has been duly paid or provided for. If redemption is being effected
by an entity other than the Corporation, on and as of the date fixed for
redemption, such entity shall be deemed to own the Series A Preferred Shares
being redeemed for all purposes of these Articles of Incorporation, provided
that the redemption price (including the amount of any authorized and
declared but unpaid dividends to the date fixed for redemption, without
interest) has been duly paid or provided for.
(b) Tax Event. The Corporation will have the right, at any time upon
the occurrence of a Tax Event, to redeem the Series A Preferred Shares, in
whole, but not in part, upon notice as provided in subsection (d) of this
Section 6.6.3, at a redemption price of $25.00 per share, plus all
authorized, declared and unpaid dividends for the then-current Dividend
Period to the date fixed for redemption, without interest. As used herein,
"Tax Event" means the receipt by the Corporation of an opinion of a law
firm, experienced in such matters to the effect that, as a result of (i)
any amendment to, clarification of, or change (including any announced
prospective change) in, the laws, treatises or any regulations thereunder
of the United States or any political subdivision or taxing authority
thereof or therein affecting taxation, (ii) any judicial decision, official
administrative pronouncement, published or private ruling, regulatory
procedure, notice or announcement (including any notice or announcement or
intent to adopt such procedures or regulations) (each, an "Administrative
Action") or (iii) any amendment to, clarification of, or change in the
official positions or the interpretation of any such Administrative Action
or any interpretation or pronouncement that provides for a position with
respect to any such Administrative Action that differs from the theretofore
generally accepted position, in each case, by any legislative body, court,
governmental authority or regulatory body, irrespective of the manner in
which such amendment, clarification or change is made known, which amendment,
clarification or change is effective or such pronouncement of decision is
announced on or after the date of issuance of the Series A Preferred Shares,
there is more than an insubstantial risk that (A) dividends paid or to be
paid by the Corporation with respect to the stock of the Corporation are not,
or will not be, fully deductible by the Corporation for United States federal
income tax purposes or (B) the Corporation is, or will be, subject to more
than a de minimis amount of other taxes, duties or other governmental charges
as a result of dividends paid or to be paid by the Corporation.
(c) Change of Control. In addition to the redemption provisions of
subsections (a) and (b) above and not in lieu of or in substitution therefor,
in the event of a Change of Control, subject to receipt of any required
regulatory approvals, the Series A Preferred Shares shall be redeemable at
the option of the Corporation or its successor or any acquiring or resulting
entity with respect to the Corporation (including by any parent or subsidiary
of the Corporation, any such successor, or any
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such acquiring or resulting entity), as applicable, on or prior to
_________, 2002, in whole but not in part. Redemption of the Series A
Preferred Shares pursuant to this subsection (c) shall be effected by notice
as provided in subsection (d) of this Section 6.6.3, given by the Corporation
or its successor or any acquiring or resulting entity with respect to the
Corporation (including by any parent or subsidiary of the Corporation, any
such successor, or any such acquiring or resulting entity), as applicable, at
a redemption price per share equal to (i) $25.00, plus (ii) an amount equal
to any authorized, declared and unpaid dividends to the date fixed for
redemption, without interest, and, without duplication, an additional amount
equal to the amount of dividends that would be payable on the Series A
Preferred Shares in respect of the period from the first day of the Dividend
Period in which the date fixed for redemption occurs to the date fixed for
redemption (assuming all such dividends were to be authorized and declared),
plus (iii) the Applicable Premium, payable in cash.
The aggregate redemption price payable to each holder of record of
Series A Preferred Shares to be redeemed shall be rounded to the nearest cent
($0.01).
Subject to subsection (d) of this Section 6.6.3, the Corporation or
any such successor or acquiring or resulting entity shall be entitled to
issue a notice of redemption under this subsection (c) after the Corporation
or a parent company shall have entered into a definitive binding agreement
with a third party that will result in a Change of Control, provided that (i)
the date fixed for redemption shall not be earlier than the date on which the
related Change of Control shall occur and (ii) the right and obligation to
effect such redemption shall be contingent upon the occurrence of such Change
of Control.
If redemption is being effected by the Corporation, on and as of the
date fixed for redemption, dividends shall cease to accrue on the Series A
Preferred Shares called for redemption, and they shall be deemed to cease to
be outstanding, provided that the redemption price (including any authorized
and declared but unpaid dividends to the date fixed for redemption, without
interest) has been duly paid or provided for. If redemption is being
effected by an entity other than the Corporation, on and as of the redemption
date such entity shall be deemed to own the Series A Preferred Shares being
redeemed for all purposes of these Articles of Incorporation, provided that
the redemption price (including the amount of any authorized and declared but
unpaid dividends to the date fixed for redemption) has been duly paid or
provided for.
"Affiliate" of any specified Person means (i) any other Person
which, directly or indirectly, is in control of, is controlled by or is under
common control with such specified person or (ii) any other Person who is a
director or executive officer (A) of such specified Person, (B) of any
Subsidiary of such specified Person or (C) of any Person described in clause
(i) above. For purposes of this definition, control of a
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Person means the power, direct or indirect, to direct or cause the direction
of the management and policies of such Person whether by contract or
otherwise; and the terms "controlling" and "controlled' have meanings
correlative to the foregoing.
"Applicable Premium" means the greater of (i) $25.00 and (ii) the
excess of (A) the present value of (1) an amount equal to the amount of
dividends that would be payable on the Series A Preferred Shares in respect
of the period from the date fixed for redemption through _________, 2002
(assuming all such dividends were to be declared) plus (2) $_____, computed
using a discount rate equal to the Treasury Rate plus [75] basis points, over
(B) $25.00.
"Business Day" means any day other than a Saturday, Sunday or a day
on which banking institutions are not required to be open in the State of
California.
"Capital Stock" of any Person means any and all shares, interests
(including partnership interests), rights to purchase, warrants, options,
participations or other equivalents of or interests in (however designated)
equity of such Person, including any Preferred Stock, but excluding any debt
securities convertible into or exchangeable for such equity.
"Change of Control" means the occurrence of any of the following
events:
(i) any Person other than a Permitted Holder shall be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934, as amended), directly or
indirectly, of a majority in the aggregate of the total voting
power of the Voting Stock of People's Bank of California (the
"Bank") or SoCal Holdings, Inc. (the "Holding Company"), whether as
a result of issuance of securities of the Bank or the Holding
Company, any merger, consolidation, liquidation or dissolution of
the Bank or the Holding Company, any direct or indirect transfer of
securities by a Permitted Holder or otherwise; or
(ii) a sale, transfer, conveyance or other disposition, in a
transaction or in a series of related transactions (other than to an
Affiliate of the Bank or one or more of its subsidiaries), in either
case occurring outside the ordinary course of business, of more than
75% of the assets and 75% of the deposit liabilities of the Bank
shown on the consolidated balance sheet of the Bank as of the end of
the most recent fiscal quarter ending at least 45 days prior to such
transaction (or the first in such related series of transactions).
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"Permitted Holder" means the Trustees of the Estate of
Bernice Pauahi Bishop (the "Bishop Estate"), BIL Securities
(Offshore) Limited ("BIL Securities") or Arbur, Inc. ("Arbur") or
any Person controlled, directly or indirectly, by the Bishop
Estate, BIL Securities or Arbur.
"Person" shall mean an individual, corporation, partnership,
estate, trust (including a trust qualified under Sections 401(a)
or 501(c)(17) of the Code), a portion of a trust permanently set
aside for or to be used exclusively for the purposes described in
Section 642(c) of the Code, association, private foundation within
the meaning of Section 509(a) of the Code, joint stock company or
other entity.
"Subsidiary" means any corporation, association, partnership
or other business entity of which more than 50% of the total
voting power of shares of Capital Stock or other interests
(including partnership interests) entitled (without regard to the
occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned,
directly or indirectly, by (i) a Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Treasury Rate" means the yield to maturity at the time of
computation of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal
Reserve Statistical Release H.15(519) which has become publicly
available at least two Business Days prior to the date fixed for
redemption (or, if such Statistical Release is no longer published,
any publicly available source of similar market data)) most nearly
equal to the then remaining period of time to __________, 2002;
provided, however, that, if such period is not equal to the
constant maturity of a United States Treasury security for which a
weekly average yield is given, the Treasury Rate shall be obtained
by linear interpolation (calculated to the nearest one-twelfth of a
year) from the weekly average yields of United States Treasury
securities for which such yields are given, except that, if such
period is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.
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"Voting Stock" of a corporation means all classes of Capital
Stock of such corporation then outstanding and normally entitled
to vote in the election of directors.
"Wholly owned Subsidiary" means a Subsidiary of a Person all
the Capital Stock of which (other than directors' qualifying
shares) is owned by such Person or another Wholly owned Subsidiary.
(d) Notice of Optional Redemption. Notice of any optional
redemption, setting forth (i) the date and place fixed for said redemption,
(ii) the redemption price and (iii) a statement that dividends on the Series
A Preferred Shares (A) to be redeemed by the Corporation will cease to accrue
on such redemption date, or (B) to be redeemed by an entity other than the
Corporation will thereafter accrue solely for the benefit of such entity,
shall be mailed at least thirty (30) days, but not more than sixty (60)days,
prior to said date fixed for redemption to each holder of record of Series A
Preferred Shares to be redeemed at his or her address as the same shall
appear on the stock ledger of the Corporation. If less than all of the Series
A Preferred Shares owned by such holder are then to be redeemed, such notice
shall specify the number of shares thereof that are to be redeemed and the
numbers of the certificates representing such shares. Notice of any
redemption shall be given by first class mail, postage prepaid. Neither
failure to mail such notice, nor any defect the holders. Any notice which was
mailed in the manner herein provided shall be conclusively presumed to have
been duly given whether or not the holder receives such notice.
If such notice of redemption shall have been so mailed, and if, on
before the date fixed for redemption specified in such notice, all necessary
for such redemption shall have been set aside by the (or other entity as
provided in subsection (a) or (c) of this Section 6.6.3) separate and apart
from its other funds in trust for the account of the holders of Series A
Preferred Shares to be redeemed (so as to be and continue to be available
therefor) or delivered to the redemption agent with irrevocable instructions
to effect the redemption in accordance with the relevant notice of
redemption, then, on and after said redemption date, notwithstanding that any
certificate for Series A Preferred Shares so called for redemption shall not
have been surrendered for cancellation or transfer, the Series A Preferred
Shares (i) so called for redemption by the Corporation shall be deemed to be
no longer outstanding and all rights with respect to such Series A Preferred
Shares so called for redemption shall forthwith cease and terminate, or (ii)
so called for redemption by an entity other than the Corporation shall be
deemed owned for all purposes of these Articles of Incorporation by such
entity, except in each case for the right of the holders thereof to receive,
out of the funds so set aside in trust, the
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amount payable on redemption thereof, but without interest, upon surrender
(and endorsement or assignment for transfer, if required by the Corporation
or such other entity) of their certificates.
In the event that holders of Series A Preferred Shares that shall
have been redeemed shall not within two (2) years (or any longer period if
required by law) after the redemption date claim any amount deposited in
trust with a bank or trust company for the redemption of such shares, such
bank or trust company shall, upon demand and if permitted by applicable law,
pay over to the Corporation (or other entity that redeemed the shares) any
such unclaimed amount so deposited with it, and shall thereupon be relieved
of all responsibility in respect thereof, and thereafter the holders of such
shares shall, subject to applicable escheat laws, look only to the
Corporation (or other entity that redeemed the shares) for payment of the
redemption price thereof, but without interest from the date fixed for
redemption.
(d) Status of Shares Redeemed. Series A Preferred Shares redeemed
pursuant to this Section 6.6.3, or purchased or otherwise acquired for
value by the Corporation shall, after such acquisition, have the status of
authorized and unissued shares of Preferred Stock and may be reissued by
the Corporation at any time as shares of any series of Preferred Stock
other than as Series A Preferred Shares.
Section 6.6.4 Automatic Exchange.
(a) General. Subject to the terms and conditions of this Section
6.6.4, each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") for one newly issued share of _____% Noncumulative
Preferred Stock, par value $.01 per share (a "Bank Preferred Share"), of
the Bank. The issuance of the Bank Preferred Shares has been duly
authorized by the Board of Directors of the Bank. The preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of the Bank Preferred
Shares shall be as set forth in the First Supplementary Section to Section
5 of the Bank's Charter which has been filed with the Office of Thrift
Supervision (the "OTS"). All corporate action necessary for the Bank to
issue the Bank Preferred Shares as of the Time of Exchange was completed
prior to or concurrently with completion of the offering of the Series A
Preferred Shares.
(b) Conditions of Exchange. The Automatic Exchange will occur only
if the appropriate federal regulatory agency directs in writing (a
"Directive") an exchange of the Series A Preferred Shares for Bank
Preferred Shares because (i) the Bank becomes "undercapitalized" under
prompt corrective action regulations, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal regulatory
agency, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term (the "Exchange Event").
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(c) Surrender of Certificates. Upon the Exchange Event, each holder
of Series A Preferred Shares shall be unconditionally obligated to surrender
to the Bank the certificates representing each Series A Preferred Share held
by such holder, and the Bank shall be unconditionally obligated to issue to
such holder in exchange for each such Series A Preferred Share a certificate
representing one Bank Preferred Share.
(d) Effectiveness of and Procedure for Exchange. The Automatic
Exchange shall occur as of 8:00 a.m. Eastern Time on the effective date of
such exchange as set forth in the Directive, or, if such date is not set
forth in the Directive, as of 8:00 a.m. Eastern Time on the first Business
Day immediately following the date of the issuance of the Directive (the
"Time of Exchange"). As of the Time of Exchange, all of the Series A
Preferred Shares will be deemed canceled without any further action on the
part of the Corporation or any other Person, all rights of the holders of
the Series A Preferred Shares as stockholders of the Corporation shall
cease, and such persons shall thereupon and thereafter be deemed to be and
shall be for all purposes the holders of Bank Preferred Shares. Notice of
the occurrence of the Exchange Event shall be given by first-class mail,
postage prepaid, mailed within 30 days of such event, to each holder of
record of the Series A Preferred Shares, at such holder's address as the
same appears on the stock register of the Corporation. Each such notice
shall indicate the place or places where certificates for the Series A
Preferred Shares are to be surrendered by the holders thereof, and the Bank
shall deliver to each such holder certificates for Bank Preferred Shares
upon surrender of certificates for the Series A Preferred Shares. Until
such replacement share certificates are delivered (or in the event such
replacement certificates are not delivered), certificates previously
representing the Series A Preferred Shares shall be deemed for all purposes
to represent Bank Preferred Shares.
(e) Status of Shares Redeemed; Treatment of Dividends. Any Series A
Preferred Shares purchased or redeemed by the Corporation in accordance
with Section 6.6.3 hereof prior to the Time of Exchange shall not be deemed
outstanding and shall not be subject to the Automatic Exchange. In the
event of the Automatic Exchange, any accrued and unpaid dividends on the
Series A Preferred Shares as of the Time of Exchange shall be deemed to be
accrued and unpaid dividends on the Bank Preferred Shares.
Section 6.6.5 Liquidation Value.
(a) Liquidating Distributions. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of Series A Preferred Shares shall be entitled to
receive for each share thereof, out of the assets of the Corporation
legally available for distribution to shareholders under applicable law, or
the proceeds thereof, before any payment or distribution of the assets
shall be made to holders of shares of Common Stock or any other Junior
Stock (subject to the rights of the holders of any class or series of
equity securities having
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preference with respect to distributions upon liquidation and the
Corporation's general creditors), liquidating distributions in the amount of
$25.00 per share, plus an amount per share equal to any dividends authorized
and declared but unpaid, without interest.
If the amounts available for distribution in respect of Series A
Preferred Shares and any outstanding Parity Stock upon any such voluntary
or involuntary liquidation, dissolution or winding up are not sufficient to
satisfy the full liquidation rights of all of the outstanding Series A
Preferred Shares and such Parity Stock, then the holders of such
outstanding shares shall share ratably in any such distribution of assets
in proportion to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of Series A Preferred Shares will
not be entitled to any further participation in any liquidating
distribution of any remaining assets by the Corporation. All distributions
made in respect of Series A Preferred Shares in connection with such a
liquidation, dissolution or winding up of the Corporation shall be made pro
rata to the holders entitled thereto.
(b) Consolidation, Merger or Certain Other Actions. Neither the
consolidation, merger or other business combination of the Corporation with
or into any other person, nor the sale of all or substantially all of the
assets of the Corporation, shall be deemed to be a liquidation, dissolution
or winding up of the Corporation for purposes of this Section 6.6.5.
Section 6.6.6 Voting Rights.
(a) General. Except as expressly provided in this Section 6.6.6,
holders of Series A Preferred Shares shall have no voting rights. When the
holders of Series A Preferred Shares are entitled to vote, each Series A
Preferred Share will be entitled to one vote.
(b) Right to Elect Directors. If full dividends on the Series A
Preferred Shares shall not have been paid for six (6) Dividend Periods, the
maximum authorized number of directors of the Corporation shall thereupon
be increased by two (2). Subject to compliance with any requirement for
regulatory approval of (or non-objection to) persons serving as directors,
the holders of Series A Preferred Shares, voting together as a class with
the holders of any Parity Stock upon which the same voting rights as those
of the Series A Preferred Shares have been conferred and are irrevocable,
shall have the exclusive right to elect the two additional directors at the
Corporation's next annual meeting of shareholders and at each subsequent
annual meeting until full dividends have been authorized, declared and paid
or authorized and declared and a sum sufficient for payment thereof is set
apart for payment for four (4) consecutive Dividend Periods. The term of such
directors (each a "Preferred Director") elected thereby shall terminate, and
the total number of directors shall be
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decreased by two (2), upon the first annual meeting of stockholders after
the payment or the authorization, declaration and setting aside for payment
of full dividends on the Series A Preferred Shares for four (4) consecutive
Dividend Periods. Any Preferred Director may be removed by, and shall not be
removed except by, the vote of the holders of record of the outstanding
Series A Preferred Shares and Parity Stock entitled to vote, voting together
as a single class without regard to series, at a meeting of the Corporation's
stockholders. As long as dividends on the Series A Preferred Shares shall
not have been paid for six (6) Dividend Periods, (i) any vacancy in the
office of a Preferred Director may be filled (except as provided in the
following clause (ii)) by an instrument in writing signed by the remaining
Preferred Director and filed with the Corporation, and (ii) in the case of
the removal of any Preferred Director, the vacancy may be filled by the vote
of the holders of the outstanding Series A Preferred Shares and Parity Stock
entitled to vote, voting together as a single class without regard to series,
at the same meeting at which such removal shall be voted. Each director
appointed as aforesaid by the remaining Preferred Director shall be deemed,
for all purposes hereof, to be a Preferred Director.
(c) Certain Voting Rights. So long as any Series A Preferred Shares
are outstanding, the Corporation shall not, without the consent or vote of
the holders of at least two-thirds of the outstanding Series A Preferred
Shares voting separately as a class, (i) amend, alter or repeal or
otherwise change any provision of these Articles of Incorporation if such
amendment, alteration, repeal or change would materially and adversely
affect the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption of the Series A
Preferred Shares, or (ii) authorize, create or increase the authorized
amount of or issue any class or series of any equity securities of the
Corporation, or any warrants, options or other rights exercisable or
convertible or exchangeable into any class or series of any equity
securities of the Corporation, ranking prior to the Series A Preferred
Shares, either as to dividend rights or rights on liquidation, dissolution
or winding up of the Corporation or (iii) merge, consolidate, reorganize or
effect any other business combination involving the Corporation, unless the
resulting corporation will thereafter have no class or series of equity
securities either authorized or outstanding ranking prior to the Series A
Preferred Shares as to dividends or as to the distribution of assets upon
liquidation, dissolution or winding up, except the same number of shares of
such equity securities with the same preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption as the
shares of equity securities of the Corporation that are authorized and
outstanding immediately prior to such transaction, and each holder of Series
A Preferred Shares immediately prior to such transaction shall receive shares
with the same preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms
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or conditions of redemption of the resulting corporation as the Series A
Preferred Shares held by such holder immediately prior thereto.
The creation or issuance of Parity Stock or Junior Stock in respect
of the payment of dividends, or the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, or an amendment that increases
the number of authorized shares of preferred stock of the Series A Preferred
Shares or any Junior Stock or Parity Stock, shall not be deemed to be a
material and adverse change requiring a vote of the holders of Series A
Preferred Shares pursuant to this Section 6.6.6(c).
6.6.7 Independent Directors.
(a) Number; Definition. As long as any Series A Preferred Shares are
outstanding, at least two directors on the Board of Directors shall be
Independent Directors. As used herein, "Independent Director" means any
director of the Corporation who is either (i) not a current officer or
employee of the Corporation or (ii) not a current director, officer or
employee of the Bank or any affiliate of the Bank.
(b) Approval of Independent Directors. As long as any Series A
Preferred Shares are outstanding, the Corporation may not take the
following actions without first obtaining the approval of a majority of the
Independent Directors: (i) the issuance of additional Preferred Stock
ranking on a parity with the Series A Preferred Shares, (ii) the incurrence
of debt for borrowed money in excess of 20% of the Corporation's total
stockholders' equity, (iii) the acquisition of assets other than Mortgage
Loans, Mortgage-Backed Securities or Other Authorized Investments, (iv) the
termination or modification of, or the election not to renew, the Advisory
Agreement dated ____________, 1997, by and between the Corporation and the
Bank, the Commercial Mortgage Servicing Agreement between the Corporation and
the Bank, dated _______, 1997, the Assignment, Assumption and Recognition
Agreement between Temple Inland Mortgage Corporation, the Bank and the
Corporation, dated ________, 1997 or the subcontracting of any duties
under the Advisory Agreement or the Commercial Mortgage Servicing
Agreement to third parties unaffiliated with the Bank, (v) any material
amendment to or modification of either the Residential Mortgage Purchase
and Warranties Agreement or the Commercial Mortgage Purchase and Warranties
Agreement, each dated _______, 1997 between the Corporation and the Bank,
(vi) the determination to revoke the Corporation's status as a real estate
investment trust under Sections 856 through 860 of the Code, and (vii) any
dissolution, liquidation or termination of the Company prior to _______,
2007. So long as the number of Independent Directors is two, the foregoing
actions must be approved by both of the Independent Directors. For purposes
of this Section 6.6.7, (i) "Mortgage Loans" means whole loans secured by
single-family (one- to four-unit) residential, multi-family or commercial
real estate
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properties, (ii) "Mortgage-Backed Securities" means securities either issued
or guaranteed by agencies of the Federal government or government sponsored
agencies or that are rated by at least one nationally recognized independent
rating organization and that represent interests in or obligations backed by
pools of Mortgage Loans, and (iii) "Other Authorized Investments" means
non-mortgage-related securities authorized by Section 856(c)(5)(B) of the
Code, in an amount which shall not exceed 20% of the value of the Company's
total assets.
(c) Determination by Independent Directors. In determining whether
any proposed action requiring their consent is in the best interests of the
Corporation, the Independent Directors shall consider the interests of
holders of both the Common Stock and the Preferred Stock, including,
without limitation, the holders of the Series A Preferred Shares. In
considering the interests of the holders of the Preferred Stock, including,
without limitation, holders of the Series A Preferred Shares, the
Independent Directors shall owe the same duties that the Independent
Directors owe with respect to holders of shares of Common Stock.
Section 6.6.8 No Conversion Rights. The holders of Series A
Preferred Shares shall not have any rights to convert such shares into shares
of any other class or series of stock or into any other securities of, or any
interest in, the Corporation.
Section 6.6.9 No Sinking Fund. No sinking fund shall be established
for the retirement or redemption of Series A Preferred Shares.
Section 6.6.10 Preemptive or Subscription Rights. No holder of
Series A Preferred Shares shall have any preemptive or subscription rights in
respect of any shares of the Corporation that may be issued.
Section 6.6.11 No Other Rights. The Series A Preferred Shares shall
not have any designations, preferences or relative, participating, optional
or other special rights except as set forth in the Articles of Incorporation
or as otherwise required by law.
Section 6.6.12 Compliance with Applicable Law. Declaration by the
Board of Directors and payment by the Corporation of dividends to holders of
the Series A Preferred Shares and repurchase, redemption or other acquisition
by the Corporation (or another entity as provided in subsection (a) of
Section 6.6.3 hereof) of Series A Preferred Shares shall be subject in all
respects to any and all restrictions and limitations placed on dividends,
redemptions or other distributions by the Corporation (or any such other
entity) under (i) laws, regulations and regulatory conditions or limitations
applicable to or regarding the Corporation (or any such other entity) from
time to time and (ii) agreements with federal banking authorities with
respect to the Corporation (or any such other entity) from time to time in
effect.
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Section 6.6.13 Maintenance of Status as Reporting Company. As long
as any Series A Preferred Shares are outstanding, the Corporation shall
maintain its status as a reporting company under the Securities Exchange Act
of 1934, as amended.
ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
Section 7.1 Definitions. For the purpose of this Article VII, the
following terms not otherwise defined in these Articles of Incorporation
shall have the following meanings:
Ownership Limit. The term "Ownership Limit" shall mean no more than
7.5% of the aggregate initial liquidation preference of the issued and
outstanding shares of Preferred Stock of the Corporation, including the
Series A Preferred Shares. The number and value of the outstanding shares of
Capital Stock shall be determined by the Board of Directors of the
Corporation in good faith, which determination shall be conclusive for all
purposes hereof. The Board of Directors also may determine that compliance
with any restriction or limitation on stock ownership and transfers set forth
in this Article VII is no longer required for REIT qualification or that,
based upon then current law, such restriction or limitation may be modified.
Constructive Ownership. The term "Constructive Ownership" shall
mean ownership of Capital Stock by a Person, whether the interest in the
shares of Capital Stock is held directly or indirectly (including by a
nominee), and shall include interests that would be treated as owned through
the application of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code. The terms "Constructive Owner," "Constructively
Owns" and "Constructively Owned" shall have the correlative meanings.
Capital Stock. The term "Capital Stock" shall mean all classes or
series of stock of the Corporation, including, without limitation, Common
Stock and Preferred Stock.
Charitable Beneficiary. The term "Charitable Beneficiary" shall
mean one or more beneficiaries of the Trust as determined pursuant to Section
7.3.6, provided that each such organization must be described in Section
501(c)(3) of the Code and contributions to each such organization must be
eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of
the Code.
Excepted Holder. The term "Excepted Holder" shall mean the Bishop
Estate, BIL Securities and Arbur and any entity controlled directly or
indirectly by the Bishop Estate, BIL Securities and Arbur, and their
successors, for each of which no Ownership Limit shall apply, and any
stockholder of the Corporation who is exempted from application of the
Ownership Limit or for whom the Ownership Limit is modified by these Articles
of Incorporation or by the Board of Directors pursuant to Section 7.2.7.
Furthermore, any person which owns or is deemed to own shares of the
Corporation by reason of the attribution of shares of the Corporation (under
certain attribution provisions of the Code) to an Excepted Shareholder shall
be treated as an Excepted Shareholder.
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Initial Date. The term "Initial Date" shall mean the date upon
which the Articles of Incorporation containing this Article VII are filed
with the SDAT.
Market Price. The term "Market Price" on any date shall mean, with
respect to any class or series of outstanding shares of Capital Stock, the
Closing Price for such Capital Stock on such date. The "Closing Price" on any
date shall mean the last sale price for such Capital Stock, regular way, or,
in case no such sale takes place on such day, the average of the closing bid
and asked prices, regular way, for such Capital Stock, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the principal national
securities exchange on which such Capital Stock is listed or admitted to
trading or, if such Capital Stock is not listed or admitted to trading on any
national securities exchange, the last quoted price, or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter
market, as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System or, if such system is no longer in use, the
principal other automated quotation system that may then be in use or, if
such Capital Stock is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in such Capital Stock selected by the Board of Directors of
the Corporation or, in the event that no trading price is available for such
Capital Stock, the fair market value of the Capital Stock, as determined in
good faith by the Board of Directors of the Corporation.
Prohibited Owner. The term "Prohibited Owner" shall mean, with
respect to any purported Transfer, any Person who, but for the provisions of
Section 7.2.1, would own or Constructively Own shares of Preferred Stock in
violation of this Article VII, and if appropriate in the context, shall also
mean any Person who would have been the record owner of the shares that the
Prohibited Owner would have so owned.
Restriction Termination Date. The term "Restriction Termination
Date" shall mean the first day after the Initial Date on which the
Corporation determines pursuant to Section 5.7 of the Articles of
Incorporation that it is no longer in the best interests of the Corporation
to attempt to, or continue to, qualify as a REIT.
Transfer. The term "Transfer" shall mean any issuance, sale,
transfer, gift, assignment, devise or other disposition, as well as any other
event that causes any Person to acquire Constructive Ownership of Preferred
Stock or the right to vote or receive dividends on Preferred Stock, or any
agreement to take any such actions or cause any such events, including (a)
the granting or exercise of any option (or any disposition of any option),
(b) any disposition of any securities or rights convertible into or
exchangeable for Preferred Stock or any interest in Preferred Stock or any
exercise of any such conversion or exchange right, (c) transfers of interests
in other entities that result in changes in Constructive Ownership of
Preferred Stock and (d) the transfer of any shares of Preferred Stock
pursuant to a waiver of the Ownership Limit under Section 7.2.7.; in each
case, whether voluntary or
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involuntary, whether Constructively Owned and whether by operation of law or
otherwise. The terms "Transferring" and "Transferred" shall have the
correlative meanings.
Trust. The term "Trust" shall mean any trust provided for in
Section 7.3.1.
Trustee. The term "Trustee" shall mean the Person unaffiliated with
the Corporation and a Prohibited Owner, that is appointed by the Corporation
to serve as trustee of the Trust.
Section 7.2 Capital Stock.
Section 7.2.1 Ownership Limitations. During the period
commencing on the Initial Date and prior to the Restriction Termination Date:
(a) Basic Restrictions.
(i) No Person, other than an Excepted Holder, shall
Constructively Own shares of Preferred Stock in excess of the
Ownership Limit.
(ii) Notwithstanding any other provisions contained
herein, any Transfer of shares of Preferred Stock that,
if effective, would result in the Preferred Stock being
beneficially owned by less than 100 Persons (determined under the
principles of Section 856(a)(5) of the Code) shall be void ab
initio, and the intended transferee shall acquire no rights in such
shares of Preferred Stock.
(b) Transfer in Trust. If any Transfer of shares of Preferred
Stock occurs which, if effective, would result in any Person Constructively
Owning shares of Preferred Stock in violation of Section 7.2.1(a)(i),
(i) then that number of shares of the Preferred Stock the
Constructive Ownership of which otherwise would cause such Person
to violate Section 7.2.1(a)(i) (rounded up to the nearest whole
share) shall be automatically transferred to a Trust for the
benefit of a Charitable Beneficiary, as described in Section 7.3,
effective as of the close of business on the Business Day prior
to the date of such Transfer, and such Person shall acquire no
rights in such shares; or
(ii) if the transfer to the Trust described in clause (i)
of this sentence would not be effective for any reason to prevent
the violation of Section 7.2.1(a)(i), then the Transfer of that
number of shares of Preferred Stock that otherwise would cause
any Person to violate Section 7.2.1(a)(i)
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shall be void ab initio, and the intended transferee shall
acquire no rights in such shares of Capital Stock.
Section 7.2.2 Remedies for Breach. If the Board of Directors of
the Corporation or any duly authorized committee thereof shall at any time
determine in good faith that a Transfer or other event has taken place that
results in a violation of Section 7.2.1 or that a Person intends to acquire
or has attempted to acquire Constructive Ownership of any shares of Preferred
Stock in violation of Section 7.2.1 (whether or not such violation is
intended), the Board of Directors or a committee thereof shall take such
action as it deems advisable to refuse to give effect to or to prevent such
Transfer or other event, including, without limitation, causing the
Corporation to redeem shares, refusing to give effect to such Transfer on the
books of the Corporation or instituting proceedings to enjoin such Transfer
or other event; provided, however, that any Transfers or attempted Transfers
or other events in violation of Section 7.2.1 shall automatically result in
the transfer to the Trust described above, and, where applicable, such
Transfer (or other event) shall be void ab initio as provided above
irrespective of any action (or non-action) by the Board of Directors or a
committee thereof.
Section 7.2.3 Notice of Restricted Transfer. Any Person who
acquires or attempts or intends to acquire Ownership or Constructive
Ownership of shares of Preferred Stock that will or may violate Section
7.2.1(a), or any Person who would have owned shares of Preferred Stock that
resulted in a transfer to the Trust pursuant to the provisions of Section
7.2.1(b) shall immediately give written notice to the Corporation of such
event, or in the case of such a proposed or attempted transaction, give at
least 15 days prior written notice, and shall provide to the Corporation such
other information as the Corporation may request in order to determine the
effect, if any, of such Transfer on the Corporation's status as a REIT.
Section 7.2.4 Owners Required To Provide Information. From the
Initial Date and prior to the Restriction Termination Date:
(a) every owner of more than one percent (or such lower
percentage as required by the Code or the Treasury Regulations
promulgated thereunder) of the outstanding shares of Capital Stock,
within 30 days of June 30 and December 31 of each year, shall give
written notice to the Corporation stating the name and address of
such owner, the number of shares of Capital Stock and other shares
of the Capital Stock Constructively Owned and a description of the
manner in which such shares are held. Each such owner shall provide
to the Corporation such additional information as the Corporation
may request in order to determine the effect, if any, of such
Constructive Ownership on the Corporation's status as a REIT and to
ensure compliance with the Ownership Limit.
(b) each Person who is a Constructive Owner of Capital Stock
and each Person (including the stockholder of record) who is holding
Capital Stock for a
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Constructive Owner shall provide to the Corporation such
information as the Corporation may request, in good faith, in order to
determine the Corporation's status as a REIT and to comply with
requirements of any taxing authority or governmental authority or to
determine such compliance.
Section 7.2.5 Remedies Not Limited. Subject to Section 5.7 of the
Articles of Incorporation, nothing contained in this Section 7.2 shall limit
the authority of the Board of Directors of the Corporation to take such other
action as it deems necessary or advisable to protect the Corporation and the
interests of its stockholders in preserving the Corporation's status as a
REIT.
Section 7.2.6 Ambiguity. In the case of an ambiguity in the
application of any of the provisions of this Section 7.2, Section 7.3, or any
definition contained in Section 7.1, the Board of Directors of the
Corporation shall have the power to determine the application of the
provisions of this Section 7.2 or Section 7.3 with respect to any situation
based on the facts known to it. In the event Section 7.2 or 7.3 requires an
action by the Board of Directors and the Articles of Incorporation fails to
provide specific guidance with respect to such action, the Board of Directors
shall have the power to determine the action to be taken so long as such
action is not contrary to the provisions of Sections 7.1, 7.2 or 7.3.
Section 7.2.7 Exceptions.
(a) Subject to Section 7.2.7(b), the Board of Directors of the
Corporation, in its sole discretion, may exempt a Person from the
Ownership Limit and may establish or increase an Ownership Limit for
such Person if it receives a ruling from the Internal Revenue
Service, or an opinion of counsel, in either case in form and
substance satisfactory to the Board of Directors in its sole
discretion, as it may deem necessary or advisable in order to
determine or ensure the Corporation's status as a REIT.
Notwithstanding the receipt of any ruling or opinion, the Board of
Directors may impose such conditions or restrictions as it deems
appropriate in connection with granting such exception.
(b) An underwriter which participates in a public offering or a
private placement of Preferred Stock (or securities convertible into
or exchangeable for Capital Stock) may own or Constructively Own
shares of Capital Stock (or securities convertible into or
exchangeable for Capital Stock) in excess of the Ownership Limit,
but only to the extent necessary to facilitate such public offering
or private placement.
Section 7.2.8 Legend. Each certificate for shares of Preferred
Stock shall bear substantially the following legend:
The shares represented by this certificate are subject to
restrictions on Constructive Ownership and Transfer for the
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purpose of the Corporation's maintenance of its status as a Real Estate
Investment Trust under the Internal Revenue Code of 1986, as amended (the
"Code"). Subject to certain further restrictions and except as expressly
provided in the Corporation's Articles of Incorporation, (i) no Person may
Constructively Own in excess of 7.5% of the aggregate initial liquidation
preference of the issued and outstanding shares of Preferred Stock of the
Corporation, including the Series A Preferred Shares; and (ii) no Person may
Transfer shares of Capital Stock if such Transfer would result in the
Capital Stock of the Corporation being owned (directly or
beneficially) by fewer than 100 Persons. Any Person who attempts to
Constructively Own shares of Capital Stock which causes or will cause a
Person to Constructively Own shares of Capital Stock in excess or in
violation of the above limitations must immediately notify the Corporation.
If any of the restrictions on transfer or ownership are violated, the shares
of Capital Stock represented hereby will be automatically transferred to a
Trustee of a Trust for the benefit of one or more Charitable Beneficiaries.
In addition, upon the occurrence of certain events, attempted Transfers in
violation of the restrictions described above may be void ab initio. All
capitalized terms in this legend have the meanings defined in the Articles of
Incorporation of the Corporation, as the same may be amended from time to
time, a copy of which, including the restrictions on transfer and ownership,
will be furnished to each holder of Capital Stock of the Corporation on
request and without charge.
Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability to a stockholder on request and without charge.
Section 7.3 Transfer of Preferred Stock in Trust.
Section 7.3.1 Ownership in Trust. Upon any purported Transfer or
other event that would result in a transfer of shares of Preferred Stock to a
Trust, such shares of Preferred Stock shall be deemed to have been
transferred to the Trustee as trustee of a Trust for the exclusive benefit of
one or more Charitable Beneficiaries. Such transfer to the Trustee shall be
deemed to be effective as of the close of business on the Business Day prior
to the purported Transfer or other event that results in the transfer to the
Trust. The Trustee shall be appointed by the Corporation and shall be a
Person unaffiliated with the Corporation and any Prohibited Owner. Each
Charitable Beneficiary shall be designated by the Corporation as provided in
Section 7.3.6.
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Section 7.3.2 Status of Shares Held by the Trustee. Shares of
Preferred Stock held by the Trustee shall be issued and outstanding shares of
Preferred Stock of the Company. The Prohibited Owner shall have no rights in
the shares held by the Trustee. The Prohibited Owner shall not benefit
economically from ownership of any shares held in trust by the Trustee, shall
have no rights to dividends and shall not possess any rights to vote or other
rights attributable to the shares held in the Trust.
Section 7.3.3 Dividend and Voting Rights. The Trustee shall have
all voting rights and rights to dividends or other distributions with respect
to shares of Preferred Stock held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any
dividend or other distribution paid prior to the discovery by the Corporation
that the shares of Preferred Stock have been transferred to the Trustee shall
be paid by the recipient of such dividend or distribution to the Trustee upon
demand and any dividend or other distribution authorized but unpaid shall be
paid when due to the Trustee. Any dividend or distribution so paid to the
Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited
Owner shall have no voting rights with respect to shares held in the Trust
and, subject to Maryland law, effective as of the date that the shares of
Preferred Stock have been transferred to the Trustee, the Trustee shall have
the authority (at the Trustee's sole discretion) (i) to rescind as void any
vote cast by a Prohibited Owner prior to the discovery by the Corporation
that the shares of Preferred Stock have been transferred to the Trustee and
(ii) to recast such vote in accordance with the desires of the Trustee acting
for the benefit of the Charitable Beneficiary; provided, however, that if the
Corporation has already taken irreversible corporate action, then the Trustee
shall not have the authority to rescind and recast such vote. Notwithstanding
the provisions of this Article VII, until the Corporation has received
notification that shares of Preferred Stock have been transferred into a
Trust, the Corporation shall be entitled to rely on its share transfer and
other stockholder records for purposes of preparing lists of stockholders
entitled to vote at meetings, determining the validity and authority of
proxies and otherwise conducting votes of stockholders.
Section 7.3.4 Sale of Shares by Trustee. Within 20 days of
receiving notice from the Corporation that shares of Preferred Stock have
been transferred to the Trust, the Trustee of the Trust shall sell the shares
held in the Trust to a person, designated by the Trustee, whose ownership of
the shares will not violate the ownership limitations set forth in this
Article VII. Upon such sale, the interest of the Charitable Beneficiary in
the shares sold shall terminate and the Trustee shall distribute the net
proceeds of the sale to the Prohibited Owner and to the Charitable
Beneficiary as provided in this Section 7.3.4. The Prohibited Owner shall
receive the lesser of (1) the price paid by the Prohibited Owner for the
shares or, if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Trust (e.g.,
in the case of a gift, devise or other such transaction), the Market Price of
the shares on the day of the event causing the shares to be held in the Trust
and (2) the price per share received by the Trustee from the sale or other
disposition of the shares held in the Trust. Any net sales proceeds in excess
of the amount payable to the Prohibited Owner shall be immediately paid to
the Charitable
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Beneficiary. If, prior to the discovery by the Corporation that shares of
Preferred Stock have been transferred to the Trustee, such shares are sold by
a Prohibited Owner, then (i) such shares shall be deemed to have been sold on
behalf of the Trust and (ii) to the extent that the Prohibited Owner received
an amount for such shares that exceeds the amount that such Prohibited Owner
was entitled to receive pursuant to this Section 7.3.4, such excess shall be
paid to the Trustee upon demand.
Section 7.3.5 Purchase Right in Stock Transferred to the Trustee.
Shares of Preferred Stock transferred to the Trustee shall be deemed to have
been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Trust (or, in the case of a devise or gift,
the Market Price at the time of such devise or gift) and (ii) the Market
Price on the date the Corporation, or its designee, accepts such offer. The
Corporation shall have the right to accept such offer until the Trustee has
sold the shares held in the Trust pursuant to Section 7.3.4. Upon such a sale
to the Corporation, the interest of the Charitable Beneficiary in the shares
sold shall terminate and the Trustee shall distribute the net proceeds of the
sale to the Prohibited Owner.
Section 7.3.6 Designation of Charitable Beneficiaries. By written
notice to the Trustee, the Corporation shall designate one or more nonprofit
organizations to be the Charitable Beneficiary of the interest in the Trust
such that (i) the shares of Capital Stock held in the Trust would not violate
the restrictions set forth in this Article VII in the hands of such
Charitable Beneficiary and (ii) each such organization must be described in
Section 501(c)(3) of the Code and contributions to each such organization
must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and
2522 of the Code.
Section 7.4 Settlement of Transactions. Nothing in this Article VII
shall preclude the settlement of any transaction entered into through the
facilities of any national securities exchange or automated inter-dealer
quotation system. The fact that the settlement of any transaction is so
permitted shall not negate the effect of any other provision of this Article
VII and any transferee in such a transaction shall be subject to all of the
provisions and limitations set forth in this Article VII.
Section 7.5 Enforcement. The Corporation is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions
of this Article VII.
Section 7.6 Non-Waiver. No delay or failure on the part of the
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of
Directors, as the case may be, except to the extent specifically waived in
writing.
ARTICLE VIII
AMENDMENTS
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The Corporation reserves the right from time to time to make any
amendment to its Articles of Incorporation, now or hereafter authorized by
law, including any amendment altering the terms or contract rights, as
expressly set forth in these Articles of Incorporation, of any shares of
outstanding stock. All rights and powers conferred by the Articles of
Incorporation on stockholders, directors and officers are granted subject to
this reservation. Subject to the rights of the holders of shares of Series A
Preferred Stock set forth in Section 6.6, any amendment to the Articles of
Incorporation shall be valid only if approved by the affirmative vote of a
majority of all the votes entitled to be cast on the matter. Any amendment to
Section 6.6 of the Articles of Incorporation shall be valid only if approved
as provided therein.
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers of a
corporation, no director or officer of the Corporation shall be liable to the
Corporation or its stockholders for money damages. Neither the amendment nor
repeal of this Article IX, nor the adoption or amendment of any other
provision of the Articles of Incorporation or Bylaws inconsistent with this
Article IX, shall apply to or affect in any respect the applicability of the
preceding sentence with respect to any act or failure to act which occurred
prior to such amendment, repeal or adoption.
ARTICLE X
NON-APPLICABILITY OF MARYLAND GENERAL CORPORATION LAW TO
CERTAIN BUSINESS COMBINATIONS AND CONTROL
SHARE ACQUISITIONS
The provisions of Title 3, Subtitle 6 of the Corporations and
Associations Article of the Annotated Code of Maryland (or any successor
statute) shall not apply to any business combination by the Bank and any
present or future affiliates thereof. This Article X may be altered,
repealed, in whole or in part, at any time, provided that such repeal shall
not affect any business combinations that have been consummated or are
subject to an existing agreement entered into prior to such alteration or
repeal.
The provisions of Title 3, Subtitle 7 of the Corporations and
Associations Article of the Annotated Code of Maryland (or any successor
statute) shall not apply to any acquisition by the Bank and any present or
future affiliates thereof of shares of stock of the Corporation. This
Article X may be repealed, in whole or in part, at any time, whether before
or after an acquisition of control shares and, upon such repeal, may, to the
extent provided by any successor article or bylaw, apply to any prior or
subsequent control share acquisition.
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THIRD: The amendment to and restatement of the Articles of Incorporation
as hereinabove set forth has been duly advised by the Board of Directors and
approved by the stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the Corporation
in the State of Maryland is as set forth in Article IV of the foregoing
amendment and restatement of the Articles of Incorporation.
FIFTH: The name and address of the Corporation's current resident agent
is as set forth in Article IV of the foregoing amendment and restatement of
the Articles of Incorporation.
SIXTH: The number of directors of the Corporation and the names of those
currently in office are as set forth in Article V of the foregoing amendment
and restatement of the Articles of Incorporation.
SEVENTH: The total number of shares of stock which the Corporation had
authority to issue immediately prior to this amendment and restatement was
10,000 shares, $.01 par value per share, all of one class. The aggregate par
value of all shares of stock having par value was $100.
EIGHTH: The total number of shares of stock which the Corporation has
authority to issue pursuant to the foregoing amendment and restatement of the
Articles of Incorporation is 8,000,000, consisting of 4,000,000 shares of
Common Stock, $.01 par value per share, and 4,000,000 shares of Preferred
Stock, $.01 par value per share. The aggregate par value of all authorized
shares of stock having par value is $80,000.
NINTH: The undersigned President acknowledges these Articles of
Amendment and Restatement to be the corporate act of the Corporation and, as
to all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that
this statement is made under the penalties for perjury.
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IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President and attested to by its Secretary on this _____ day of ____________,
1997.
ATTEST: PEOPLE'S PREFERRED CAPITAL
CORPORATION
__________________________ By: _______________________________
Secretary President
31
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August ___, 1997
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Re: Registration Statement on Form S-11
Registration No. 333-31051
Ladies and Gentlemen:
We have acted as counsel for People's Preferred Capital Corporation, a
Maryland corporation (the "Company"), and People's Bank of California, a federal
savings bank, in connection with the above-captioned registration statement on
Form S-11 (the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") on July ___, 1997 and Amendment No. 1 to the
Registration Statement dated _________, 1997 for the purpose of registering
Series A Preferred Shares (the "Preferred Shares") of the Company in connection
with the sale of such Preferred Shares to the public.
In this connection, we have examined the Registration Statement, as
amended, and such other documents as we have deemed necessary or appropriate as
a basis for the opinion set forth below, and we have assumed (i) that such
documents will not be amended and (ii) that the parties to such documents will
comply with the terms thereof.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents. As to any
facts material to the opinions expressed herein which were not independently
established or verified, we are relying upon statements, representations, and
certifications of officers and other representatives of the Company.
In rendering our opinion, we have also considered and relied upon the
Internal Revenue Code of 1986, as amended, and administrative rulings, judicial
decisions, regulations, and such other authorities as we have deemed
appropriate, all as in effect as of the date hereof. The statutory provisions,
regulations, interpretations, and other authorities upon which our opinion is
based are subject to change, and such changes could apply retroactively. In
addition, there can be no assurance that positions contrary to those stated in
our opinion will not be taken by the Internal Revenue Service.
We express no opinions as to the laws of any jurisdiction other than the
federal laws of the United States of America to the extent specifically referred
to herein.
<PAGE>
People's Preferred Capital Corporation
July __, 1997
Page 2
Based upon and subject to the foregoing, and subject to the qualifications
set forth therein, we adopt the opinions expressed in the Registration Statement
under the heading "FEDERAL INCOME TAX CONSIDERATIONS" as our opinion in this
matter.
This opinion is furnished to you solely for your benefit in connection with
the filing of the Registration Statement and, except as set forth below, is not
to be used, circulated, quoted or otherwise referred to for any other purpose or
relied upon by any other person for any purpose without our prior written
consent. We hereby consent to the use of our name under the heading "Legal
Matters" in the Registration Statement and the filing of this opinion with the
Commission as Exhibit 8.1 to the Registration Statement. In giving this consent,
we do not thereby admit that we are within the category of persons whose consent
is required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Commission promulgated thereunder. This opinion is
expressed as of the date hereof unless otherwise expressly stated and applies
only to the disclosure under the heading "FEDERAL INCOME TAX CONSIDERATIONS" set
forth in the Registration Statement filed as of the date hereof. We disclaim any
undertaking to advise you of any subsequent changes of the facts stated or
assumed herein or any subsequent changes in applicable law.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK, LLP
By: _____________________________________
Norman B. Antin, A Partner
<PAGE>
September ______, 1997
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Re: Registration Statement on Form S-11
(No. 333-31051)
Ladies and Gentlemen:
We have served as counsel to People's Preferred Capital Corporation, a
Maryland corporation (the "Company"), in connection with certain matters of
Maryland law arising out of the registration of up to 1,426,000 shares (the
"Shares") of Noncumulative Exchangeable Preferred Stock, Series A, $.01 par
value per share (the "Series A Preferred Stock"), of the Company (including
186,000 shares of Series A Preferred Stock which the Underwriters have the
option to purchase solely to cover over-allotments, if any), covered by the
above-referenced Registration Statement (the "Registration Statement"), filed by
the Company with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "1933 Act"). Unless otherwise
defined herein, capitalized terms used herein shall have the meanings assigned
to them in the Registration Statement.
In connection with our representation of the Company, and as a basis for
the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (hereinafter collectively referred to as the "Documents"):
1. The Registration Statement and the related form of prospectus included
therein in the form in which it was transmitted to the Commission under the 1933
Act;
2. The Articles of Incorporation of the Company (the "Articles"),
certified as of a recent date by the State Department of Assessments and
Taxation of Maryland (the "SDAT");
3. The Bylaws of the Company, certified as of a recent date by its
Secretary;
4. Resolutions adopted by the Board of Directors of the Company (the
"Board") relating to the sale, issuance and registration of the Shares and the
creation of, and delegation of authority to, a pricing committee thereof (the
"Pricing Committee"), certified as of a recent date by the Secretary of the
Company (the "Resolutions");
5. The form of certificate representing a share of Series A Preferred
Stock, certified as of a recent date by the Secretary of the Company;
<PAGE>
People's Preferred Capital Corporation
September __ 1997
Page 2
6. A certificate of the SDAT as to the good standing of the Company,
dated as of a recent date;
7. Such other documents and matters as we have deemed necessary or
appropriate to express the opinion set forth in this letter, subject to the
assumptions, limitations and qualifications stated herein.
In expressing the opinion set forth below, we have assumed, and so far as
is known to us there are no facts inconsistent with, the following:
1. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding.
2. Each individual executing any of the Documents on behalf of a party
(other than the Company) is duly authorized to do so.
3. Each individual executing any of the Documents, whether on behalf of
such individual or another person, is legally competent to do so.
4. All Documents submitted to us as originals are authentic. All
Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on all such Documents are genuine. All public
records reviewed or relied upon by us or on our behalf are true and complete.
All statements and information contained in the Documents are true and complete.
There are no modifications of or amendments to the Documents, and there has been
no waiver of any of the provisions of the Documents, by actions or conduct of
the parties or otherwise.
5. In accordance with the Resolutions, the Board, or the Pricing
Committee or another duly authorized committee of the Board, will duly adopt
resolutions (the "Pricing Resolutions") including all terms and conditions
required by the Maryland General Corporation Law, as amended, prior to the
issuance of the Shares.
6. The Shares will not be issued or transferred in violation of any
restriction or limitation contained in the Articles.
The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based upon the foregoing, and subject to the assumptions, limitations and
qualifications stated herein, it is our opinion that:
<PAGE>
People's Preferred Capital Corporation
September __ 1997
Page 3
1. The Company is a corporation duly incorporated and existing under and
by virtue of the laws of the State of Maryland and is in good standing with the
SDAT.
2. The Shares have been duly authorized and, when and if delivered
against payment therefor in accordance with the Resolutions, the Pricing
Resolutions and any other resolutions of the Board of Directors, or the Pricing
Committee or any other duly authorized committee of the Board of Directors,
authorizing their issuance, the Shares will be duly and validly issued, fully
paid and nonassessable.
The foregoing opinion is limited to the laws of the State of Maryland and
we do not express any opinion herein concerning any other law. We express no
opinion as to compliance with the securities (or "blue sky") laws of any State.
We assume no obligation to supplement this opinion if any applicable law
changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
This opinion is being furnished to you solely for submission to the
Commission as an exhibit to the Registration Statement and, accordingly, may not
be relied upon by, quoted in any manner to, or delivered to any other person or
entity without, in each instance, our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein. In giving
this consent, we do not admit that we are within the category of persons whose
consent is required by Section 7 of the 1933 Act, as amended or the rules and
regulations of the Commission promulgated thereunder.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK, LLP
By: ____________________________________
Norman B. Antin, A Partner
<PAGE>
Ex10(a)
- -------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
PEOPLE'S PREFERRED CAPITAL CORPORATION
Purchaser
PEOPLE'S BANK OF CALIFORNIA
Seller
Dated as of _____________, 1997
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. Definitions.................................................
SECTION 2. Agreement to Purchase Initial Portfolio.....................
SECTION 3. Subsequent Purchases........................................
SECTION 4. Payment of Purchase Price...................................
SECTION 5. Examination of Mortgage Files...............................
SECTION 6. Conveyance from Seller to Purchaser.........................
Subsection 6.1 Possession of Servicing Files...........................
Subsection 6.2 Books and Records.......................................
Subsection 6.3 Delivery of Custodian's File............................
SECTION 7. Servicing of the Mortgage Loans.............................
SECTION 8. Representations, Warranties and Covenants of the
Seller; Remedies for Breach................................
Subsection 8.1 Representations and Warranties Regarding the Seller....
Subsection 8.2 Representations and Warranties Regarding
Individual Mortgage Loans.............................
Subsection 8.3 Remedies for Breach of Representations and Warranties..
SECTION 9. Closing.....................................................
SECTION 10. Closing Documents...........................................
SECTION 11. Costs.......................................................
SECTION 12. Merger or Consolidation of the Seller.......................
SECTION 13. Mandatory Delivery; Grant of Security Interest..............
SECTION 14. Notices.....................................................
SECTION 15. Severability Clause.........................................
SECTION 16. Counterparts................................................
SECTION 17. Governing Law...............................................
SECTION 18. Intention of the Parties....................................
SECTION 19. Successors and Assigns; Assignment of Purchase Agreement....
SECTION 20. Waivers.....................................................
SECTION 21. Entire Agreement, Amendment.................................
SECTION 22. General Interpretive Principles.............................
SECTION 23. Reproduction of Documents...................................
SECTION 24. Further Agreements..........................................
SECTION 25. Recordation of Assignments of Mortgage......................
i
<PAGE>
EXHIBITS
EXHIBIT A Contents of Each Mortgage File
EXHIBIT B Residential Mortgage Servicing Agreement
EXHIBIT C Form of Seller's Officer's Certificate
EXHIBIT D Form of Opinion of Counsel to the Seller
EXHIBIT E Notice of Sale and Release of Collateral
EXHIBIT F Form of Security Release Certification
EXHIBIT G Form of Assignment and Assumption Agreement
EXHIBIT H Initial Portfolio Mortgage Loan Schedule
EXHIBIT I Form of Commitment Letter
ii
<PAGE>
RESIDENTIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
This RESIDENTIAL MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the
"Agreement"), dated as of _______, 1997, by and between People's Preferred
Capital Corporation, a Maryland corporation, having an office at 5900 Wilshire
Boulevard, Los Angeles, California 90036 (the "Purchaser"), and People's Bank of
California, a stock savings bank organized under the laws of the United States
of America, having an office at 5900 Wilshire Boulevard, Los Angeles, California
90036 (the "Seller").
W I T N E S S E T H:
--------------------
WHEREAS, the Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller, from time to time, certain Mortgage Loans
(as defined herein) on a servicing retained basis as described herein, and which
shall be delivered as whole loans; and
WHEREAS, each Mortgage Loan, at the time it is sold by Seller to Purchaser
pursuant to this Agreement, will be secured by a mortgage, deed of trust or
other security instrument creating a first lien on a residential dwelling
located in the jurisdiction indicated on the related Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of the
conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the premises and mutual agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Purchaser and the Seller agree
as follows:
SECTION 1. Definitions.
For purposes of this Agreement and any Commitment Letter (as defined
herein), the following capitalized terms shall have the respective meanings set
forth below. Other capitalized terms used in this Agreement and not defined
herein shall have the respective meanings set forth in the Residential Servicing
Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Act" means The National Housing Act, as amended from time to time.
<PAGE>
"Adjustable Rate Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement the Mortgage Interest Rate of which adjusts
periodically.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agreement" means this Residential Mortgage Loan Purchase and Warranties
Agreement, all amendments hereof and supplements hereto and each Commitment
Letter hereunder.
"ALTA" means The American Land Title Association or any successor thereto.
"Ancillary Income" means all late charges, assumption fees, escrow account
benefits, reinstatement fees, conversion fees, optional insurance commissions
and similar types of fees arising from or in connection with any Mortgage and
collected from the related Mortgagor, to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"Appraised Value" means the value of the Mortgaged Property set forth in an
appraisal made in connection with the origination of the related Mortgage Loan
as the value of the Mortgaged Property.
"Assignment and Assumption Agreement" has the meaning set forth in Section
19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered in
blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage Loan to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a
day on which banking and savings and loan institutions in the State of
California or the State in which the servicing operations of the Seller's
Servicer are located, are authorized or obligated by law or executive order to
be closed.
"Classified" is used herein generally to describe a Mortgage Loan which is
deemed substandard, doubtful or loss with respect to collectibility.
"Closing Date" means the Initial Closing Date and any other date on which
the parties hereto shall agree to close a sale of Mortgage Loans hereunder as
set forth in a duly executed Commitment Letter.
2
<PAGE>
"Code" means Internal Revenue Code of 1986, as amended.
"Commitment Letter" means a letter agreement executed by the Purchaser and
the Seller providing for the purchase and sale of Mortgage Loans and
substantially in the form of Exhibit I hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Conventional Loan" means a conventional residential first lien mortgage
loan which is a Mortgage Loan.
"Convertible Mortgage Loan" means any individual Mortgage Loan purchased
pursuant to this Agreement which contains a provision whereby the Mortgagor is
permitted to convert the Mortgage Loan to a fixed rate Mortgage Loan in
accordance with the terms of the related Mortgage Note.
"Custodial Account" means the separate trust account created and maintained
pursuant to the Residential Servicing Agreement.
"Cut-off Date" means the Initial Cut-off Date and any other date as of
which the principal balance of Mortgage Loans will be determined for purposes of
calculating the Purchase Price for the purchase and sale of Mortgage Loans,
which date shall be set forth in the related Commitment Letter.
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Due Date" means the day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained pursuant
to the Residential Servicing Agreement with respect to each Mortgage Loan, as
specified in the Residential Servicing Agreement.
3
<PAGE>
"Escrow Payments" means, with respect to any Mortgage Loan, the amounts
(whether referred to as escrow, impound or otherwise) constituting ground
rents, taxes, assessments, water rates, sewer rents, municipal charges,
mortgage insurance premiums, fire and hazard insurance premiums, flood
insurance premiums, earthquake insurance premiums, condominium charges, and,
to the extent that such items can become a lien on the Mortgaged Property
superior to the Mortgage, if unpaid, and are reportable by the Servicer's tax
lien reporting service, any other payments required to be escrowed by the
Mortgagor with the mortgagee pursuant to the Mortgage or any other document.
"FHA" means the Federal Housing Administration, an agency within the United
States Department of Housing and Urban Development, or any successor thereto and
including the Federal Housing Commissioner and the Secretary of Housing and
Urban Development where appropriate under the FHA Regulations.
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any successor
thereto.
"FNMA" means the Federal National Mortgage Association, or any successor
thereto.
"Gross Margin" means, with respect to each Adjustable Rate Mortgage Loan,
the applicable fixed percentage which, when added to the applicable Index
(and rounded as set forth in the applicable mortgage note), calculates to the
current Mortgage Interest Rate paid by the related Mortgagor (without taking
into account any Lifetime Rate Caps, Periodic Rate Caps or, minimum interest
rates).
"HUD" means the Department of Housing and Urban Development, or any federal
agency or official thereof which may from time to time succeed to the functions
thereof with regard to FHA mortgage insurance. The term "HUD," for purposes of
this Agreement, is also deemed to include subdivisions thereof such as the FHA
and Government National Mortgage Association.
"Independent Directors" means the members of the Board of Directors of the
Purchaser who are not current employees or officers of the Purchaser or current
employees, officers or directors of the Seller or any affiliate of the Seller.
In addition, any members of the Board of Directors of the Purchaser elected by
holders of the preferred stock of the Purchaser, including the Series A
Preferred Shares, will be deemed to be "Independent Directors" for purposes of
approving actions requiring the approval of a majority of the Independent
Directors.
"Index" means, with respect to each Interest Rate Adjustment Date of a
Six-Month Treasury Rate Adjustable Rate Mortgage Loan, the weekly average
investment yield of auction rates on six-month Treasury securities as made
available by the Federal Reserve Board; with respect to each Interest Rate
Adjustment Date of a One-Year Treasury Rate Adjustable Rate Mortgage Loan, the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of one year, as made available by the Federal Reserve Board; and, with
respect to each Interest Rate Adjustment Date of an Eleventh District Cost of
Funds Adjustable Rate Mortgage Loan, the then-current monthly weighted average
cost of funds for savings institutions in Arizona, California and Nevada that
are members of the Eleventh Federal Home Loan Bank District.
4
<PAGE>
"Initial Closing Date" means ___________, 1997, or such other date as the
parties hereto may mutually agree.
"Initial Cut-off Date" means ____________, 1997.
"Initial Portfolio Mortgage Loan Schedule" means the schedule of Mortgage
Loans to be purchased by the Purchaser on the Initial Closing Date, attached
hereto as Exhibit H.
"Initial Portfolio Purchase Price" means the amount set forth in Section 2
of this Agreement.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds of
insurance policies insuring the Mortgage Loan or the related Mortgaged Property.
"Interest Rate Adjustment Date" means, with respect to each Adjustable Rate
Mortgage Loan, the date, specified in the related Mortgage Note, on which the
Mortgage Interest Rate is adjusted.
"Lifetime Rate Cap" means the provision of each Mortgage Note related to an
Adjustable Rate Mortgage Loan which provides for an absolute maximum Mortgage
Interest Rate thereunder as set forth in the related Mortgage Note.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of such Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage Loan,
the ratio (expressed as a percentage) of the original principal amount of the
Mortgage Loan to the lesser of (a) the Appraised Value of the related Mortgaged
Property at origination and (b) if the Mortgage Loan was made to finance the
acquisition of the related Mortgaged Property, the purchase price of the
Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note, including any riders, addendums, assumptions, modifications
or extensions thereto, which creates a first lien on an unsubordinated estate
in fee simple in real property securing the Mortgage Note; except that with
respect to real property located in jurisdictions in which the use of
leasehold estates for residential properties is a widely accepted practice,
the mortgage, deed of trust or other instrument securing the Mortgage Note
may secure and create a first lien upon a leasehold estate of the Mortgagor.
5
<PAGE>
"Mortgage File" means the items pertaining to a particular Mortgage Loan
referred to in Exhibit A, and any additional documents required to be added to
the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of an Adjustable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
"Mortgage Loan" means an individual residential first mortgage loan which
is the subject of this Agreement, each Mortgage Loan originally sold pursuant to
this Agreement being identified on Exhibit H attached hereto, and each Mortgage
Loan sold pursuant to a Commitment Letter being identified on the applicable
Mortgage Loan Schedule, and each of which Mortgage Loans includes or shall
include, without limitation, the Mortgage File, the Monthly Payments, Principal
Prepayments, Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds,
and all other rights, benefits, proceeds and obligations arising from or in
connection with such Mortgage Loan, excluding replaced or repurchased mortgage
loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan, the
following documents pertaining to such Mortgage Loan:
(a) The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I to Exhibit A hereto, a lost note affidavit,
executed by an officer of the Seller, with a copy of the original note
attached thereto) bearing all intervening endorsements, endorsed "Pay
to the order of (in blank) without recourse" and signed in the
name of the Seller by an authorized officer. To the extent that there
is no room on the face of the Mortgage Notes for endorsements, the
endorsement may be contained on an allonge, if state law so allows.
If the Mortgage Loan was acquired by the Seller in a merger, the
endorsement must be by "[Seller], successor by merger to [name of
predecessor]." If the Mortgage Loan was acquired or originated by the
Seller while doing business under another name, the endorsement must
be by "[Seller], formerly known as [previous name]"; and
(b) The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all of the Mortgage Loans in form and substance
acceptable for and signed in the name of the Seller. If the Mortgage
Loan was acquired by the Seller in a merger, the Assignment of
Mortgage must be made by "[Seller], successor by merger to [name of
predecessor]". If the Mortgage Loan was acquired or originated by the
Seller while doing business under another name, the Assignment of
Mortgage must be by "[Seller], formerly known as [previous name]."
(c) The original of any guarantee executed in connection with the Mortgage
Note.
6
<PAGE>
(d) The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or cause
to be delivered the original Mortgage with evidence of recording
thereon on or prior to the Closing Date because of a delay caused by
the public recording office where such Mortgage has been delivered for
recordation, a photocopy of such Mortgage certified by the Seller to
be true and correct will be delivered; if such Mortgage has been lost
or if such public recording office retains the original recorded
Mortgage, the Seller shall deliver or cause to be delivered to the
Purchaser, a photocopy of such Mortgage, certified by such public
recording office to be a true and complete copy of the original
recorded Mortgage.
(e) The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon if
such agreements have been recorded, or certified copies of such
documents if the originals thereof are unavailable.
(f) Originals of all intervening assignments of the Mortgage with evidence
of recording thereon, if such intervening assignment has been
recorded.
(g) The original mortgagee policy of title insurance or, in the event such
original title policy is unavailable, a certified true copy of the
related policy binder or commitment for title certified to be true and
complete by the title insurance company.
(h) Any other security agreement, chattel mortgage or equivalent executed
in connection with the Mortgage.
(i) For Mortgage Loans with original LTV's greater than 80%, evidence of a
Primary Insurance Policy.
"Mortgage Loan Schedule" means (a) the Initial Portfolio Mortgage Loan
Schedule attached hereto as Exhibit H and (b) any schedule of Mortgage Loans in
similar form attached to and constituting part of a duly executed Commitment
Letter, in each case setting forth at least the following information with
respect to each Mortgage Loan set forth thereon: (1) the Seller's Mortgage Loan
identifying number; (2) the Mortgagor's name; (3) the street address of the
Mortgaged Property including the city, state and zip code; (4) a code indicating
whether the Mortgaged Property at origination was owner-occupied, second home or
investor owned; (5) the property type, i.e., the type of residential units
constituting the Mortgaged Property; (6) the original months to maturity; (7)
the remaining months to maturity from the applicable Cut-off Date, based on the
original amortization schedule, and, if different, the maturity expressed in the
same manner but based on the actual amortization schedule; (8) the Loan-to-Value
Ratio at origination; (9) the Mortgage Interest Rate as of the applicable
Cut-off Date; (10) the stated maturity date; (11) the amount of the Monthly
Payment as of the applicable Cut-off Date; (12) the original principal amount of
the Mortgage Loan; (13) the principal balance of the Mortgage
7
<PAGE>
Loan as of the close of business on the applicable Cut-off Date, after
deduction of payments of principal due on or before such Cut-off Date; (14) a
code indicating the purpose of the loan (i.e., purchase and refinance); (15)
a code indicating the documentation style (i.e. full, alternative or
reduced); (16) the type of Mortgage Loan product, if any; (17) the first
payment Due Date; (18) the initial Mortgage Interest Rate; (19) the amount
of the first Monthly Payment; (20) the name of any Qualified Insurer with
respect to a PMI Policy; and (21) the Servicing Fee Rate. With respect to
any Adjustable Rate Mortgage Loan, such schedule shall also set forth (1) the
Interest Rate Adjustment Dates; (2) the Gross Margin; (3) the Lifetime Rate
Cap; (4) any Periodic Rate Caps; (5) any minimum interest rate, if other than
the Gross Margin; (6) the first Interest Rate Adjustment Date after the
applicable Cut-off Date; (7) any Payment Adjustment Cap; (8) the first
Payment Adjustment Date after the related Cut-off Date; (9) whether such
Mortgage Loan has the potential to negatively amortize; and (10) the name of
the applicable Index, in each case, under the terms of the Mortgage Note.
With respect to the Mortgage Loans in the aggregate set forth thereon, each
Mortgage Loan Schedule shall set forth the following information, as of the
applicable Cut-off Date: (1) the number of Mortgage Loans; (2) the current
aggregate outstanding principal balance of the Mortgage Loans; (3) the
weighted average Mortgage Interest Rate of the Mortgage Loans; and (4) the
weighted average remaining maturity of the Mortgage Loans and (5) the
weighted average servicing fee.
"Mortgage Note" means the note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage, including any amendment, modification or
addendum thereto.
"Mortgaged Property" means the real property (or leasehold estate, if
applicable) securing repayment of the debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Non-accrual Status" refers to Mortgage Loans that are 90 days or more past
due in the payment of principal or interest.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President
and by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller or the Servicer, as the case may be, and
delivered to the Purchaser as required by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Seller, reasonably acceptable to the Purchaser.
8
<PAGE>
"Payment Adjustment Cap" means, with respect to an Adjustable Rate Mortgage
Loan, the maximum amount of the related Monthly Payment as adjusted on a given
Payment Adjustment Date in accordance with the terms of the related Mortgage
Note.
"Payment Adjustment Date" means, with respect to each Adjustable Rate
Mortgage Loan, the date set forth in the related Mortgage Note on which the
Monthly Payment is adjusted in accordance with the terms of the Mortgage Note.
"Periodic Rate Cap" means the provision of each Mortgage Note related to
each Adjustable Rate Mortgage Loan which provides for an absolute maximum amount
by which the Mortgage Interest Rate therein may increase or decrease on an
Interest Rate Adjustment Date above or below the Mortgage Interest Rate
previously in effect as set forth in the applicable Mortgage Note.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"PMI Policy" or "Primary Mortgage Insurance Policy" means a policy of
primary mortgage guaranty insurance issued by a Qualified Insurer.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price to be paid on the applicable Closing Date
by the Purchaser to the Seller in consideration for the Mortgage Loans to be
purchased by the Purchaser on such Closing Date (including, without limitation,
the Initial Portfolio Purchase Price to be paid by Purchaser at the Initial
Closing) as set forth in this Agreement or a duly executed Commitment Letter, as
the case may be.
"Purchaser" means People's Preferred Capital Corporation or its successor
in interest or assigns or any successor to the Purchaser under this Agreement as
herein provided.
"Qualified Appraiser" means, with respect to a Mortgaged Property, an
appraiser who had no interest, direct or indirect in such Mortgaged Property or
in any loan made on the security thereof, and whose compensation is not affected
by the approval or disapproval of the Mortgage Loan, and such appraiser and the
appraisal made by such appraiser both satisfy the requirements
9
<PAGE>
of Title XI of the Federal Institutions Reform, Recovery, and Enforcement Act
of 1989 and the regulations promulgated thereunder, all as in effect on the
date the Mortgage Property was appraised.
"Qualified Insurer" means an insurance company duly qualified as such under
the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided and approved as an insurer by FNMA
with respect to primary mortgage insurance and, in addition, in the two highest
rating categories by Best's with respect to hazard and flood insurance.
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to be
substituted by the Seller for a Deleted Mortgage Loan which must, on the date
of such substitution, (i) have an outstanding principal balance, after
deduction of all scheduled payments due in the month of substitution (or in
the case of a substitution of more than one mortgage loan for a Deleted
Mortgage Loan, an aggregate principal balance), not in excess of the
outstanding principal balance of the Deleted Mortgage Loan (the amount of any
shortfall will be provided by the Seller to the Servicer for deposit in the
Custodial Account by the Seller in the month of substitution); (ii) have a
Mortgage Interest Rate and a remaining term to maturity, each of which is as
reasonably comparable as possible to the Mortgage Interest Rate and remaining
term to maturity of the Deleted Mortgage Loan; (iii) be of the same type as
the Deleted Mortgage Loan (i.e., Mortgage Loan with the same Periodic Rate
Caps or fixed rate); and (iv) comply with each representation and warranty
(respecting individual Mortgage Loans) set forth in Section 8.2 hereof.
"Remittance Date" means the date specified in the Residential Servicing
Agreement.
"Repurchase Price" means, with respect to any Mortgage Loan, a price equal
to (i) the unpaid principal balance of such Mortgage Loan plus (ii) interest,
net of Servicing Fees, on such unpaid principal balance of such Mortgage Loan at
the Mortgage Interest Rate from the last date through which interest has been
paid or advanced to the Purchaser to the date of repurchase, less any
unreimbursed advances made by the Servicer, if any, in respect of such
repurchased Mortgage Loan.
"Residential Servicing Agreement" means the Assignment, Assumption and
Recognition Agreement, attached as Exhibit B hereto, to be entered into by the
Seller, the Purchaser and Temple-Inland Mortgage Corporation, as servicer,
providing for Temple-Inland Mortgage Corporation to service the Mortgage Loans
for the Purchaser as specified by the Residential Servicing Agreement.
"RESPA" means Real Estate Settlement Procedures Act, as amended from time
to time.
"Seller" means People's Bank of California, and its successors in interest
and assigns.
"Series A Preferred Shares" means the __% Noncumulative Exchangeable
Preferred Stock, Series A, par value $.01 per share, of the Purchaser.
10
<PAGE>
"Servicer" means Temple-Inland Mortgage Corporation.
"Servicing Fee" means, with respect to each Mortgage Loan, subject to the
Residential Servicing Agreement, the amount of the annual fee the Purchaser
shall pay to the Servicer, which shall for a period of one full month be equal
to one-twelfth of the product of (a) the Servicing Fee Rate and (b) the Stated
Principal Balance of such Mortgage Loan. Such fee shall be payable monthly,
computed on the basis of the same principal amount and period in respect of
which any related interest payment on a Mortgage Loan is computed, and shall be
pro rated for any portion of a month during which the Mortgage Loan is serviced
by the Servicer under the Residential Servicing Agreement. The obligation of the
Purchaser to pay the Servicing Fee with respect to any Mortgage Loan is limited
to, and the Servicing Fee is payable solely from, the interest portion
(including recoveries with respect to interest from Liquidation Proceeds, to the
extent permitted by the Residential Servicing Agreement) of the related Monthly
Payment collected by the Servicer, or as otherwise provided under the
Residential Servicing Agreement. In addition to the Servicing Fee, the Servicer
shall be entitled to retain all Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the applicable Mortgage Loan Schedule with respect to such Mortgage
Loan.
"Servicing File" means, with respect to each Mortgage Loan, the files
retained by the Servicer during the period in which the Servicer is acting as
Servicer pursuant to the Residential Servicing Agreement, consisting of
originals of all documents in the Mortgage File which are not delivered to the
Purchaser or its designee and copies of the other Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan, (i) the unpaid
principal balance as of the date of determination of such balance.
SECTION 2. Agreement to Purchase Initial Portfolio.
The Seller hereby agrees to sell, transfer, assign, set over and convey to
the Purchaser on the Initial Closing Date, without recourse, but subject to the
terms of this Agreement, all right, title and interest of the Seller in and to
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
the related Mortgage Files and all rights and obligations arising under the
documents contained therein. Mortgage Loans on the Initial Portfolio Mortgage
Loan Schedule shall have an aggregate principal balance on the Initial Cut-off
Date in an amount equal to no less than $__________.
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The Initial Portfolio Purchase Price payable by the Purchaser in
consideration for the Mortgage Loans listed on the Initial Portfolio Mortgage
Loan Schedule shall be equal to the actual aggregate unpaid
principal balance of the Mortgage Loans accepted by the Purchaser on the
Initial Closing Date plus interest accrued on such Mortgage Loans at the
weighted average Mortgage Interest Rate from the last interest paid to date
for each such Mortgage Loan to and including the day prior to the Initial
Closing Date.
SECTION 3. Subsequent Purchases.
From time to time, by executing a Commitment Letter substantially in the
form of Exhibit I hereto, the Seller shall sell, transfer, assign, set over and
convey to the Purchaser, without recourse, but subject to the terms of this
Agreement, and the Purchaser will purchase, all the right, title and interest of
the Seller, as of the applicable Closing Date, in and to the Mortgage Loans set
forth in the Mortgage Loan Schedule attached to such Commitment Letter, and the
Purchaser shall pay to Seller the Purchase Price set forth in such Commitment
Letter on such Closing Date.
SECTION 4. Payment of Purchase Price.
The estimated Purchase Price computed as of the Initial Cut-off Dates, as
applicable, shall be paid by Purchaser on the applicable Closing Date by wire
transfer of immediately available funds. The difference, if any, between such
estimated Purchase Price and the actual Purchase Price computed as of the
applicable Closing Date shall be paid by Seller or Purchaser to the other as
the case may be, no later than ten business days after the applicable Closing
Date.
The Purchaser shall, with respect to any Mortgage Loan purchased
hereunder or pursuant to a duly executed Commitment Letter, be entitled to
(1) all scheduled principal due after the applicable Cut-off Date, (2) all
other recoveries of principal collected on or after the applicable Cut-off
Date (provided, however, that all scheduled payments of principal due on or
before such Cut-off Date and collected after the Cut-off Date shall belong to
Seller), and (3) all payments of interest on the Mortgage Loans (net of
applicable Servicing Fees as provided in the Residential Servicing Agreement)
collected on or after such Cut-off Date (other than that portion of any such
payment which is allocable to the period prior to such Cut-off Date). The
outstanding principal balance of each Mortgage Loan as of the applicable
Cut-off Date is determined after application of payments of principal due and
collected on or before such Cut-off Date together with any unscheduled
principal prepayments received prior to such Cutoff Date; provided,
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however, that payments of scheduled principal and interest prepaid for a Due
Date beyond such Cut-off Date shall not be applied to the principal balance
as of such Cut-off Date. Such prepaid amounts shall be the property of the
Purchaser. Any such prepaid amounts shall be deposited into the Custodial
Account, which account is established pursuant to the Residential Servicing
Agreement for the benefit of the Purchaser for subsequent remittance to the
Purchaser.
SECTION 5. Examination of Mortgage Files.
Prior to the date hereof or the date of any duly executed Commitment
Letter, as the case may be, the Seller has or shall have (a) delivered to the
Purchaser or its designee in escrow, for examination with respect to each
Mortgage Loan to be purchased, the related Mortgage File pertaining to each
Mortgage Loan, or (b) made the related Mortgage File available to the Purchaser
for examination at the Seller's offices or such other location as shall
otherwise be agreed upon by the Purchaser and the Seller. The fact that the
Purchaser or its designee has conducted or has failed to conduct any partial or
complete examination of any Mortgage Files shall not affect the Purchaser's (or
any of its successor's) rights to demand repurchase, substitution or other
relief as provided herein.
SECTION 6. Conveyance from Seller to Purchaser.
Subsection 6.1 Possession of Servicing Files.
The Servicing Files relating to any Mortgage Loans purchased by Purchaser
hereunder or pursuant to a duly executed Commitment Letter shall be retained by
the Servicer in accordance with the terms of the Residential Servicing Agreement
and, as provided therein, shall be appropriately identified in the computer
system and/or books and records of the Servicer, as appropriate, to clearly
reflect the sale of the related Mortgage Loan to the Purchaser.
Subsection 6.2 Books and Records.
Record title to each Mortgage Loan as of the applicable Closing Date shall
be in the name of the Seller, or the Purchaser or one or more of its designees,
as the Purchaser shall select. Notwithstanding the foregoing, each Mortgage and
related Mortgage Note shall be possessed solely by the Purchaser or the
appropriate designee of the Purchaser, as the case may be. All rights arising
out of the Mortgage Loans including, but not limited to, all amounts received by
the Seller or the Servicer after the applicable Cut-off Date on or in connection
with a Mortgage Loan (other than amounts due prior to the applicable Cut-off
Date) shall be vested in the Purchaser or one or more of its designees;
provided, however, that all amounts received on or in connection with a Mortgage
Loan (other than amounts due prior to the applicable Cut-off Date) shall be
received and held by the Seller or the Servicer in trust for the benefit of the
Purchaser or its designee, as the case may be, as the owner of the Mortgage
Loans pursuant to the terms of this Agreement.
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The sale of each Mortgage Loan shall be reflected on the Seller's balance
sheet and other financial statements as a sale of assets by the Seller.
Subsection 6.3 Delivery of Mortgage Loan Documents.
On or prior to each Closing Date, the Seller shall deliver and release to
the Purchaser or its designee the Mortgage Loan Documents with respect to each
Mortgage Loan sold to the Purchaser on such Closing Date, and set forth on the
Mortgage Loan Schedule, except as otherwise provided in the Residential
Servicing Agreement.
The Seller shall forward, or shall cause the Servicer to forward, to the
Purchaser or its designee all original documents evidencing an assumption,
modification, consolidation, conversion or extension of any Mortgage Loan
entered into in accordance with the Residential Servicing Agreement within 30
days of their execution, provided, however, that the Seller shall provide, or
shall cause the Servicer to provide, the Purchaser or its designee with a
certified true copy of any such document submitted for recordation within 30
days of its execution, and shall promptly provide the original of any document
submitted for recordation or a copy of such document certified by the
appropriate public recording office to be a true and complete copy of the
original within ninety (90) days of its submission for recordation (provided,
that with respect to assignments of the Mortgages reflecting the assignment from
the Seller to the Purchaser, one final assignment shall be executed by Seller in
blanket non-recordable form, and no other forms of assignment of such Mortgages
shall be executed or recorded unless and until the Purchaser shall request
execution of individual Assignments of Mortgages pursuant to and in accordance
with Section 25 hereof).
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the submission for
recordation and in the event that the Seller does not cure such failure within
30 days of discovery or receipt of written notification of such failure from the
Purchaser, the related Mortgage Loan shall, upon the request of the Purchaser,
be repurchased by the Seller at the price and in the manner specified in
Subsection 8.3. The foregoing repurchase obligation shall not apply in the event
that the Seller cannot deliver, or cause to be delivered, such original or copy
of any document submitted for recordation to the appropriate public recording
office within the specified period due to a delay caused by the recording office
in the applicable jurisdiction; provided that the Seller shall instead deliver,
or cause to be delivered, a recording receipt of such recording office or, if
such recording receipt is not available, an officer's certificate of a servicing
officer of the Servicer, confirming that such documents have been accepted for
recording. Notwithstanding anything herein to the contrary, under the
circumstances described in the preceding sentence, the Seller shall continue to
make all reasonable efforts to obtain the original of any document submitted for
recordation to the appropriate public recording office.
The Seller shall pay all initial recording fees, if any, for the
Assignments of Mortgage and any other fees or costs in transferring all original
documents to the Purchaser or its designee.
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The Purchaser or its designee shall be responsible for recording the
Assignments of Mortgage and shall be reimbursed by the Seller for the
reasonable costs associated therewith pursuant to the preceding sentence.
SECTION 7. Servicing of the Mortgage Loans.
All Mortgage Loans will be sold by the Seller to the Purchaser on a
servicing retained basis.
The Purchaser shall retain the Servicer as independent contract servicer of
the Mortgage Loans pursuant to and in accordance with the terms and conditions
contained in the Residential Servicing Agreement. The Purchaser, the Seller and
the Servicer shall execute the Residential Servicing Agreement on or before the
Initial Closing Date in the form attached hereto as Exhibit B.
Pursuant to the Residential Servicing Agreement, the Servicer shall
service the Mortgage Loans on behalf of the Purchaser and shall be entitled
to the Servicing Fee and any Ancillary Income with respect to each Mortgage
Loan from the Closing Date with respect to the sale and purchase thereof
until the termination of the Residential Servicing Agreement with respect to
such Mortgage Loan as set forth in the Residential Servicing Agreement. The
Servicer shall conduct such servicing in accordance with the terms of the
Residential Servicing Agreement. In the event that the Purchaser elects to
terminate the servicing by the Servicer of a Mortgage Loan which has gone
into Non-accrual status or has been foreclosed and as to which title to the
related Mortgage Property has been transferred to the Purchaser ("REO
Property"), pursuant to the terms of the Residential Servicing Agreement, at
the Purchaser's election and direction, the Seller shall service such
Mortgage Loans or REO Property on behalf of the Purchaser in the same manner
in which such services its own Mortgage Loans and REO of similiar kind. The
Seller shall be entitled to Servicing Compensation with respect to those
transferred Mortgage Loans which have gone into Non-accrual status on the
same basis as the Servicer under the residential servicing agreement.
SECTION 8. Representations, Warranties and Covenants of the Seller; Remedies
for Breach.
Subsection 8.1 Representations and Warranties Regarding the Seller.
The Seller represents, warrants and covenants to the Purchaser that as of
the date hereof and as of each Closing Date:
(a) Due Organization and Authority; Enforceability. The Seller is a stock
savings bank duly organized, validly existing and in good standing under the
laws of the United States of America and has all licenses necessary to carry on
its business as now being conducted and is licensed, qualified and in good
standing in each state wherein it owns or leases any material properties or
where a Mortgaged Property is located, if the laws of such state require
licensing or qualification in order to conduct business of the type conducted by
the Seller, and in any event the Seller is in compliance with the laws of any
such state to the extent necessary to ensure the enforceability of the related
Mortgage Loan in accordance with the terms of this Agreement; the Seller has the
full corporate power, authority and legal right to hold, transfer and convey the
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Mortgage Loans and to execute and deliver this Agreement and to perform its
obligations hereunder; the execution, delivery and performance of this Agreement
(including all instruments of transfer to be delivered pursuant to this
Agreement) by the Seller and the consummation of the transactions contemplated
hereby have been duly and validly authorized; this Agreement and all agreements
contemplated hereby have been duly executed and delivered and constitute the
valid, legal, binding and enforceable obligations of the Seller subject to
bankruptcy laws and other similar laws of general application affecting rights
of creditors and subject to the application of the rules of equity, including
those respecting the availability of specific performance, none of which will
materially interfere with the realization of the benefits provided thereunder,
regardless of whether such enforcement is sought in a proceeding in equity or at
law; and all requisite corporate action has been taken by the Seller to make
this Agreement and all agreements contemplated hereby valid and binding upon the
Seller in accordance with their terms;
(b) Ordinary Course of Business. The consummation of the transactions
contemplated by this Agreement are in the ordinary course of business of the
Seller, and the transfer, assignment and conveyance of the Mortgage Notes and
the Mortgages by the Seller pursuant to this Agreement are not subject to the
bulk transfer or any similar statutory provisions in effect in any applicable
jurisdiction;
(c) No Conflicts. Neither the execution and delivery of this Agreement,
the sale of the Mortgage Loans to the Purchaser, the consummation of the
transactions contemplated hereby, nor the fulfillment of or compliance with the
terms and conditions of this Agreement, will conflict with or result in a breach
of any of the terms, conditions or provisions of the Seller's charter or bylaws
or any legal restriction or any agreement or instrument to which the Seller is
now a party or by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of any law,
rule, regulation, order, judgment or decree to which the Seller or its property
is subject, or result in the creation or imposition of any lien, charge or
encumbrance that would have an adverse effect upon any of its properties
pursuant to the terms of any mortgage, contract, deed of trust or other
instrument or impair the ability of the Purchaser to realize on the Mortgage
Loans, impair the value of the Mortgage Loans, impair the ability of the
Purchaser to realize the full amount of any mortgage insurance benefits accruing
pursuant to this Agreement or impair the ability of the Seller to perform its
obligations hereunder;
(d) Ability to Perform; Solvency. The Seller does not believe, nor does it
have any reason or cause to believe, that it cannot perform each and every
covenant contained in this Agreement. The Seller is solvent and the sale of the
Mortgage Loans will not cause the Seller to become insolvent. The sale of the
Mortgage Loans is not undertaken with the intent to hinder, delay or defraud any
of the Seller's creditors;
(e) No Litigation Pending. There is no action, suit, proceeding or
investigation pending or threatened against the Seller, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, could result in any material adverse change in the business,
operations, financial
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condition, properties or assets of the Seller, or in any material impairment
of the right or ability of the Seller to carry on its business substantially
as now conducted, or which would draw into question the validity of this
Agreement or any Mortgage Loan or of any action taken or to be taken in
connection with the obligations of the Seller contemplated herein, or which
would be likely to impair materially the ability of the Seller to perform
under the terms of this Agreement;
(f) No Consent Required. No consent, approval, authorization or order of,
or registration or filing with, or notice to any court or governmental agency or
body is required for the execution, delivery and performance by the Seller of or
compliance by the Seller with this Agreement or the Mortgage Loans, the delivery
of a portion of the Mortgage Files to the Purchaser or its designee or the sale
of the Mortgage Loans or the consummation of the transactions contemplated by
this Agreement, or if required, such approval has been obtained prior to the
applicable Closing Date;
(g) Selection Process. The Mortgage Loans were selected from among the
outstanding mortgage loans in the Seller's portfolio as of the applicable
Closing Date as to which the representations and warranties set forth in
Subsection 8.2 could be made and such selection was not made in a manner so as
to affect adversely the interests of the Purchaser;
(h) Initial Portfolio. The aggregate characteristics of the Mortgage Loans
set forth in the Initial Portfolio Mortgage Loan Schedule are as set forth under
the heading "Business and Strategy--Description of Initial Portfolio" in the
Prospectus relating to the Series A Preferred Shares of the Purchaser, dated
__________, 1997;
(i) No Untrue Information. Neither this Agreement nor any information,
statement, tape, diskette, report, form, or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statements contained herein or therein not misleading; and
(j) No Brokers. The Seller has not dealt with any broker, investment
banker, agent or other person that may be entitled to any commission or
compensation in connection with the sale of the Mortgage Loans.
Subsection 8.2 Representations and Warranties Regarding Individual
Mortgage Loans.
The Seller hereby represents and warrants to the Purchaser, as to each
Mortgage Loan and as of the applicable Closing Date for such Mortgage Loan (or
as of such other date as may be specified below), that:
(a) Mortgage Loans as Described. The information set forth in the
applicable Mortgage Loan Schedule is complete, true and correct in all material
respects as of the date indicated thereon;
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(b) Payments Current; Status. All payments required to be made up to, but
not including, the applicable Cut-off Date for the Mortgage Loan under the terms
of the Mortgage Note have been made and credited. No payment required under the
Mortgage Loan is delinquent nor has any payment under the Mortgage Loan been 30
days or more delinquent more than once within the period falling twelve (12)
months prior to the applicable Cut-off Date. The Mortgage Loan is not, and has
not been at any time in the twelve months immediately preceding the applicable
Cut-off Date, (i) Classified, (ii) in Non-accrual Status or (iii) renegotiated
due to the financial deterioration of the Mortgagor;
(c) No Outstanding Charges. There are no defaults in complying with the
terms of the Mortgage, and all taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges, leasehold payments or ground rents
which previously became due and owing have been paid, or an escrow of funds or
payment plan has been established in an amount sufficient to pay for every such
item which remains unpaid and which has been assessed but is not yet due and
payable. The Seller has not advanced funds, or induced, solicited or knowingly
received any advance of funds by a party other than the Mortgagor, directly or
indirectly, for the payment of any amount required under the Mortgage Loan,
except for interest accruing from the date of the Mortgage Note or date of
disbursement of the Mortgage Loan proceeds, whichever is earlier, to the day
which precedes by one month the Due Date of the first installment of principal
and interest;
(d) Original Terms Unmodified. The terms of the Mortgage Note and
Mortgage have not been impaired, waived, altered or modified in any respect,
from the date of origination except as contained in the Mortgage Loan and
the terms of which are reflected in the related Mortgage Loan Schedule, if
applicable. The terms of any such waiver, alteration or modification are
reflected on the related Mortgage Loan Schedule, if applicable, and either
(i) the substance of such terms has been approved by the title insurer, if
any, to the extent required by the policy, or (ii) such waiver, alteration or
modification has not and will not affect the priority of the related
Mortgage. No Mortgagor has been released, in whole or in part, except in
connection with an assumption agreement, which assumption agreement is part
of the Mortgage Loan File delivered to the Purchaser or its designee and the
terms of which are reflected in the related Mortgage Loan Schedule;
(e) No Defenses. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto, and no Mortgagor is now or was, at the time of origination of
the related Mortgage Loan, a debtor in any state or Federal bankruptcy or
insolvency proceeding;
(f) Hazard Insurance. Pursuant to the terms of the Mortgage, all
buildings or other improvements upon the Mortgaged Property are insured by a
generally acceptable insurer against
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loss by fire, hazards of extended coverage and such other hazards as are set
forth in the Residential Servicing Agreement attached hereto as Exhibit B. If
required by the Flood Disaster Protection Act of 1973, as amended, the
Mortgage Loan is covered by a flood insurance policy meeting the requirements
of the current guidelines of the Federal Insurance Administration, which
policy conforms to FNMA, as well as all additional requirements set forth in
the Residential Servicing Agreement attached hereto as Exhibit B. All
individual insurance policies contain a standard mortgagee clause naming the
Seller and its successors and assigns as mortgagee, and all premiums thereon
have been paid. The Mortgage for each Mortgage Loan obligates the Mortgagor
thereunder to maintain the hazard insurance policy at the Mortgagor's cost
and expense, and on the Mortgagor's failure to do so, authorizes the holder
of the Mortgage to obtain and maintain such insurance at such Mortgagor's
cost and expense, and to seek reimbursement therefor from the Mortgagor.
Where required by state law or regulation, the Mortgagor has been given an
opportunity to choose the carrier of the required hazard insurance, provided
the policy is not a "master" or "blanket" hazard insurance policy covering a
condominium, or any hazard insurance policy covering the common facilities of
a planned unit development. To the best knowledge of the Seller, the hazard
insurance policy is the valid and binding obligation of the insurer, is in
full force and effect, and will be in full force and effect and inure to the
benefit of the Purchaser upon the consummation of the transactions
contemplated by this Agreement. No action, inaction or event has occurred
and no state of facts exists or has existed that has resulted or could result
in the exclusion from, denial of, or defense to coverage under any hazard
insurance policy. The Seller has not engaged in, and has no knowledge of the
Mortgagor's having engaged in, any act or omission which would impair the
coverage of any such policy, the benefits of the endorsement provided for
herein, or the validity and binding effect of either including, without
limitation, no unlawful fee, commission, kickback or other unlawful
compensation or value of any kind has been or will be received, retained or
realized by any attorney, firm or other person or entity, and no such
unlawful items have been received, retained or realized by the Seller;
(g) Compliance with Applicable Laws. Any and all requirements of any
federal, state or local law including, without limitation, usury,
truth-in-lending, real estate settlement procedures, consumer credit protection,
fair housing, equal credit opportunity and disclosure laws applicable to the
Mortgage Loan have been complied with in all material respects, the consummation
of the transactions contemplated hereby will not involve the violation of any
such laws or regulations, and the Seller or the Servicer shall maintain in its
possession, available for the Purchaser's inspection, and shall deliver to the
Purchaser upon demand, evidence of compliance with all such requirements;
(h) No Satisfaction of Mortgage. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the Mortgaged
Property has not been released from the lien of the Mortgage, in whole or in
part, nor has any instrument been executed that would effect any such
release, cancellation, subordination or rescission. Neither the Seller, the
Servicer nor any other Person has waived the performance by the Mortgagor of
any action, if the Mortgagor's failure to perform such action would cause the
Mortgage Loan to be in default, nor
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has the Seller, the Servicer nor any other Person waived any default
resulting from any action or inaction by the Mortgagor;
(i) Location and Type of Mortgaged Property. The Mortgaged Property is
located in the state identified in the related Mortgage Loan Schedule and
consists of a single parcel of real property with a detached single family
residence erected thereon, or a townhouse, or a two-to four-family dwelling, or
an individual condominium unit in a condominium project, or an individual unit
in a planned unit development, provided, however, that any condominium unit or
planned unit development shall conform with requirements acceptable to FNMA
regarding such dwellings and that no residence or dwelling is a single parcel of
real property with a cooperative housing corporation erected thereon, a mobile
home or a manufactured dwelling. As of the date of origination, no portion of
the Mortgaged Property is used for commercial purposes and, to the best
knowledge of Seller, since the date of origination, no portion of the Mortgaged
Property is used for commercial purposes;
(j) Valid First Lien. The Mortgage is a valid, subsisting, enforceable and
perfected first lien on the Mortgaged Property, including all buildings,
improvements and fixtures on the Mortgaged Property and all installations and
mechanical, electrical, plumbing, heating and air conditioning systems located
in or annexed to such buildings, and all additions, alterations and replacements
made at any time with respect to the foregoing as set forth in each Mortgage.
The lien of the Mortgage is subject only to:
(1) the lien of current real property taxes and assessments not yet
due and payable;
(2) covenants, conditions and restrictions, rights of way, easements
and other matters of the public record as of the date of recording
acceptable to prudent mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered
to the originator of the Mortgage Loan and (a) specifically referred to or
otherwise considered in the appraisal made for the originator of the
Mortgage Loan or (b) which do not adversely affect the Appraised Value of
the Mortgaged Property set forth in such appraisal; and
(3) other matters to which like properties are commonly subject which
do not materially interfere with the benefits of the security intended to
be provided by the Mortgage or the use, enjoyment, value or marketability
of the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to
and delivered in connection with the Mortgage Loan establishes and creates a
valid, subsisting, enforceable and perfected first lien and first priority
security interest on the property described therein and the Seller has full
right to sell and assign the same to the Purchaser. The Mortgaged Property was
not, as of the date of origination of the Mortgage Loan, subject to a mortgage,
deed of trust, deed to secure debt or other security instrument creating a lien
subordinate to the lien of the Mortgage
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(except any such subordinate loan which was created in connection with the
origination of the related Mortgage Loan details of which are contained in
the related Mortgage File);
(k) Validity of Mortgage Documents. The Mortgage Note and the Mortgage and
any other agreement executed and delivered by a Mortgagor in connection with a
Mortgage Loan are genuine, and each is the legal, valid and binding obligation
of the maker thereof enforceable in accordance with its terms. To the best
knowledge of the Seller, all parties to the Mortgage Note, the Mortgage and any
other such related agreement had legal capacity to enter into the Mortgage Loan
and to execute and deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and any other such related
agreement have been duly and properly executed by such parties. To the best
knowledge of the Seller, no fraud, error, omission, misrepresentation,
negligence or similar occurrence with respect to a Mortgage Loan has taken place
on the part of any Person, including without limitation, the Mortgagor, any
appraiser, any builder or developer, or any other party involved in the
origination of the Mortgage Loan;
(l) Full Disbursement of Proceeds. The Mortgage Loan has been closed and
the proceeds of the Mortgage Loan have been fully disbursed and there is no
requirement for future advances thereunder, and any and all requirements as to
completion of any on-site or off-site improvement and as to disbursements of any
escrow funds therefor have been complied with. All costs, fees and expenses
incurred in making or closing the Mortgage Loan and the recording of the
Mortgage were paid, and the Mortgagor is not entitled to any refund of any
amounts paid or due under the Mortgage Note or Mortgage;
(m) Ownership. The Seller is the sole owner of record and holder of the
Mortgage Loan and the indebtedness evidenced by each Mortgage Note, except for
the assignments of mortgage which have been sent for recording, and upon
recordation the Purchaser will be the sole owner of record and holder of each
Mortgage and the indebtedness evidenced by each Mortgage Note, and upon the sale
of the Mortgage Loans to the Purchaser, the Servicer will retain the Mortgage
Files or any part thereof not delivered to the Purchaser or its designee in
trust only for the purpose of servicing and supervising the servicing of each
Mortgage Loan. The Mortgage Loan is not assigned or pledged, and the Seller has
good and indefeasible title thereto, and has full right to transfer and sell the
Mortgage Loan to the Purchaser free and clear of any encumbrance, equity,
participation interest, lien, pledge, charge, claim or security interest, and
has full right and authority subject to no interest or participation of, or
agreement with, any other party, to sell and assign each Mortgage Loan pursuant
to this Agreement and following the sale of each Mortgage Loan, the Purchaser
will own such Mortgage Loan free and clear of any encumbrance, equity,
participation interest, lien, pledge, charge, claim or security interest except
as created by Purchaser. The Seller intends to relinquish all rights to
possess, control and monitor the Mortgage Loan. After the applicable Closing
Date, the Seller will have no right to modify or alter the terms of the sale of
any Mortgage Loan and the Seller will have no obligation or right to repurchase
such Mortgage Loan or substitute another Mortgage Loan therefor, except as
provided in this Agreement;
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(n) Doing Business. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (1) in
compliance with any and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located and (2) either (i) organized
under the laws of such state, or (ii) qualified to do business in such state, or
(iii) a federal savings and loan association, a savings bank or a national bank
having a principal office in such state, or (3) not doing business in such
state;
(o) PMI Policy. Each Mortgage Loan which at the time of its origination
was required to be insured as to payment defaults by a PMI Policy in accordance
with the underwriting policies customarily employed by the Seller or one of its
predecessors in interest during the period of such origination was so insured.
All provisions of each PMI Policy have been and are being complied with, each
such policy is valid and remains in full force and effect, and all premiums due
thereunder have been paid. To the best knowledge of the Seller, no action,
inaction, or event has occurred and no state of facts exists that has, or will
result in the exclusion from, denial of, or defense to coverage by the PMI
Policy (including, without limitation, any exclusions, denials or defenses which
would limit or reduce the availability of the timely payment of the full amount
of the loss otherwise due thereunder to the insured) whether arising out of
actions, representations, errors, omissions, negligence, or fraud of the Seller,
the related Mortgagor or any party involved in the application for such
coverage, including the appraisal, plans and specifications and other exhibits
or documents submitted therewith to the insurer under such insurance policy, or
for any other reason under such coverage, but not including the failure of such
insurer to pay by reason of such insurer's breach of such insurance policy or
such insurer's financial inability to pay. Any Mortgage Loan subject to a PMI
Policy obligates the Mortgagor thereunder to maintain the PMI Policy and to pay
all premiums and charges in connection therewith.
(p) Title Insurance. The Mortgage Loan is covered by an ALTA lender's
title insurance policy or other form of policy or insurance acceptable to FNMA
and each such title insurance policy is issued by a title insurer acceptable to
FNMA and qualified to do business in the jurisdiction where the Mortgaged
Property is located, insuring the Seller, its successors and assigns, as to the
first priority lien of the Mortgage in the original principal amount of the
Mortgage Loan, subject only to the exceptions contained in clauses (1), (2) and
(3) of paragraph (j) of this Subsection 8.2, and against any loss by reason of
the invalidity or unenforceability of the lien resulting from the provisions of
the Mortgage providing for adjustment to the Mortgage Interest Rate and Monthly
Payment. Where required by state law or regulation, the Mortgagor has been given
the opportunity to choose the carrier of the required mortgage title insurance.
Additionally, such lender's title insurance policy affirmatively insures ingress
and egress, and against encroachments by or upon the Mortgaged Property or any
interest therein. The Seller, its successor and assigns, are the sole insureds
of such lender's title insurance policy, and such lender's title insurance
policy is valid and remains in full force and effect and will be in force and
effect upon the consummation of the transactions contemplated by this Agreement.
No claims have been made under such lender's title insurance policy and, neither
the Seller nor, to the best knowledge of Seller, any other prior holder of the
related Mortgage, has done, by act or
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omission, anything which would impair the coverage of such lender's title
insurance policy, including without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of any kind has been or will
be received, retained or realized by any attorney, firm or other person or
entity, and no such unlawful items have been received, retained or realized
by the Seller;
(q) No Defaults. There is no default, breach, violation or event which
would permit acceleration existing under the Mortgage or the Mortgage Note and
no event which, with the passage of time or with notice and the expiration of
any grace or cure period, would constitute a default, breach, violation or event
which would permit acceleration, and neither the Seller nor its predecessors
have waived any default, breach, violation or event which would permit
acceleration;
(r) No Mechanics' Liens. To the best knowledge of Seller, there is no
mechanics' or similar liens or claims filed for work, labor or material (and no
rights are outstanding that under law could give rise to such liens) affecting
the Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage;
(s) Location of Improvements; No Encroachments. With respect to each
Mortgage Loan, to the best knowledge of Seller, all improvements which were
considered in determining the Appraised Value of the Mortgaged Property lay
wholly within the boundaries and building restriction lines of the Mortgaged
Property, and no improvements on adjoining properties encroach upon the
Mortgaged Property. To the best knowledge of Seller, no improvement located on
or being part of the Mortgaged Property is in violation of any applicable zoning
law or regulation;
(t) Origination: Payment Terms. The Mortgage Loan was originated by a
mortgagee approved by the Secretary of HUD pursuant to Sections 203 and 211 of
the Act, a savings and loan association, a savings bank, a commercial bank,
credit union, insurance company or similar institution which is supervised and
examined by a federal or state authority. To the best knowledge of the Seller,
the documents, instruments and agreements submitted for loan underwriting were
not falsified and contain no untrue statement of material fact or omit to state
a material fact required to be stated therein or necessary to make the
information and statements therein not misleading. Principal payments on the
Mortgage Loan commenced no more than sixty (60) days after funds were disbursed
in connection with the Mortgage Loan. The Mortgage Interest Rate, as well as the
Lifetime Rate Cap and the Periodic Rate Cap if the Mortgage Loan is an
Adjustable Rate Mortgage Loan, are as set forth on the applicable Mortgage Loan
Schedule. The Mortgage Note is payable each month in equal monthly installments
of principal and interest, which installments of interest are subject to change
if the Mortgage Loan is an Adjustable Rate Mortgage Loan due to the adjustments
to the Mortgage Interest Rate on each Interest Rate Adjustment Date, with
interest calculated and payable in arrears, sufficient to amortize the
Mortgage Loan fully by the stated maturity date, over an original term of not
more than forty years from commencement of amortization. Each Convertible
Mortgage Loan contains a provision allowing the Mortgagor to convert the
Mortgage Note from an adjustable interest rate Mortgage
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Note to a fixed interest rate Mortgage Note in accordance with the terms of
the Mortgage Note or a rider to the related Mortgage Note;
(u) Customary Provisions. The Mortgage contains customary and
enforceable provisions such as to render the rights and remedies of the
holder thereof adequate for the realization against the Mortgaged Property of
the benefits of the security provided thereby, including, (i) in the case of
a Mortgage designated as a deed of trust, by trustee's sale, and (ii)
otherwise by judicial foreclosure. For Mortgage Loans secured by Mortgage
Property located in California, there is no homestead or other exemption
available to a Mortgagor which would interfere with the right to sell the
Mortgaged Property at a trustee's sale or the right to foreclose the
Mortgage, subject to applicable federal and state laws and judicial precedent
with respect to bankruptcy and right of redemption or similar law;
(v) Conformance with Underwriting Standards. The Mortgage Loan was
underwritten in accordance with the underwriting standards of the Seller or
one of its predecessors in interest, as applicable, or FNMA's underwriting
standards (except that the principal balance of certain Mortgage Loans may
have exceeded the limits of FNMA), in each case in effect at the time the
Mortgage Loan was originated. The Mortgage Note and Mortgage are on forms
acceptable to the Purchaser, in its sole discretion, as evidenced by the
Purchaser's purchase of the related Mortgage Loans, and the Seller has not
made any representations to a Mortgagor that are inconsistent with the
mortgage and the Mortgage Note;
(w) Occupancy of the Mortgaged Property. With respect to each Mortgage
Loan, the related Mortgaged Property is lawfully occupied under applicable law.
To the best knowledge of Seller, all inspections, licenses and certificates
required to be made or issued with respect to all occupied portions of the
Mortgaged Property and, with respect to the use and occupancy of the same,
including but not limited to certificates of occupancy and fire underwriting
certificates, have been made or obtained from the appropriate authorities;
(x) No Additional Collateral. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding Mortgage and the
security interest of any applicable security agreement or chattel mortgage
referred to in clause (j) above;
(y) Deeds of Trust. In the event the Mortgage constitutes a deed of trust,
a trustee, authorized and duly qualified under applicable law to serve as such,
has been properly designated and currently so serves and is named in the
Mortgage, and no fees or expenses are or will become payable by the Purchaser to
the trustee under the deed of trust, except in connection with a trustee's sale
after default by the Mortgagor;
(z) Value and Marketability. The Seller has no actual knowledge of any
circumstances or conditions with respect to the Mortgage, the Mortgaged
Property, the Mortgagor,
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the Mortgage File or the Mortgagor's credit standing that can reasonably be
expected to cause the Mortgage Loan to become delinquent, or adversely affect
the value or marketability of the Mortgage Loan;
(aa) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage, the
Assignment of Mortgage and any other Mortgage Loan Documents (except for Primary
Insurance Policies held by the Servicer) for each Mortgage Loan have been
delivered to the Purchaser or its designee. The Seller and the Servicer are in
possession of a complete, true and accurate Mortgage File in compliance with
Exhibit A hereto, except for such documents the originals of which have been
delivered to the Purchaser or its designee;
(bb) Condominiums/Planned Unit Developments. If the Mortgaged Property
is a condominium unit or a planned unit development, such condominium or
planned unit development project which would be acceptable to FNMA.
(cc) [Reserved]
(dd) Assumability. Either (i) the Mortgage Loan Documents provide that a
related Mortgage Loan may only be assumed if the party assuming such Mortgage
Loan meets certain credit requirements stated in such documents, or (ii) the
Mortgage Note with respect to such Mortgage Loan contains a "due-on-sale"
provision which prevents the assumption of the Mortgage Loan by a proposed
transferee and accelerates the payment of the outstanding principal balance of
such Mortgage Loan;
(ee) No Buydown Provisions; No Graduated Payments or Contingent Interests.
The Mortgage Loan does not contain provisions pursuant to which Monthly Payments
are paid or partially paid with funds deposited in any separate account
established by the Seller, the Mortgagor, or anyone on behalf of the Mortgagor,
or paid by any source other than the Mortgagor nor does it contain any other
similar provisions which may constitute a "buydown" provision. The Mortgage Loan
is not a graduated payment mortgage loan and the Mortgage Loan does not have a
shared appreciation or other contingent interest feature;
(ff) [Reserved]
(gg) Mortgaged Property Undamaged; No Condemnation Proceedings. To the
best knowledge of Seller, there is no proceeding pending or to the best
knowledge of seller threatened for the total or partial condemnation of the
Mortgaged Property. To the best knowledge of Seller, the Mortgaged Property
is undamaged by waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty so as to affect adversely the value of the
Mortgaged Property as security for the Mortgage Loan or the use for which the
premises were intended and each Mortgaged Property is in good repair;
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(hh) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The
origination and collection practices used by the Seller and the Servicer with
respect to the Mortgage Loan have been in all material respects in compliance
with Accepted Servicing Practices, applicable laws and regulations, and have
been in all material respects legal and proper. With respect to escrow deposits
and Escrow Payments, all such payments are in the possession of, or under the
control of, the Servicer and, to the best knowledge of the Seller, there exist
no deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. To the best knowledge of the Seller, all
Escrow Payments have been collected in full compliance with state and federal
law and the provisions of the related Mortgage Note and Mortgage. An escrow of
funds is not prohibited by applicable law and has been established in an amount
sufficient to pay for every item that remains unpaid and has been assessed but
is not yet due and payable if required under the Mortgage Loan. No escrow
deposits or Escrow Payments or other charges or payments due the Servicer have
been capitalized under the Mortgage or the Mortgage Note. To the best knowledge
of the Seller, all Mortgage Interest Rate adjustments and adjustments to the
Monthly Payment, if the Mortgage Loan is an Adjustable Rate Mortgage Loan, have
been made in strict compliance with state and federal law and the terms of the
related Mortgage and Mortgage Note on the related Interest Rate Adjustment Date.
With respect to each Adjustable Rate Mortgage Loan, the Mortgage Interest Rate
adjusts annually, semiannually or monthly as set forth in the applicable
Mortgage Notes. If, pursuant to the terms of the Mortgage Note, another index
was selected for determining the Mortgage Interest Rate, the same index was used
with respect to each Mortgage Note which required a new index to be selected,
and such selection did not conflict with the terms of the related Mortgage Note.
To the best knowledge of the Seller, the Servicer executed and delivered any and
all notices required under applicable law and the terms of the related Mortgage
Note and Mortgage regarding the Mortgage Interest Rate and the Monthly Payment
adjustments. Any interest required to be paid pursuant to state, federal and
local law has been properly paid and credited;
(ii) Other Insurance Policies. In connection with the placement of any
hazard insurance policy or PMI Policy, no commission, fee, or other compensation
has been or will be received by the Seller or by any officer, director, or
employee of the Seller or any designee of the Seller or any corporation in which
the Seller or any officer, director, or employee had a financial interest at the
time of placement of such insurance;
(jj) No Violation of Environmental Laws. To the best knowledge of Seller,
there is no pending action or proceeding directly involving the Mortgaged
Property in which compliance with any environmental law, rule or regulation is
an issue, there is no violation of any environmental law, rule or regulation
with respect to the Mortgaged Property, and nothing further remains to be done
to satisfy in full all requirements of each such law, rule or regulation
constituting a prerequisite to use and enjoyment of said property;
(kk) Soldiers' and Sailors' Civil Relief Act. The Mortgagor has not
notified the Seller and the Seller has no knowledge of any relief requested or
allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of
1940;
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(ll) Appraisal. The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan by a
Qualified Appraiser who had no interest, direct or indirect in the Mortgaged
Property or in any loan made on the security thereof, and whose compensation
is not affected by the approval or disapproval of the Mortgage Loan, and, if
applicable, the appraisal and appraiser both satisfy the requirements of FNMA
and Title XI of the Federal Institutions Reform, Recovery, and Enforcement
Act of 1989 and the regulations promulgated thereunder the Mortgage Loan was
originated, on the date;
(mm) [Reserved]
(nn) [Reserved]
(oo) [Reserved]
(pp) Escrow Analysis. With respect to each Mortgage Loan for which an
Escrow Account exists, Seller has analyzed or has caused the Servicer to
analyze, within the last twelve months (unless such Mortgage Loan was
originated within such twelve month period) the required Escrow Payments for
each Mortgage and adjusted the amount of such payments so that, assuming all
required payments are timely made, any deficiency will be eliminated on or
before the first anniversary of such analysis, or any overage will be
refunded to the Mortgagor, in accordance with RESPA and any other applicable
law; and
(qq) Prior Servicing. Each Mortgage Loan has been serviced in all material
respects in compliance with Accepted Servicing Practices; provided that, in the
event of any breach of the representation and warranty set forth in this
Subsection (qq), the Seller shall not be required to repurchase any such
Mortgage Loan unless such breach had, and continues to have, a material and
adverse effect on the value of the related Mortgage Loan or the interest of the
Purchaser therein.
Subsection 8.3 Remedies for Breach of Representations and Warranties.
It is understood and agreed that the representations and warranties set
forth in Subsections 8.1 and 8.2 shall survive the sale of the Mortgage Loans to
the Purchaser and shall inure to the benefit of the Purchaser, notwithstanding
any restrictive or qualified endorsement on any Mortgage Note or Assignment of
Mortgage or the examination or failure to examine any Mortgage File. Upon
discovery by either the Seller or the Purchaser of a breach of any of the
foregoing representations and warranties which materially and adversely affects
the interests of the Purchaser in the related Mortgage Loan, the party
discovering such breach shall give prompt written notice to the other.
The Seller, promptly after discovery of a breach of any such representation
or warranty, shall notify the Purchaser of such breach and the details thereof.
Within sixty (60) days of the earlier of (i) notice by the Seller pursuant to
the immediately preceding sentence or (ii) notice
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by the Purchaser to the Seller of any breach of a representation or warranty
with respect to a Mortgage Loan, the Seller shall use its best efforts
promptly to cure such breach in all material respects. If such breach can
ultimately be cured but is not reasonably expected to be cured within the 60
day period, Seller shall have such additional time as is reasonably
determined by Purchaser (not to exceed 120 days) to cure or correct such
breach provided Seller has commenced curing or correcting such breach and is
diligently pursuing same. If such breach cannot be or has not been cured, the
Seller shall, upon the expiration of the cure period described above, at the
Purchaser's option and subject to the provisions of this Subsection 8.3,
repurchase such Mortgage Loan at the Repurchase Price, unless the Seller
elects to substitute a Qualified Substitute Mortgage Loan for such Mortgage
Loan pursuant to this Subsection 8.3. The Seller may, at the Seller's option
and provided that the Seller has a Qualified Substitute Mortgage Loan, rather
than repurchase the Mortgage Loan as provided above, remove such Mortgage
Loan (a "Deleted Mortgage Loan") and substitute in its place a Qualified
Substitute Mortgage Loan or Loans. If the Seller has no Qualified Substitute
Mortgage Loan, it shall repurchase the deficient Mortgage Loan. Any
repurchase of a Mortgage Loan or Mortgage Loans pursuant to the foregoing
provisions of this Subsection 8.3 shall be accomplished by either (a) if the
Residential Servicing Agreement is in effect, deposit in the Custodial
Account of the amount of the Repurchase Price for payment to the Purchaser on
the next scheduled Remittance Date, after deducting therefrom any amount
received in respect of such repurchased Mortgage Loan or Loans and being held
in the Custodial Account for future distribution or (b) if the Residential
Servicing Agreement is no longer in effect, by direct remittance of the
Repurchase Price to the Purchaser or its designee in accordance with the
Purchaser's instructions.
At the time of repurchase or substitution, the Purchaser and the Seller
shall arrange for the reassignment of the Deleted Mortgage Loan to the Seller
and the delivery to the Seller of any documents held by the Purchaser or its
designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to such
Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the related Mortgage Loan Schedule to
reflect the withdrawal of the Deleted Mortgage Loan from this Agreement, and, in
the case of substitution, identify a Qualified Substitute Mortgage Loan and
amend the related Mortgage Loan Schedule to reflect the addition of such
Qualified Substitute Mortgage Loan to this Agreement. In connection with any
such substitution, the Seller shall be deemed to have made as to such Qualified
Substitute Mortgage Loan the representations and warranties set forth in this
Agreement except that all such representations and warranties set forth in this
Agreement shall be deemed made as of the date of such substitution. The Seller
shall effect such substitution by delivering to the Purchaser or its designee
for such Qualified Substitute Mortgage Loan the documents required by Subsection
6.3, with the Mortgage Note endorsed as required by Subsection 6.3. The Seller
shall deposit in the Custodial Account the Monthly Payment, or in
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the event that the Residential Servicing Agreement is no longer in effect,
remit directly to the Purchaser or its designee in accordance with the
Purchaser's instructions the Monthly Payment less the Servicing Fee due, if
any, on such Qualified Substitute Mortgage Loan or Loans in the month
following the date of such substitution. Monthly Payments due with respect to
Qualified Substitute Mortgage Loans in the month of substitution shall be
retained by the Seller. For the month of substitution, payments to the
Purchaser shall include the Monthly Payment due on any Deleted Mortgage Loan
in the month of substitution, and the Seller shall thereafter be entitled to
retain all amounts subsequently received by the Seller in respect of such
Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the amount
(if any) by which the aggregate principal balance of all Qualified Substitute
Mortgage Loans as of the date of substitution is less than the aggregate Stated
Principal Balance of all Deleted Mortgage Loans (after application of scheduled
principal payments due in the month of substitution). The amount of such
shortfall shall be distributed by the Seller directly to the Purchaser or its
designee in accordance with the Purchaser's instructions within two (2) Business
Days of such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses,
damages, penalties, fines, forfeitures, reasonable and necessary legal fees
and related costs, judgments, and other costs and expenses (but excluding any
consequential, indirect damages, special, exemplary or punitive damages
("Special Damages"), except for such special Damages which the Purchaser is
required by law to pay) resulting from any claim, demand, defense or
assertion based on or grounded upon, or resulting from, a breach of the
Seller representations and warranties contained in this Agreement. It is
understood and agreed that the obligations of the Seller set forth in this
Subsection 8.3 to cure, substitute for or repurchase a defective Mortgage
Loan and to indemnify the Purchaser as provided in this Subsection 8.3
constitute the sole remedies of the Purchaser respecting a breach of the
foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of the
breach of any representations and warranties made in Subsections 8.1 and 8.2
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with this
Agreement.
SECTION 9. Closing.
The closing for the purchase and sale of any Mortgage Loans shall take
place on (i) the Initial Closing Date with respect to the purchase and sale of
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
(ii) on the Closing Date set forth in a duly executed Commitment Letter with
respect to the purchase and sale of Mortgage Loans pursuant thereto. At the
Purchaser's option, any closing shall be either: by telephone, confirmed by
letter or wire as the parties shall agree, or conducted in person, at such place
as the parties shall agree.
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The closing for the purchase and sale of Mortgage Loans to be purchased on
any Closing Date shall be subject to each of the following conditions:
(a) all of the representations and warranties of the Seller under this
Agreement shall be true and correct as of such Closing Date, no
default shall have occurred and no event shall have occurred which,
with notice or the passage of time or both, would constitute a default
under this Agreement;
(b) the Purchaser shall have received, or the Purchaser's attorneys shall
have received in escrow, all closing documents as specified in Section
10 of this Agreement, in such forms as are agreed upon and acceptable
to the Purchaser, duly executed by all signatories other than the
Purchaser as required pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the Purchaser or its
designee all Mortgage Loan Documents with respect to each Mortgage
Loan not otherwise required under the Residential Servicing Agreement
to be in the possession of, and actually in the possession of the
Servicer; and
(d) all other terms and conditions of this Agreement shall have been
complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the Seller
on the applicable Closing Date the applicable Purchase Price, plus accrued
interest pursuant to Section 4 of this Agreement, by wire transfer of
immediately available funds to the account designated by the Seller.
SECTION 10. Closing Documents.
The closing documents for the Mortgage Loans to be purchased on any Closing
Date shall consist of fully executed originals of the following documents:
1. on the Initial Closing Date only, this Agreement (and on all
subsequent Closing Dates, a Commitment Letter in the form of Exhibit I
hereto);
2. on the Initial Closing Date only, the Residential Servicing Agreement,
dated as of the Initial Cut-off Date, in the form of Exhibit B hereto;
3. an Officer's Certificate, in the form of Exhibit C hereto, including
all attachments thereto;
4. an Opinion of Counsel of the Seller (who may be an employee of the
Seller), in the form of Exhibit D hereto;
5. a Notice of Sale and Release of Collateral, in the form of Exhibit E
hereto;
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6. a Security Release Certification, in the form of Exhibit F hereto
executed by any person, as requested by the Purchaser, if any of the
Mortgage Loans have at any time been subject to any security interest,
pledge or hypothecation for the benefit of such person; and
7. a certificate or other evidence of merger or acquisition, if any of
the Mortgage Loans being purchased were acquired by Seller by merger
or acquisition.
The Seller shall bear the risk of loss of any closing documents and
Mortgage Loan documents until such time as they are received by the Purchaser or
its attorneys or designees, as applicable.
SECTION 11. Costs.
The Purchaser shall pay any commissions due its salesmen and the legal fees
and expenses of its attorneys. All other costs and expenses incurred in
connection with the transfer and delivery of the Mortgage Loans including
recording fees, fees for recording Assignments of Mortgages, fees for title
policy endorsements and continuations and, if applicable, the Seller's
attorney's fees, shall be paid by the Seller.
SECTION 12. Merger or Consolidation of the Seller.
The Seller will keep in full effect its existence, rights and franchises
as a corporation under the laws of the state of its incorporation except as
permitted herein, and will obtain and preserve its qualification to do
business as a foreign corporation in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, or any of the Mortgage Loans and to perform
its duties under this Agreement. In the event Seller or any of its
successors or assigns (i) consolidates with or merges into any other Person
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or substantially
all of its properties and assets to any Person, then, and in each such case,
proper provision shall be made so that the successors and assigns of Seller
assume the obligations of seller set forth in this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the Seller,
shall be the successor of the Seller hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided, however, that the
successor or surviving Person shall have a tangible net worth of at least
$30,000,000.
SECTION 13. Mandatory Delivery; Grant of Security Interest.
The sale and delivery on any Closing Date of the Mortgage Loans described
on the applicable Mortgage Loan Schedule is mandatory from and after the date of
the execution of this
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Agreement or a Commitment Letter, as the case may be, it being specifically
understood and agreed that each Mortgage Loan is unique and identifiable and
that an award of money damages would be insufficient to compensate the
Purchaser for the losses and damages incurred by the Purchaser (including
damages to prospective purchasers of the Mortgage Loans) in the event of the
Seller's failure to deliver (i) each of the Mortgage Loans or (ii) one or
more Qualified Substitute Mortgage Loans or (iii) one or more Mortgage Loans
otherwise acceptable to the Purchaser on or before such Closing Date. The
Seller hereby grants to the Purchaser a lien on and a continuing security
interest in each Mortgage Loan set forth on the Initial Portfolio Mortgage
Loan Schedule and each document and instrument evidencing each such Mortgage
Loan to secure the performance by the Seller of its obligations under this
Agreement, and the Seller agrees that it shall hold such Mortgage Loans in
custody for the Purchaser subject to the Purchaser's (i) right to reject any
Mortgage Loan (or Qualified Substitute Mortgage Loan) under the terms of this
Agreement and to require another Mortgage Loan (or Qualified Substitute
Mortgage Loan) to be substituted therefor, and (ii) obligation to pay the
Initial Purchase Price plus accrued interest as set forth in Section 4 hereof
for the Mortgage Loans. All rights and remedies of the Purchaser under this
Agreement are distinct from, and cumulative with, any other rights or
remedies under this Agreement or afforded by law or equity and all such
rights and remedies may be exercised concurrently, independently or
successively.
SECTION 14. Notices.
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed, by registered or certified
mail, return receipt requested, or, if by other means, when received by the
other party at the address as follows:
(i) if to the Seller:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
(ii) if to the Purchaser:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
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SECTION 15. Severability Clause.
Any part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be conferred by this Agreement, the
parties shall negotiate, in good faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Agreement without regard to such invalidity.
SECTION 16. Counterparts.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. Governing Law.
This Agreement shall be deemed to have been made in the State of
California. The Agreement shall be construed in accordance with the laws of the
State of California and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with the substantive laws of the
State of California (without regard to conflicts of laws principles), except to
the extent preempted by Federal law.
SECTION 18. Intention of the Parties.
It is the intention of the parties that the Purchaser is purchasing, and
the Seller is selling the Mortgage Loans and not a debt instrument of the Seller
or another security. Accordingly, the parties hereto each intend to treat the
transaction for Federal income tax purposes as a sale by the Seller, and a
purchase by the Purchaser, of the Mortgage Loans.
SECTION 19. Successors and Assigns; Assignment of Purchase Agreement.
This Agreement shall bind and inure to the benefit of and be enforceable by
the Seller and the Purchaser and the respective permitted successors and assigns
of the Seller and the successors and assigns of the Purchaser. This Agreement
shall not be assigned, pledged or hypothecated by the Seller to a third party
without the consent of the Purchaser. Subject to any applicable requirements of
the Residential Servicing Agreement, this Agreement may be assigned, pledged or
hypothecated by the Purchaser without the prior consent of the Seller. If the
Purchaser assigns all or any of its rights as Purchaser hereunder, the assignee
of the Purchaser will become the
33
<PAGE>
"Purchaser" hereunder to the extent of such assignment, provided that at no
time shall there be more than fifteen (15) persons having the status of
"Purchaser" hereunder. Any assignment by the Purchaser shall be accompanied
by the delivery and execution of an Assignment and Assumption Agreement (the
"Assignment and Assumption Agreement") substantially in the form attached
hereto as Exhibit G. Subject to any applicable requirements of the
Residential Servicing Agreement, the Servicer shall be required to remit all
amounts required to be remitted to the Purchaser hereunder to said assignee
commencing with the first Remittance Date falling after receipt of said copy
of the related Assignment and Assumption Agreement provided that the Servicer
receives said copy no later than three (3) Business Days immediately prior to
the first day of the month of the related Remittance Date.
SECTION 20. Waivers.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
SECTION 21. Entire Agreement; Amendment.
This Agreement (including the Schedules and Exhibits annexed hereto or
referred to herein) and any Commitment Letter duly executed by the parties
hereto contain the entire agreement between the parties with respect to the
transactions contemplated hereby and supersede all prior agreements, written or
oral, with respect thereto. No amendment, modification or alteration of the
terms or provisions of this Agreement shall be binding unless the same shall be
in writing and duly executed by the authorized representatives of the parties
hereto, provided, however, that as long as any Series A Preferred Shares remain
outstanding, no material amendment to or modification or alteration of this
Agreement may be entered into or approved by the Purchaser without the approval
of a majority of the Independent Directors.
SECTION 22. General Interpretive Principles.
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to them
in this Agreement and include the plural as well as the singular, and the use of
any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a document are to
designated Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
34
<PAGE>
(d) reference to a Subsection without further reference to a Section is a
reference to such Subsection as contained in the same Section in which the
reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular provision;
and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
SECTION 23. Reproduction of Documents.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at any closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process but solely for the
purposes set forth in this Agreement. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
SECTION 24. Further Agreements.
The Seller and the Purchaser each agree to execute and deliver to the other
such reasonable and appropriate additional documents, instruments or agreements
as may be necessary or appropriate to effectuate the purposes of this Agreement.
SECTION 25. Recordation of Assignments of Mortgage.
The Seller shall execute a blanket assignment of the Mortgages underlying
each Mortgage Loan sold to the Purchaser pursuant to this Agreement or a duly
executed Commitment Letter. Upon the written request of Purchaser (whether due
to the proposed sale of any Mortgage Loan by Purchaser or otherwise), or to the
extent deemed necessary by the Servicer in connection with servicing a Mortgage
Loan pursuant to the terms of the Residential Servicing Agreement, the Seller
shall promptly prepare and execute individual Assignments of Mortgage to be
recorded in all appropriate public offices for real property records in all the
counties or other comparable jurisdictions in which any or all of the Mortgaged
Properties are situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Purchaser or Purchaser's
designee, but in any event, at the Seller's expense for a single recordation
with respect to each Assignment of Mortgage.
35
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL CORPORATION
By:
-----------------------------------
Name:
-------------------------------
Title:
-------------------------------
PEOPLE'S BANK OF CALIFORNIA
By:
-----------------------------------
Name:
------------------------------
Title:
------------------------------
By:
-----------------------------------
Name:
------------------------------
Title:
------------------------------
36
<PAGE>
EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include each
of the following items (to the extent such items are applicable and exist
within the sellers Mortgage file), which shall be available for inspection by
the Purchaser and any prospective Purchaser, and which shall be delivered to
the Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan
Purchase and Warranties Agreement to which this Exhibit is attached (the
"Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I hereto, a lost note affidavit, executed by an
officer of the Seller, with a copy of the original note attached
thereto) bearing all intervening endorsements, endorsed "Pay to the
order of ____________ without recourse" (except as otherwise provided
in the Agreement) and signed in the name of the Seller by an
authorized officer. To the extent that there is no room on the face of
the Mortgage Notes for endorsements, the endorsement may be contained
on an allonge, if state law so allows. If the Mortgage Loan was
acquired by the Seller in a merger, the endorsement must be by
"[Seller], successor by merger to [name of predecessor]". If the
Mortgage Loan was acquired or originated by the Seller while doing
business under another name, the endorsement must be by "[Seller],
formerly known as [previous name]".
2. The original of any guarantee executed in connection with the Mortgage
Note.
3. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or cause
to be delivered the original Mortgage with evidence of recording
thereon on or prior to the Closing Date because of a delay caused by
the public recording office where such Mortgage has been delivered for
recordation, a photocopy of such Mortgage certified by the Seller to
be true and correct will be delivered; if such Mortgage has been lost
or if such public recording office retains the original recorded
Mortgage, the Seller shall deliver or cause to be delivered to the
Purchaser, a photocopy of such Mortgage, certified by such public
recording office to be a true and complete copy of the original
recorded Mortgage.
4. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon or
certified copies of such documents if the originals thereof are
unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all Mortgage Loans and signed in the name of
the Seller by an authorized officer. If the Mortgage Loan was
acquired by the Seller in a merger, the
A-1
<PAGE>
Assignment of Mortgage must be made by "[Seller], successor by merger
to [name of predecessor]". If the Mortgage Loan was acquired or
originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as
[previous name]". With respect to Co-op Loans, the Assignment of
Mortgage shall include an assignment of Security Instruments.
6. Originals of all intervening assignments of the Mortgage with evidence
of recording thereon if such intervening assignment has been recorded.
7. The original mortgagee policy of title insurance or, in the event such
original title policy is unavailable, a certified true copy of the
related policy binder or commitment for title certified to be true and
complete by the title insurance company.
8. Any original security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
9. The original hazard insurance policy and, if required by law, flood
insurance policy, in accordance with Section 8.02(f) of the Agreement.
10. Residential loan application.
11. Mortgage Loan closing statement.
12. Verification of employment and income.
13. Verification of acceptable evidence of source and amount of down
payment.
14. Credit report on the Mortgagor.
15. Residential appraisal report.
16. Photograph of the Mortgaged Property.
17. Survey of the Mortgaged Property, if any.
18. To the extent applicable, copy of each instrument necessary to
complete identification of any exception set forth in the exception
schedule in the title policy, i.e., map or plat, restrictions,
easements, sewer agreements, home association declarations, etc.
19. All required disclosure statements.
A-2
<PAGE>
20. If available, termite report, structural engineer's report, water
portability and septic certification.
21. Sales contract, if any.
22. Tax receipts, insurance premium receipts, ledger sheets, insurance
claim files, correspondence, current and historical computerized data
files, and all other processing, underwriting and closing papers and
records which are customarily contained in a mortgage loan file and
which are required to document the Mortgage Loan or to service the
Mortgage Loan.
23. For Mortgage Loans with original LTV's greater than 80%, evidence of a
Primary Insurance Policy.
The Servicer (as defined in the Agreement) retains possession of the
originals of those items identified in Items 9-23 of this Exhibit A.
A-3
<PAGE>
EXHIBIT B
B-1
<PAGE>
EXHIBIT C
FORM OF SELLER'S OFFICER'S CERTIFICATE
I, _____________, hereby certify that I am the duly elected Executive Vice
President of People's Bank of California, a federal savings bank organized under
the laws of the United States (the "Seller") and further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete copy of
the restated Federal Stock Charter of the Seller which is in full force and
effect on the date hereof and which has been in effect without amendment,
waiver, rescission or modification since
2. Attached hereto as Exhibit 2 is a true, correct and complete copy of
the bylaws of the Seller which are in effect on the date hereof and which have
been in effect without amendment, waiver, rescission or modification since
_____________.
3. Attached hereto as Exhibit 3 is an original certificate of good
standing of the Seller issued within ten days of the date hereof, and no event
has occurred since the date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete copy of
the corporate resolutions of the Board of Directors of the Seller authorizing
the Seller to execute and deliver each of the Residential Mortgage Loan Purchase
and Warranties Agreement, dated as of __________, 1997, by and between People's
Preferred Capital Corporation (the "Purchaser") and the Seller (the "Purchase
Agreement"), the Commitment Letter, dated as of _______, by and between the
Purchaser and the Seller [if applicable] and to endorse the mortgage notes and
execute the assignments of mortgages by original or facsimile signature, and
such resolutions are in effect on the date hereof and have been in effect
without amendment, waiver, rescission or modification since
5. Either (i) no consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery and
performance by the Seller of or compliance by the Seller with the Purchase
Agreement [and the Commitment Letter], the sale of the mortgage loans or the
consummation of the transactions contemplated by the Purchase Agreement; or (ii)
any required consent, approval, authorization or order has been obtained by the
Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement [or the Commitment Letter]
conflicts or will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws of the
Seller, the terms of any indenture or other agreement or instrument to which the
Seller is a party or by which it is bound or to which it is subject, or any
statute or order, rule, regulations, writ, injunction or decree of any court,
governmental authority or regulatory body to which the Seller is subject or by
which it is bound.
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<PAGE>
7. To the best of my knowledge, there is no action, suit, proceeding or
investigation pending or threatened against the Seller which, in my judgment,
either in any one instance or in the aggregate, may result in any material
adverse change in the business, operations, financial condition, properties or
assets of the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted or in any
material liability on the part of the Seller or which would draw into question
the validity of the Purchase Agreement [or the Commitment Letter] or the
mortgage loans or of any action taken or to be taken in connection with the
transactions contemplated hereby, or which would be likely to impair materially
the ability of the Seller to perform under the terms of the Purchase Agreement
[and the Commitment Letter].
8. Each person listed on Exhibit 5 attached hereto who, as an officer or
representative of the Seller, signed the Purchase Agreement [and the Commitment
Letter] and any other document delivered prior to or on the date hereof in
connection with any purchase described in the Purchase Agreement was, at the
respective times of such signing and delivery, and is now, a duly elected or
appointed, qualified and acting officer or representative of the Seller, who
holds the office set forth opposite his or her name on Exhibit 5, and the
signatures of such persons appearing on such documents are their genuine
signatures.
9. The Seller is duly authorized to engage in the transactions described
and contemplated in the Purchase Agreement [and the Commitment Letter].
C-2
<PAGE>
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of
the Seller.
Dated: , 1997 By:
----------- ---------------------------------
Name: J. Michael Holmes
[Seal] Title: Executive Vice President
I, William W. Flader, an Executive Vice President of People's Bank of
California, hereby certify that J. Michael Holmes is the duly elected, qualified
and acting Executive Vice President of the Seller and that the signature
appearing above is his genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated: , 1997 By:
----------- ---------------------------------
Name: William W. Flader
Title: Executive Vice President
C-3
<PAGE>
EXHIBIT 5
to Seller's Officer's Certificate
Name Title Signature
- ---------------------- ------------------------ -----------------------
C-4
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER
_________________, 1997
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Dear Sirs:
You have requested my opinion, as General Counsel to People's Bank of
California (the "Seller"), with respect to certain matters in connection with
the sale by the Seller of the Mortgage Loans pursuant to that certain
Residential Mortgage Loan Purchase and Warranties Agreement by and between the
Seller and People's Preferred Capital Corporation (the "Purchaser"), dated as of
__________, 1997 (the "Purchase Agreement") which sale is in the form of whole
loans, delivered pursuant to the Purchase Agreement and serviced pursuant to a
Residential Servicing Agreement, dated as of __________, 1997, by and between
Temple-Inland Mortgage Corporation and the Purchaser (the "Servicing
Agreement"). Capitalized terms not otherwise defined herein have the meanings
set forth in the Purchase Agreement and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement [and, if applicable, the Commitment Letter
dated ______________________;]
2. the Residential Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as I have deemed necessary
and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon the
representations and warranties of the Seller contained in the Purchase
Agreement. I have assumed the authenticity of all documents submitted to me as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents.
D-1
<PAGE>
Based upon the foregoing, it is my opinion that:
1. The Seller is a federal savings bank duly organized, validly existing
and in good standing under the laws of the United States and is
qualified to transact business in, and is in good standing under, the
laws of the United States.
2. The Seller has the power to engage in the transactions contemplated by
the Purchase Agreement [and, if applicable, the Commitment Letter
dated ____________________;] and all requisite power, authority and
legal right to execute and deliver the Purchase Agreement and to
perform and observe the terms and conditions of such agreements.
3. The Purchase Agreement has been duly authorized, executed and
delivered by the Seller and is a legal, valid and binding agreement
enforceable in accordance with its respective terms against the
Seller, subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder or
with the Purchaser's ownership of the Mortgage Loans.
4. The Seller has been duly authorized to allow certain specified
officers to execute any and all documents by original signature in
order to complete the transactions contemplated by the Purchase
Agreement and by original or facsimile signature in order to execute
the endorsements to the Mortgage Notes and the Assignments of
Mortgages, and the original or facsimile signature of the officer of
the Seller executing the endorsements to the Mortgage Notes and the
Assignments of Mortgages represents the legal and valid signature of
said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery
and performance by the Seller of or compliance by the Seller with the
Purchase Agreement and the sale of the Mortgage Loans or the
consummation of the transactions contemplated by the Purchase
Agreement or (ii) any required consent, approval, authorization or
order has been obtained by the Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement conflicts or will
conflict with or results or will result in a breach of or constitutes
or will constitute a default under the charter or bylaws of the
Seller, the terms of any indenture or other agreement or instrument to
which the Seller is a party or by which it is bound or to which it is
subject, or violates any statute or order, rule, regulations, writ,
injunction or decree of any court, governmental authority or
regulatory body to which the Seller is subject or by which it is
bound.
D-2
<PAGE>
7. There is no action, suit, proceeding or investigation pending or, to
the best of my knowledge, threatened against the Seller which, in my
judgment, either in any one instance or in the aggregate, may result
in any material adverse change in the business, operations, financial
condition, properties or assets of the Seller or in any material
impairment of the right or ability of the Seller to carry on its
business substantially as now conducted or in any material liability
on the part of the Seller or which would draw into question the
validity of the Purchase Agreement or the Mortgage Loans or of any
action taken or to be taken in connection with the transactions
contemplated thereby, or which would be likely to impair materially
the ability of the Seller to perform under the terms of the Purchase
Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the manner
contemplated by the Purchase Agreement is sufficient to fully transfer
to the Purchaser all right, title and interest of the Seller thereto
as noteholder and mortgagee.
This opinion is given to you for your sole benefit, and no other person or
entity is entitled to rely hereon.
Very truly yours,
------------------------------------
Doreen J. Blauschild
General Counsel
D-3
<PAGE>
EXHIBIT E
______________________, 1997
Federal Home Loan Bank of
San Francisco (the "Association")
600 California Street
San Francisco, California 94108
Attention: -------------------------------
-------------------------------
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that People's Bank of California, a federal
savings bank, organized pursuant to the laws of the United States (the "Bank")
has committed to sell to People's Preferred Capital Corporation under a
Residential Mortgage Loan Purchase and Warranties Agreement, dated as of
__________, 1997, certain mortgage loans owned by the Bank. The Bank warrants
that the mortgage loans to be sold to People's Preferred Capital Corporation are
in addition to and beyond any collateral required to secure advances made by the
Association to the Bank.
The Bank acknowledges that the mortgage loans to be sold to People's
Preferred Capital Corporation shall not be used as additional or substitute
collateral for advances made by the Association. People's Preferred Capital
Corporation understands that the balance of the Bank's mortgage loan portfolio
may be used as collateral or additional collateral for advances made by the
Association, and confirms that it has no interest therein.
E-1
<PAGE>
Execution of this letter by the Association shall constitute a full and
complete release of any security interest, claim, or lien which the Association
may have against the mortgage loans to be sold to People's Preferred Capital
Corporation.
Very truly yours,
--------------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Date:
--------------------------------
Acknowledged and approved:
FEDERAL HOME LOAN BANK OF
SAN FRANCISCO
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Date:
-------------------------
E-2
<PAGE>
EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. Release of Security Interest
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
People's Preferred Capital Corporation from People's Bank of California pursuant
to that certain Residential Mortgage Loan Purchase and Warranties Agreement,
dated as of __________, 1997, and certifies that all notes, mortgages,
assignments and other documents in its possession relating to such Mortgage
Loans have been delivered and released to People's Bank of California or its
designees, as of the date and time of the sale of such Mortgage Loans to
People's Preferred Capital Corporation.
Name and Address of Financial Institution
- -----------------------------------------
(name)
- -----------------------------------------
(Address)
By:
--------------------------------------
II. Certification of Release
People's Bank of California hereby certifies to People's Preferred Capital
Corporation that, as of the date and time of the sale of the above-mentioned
Mortgage Loans to People's Preferred Capital Corporation, the security interests
in the Mortgage Loans released by the above-named financial institution comprise
all security interests relating to or affecting any and all such Mortgage Loans.
People's Bank of California warrants that, as of such time, there are and will
be no other security interests affecting any or all of such Mortgage Loans.
-----------------------------------
By:
-------------------------------
Title:
----------------------------
Date:
-----------------------------
F-1
<PAGE>
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT, dated _________, between
____________, a __________ corporation ("Assignor") and __________, a
________________ corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of which
hereby are acknowledged, and of the mutual covenants herein contained, the
parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee, as
purchaser, all of the right, title and interest of Assignor with respect to the
mortgage loans listed on Exhibit A attached hereto (the "Mortgage Loans"), and
with respect to such Mortgage Loans, in, to and under (a) that certain
Residential Mortgage Loan Purchase and Warranties Agreement dated __________,
1997 by and between People's Bank of California (the "Seller") and People's
Preferred Capital Corporation (the "Purchaser") (the "Purchase Agreement"), and
(b) that certain Assignment, Assumption and Recognition Agreement dated as of
_______, 1997, by and between the Seller, the Purchaser and Temple-Inland
Mortgage Corporation (the "Servicer") (the "Residential Servicing Agreement";
the Residential Servicing Agreement and the Purchase Agreement are collectively
referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with, the
Assignee that:
a. The Assignor is the lawful owner of the Mortgage Loans with the
full right to transfer the Mortgage Loans free from any and all
claims and encumbrances whatsoever;
b. The Assignor has not received notice of, and has no knowledge of,
any offsets, counterclaims or other defenses available to the
Seller with respect to the Agreements or the Mortgage Loans;
c. The Assignor has not waived or agreed to any waiver under, or
agreed to any amendment or other modification of, the Agreements.
The Assignor has no knowledge of, and has not received notice of,
any waivers under or amendments or other modifications of, or
assignments of rights or obligations under, the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Mortgage
Loans or any interest in the Mortgage Loans, or solicited any
offer to buy or accept a transfer, pledge or other disposition of
the Mortgage Loans, or any interest in the Mortgage Loans or
otherwise approached or negotiated with respect to the Mortgage
Loans, or any interest in the Mortgage with any person in any
manner, or made any general solicitation by means of
G-1
<PAGE>
generaladvertising or in any other manner, or taken any other
action which would constitute a distribution of the Mortgage Loans
under the Securities Act of 1933, as amended (the "1933 Act") or
which would render the disposition of the Mortgage Loans a
violation of Section 5 of the 1933 Act or require registration
pursuant thereto.
3. The Assignee warrants and represents to, and covenants with, the
Assignor and the Seller pursuant to the Agreements that:
a. The Assignee is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, and has all requisite corporate power and
authority to acquire, own and purchase the Mortgage Loans;
b. The Assignee has full corporate power and authority to execute,
deliver and perform under this Assignment and Assumption
Agreement, and to consummate the transactions set forth herein.
The execution, delivery and performance of the Assignee of this
Assignment and Assumption Agreement, and the consummation by it
of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action of the Assignee.
This Assignment and Assumption Agreement has been duly executed
and delivered by the Assignee and constitutes the valid and
legally binding obligation of the Assignee enforceable against
the Assignee in accordance with its respective terms;
c. To the best of Assignee's knowledge, no material consent,
approval, order or authorization of, or declaration, filing or
registration with, any governmental entity is required to be
obtained or made by the Assignee in connection with the
execution, delivery or performance by the Assignee of this
Assignment and Assumption Agreement, or the consummation by it of
the transactions contemplated hereby;
d. The Assignee agrees to be bound, as Purchaser, by all of the
terms, covenants and conditions of the Agreements, the Mortgage
Loans, and from and after the date hereof, the Assignee assumes
for the benefit of each of the Seller and the Assignor all of the
Assignor' s obligations as Purchaser thereunder, including,
without limitation, the limitation on assignment set forth in
Section 19 of the Purchase Agreement;
e. The Assignee understands that the Mortgage Loans have not been
registered under the 1933 Act or the securities laws of any
state;
G-2
<PAGE>
f. The purchase price being paid by the Assignee for the Mortgage
Loans is in excess of $250,000 and will be paid by cash
remittance of the full purchase price within sixty (60) days of
the sale;
g. The Assignee is acquiring the Mortgage Loans for investment for
its own account only and not for any other person;
h. The Assignee considers itself a sophisticated institutional
investor having such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and
risks of investment in the Mortgage Loans;
I. The Assignee has been furnished with all information regarding
the Mortgage Loans that it has requested from the Assignor or the
Seller;
j. Neither the Assignee nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Mortgage
Loans or any interest in the Mortgage Loans, or solicited any
offer to buy or accept a transfer, pledge or other disposition of
the Mortgage Loans or any interest in the Mortgage Loans, or
otherwise approached or negotiated with respect to the Mortgage
Loans or any interest in the Mortgage Loans with any person in
any manner which would constitute a distribution of the Mortgage
Loans under the 1933 Act or which would render the disposition of
the Mortgage Loans a violation of Section 5 of the 1933 Act or
require registration pursuant thereto, nor will it act, nor has
it authorized or will it authorize any person to act, in such
manner with respect to the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit plan ("Plan")
within the meaning of section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or a plan (also
"Plan") within the meaning of section 4975(e)(1) of the Internal
Revenue Code of 1986 ("Code"), and the Assignee is not directly
or indirectly purchasing the Mortgage Loans on behalf of,
investment manager of, as named fiduciary of, as Trustee of, or
with assets of, a Plan; or (2) the Assignee's purchase of the
Mortgage Loans will not result in a prohibited transaction under
section 406 of ERISA or section 4975 of the Code.
G-3
<PAGE>
4. (a) The Assignee's address for purposes of all notices and
correspondence related to the Mortgage Loans and the Agreements is:
---------------------------
---------------------------
---------------------------
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are:
---------------------------
---------------------------
---------------------------
(b) The Assignor's address for purposes for all notices and correspondence
related to the Mortgage Loans and this Agreement is:
---------------------------
---------------------------
---------------------------
5. This Agreement shall be construed in accordance with the substantive
laws of the State of California (without regard to conflicts of laws principles)
and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with such laws, except to the extent preempted by
federal law.
6. This Agreement shall inure to the benefit of the successors and
assigns of the parties hereto. This Agreement may not be assigned by the
Assignee without the express written consent of the Assignor. Any entity into
which the Assignor or Assignee may be merged or consolidated shall, without the
requirement for any further writing, be deemed the Assignor or Assignee,
respectively, hereunder.
7. No term or provision of this Agreement may be waived or modified
unless such waiver or modification is in writing and signed by the party against
whom such waiver or modification is sought to be enforced.
8. This Agreement shall survive the conveyance of the Mortgage Loans and
the assignment of the Agreements by the Assignor.
G-4
<PAGE>
9. Notwithstanding the assignment of the Agreements by either the
Assignor or Assignee, this Agreement shall not be deemed assigned by the
Assignor or the Assignee unless assigned by separate written instrument.
10. For the purpose for facilitating the execution of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute and be one
and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be executed by their duly authorized officers as of the date first
above written.
- --------------------------------- -------------------------------------
Assignor Assignee
By: By:
----------------------------- --------------------------------------
Its: Its:
--------------------------- -------------------------------------
Taxpayer Identification Taxpayer Identification
No.: No.:
---------------- -------------------------------------
G-5
<PAGE>
EXHIBIT H
INITIAL PORTFOLIO MORTGAGE LOAN SCHEDULE
H-1
<PAGE>
EXHIBIT I
FORM OF COMMITMENT LETTER
[Date]
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Ladies and Gentlemen:
People's Preferred Capital Corporation, a Maryland corporation
("Purchaser"), hereby agrees to purchase from you ("Seller"), and you hereby
agree to sell, transfer, assign and convey to Purchaser, on ________________
(the "Closing Date"), all of your right, title and interest in and to those
residential mortgage loans (the "Mortgage Loans") set forth on Schedule I (the
"Mortgage Loan Schedule") attached hereto, the related Mortgage Files and all
rights and obligations of Seller arising under the documents contained therein,
subject to the terms and conditions set forth in this Commitment Letter and in
that certain Residential Mortgage Loan Purchase and Warranties Agreement, dated
as of ______________, 1997 (the "Purchase Agreement"), by and between Purchaser
and Seller.
The Mortgage Loans shall have an aggregate principal balance on
____________ (the "Cut-off Date") of $_______, or such amount as Purchaser and
Seller shall agree upon as evidenced by the aggregate principal balance of the
Mortgage Loans accepted by Purchaser on the Closing Date. The purchase price
payable by Purchaser to Seller at the Closing in consideration for the Mortgage
Loans set forth on the Mortgage Loan Schedule shall be $_______ (the "Purchase
Price"), or such other amount as Purchaser and Seller shall agree upon as
evidenced by the aggregate principal balance of the Mortgage Loans accepted by
Purchaser on the Closing Date.
I-1
<PAGE>
The purchase and sale of the Mortgage Loans contemplated hereby shall be
consummated by Purchaser and Seller subject to and in accordance with the terms
and conditions of the Purchase Agreement, including, without limitation, the
representations and warranties of Seller contained in Section 8 thereof and the
provisions relating to the purchase and sale of Mortgage Loans and delivery of
related documents in connection therewith set forth in Sections 4, 5, 6, 9 and
10 thereof. Capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Purchase Agreement.
Very truly yours,
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By:
--------------------------------------------
Name:
Title:
Agreed and accepted as of the day
first written above:
PEOPLE'S BANK OF CALIFORNIA
By:
----------------------------
Name:
Title:
I-2
<PAGE>
COMMERCIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
PEOPLE'S PREFERRED CAPITAL CORPORATION
Purchaser
PEOPLE'S BANK OF CALIFORNIA
Seller
Dated as of _____________, 1997
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. Definitions
SECTION 2. Agreement to Purchase Initial Portfolio
SECTION 3. Subsequent Purchases
SECTION 4. Payment of Purchase Price
SECTION 5. Examination of Mortgage Files
SECTION 6. Conveyance from Seller to Purchaser
Subsection 6.01 Possession of Servicing Files
Subsection 6.02 Books and Records
Subsection 6.03 Delivery of Custodian's File
SECTION 7. Servicing of the Mortgage Loans
SECTION 8. Representations, Warranties and Covenants of the
Seller; Remedies for Breach
Subsection 8.01 Representations and Warranties Regarding the Seller
Subsection 8.02 Representations and Warranties Regarding
Individual Mortgage Loans
Subsection 8.03 Remedies for Breach of Representations and Warranties
SECTION 9. Closing
SECTION 10. Closing Documents
SECTION 11. Costs
SECTION 12. Merger or Consolidation of the Seller
SECTION 13. Mandatory Delivery; Grant of Security Interest
SECTION 14. Notices
SECTION 15. Severability Clause
SECTION 16. Counterparts
SECTION 17. Governing Law
SECTION 18. Intention of the Parties
SECTION 19. Successors and Assigns; Assignment of Purchase Agreement
SECTION 20. Waivers
SECTION 21. Entire Agreement, Amendment
SECTION 22. General Interpretive Principles
SECTION 23. Reproduction of Documents
SECTION 24. Further Agreements
SECTION 25. Recordation of Assignments of Mortgage
i
<PAGE>
EXHIBITS
EXHIBIT A Contents of Each Mortgage File
EXHIBIT B Commercial Mortgage Servicing Agreement
EXHIBIT C Form of Seller's Officer's Certificate
EXHIBIT D Form of Opinion of Counsel to the Seller
EXHIBIT E Notice of Sale and Release of Collateral
EXHIBIT F Form of Security Release Certification
EXHIBIT G Form of Assignment and Assumption Agreement
EXHIBIT H Initial Portfolio Mortgage Loan Schedule
EXHIBIT I Form of Commitment Letter
ii
<PAGE>
COMMERCIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
This COMMERCIAL MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the
"Agreement"), dated as of __________, 1997, by and between People's Preferred
Capital Corporation, a Maryland corporation, having an office at 5900
Wilshire Boulevard, Los Angeles, California 90036 (the "Purchaser") and
People's Bank of California, a federal stock savings bank organized under the
laws of the United States, having an office at 5900 Wilshire Boulevard, Los
Angeles, California 90036 (the "Seller").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller, from time to time, certain conventional
commercial mortgage loans (the "Mortgage Loans") on a servicing retained basis
as described herein, and which shall be delivered as whole loans;
WHEREAS, each Mortgage Loan is secured by a mortgage, deed of trust or
other security instrument creating a first lien on a commercial property
indicated on the Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of the
conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the promises and mutual agreements
set forth herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Purchaser and the
Seller agree as follows:
SECTION 1. Definitions.
For purposes of this Agreement and any Commitment Letter (as defined
herein) the following capitalized terms shall have the respective meanings
set forth below. Other capitalized terms used in this Agreement and not
defined herein shall have the respective meanings set forth in the Commercial
Servicing Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect
to any specified Person means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of
voting
<PAGE>
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agreement" means this Commercial Mortgage Loan Purchase and Warranties
Agreement and all amendments hereof and supplements hereto.
"ALTA" means The American Land Title Association or any successor thereto.
"Ancillary Income" means all late charges, assumption fees, escrow account
benefits, reinstatement fees, and similar types of fees arising from or in
connection with any Mortgage, to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"Appraised Value" means the value of the Mortgaged Property set forth
in an appraisal made in connection with the origination of the related
Mortgage Loan as the value of the Mortgaged Property or such later appraisal,
if applicable.
"Assignment and Assumption Agreement" has the meaning set forth in
Section 19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered in
blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking and savings and loan institutions, in the State of
California or the state in which the Seller's servicing operations are
located, are authorized or obligated by law or executive order to be closed.
"Classified" is used herein generally to describe a Mortgage Loan which is
deemed substandard, doubtful or loss with respect to collectibility.
"Closing Date" means the Initial Closing Date and any other date on which
the parties hereto shall agree to close a sale of Mortgage Loans hereunder as
set forth in a duly executed Commitment Letter.
"Code" means Internal Revenue Code of 1986, as amended.
"Commercial Servicing Agreement" means the agreement, attached as Exhibit B
hereto, to be entered into by the Purchaser and the Seller, as servicer,
providing for the Seller to service the Mortgage Loans as specified by the
Commercial Servicing Agreement.
2
<PAGE>
"Commitment Letter" means a letter agreement executed by the Purchaser and
the Seller providing for the purchase and sale of Mortgage Loans and
substantially in the form of Exhibit I hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate trust account created and maintained
pursuant to the Commercial Servicing Agreement.
"Cut-off Date" means the Initial Cut-off Date and any other date as of
which the principal balance of Mortgage Loans will be determined for purposes of
calculating the Purchase Price for the purchase and sale of Mortgage Loans,
which date shall be set forth in the related Commitment Letter.
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Due Date" means the day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained pursuant
to the Commercial Servicing Agreement with respect to each Mortgage Loan, as
specified in the Commercial Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, any
payments required to be escrowed by the Mortgagor with the mortgagee pursuant
to the Mortgage or any other document (whether referred to as escrow, impound
or otherwise), including without limitation the amounts constituting ground
rents, taxes, assessments, water rates, sewer rents, municipal charges,
mortgage insurance premiums, fire and hazard insurance premiums.
"Independent Directors" means the members of the Board of Directors of the
Purchaser who are not current employees or officers of the Purchaser or current
employees, officers or directors of the Seller or any affiliate of the Seller.
In addition, any members of the Board of Directors of the Purchaser elected by
holders of the preferred stock of the Purchaser, including the Series A
Preferred Shares, will be deemed to be "Independent Directors" for purposes of
approving actions requiring the approval of a majority of the Independent
Directors.
"Initial Closing Date" means ___________, 1997, or such other date as the
parties hereto may mutually agree.
3
<PAGE>
"Initial Cut-off Date" means ____________, 1997.
"Initial Portfolio Mortgage Loan Schedule" means the schedule of Mortgage
Loans to be purchased by the Purchaser on the Initial Closing Date, attached
hereto as Exhibit H.
"Initial Portfolio Purchase Price" means the amount set forth in Section 2
of this Agreement.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds of
insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Interest Rate Adjustment Date" means, with respect to each Variable Rate
Mortgage Loan, the date, specified in the related Mortgage Note, on which the
Mortgage Interest Rate is adjusted.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage Loan,
the ratio (expressed as a percentage) of the original principal amount of the
Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged Property
at origination and (b) if the Mortgage Loan was made to finance the acquisition
of the related Mortgaged Property, the purchase price of the Mortgaged
Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note including any riders, addendums, assumptions, modifications
or extensions thereto, which creates a first lien on an unsubordinated estate
in fee simple in real property securing the Mortgage Note; except that with
respect to real property located in jurisdictions in which the use of
leasehold estates for commercial properties is a widely accepted practice,
the mortgage, deed of trust or other instrument securing the Mortgage Note
may secure and create a first lien upon a leasehold estate of the Mortgagor.
"Mortgage File" means the items pertaining to a particular Mortgage Loan
referred to in Exhibit A annexed hereto, and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of a Variable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
4
<PAGE>
"Mortgage Loan" means an individual Mortgage Loan which is the subject of
this Agreement, each Mortgage Loan originally sold and subject to this Agreement
being identified on Exhibit H attached hereto, and each Mortgage Loan sold
pursuant to a Commitment Letter being identified on the applicable Mortgage Loan
Schedule, and each of which Mortgage Loan includes without limitation the
Mortgage File, the Monthly Payments, Principal Prepayments, Liquidation
Proceeds, Condemnation Proceeds, Insurance Proceeds, and all other rights,
benefits, proceeds and obligations arising from or in connection with such
Mortgage Loan, excluding replaced or repurchased mortgage loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan, the
following documents pertaining to such Mortgage Loan:
a. The original Mortgage Note (or, with respect to the Mortgage Loans
listed on Schedule I to Exhibit A hereto, a lost note affidavit,
executed by an officer of the Seller, with a copy of the original note
attached thereto) bearing all intervening endorsements, endorsed "Pay
to the order of ( in blank ) without recourse" and signed in
the name of the Seller by an authorized officer. To the extent that
there is no room on the face of the Mortgage Notes for endorsements,
the endorsement may be contained on an allonge, if state law so
allows. If the Mortgage Loan was acquired by the Seller in a merger,
the endorsement must be by "[Seller], successor by merger to [name of
predecessor]". If the Mortgage Loan was acquired or originated by the
Seller while doing business under another name, the endorsement must
be by "[Seller], formerly known as [previous name]"; and
b. The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all of the Mortgage Loans in form and substance
acceptable for recording endorsed and signed in the name of the
Seller. If the Mortgage Loan was acquired by the Seller in a merger,
the Assignment of Mortgage must be made by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as
[previous name]".
c. The original of any guarantee executed in connection with the Mortgage
Note.
d. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or cause
to be delivered the original Mortgage with evidence of recording
thereon on or prior to the Closing Date because of a delay caused by
the public recording office where such Mortgage has been delivered for
recordation, a photocopy of such Mortgage certified by the Seller to
be true and correct will be delivered; if such Mortgage has been lost
or if such public recording office retains the original recorded
Mortgage, the Seller shall deliver or cause to be delivered to the
5
<PAGE>
Purchaser, a photocopy of such Mortgage, certified by such public
recording office to be a true and complete copy of the original
recorded Mortgage.
e. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon if
such agreements have been recorded, or certified copies of such
documents if the originals are unavailable.
f. Originals of all intervening Assignments of the Mortgage with evidence
of recording thereon, or if any such intervening assignment has not
been returned from the applicable recording office, a photocopy of
each such assignment certified by the Seller to be true and correct
will be delivered, or if such assignment has been lost or if such
public recording office retains the original recorded assignments of
mortgage, the Seller shall deliver or cause to be delivered to the
Purchaser, a photocopy of such intervening assignment, certified by
such public recording office to be a true and complete copy of the
original recorded intervening assignment.
g. The original mortgagee policy of title insurance or, in the event such
original title policy is unavailable, a certified true copy of the
related policy binder or commitment for title certified to be true and
complete by the title insurance company; provided that the original
mortgagee policy of title insurance shall be delivered promptly after
receipt by the Seller thereof but in no event later than one hundred
twenty (120) days from and after the Closing Date.
h. Any other security agreement, chattel mortgage or equivalent executed
in connection with the Mortgage.
"Mortgage Loan Schedule" means (a) the Initial Portfolio Mortgage Loan
Schedule attached hereto as Exhibit H and (b) any schedule of Mortgage Loans
in similar form attached to and constituting part of a duly executed
Commitment Letter, in each case setting forth at least the following
information with respect to each Mortgage Loan: (1) the Seller's Mortgage
Loan identifying number; (2) the Mortgagor's name; (3) the street address of
the Mortgaged Property including the state; (4) the type of commercial
property constituting the Mortgaged Property; (5) the type of Mortgage Loan
(i.e., whether the Mortgage Loan bears interest at a fixed or variable rate);
(6) the original months to maturity or the remaining months to maturity from
the applicable Cut-off Date, in any case based on the original amortization
schedule and, if different, the maturity expressed in the same manner but
based on the actual amortization schedule; (7) the Loan-to-Value Ratio at
origination; (8) the Mortgage Interest Rate as of the applicable Cut-off
Date; (9) the stated maturity date; (10) the amount of the Monthly Payment as
of the applicable Cut-off Date; (11) the original principal amount of the
Mortgage Loan; (12) the principal balance of the Mortgage Loan as of the
close of business on the applicable Cut-off Date, after deduction of payments
of principal due on or before such Cut-off Date; (13) a code indicating the
purpose of the loan (i.e., purchase and refinance); (14) the Interest Rate
6
<PAGE>
Adjustment Date with respect to any Variable Rate Mortgage Loan, frequency of
interest rate adjustments, interest rate caps, floors and ceilings; (15) the
Servicing Fee Rate; and (16) with respect to any Variable Rate Mortgage Loan,
the index and margin pursuant to which the Mortgage Interest Rate is
determined. With respect to the Mortgage Loans in the aggregate, the Mortgage
Loan Schedule shall set forth the following information, as of the applicable
Cut-off Date: (1) the number of Mortgage Loans; (2) the current aggregate
outstanding principal balance of the Mortgage Loans; (3) the weighted average
interest rate; and (4) the weighted average servicing fee.
"Mortgage Note" means the note or other evidence of the indebtedness
of a Mortgagor secured by a Mortgage, including any amendment, modification
or addendum thereto.
"Mortgaged Property" means the real property (or leasehold estate, if
applicable) securing repayment of the debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Non-accrual Status" refers to Mortgage Loans that are 90 days or more past
due in the payment of principal or interest.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as required
by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Seller, reasonably acceptable to the Purchaser.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price to be paid on the applicable Closing
Date by the Purchaser to the Seller in consideration for the Mortgage Loans
to be purchased by the Purchaser on such Closing Date (including, without
limitation, the Initial Portfolio Purchase Price to be paid by Purchaser at
7
<PAGE>
the Initial Closing) as set forth in this Agreement or a duly executed
Commitment Letter, as the case may be.
"Purchaser" means People's Preferred Capital Corporation or its successor
in interest or assigns or any successor to the Purchaser under this Agreement as
herein provided.
"Qualified Appraiser" means an appraiser who had no interest, direct or
indirect in the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or disapproval of the
Mortgage Loan, and such appraiser and the appraisal made by such appraiser both
satisfy the requirements of Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Property was appraised.
"Qualified Insurer" means an insurance company duly qualified as such under
the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and in the two highest rating
categories by Best's with respect to hazard and flood insurance .
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to be
substituted by the Seller for a Deleted Mortgage Loan which must, on the date of
such substitution, (i) have an outstanding principal balance, after deduction of
all scheduled payments due in the month of substitution (or in the case of a
substitution of more than one mortgage loan for a Deleted Mortgage Loan, an
aggregate principal balance), not in excess of the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall will be deposited in
the Custodial Account by the Seller in the month of substitution); (ii) have a
Mortgage Interest Rate and a remaining term to maturity, each of which is as
reasonably comparable as possible to the Mortgage Interest Rate and remaining
term to maturity of the Deleted Mortgage Loan; (iii) be of the same type as the
Deleted Mortgage Loan; and (iv) comply with each representation and warranty
(respecting individual Mortgage Loans) set forth in Section 8.02 hereof.
"Remittance Date" means the date specified in the Commercial Servicing
Agreement.
"Repurchase Price" means, with respect to any Mortgage Loan, a price equal
to (i) the unpaid principal balance of such Mortgage Loan plus (ii) interest net
of servicing fees, on such unpaid principal balance of such Mortgage Loan at the
Mortgage Interest Rate from the last date through which interest has been paid
and distributed to the Purchaser to the date of repurchase, less amounts
received or advanced, if any, by the Seller in respect of such repurchased
Mortgage Loan.
"Seller" means People's Bank of California, its successors in interest and
assigns.
"Series A Preferred Shares" means the ___% Noncumulative Exchangeable
Preferred Stock, Series A, par value $0.01 per share, of the Purchaser.
8
<PAGE>
"Servicing Fee" means, with respect to each Mortgage Loan, subject to the
Commercial Servicing Agreement, the amount of the annual fee the Purchaser shall
pay to the Seller, which shall for a period of one full month be equal to
one-twelfth of the product of (a) the Servicing Fee Rate and (b) the outstanding
principal balance of such Mortgage Loan. Such fee shall be payable monthly, and
shall be pro rated for any portion of a month during which the Mortgage Loan is
serviced by the Seller under the Servicing Agreement. The obligation of the
Purchaser to pay the Servicing Fee is limited to, and the Servicing Fee is
payable solely from, the interest portion (including recoveries with respect to
interest from Liquidation Proceeds, to the extent permitted by this Agreement)
of such Monthly Payment collected by the Seller, or as otherwise provided under
this Agreement. In addition to the Servicing Fee, the Seller shall be entitled
to retain all Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Seller during the period in which the Seller is acting as
servicer pursuant to the Commercial Servicing Agreement consisting of
originals of all documents in the Mortgage File which are not delivered to
the Purchaser or its designee and copies of the Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan the unpaid
principal balance as of the applicable date of determination of such balance.
"Variable Rate Mortgage Loan" means any individual Mortgage Loan purchased
pursuant to this Agreement the interest rate of which adjusts periodically based
on the index identified in the Mortgage Note.
SECTION 2. Agreement to Purchase Initial Portfolio.
The Seller hereby agrees to sell, transfer, assign, set over and convey to
the Purchaser on the Initial Closing Date, without recourse, but subject to the
terms of this Agreement, all right, title and interest of the Seller in and to
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
the related Mortgage Files and all rights and obligations arising under the
documents contained therein. Mortgage Loans on the Initial Portfolio Mortgage
Loan Schedule shall have an aggregate principal balance on the Initial Cut-off
Date in an amount no less than $__________.
The Initial Portfolio Purchase Price payable by the Purchaser in
consideration for the Mortgage Loans listed on the Initial Portfolio Mortgage
Loan Schedule shall be equal to
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<PAGE>
the actual aggregate unpaid principal balance of the Mortgage Loans accepted
by the Purchaser on the Initial Closing Date plus interest accrued on such
Mortgage Loans at the weighted average Mortgage Interest Rate from the last
interest paid to date for each such Mortgage Loan to and including the day
prior to the Initial Closing Date.
SECTION 3. Subsequent Purchases.
From time to time, by executing a Commitment Letter substantially in the
form of Exhibit I hereto, the Seller shall sell, transfer, assign, set over and
convey to the Purchaser, without recourse, but subject to the terms of this
Agreement, and the Purchaser will purchase, all the right, title and interest of
the Seller, as of the applicable Closing Date, in and to the Mortgage Loans set
forth in the Mortgage Loan Schedule attached to such Commitment Letter, and the
Purchaser shall pay to Seller the Purchase Price set forth in such Commitment
Letter on such Closing Date.
SECTION 4. Payment of Purchase Price.
The estimated Purchase Price computed as of the initial Cut-off Date and
other Cut-off Dates, as applicable, plus accrued interest as set forth in the
preceding paragraph shall be paid on the applicable Closing Date by wire
transfer of immediately available funds. The difference, if any, between such
estimated Purchase Price and the actual Purchase Price computed as of the
applicable Closing Date shall be paid by Seller or Purchaser to the other, as
the case may be, no later than ten business days after the applicable Closing
Date.
The Purchaser shall, with respect to any Mortgage Loan purchased
hereunder or pursuant to a duly executed Commitment Letter, be entitled to
(l) all scheduled principal due after the applicable Cut-off Date, (2) all
other recoveries of principal collected on or after the applicable Cut-off
Date (provided, however, that all scheduled payments of principal due on or
before the applicable Cut-off Date and collected after the applicable Cut-off
Date shall belong to the Seller), and (3) all payments of interest on the
Mortgage Loans net of applicable Servicing Fees collected on or after the
applicable Cut-off Date (minus that portion of any such payment which is
allocable to the period prior to such Cut-off Date). The outstanding
principal balance of each Mortgage Loan as of the applicable Cut-off Date is
determined after application of payments of principal due and connected on or
before such Cut-off Date, together with any unscheduled principal prepayments
collected prior to such Cut-off Date; provided, however, that payments of
scheduled principal and interest prepaid for a Due Date beyond the applicable
Cut-off Date shall not be applied to the principal balance as of such Cut-off
Date. Such prepaid amounts shall be the property of the Purchaser. Any such
prepaid amounts shall be deposited into the Custodial Account, which account
is established for the benefit of the Purchaser for subsequent remittance to
the Purchaser.
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SECTION 5. Examination of Mortgage Files.
Prior to the date hereof or the date of any duly executed Commitment
Letter, as the case may be, the Seller has or shall have (a) delivered to the
Purchaser or its designee in escrow, for examination with respect to each
Mortgage Loan to be purchased, the related Mortgage File, including a copy of
the Assignment of Mortgage, pertaining to each Mortgage Loan, or (b) made the
related Mortgage File available to the Purchaser for examination at the Seller's
offices or such other location as shall otherwise be agreed upon by the
Purchaser and the Seller. The fact that the Purchaser or its designee has
conducted or has failed to conduct any partial or complete examination of the
Mortgage Files shall not affect the Purchaser's (or any of its successor's)
rights to demand repurchase, substitution or other relief as provided herein.
SECTION 6. Conveyance from Seller to Purchaser.
Subsection 6.01. Possession of Servicing Files.
The Servicing Files relating to any Mortgage Loans purchased by Purchaser
hereunder or pursuant to a duly executed Commitment Letter shall be retained by
the Seller in accordance with the terms of the Commercial Servicing Agreement
and, as provided therein, shall be appropriately identified in the Seller's
computer system and/or books and records, as appropriate, to clearly reflect the
sale of the related Mortgage Loan to the Purchaser.
Subsection 6.02. Books and Records.
Record title to each Mortgage Loan as of the applicable Closing Date shall
be in the name of the Seller or the Purchaser or one or more of its designees,
as the Purchaser shall select. Notwithstanding the foregoing, each Mortgage and
related Mortgage Note shall be possessed solely by the Purchaser or the
appropriate designee of the Purchaser, as the case may be. All rights arising
out of the Mortgage Loans including, but not limited to, all funds received by
the Seller after the applicable Cut-off Date on or in connection with a Mortgage
Loan shall be vested in the Purchaser or one or more of its designees; provided,
however, that all funds received on or in connection with a Mortgage Loan shall
be received and held by the Seller in trust for the benefit of the Purchaser or
its designee, as the case may be, as the owner of the Mortgage Loans pursuant to
the terms of this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's balance
sheet and other financial statements as a sale of assets by the Seller.
Subsection 6.03. Delivery of Mortgage Loan Documents.
On or prior to each Closing Date, the Seller shall deliver and release to
the Purchaser or its designee on the Closing Date the Mortgage Loan Documents
with respect to each Mortgage Loan sold to the Purchaser and set forth on the
Mortgage Loan Schedule, except as otherwise provided in the Commercial Servicing
Agreement.
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The Seller shall forward to the Purchaser or its designee original
documents evidencing an assumption, modification, consolidation, conversion or
extension of any Mortgage Loan entered into in accordance with the Commercial
Servicing Agreement within thirty (30) days of their execution, provided,
however, that the Seller shall provide the Purchaser or its designee with a
certified true copy of any such document submitted for recordation within thirty
(30) days of its execution, and shall promptly provide the original of any
document submitted for recordation or a copy of such document certified by the
appropriate public recording office to be a true and complete copy of the
original within ninety (90) days of its submission for recordation (provided,
that with respect to assignments of the Mortgages reflecting the assignment from
the Seller to the Purchaser, one final assignment shall be executed by Seller in
blanket non-recordable form, and no other forms of assignment of such Mortgages
shall be executed or recorded unless and until the Purchaser shall request
execution of individual Assignments of Mortgages pursuant to and in accordance
with Section 25 hereof).
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the submission for
recordation, and in the event that the Seller does not cure such failure within
30 days of discovery or receipt of written notification of such failure from the
Purchaser, the related Mortgage Loan shall, upon the request of the Purchaser,
be repurchased by the Seller at the price and in the manner specified in
Subsection 8.03. The foregoing repurchase obligation shall not apply in the
event that the Seller cannot deliver, or cause to be delivered, such original or
copy of any document submitted for recordation to the appropriate public
recording office within the specified period due to a delay caused by the
recording office in the applicable jurisdiction; provided that the Seller shall
instead deliver, or cause to be delivered, a recording receipt of such recording
office or, if such recording receipt is not available, an officer's certificate
of a servicing officer of the Seller, confirming that such documents have been
accepted for recording. Notwithstanding anything herein to the contrary, under
the circumstances described in the preceding sentence, the Seller shall continue
to make all reasonable efforts to obtain the original of any document submitted
for recordation to the appropriate public recording office.
The Seller shall pay all initial recording fees, if any, for the
Assignments of Mortgage and any other fees or costs in transferring all original
documents to the Purchaser or its designee. The Purchaser or its designee shall
be responsible for recording the Assignments of Mortgage and shall be reimbursed
by the Seller for the reasonable costs associated therewith pursuant to the
preceding sentence.
SECTION 7. Servicing of the Mortgage Loans.
The Mortgage Loans have been sold by the Seller to the Purchaser on a
servicing retained basis.
The Seller will service the Mortgage Loans pursuant to and in accordance
with the terms and conditions contained in the Commercial Servicing Agreement.
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The Purchaser and the Seller shall execute the Commercial Servicing Agreement on
or before the Initial Closing Date in the form attached hereto as Exhibit B.
Pursuant to the Commercial Servicing Agreement, the Seller shall begin
servicing the Mortgage Loans on behalf of the Purchaser and shall be entitled to
the Servicing Fee and any Ancillary Income with respect to such Mortgage Loans
from the Closing Date with respect to the sale and purchase thereof until the
termination of the Commercial Servicing Agreement with respect to any of the
Mortgage Loans as set forth in the Commercial Servicing Agreement. The Seller
shall conduct such servicing in accordance with the terms of the Commercial
Servicing Agreement.
SECTION 8. Representations, Warranties and Covenants of the Seller Remedies
for Breach.
Subsection 8.01. Representations and Warranties Regarding the Seller.
The Seller represents, warrants and covenants to the Purchaser that as of
the date hereof and as of the Closing Date:
(a) Due Organization and Authority; Enforceability. The Seller is a stock
savings bank duly organized, validly existing and in good standing
under the laws of the United States and has all licenses necessary to
carry on its business as now being conducted and is licensed,
qualified and in good standing in each state wherein it owns or leases
any material properties or where a Mortgaged Property is located, if
the laws of such state require licensing or qualification in order to
conduct business of the type conducted by the Seller, and in any event
the Seller is in compliance with the laws of any such state to the
extent necessary to ensure the enforceability of the related Mortgage
Loan in accordance with the terms of this Agreement; the Seller has
the full corporate power, authority and legal right to hold, transfer
and convey the Mortgage Loans and to execute and deliver this
Agreement and to perform its obligations hereunder; the execution,
delivery and performance of this Agreement (including all instruments
of transfer to be delivered pursuant to this Agreement) by the Seller
and the consummation of the transactions contemplated hereby have been
duly and validly authorized; this Agreement and all agreements
contemplated hereby have been duly executed and delivered and
constitute the valid, legal, binding and enforceable obligations of
the Seller subject to bankruptcy laws and other similar laws of
general application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder,
regardless of whether such enforcement is sought in a proceeding in
equity or at law; and all requisite corporate action has been taken by
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the Seller to make this Agreement and all agreements contemplated
hereby valid and binding upon the Seller in accordance with their
terms;
(b) Ordinary Course of Business. The consummation of the transactions
contemplated by this Agreement are in the ordinary course of business
of the Seller, and the transfer, assignment and conveyance of the
Mortgage Notes and the Mortgages by the Seller pursuant to this
Agreement are not subject to the bulk transfer or any similar
statutory provisions in effect in any applicable jurisdiction;
(c) No Conflicts. Neither the execution and delivery of this Agreement,
the sale of the Mortgage Loans to the Purchaser, the consummation of
the transactions contemplated hereby, nor the fulfillment of or
compliance with the terms and conditions of this Agreement, will
conflict with or result in a breach of any of the terms, conditions or
provisions of the Seller's charter or bylaws or any legal restriction
or any agreement or instrument to which the Seller is now a party or
by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of
any law, rule, regulation, order, judgment or decree to which the
Seller or its property is subject, or result in the creation or
imposition of any lien, charge or encumbrance that would have an
adverse effect upon any of its properties pursuant to the terms of any
mortgage, contract, deed of trust or other instrument, or impair the
ability of the Purchaser to realize on the Mortgage Loans, impair the
value of the Mortgage Loans, impair the ability of the Purchaser to
realize the full amount of any mortgage insurance benefits accruing
pursuant to this Agreement or impair the ability of the Seller to
perform its obligations hereunder;
(d) Ability to Perform: Solvency. The Seller does not believe, nor does it
have any reason or cause to believe, that it cannot perform each and
every covenant contained in this Agreement. The Seller is solvent and
the sale of the Mortgage Loans will not cause the Seller to become
insolvent. The sale of the Mortgage Loans is not undertaken with the
intent to hinder, delay or defraud any of the Seller's creditors;
(e) No Litigation Pending. There is no action, suit, proceeding or
investigation pending or threatened against the Seller, before any
court, administrative agency or other tribunal asserting the
invalidity of this Agreement or the Commercial Servicing Agreement,
seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or the Commercial Servicing Agreement
or which, either in any one instance or in the aggregate, could result
in any material adverse change in the business, operations, financial
condition, properties or assets of the Seller, or in any material
impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or in any material liability
on the part of the Seller, or which would draw into question the
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validity of this Agreement or the Commercial Servicing Agreement or
any Mortgage Loan or of any action taken or to be taken in connection
with the obligations of the Seller contemplated herein, or which would
be likely to impair materially the ability of the Seller to perform
under the terms of this Agreement or the Commercial Servicing
Agreement;
(f) No Consent Required. No consent, approval, authorization or order of,
or registration or filing with, or notice to any court or governmental
agency or body is required for the execution, delivery and performance
by the Seller of or compliance by the Seller with this Agreement or
the Mortgage Loans, the delivery of a portion of the Mortgage Files to
the Purchaser or its designee or the sale of the Mortgage Loans or the
consummation of the transactions contemplated by this Agreement, or if
required, such approval has been obtained prior to the Closing Date;
(g) Selection Process. The Mortgage Loans were selected from among the
outstanding commercial mortgage loans in the Seller's portfolio as of
the applicable Closing Date as to which the representations and
warranties set forth in Subsection 8.02 could be made and such
selection was not made in a manner so as to affect adversely the
interests of the Purchaser;
(h) Initial Portfolio. The aggregate characteristics of the Mortgage Loans
are as set forth under the heading " Business and
Strategy--Description of Initial Portfolio" in the Prospectus relating
to the Series A Preferred Shares of the Purchaser dated ___________,
1997;
(i) No Untrue Information. Neither this Agreement nor any information,
statement, tape, diskette, report, form, or other document furnished
or to be furnished pursuant to this Agreement or in connection with
the transactions contemplated hereby contains or will contain any
untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or
therein not misleading; and
(j) No Brokers. The Seller has not dealt with any broker, investment
banker, agent or other person that may be entitled to any commission
or compensation in connection with the sale of the Mortgage Loans.
Subsection 8.02. Representations and Warranties Regarding Individual
Mortgage Loans.
The Seller hereby represents and warrants to the Purchaser that, as to each
Mortgage Loan, as of the applicable Closing Date for such Mortgage Loans (or as
of such other date as may be specified below), that:
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(a) Mortgage Loans as Described. The information set forth in the Mortgage
Loan Schedule is complete, true and correct in all material respects
as of the date indicated thereon;
(b) Payments Current; Status. All payments required to be made up to, but
not including, the applicable Cut-off Date for the Mortgage Loan under
the terms of the Mortgage Note have been made and credited. No payment
required under the Mortgage Loan is delinquent nor has any payment
under the Mortgage Loan been 30 days or more delinquent more than once
within the period falling twelve (12) months prior to the applicable
Cut-off Date. The Mortgage Loan is not, and has not been at any time
in the preceding twelve months, (i) Classified, (ii) in Non-accrual
Status or (iii) renegotiated due to the financial deterioration of the
Mortgagor;
(c) No Outstanding Charges. There are no defaults in complying with the
terms of the Mortgage, and all taxes, governmental assessments,
insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing have
been paid, or an escrow of funds or payment plan has been established
in an amount sufficient to pay for every such item which remains
unpaid and which has been assessed but is not yet due and payable. The
Seller has not advanced funds, or induced, solicited or knowingly
received any advance of funds by a party other than the Mortgagor,
directly or indirectly, for the payment of any amount required under
the Mortgage Loan, except for interest accruing from the date of the
Mortgage Note or date of disbursement of the Mortgage Loan proceeds,
whichever is earlier, to the day which precedes by one month the Due
Date of the first installment of principal and interest;
(d) Original Terms Unmodified. The terms of the Mortgage Note and Mortgage
have not been impaired, waived, altered or modified in any respect,
from the date of origination except as contained in the Mortgage
Loan Document and the terms of which are reflected in the Mortgage
Loan Schedule, if applicable. The substance of any such waiver,
alteration or modification has been approved by the title insurer,
if any, to the extent required by the policy, and its terms are
reflected on the Mortgage Loan Schedule, if applicable. No Mortgagor
has been released, in whole or in part, except in connection with an
assumption agreement, which assumption agreement is part of the
Mortgage Loan File delivered to the Purchaser or its designee and the
terms of which are reflected in the Mortgage Loan Schedule;
(e) No Defenses. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without
limitation the defense of usury, nor will the operation of any of the
terms of the Mortgage Note or the Mortgage, or the exercise of any
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right thereunder, render either the Mortgage Note or the Mortgage
unenforceable, in whole or in part and no such right of rescission,
set-off, counterclaim or defense has been asserted with respect
thereto, and no Mortgagor is now or was, at the time of origination of
the related Mortgage Loan, a debtor in any state or Federal bankruptcy
or insolvency proceeding;
(f) Hazard Insurance. Pursuant to the terms of the Mortgage, all buildings
or other improvements upon the Mortgaged Property are insured by a
generally acceptable insurer against loss by fire, hazards of extended
coverage. If required by the Flood Disaster Protection Act of 1973, as
amended, the Mortgage Loan is covered by a flood insurance policy,
meeting the requirements of the Federal Insurance Administration, as
well as all additional requirements set forth in the Commercial
Servicing Agreement attached hereto as Exhibit B. All individual
insurance policies contain a standard mortgagee clause naming the
Seller and its successors and assigns as mortgagee, and all premiums
thereon have been paid. The Mortgage obligates the Mortgagor
thereunder to maintain the hazard insurance policy at the Mortgagor's
cost and expense, and on the Mortgagor's failure to do so, authorizes
the holder of the Mortgage to obtain and maintain such insurance at
such Mortgagor's cost and expense, and to seek reimbursement therefor
from the Mortgagor. Where required by state law or regulation, the
Mortgagor has been given an opportunity to choose the carrier of the
required hazard insurance. To the best knowledge of the Seller, the
hazard insurance policy is the valid and binding obligation of the
insurer, is in full force and effect, and will be in full force and
effect and inure to the benefit of the Purchaser upon the consummation
of the transactions contemplated by this Agreement. No action,
inaction or event has occurred and no state of facts exists or has
existed that has resulted or could result in the exclusion from,
denial of, or defense to coverage under any hazard insurance policy
(including, without limitation, any exclusions, denials or defenses
which would limit or reduce the availability of the timely payment of
the full amount of the loss otherwise due thereunder to the insured)
whether arising out of actions, representations, errors, omissions,
negligence, or fraud of the Seller, the related Mortgagor or any party
involved in the application for such coverage, including the
appraisal, plans and specifications and other exhibits or documents
submitted therewith to the insurer under such insurance policy, or for
any other reason under such coverage, but not including the failure of
such insurer to pay by reason of such insurer's breach of such
insurance policy or such insurer's financial inability to pay. The
Seller has not engaged in, and has no knowledge of the Mortgagor's
having engaged in, any act or omission which would impair the coverage
of any such policy, the benefits of the endorsement provided for
herein, or the validity and binding effect of either including,
without limitation, no unlawful fee, commission, kickback or other
unlawful compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm or other person
or entity, and no such unlawful items have been received, retained or
realized by the Seller;
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(g) Compliance with Applicable Laws. Any and all requirements of any
federal, state or local law applicable to the Mortgage Loan
have been complied with in all material respects, the consummation of
the transactions contemplated hereby will not involve the violation of
any such laws or regulations, and the Seller shall maintain in its
possession, available for the Purchaser's inspection, and shall
deliver to the Purchaser upon demand, evidence of compliance with all
such requirements;
(h) No Satisfaction of Mortgage. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the
Mortgaged Property has not been released from the lien of the
Mortgage, in whole or in part, nor has any instrument been executed
that would effect any such release, cancellation, subordination or
rescission. Neither the Seller, the Servicer nor any other Person has
waived the performance by the Mortgagor of any action, if the
Mortgagor's failure to perform such action would cause the Mortgage
Loan to be in default, nor has the Seller, the Servicer nor any other
Person waived any default resulting from any action or inaction by the
Mortgagor;
(i) Location and Type of Mortgaged Property. The Mortgaged Property is
located in the state identified in the Mortgage Loan Schedule and
consists of a real property improved by a commercial or multi-family
(greater than four residential units) facility erected thereon.
(j) Valid First Lien. The Mortgage is a valid, subsisting, enforceable and
perfected first lien on the Mortgaged Property, including all
buildings, improvements and fixtures on the Mortgaged Property and/or
all installations and mechanical, electrical, plumbing, heating and
air conditioning systems located in or annexed to such buildings, and
all additions, alterations and replacements made at any time with
respect to the foregoing as set forth in each Mortgage. The lien of
the Mortgage is subject only to:
(1) the lien of current real property taxes and assessments not yet
due and payable;
(2) covenants, conditions and restrictions, rights of way, easements
and other matters of the public record as of the date of
recording acceptable to prudent mortgage lending institutions
generally and specifically referred to in the lender's title
insurance policy delivered to the originator of the Mortgage Loan
and (a) specifically referred to or otherwise considered in the
appraisal made for the originator of the Mortgage Loan or (b)
which do not adversely affect the Appraised Value of the
Mortgaged Property set forth in such appraisal; and
(3) other matters to which like properties are commonly subject which
do not materially interfere with the benefits of the security
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intended to be provided by the Mortgage or the use, enjoyment,
value or marketability of the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document
related to and delivered in connection with the Mortgage Loan
establishes and creates a valid, subsisting, enforceable and perfected
first lien and first priority security interest on the property
described therein and the Seller has full right to sell and assign the
same to the Purchaser. The Mortgaged Property was not, as of the date
of origination of the Mortgage Loan, subject to a mortgage, deed of
trust, deed to secure debt or other security instrument creating a
lien subordinate to the lien of the Mortgage (except any such
subordinate loan which was created in connection with the origination
of the related Mortgage Loan details of which are contained in the
related Mortgage File);
(k) Validity of Mortgage Documents. The Mortgage Note and the Mortgage and
any other agreement executed and delivered by a Mortgagor in
connection with a Mortgage Loan are genuine, and each is the legal,
valid and binding obligation of the maker thereof enforceable in
accordance with its terms. To the best knowledge of the Seller, all
parties to the Mortgage Note, the Mortgage and any other such related
agreement had legal capacity to enter into the Mortgage Loan and to
execute and deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and any other such
related agreement have been duly and properly executed by such
parties. To the best knowledge of the Seller, no fraud, error,
omission, misrepresentation, negligence or similar occurrence with
respect to a Mortgage Loan has taken place on the part of any Person,
including without limitation, the Mortgagor, any appraiser, any
builder or developer, or any other party involved in the origination
of the Mortgage Loan;
(l) Full Disbursement of Proceeds. The Mortgage Loan has been closed and
the proceeds of the Mortgage Loan have been fully disbursed and there
is no requirement for future advances thereunder, and any and all
requirements as to completion of any on-site or off-site improvement
and as to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making or
closing the Mortgage Loan and the recording of the Mortgage were paid,
and the Mortgagor is not entitled to any refund of any amounts paid or
due under the Mortgage Note or Mortgage;
(m) Ownership. The Seller or its Affiliate is the sole owner of record and
holder of the Mortgage Loan and the indebtedness evidenced by each
Mortgage Note, except for the assignments of mortgage which have been
sent for recording, and upon recordation the Purchaser will be the
sole owner of record and holder of each Mortgage and the indebtedness
evidenced by each Mortgage Note, and upon the sale of the Mortgage
Loans to the Purchaser, the Seller will retain the Mortgage Files or
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any part thereof with respect thereto not delivered to the Purchaser
or its designee in trust only for the purpose of servicing and
supervising the servicing of each Mortgage Loan. The Mortgage Loan is
not assigned or pledged, and the Seller has good, indefeasible and
marketable title thereto, and has full right to transfer and sell the
Mortgage Loan to the Purchaser free and clear of any encumbrance,
equity, participation interest, lien, pledge, charge, claim or
security interest, and has full right and authority subject to no
interest or participation of, or agreement with, any other party, to
sell and assign each Mortgage Loan pursuant to this Agreement and
following the sale of each Mortgage Loan, the Purchaser will own such
Mortgage Loan free and clear of any encumbrance, equity, participation
interest, lien, pledge, charge, claim or security interest except as
created by Purchaser. The Seller intends to relinquish all rights to
possess, control and monitor the Mortgage Loan, except indirectly for
purposes of servicing the Mortgage Loan as set forth in the Commercial
Servicing Agreement. After the Closing Date, the Seller will have no
right to modify or alter the terms of the sale of the Mortgage Loan
and the Seller will have no obligation or right to repurchase the
Mortgage Loan or substitute another Mortgage Loan, except as provided
in this Agreement;
(n) Doing Business. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise,
are (or, during the period in which they held and disposed of such
interest, were) (1) in compliance with any and all applicable
licensing requirements of the laws of the state wherein the Mortgaged
Property is located, and (2) either (i) organized under the laws of
such state, or (ii) qualified to do business in such state, or (iii) a
federal savings and loan association, a savings bank or a national
bank having a principal office in such state, or (3) not doing
business in such state;
(o) LTV. The original LTV of each Mortgage Loan was not more than 80%;
(p) Title Insurance. The Mortgage Loan is covered by an ALTA lender's
title insurance policy or other form of policy or insurance and each
such title insurance policy is issued by a title insurer qualified to
do business in the jurisdiction where the Mortgaged Property is
located, insuring the Seller, its successors and assigns, as to the
first priority lien of the Mortgage in the original principal amount
of the Mortgage Loan, subject only to the exceptions contained in
clauses (1), (2) and (3) of paragraph (j) of this Subsection 8.02, and
against any loss by reason of the invalidity or unenforceability of
the lien resulting from the provisions of the Mortgage providing for
adjustment to the Mortgage Interest Rate and Monthly Payment. Where
required by state law or regulation, the Mortgagor has been given the
opportunity to choose the carrier of the required mortgage title
insurance. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress, and against encroachments by
or upon the Mortgaged Property or any interest therein. The Seller,
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its successor and assigns, are the sole insurers of such lender's
title insurance policy, and such lender's title insurance policy is
valid and remains in full force and effect and will be in force and
effect upon the consummation of the transactions contemplated by this
Agreement. No claims have been made under such lender's title
insurance policy and, neither the Seller nor, to the best knowledge of
Seller, any other prior holder of the related Mortgage has done, by
act or omission, anything which would impair the coverage of such
lender's title insurance policy, including without limitation, no
unlawful fee, commission, kickback or other unlawful compensation or
value of any kind has been or will be received, retained or realized
by any attorney, firm or other person or entity, and no such unlawful
items have been received, retained or realized by the Seller;
(q) No Defaults. There is no default, breach, violation or event which
would permit acceleration existing under the Mortgage or the Mortgage
Note and no event which, with the passage of time or with notice and
the expiration of any grace or cure period, would constitute a
default, breach, violation or event which would permit acceleration,
and neither the Seller nor its predecessors have waived any default,
breach, violation or event which would permit acceleration;
(r) No Mechanics' Liens. With respect to each Mortgage Loan, to the best
knowledge of the Seller, there are no mechanics' or similar liens or
claims which have been filed for work, labor or material (and no
rights are outstanding that under law could give rise to such liens)
affecting the Mortgaged Property which are or may be liens prior to,
or equal or coordinate with, the lien of the related Mortgage;
(s) Location of Improvements; No Encroachments. With respect to each
Mortgage Loan, to the best knowledge of the Seller, all improvements
which were considered in determining the Appraised Value of the
Mortgaged Property lay wholly within the boundaries and building
restriction lines of the Mortgaged Property, and no improvements on
adjoining properties encroach upon the Mortgaged Property. To the
best knowledge of Seller, no improvement located on or being part of
the Mortgaged Property is in violation of any applicable zoning law or
regulation;
(t) Origination; Payment Terms. The Mortgage Loan was originated by a
savings and loan association, a savings bank, a commercial bank,
credit union, insurance company or similar institution which is
supervised and examined by a federal or state authority. To the best
knowledge of the Seller, the documents, instruments and agreements
submitted for loan underwriting were not falsified and contain no
untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the information and
statements therein not misleading. Principal payments on the Mortgage
Loan commenced no more than sixty (60) days after funds were disbursed
in connection with the Mortgage Loan. The Mortgage Interest Rate for
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each Mortgage Loan are as set forth on the applicable Mortgage Loan
Schedule. The Mortgage Note is payable each month in equal monthly
installments of principal and interest, which installments of interest
are subject to change if the Mortgage Loan is an Variable Rate
Mortgage Loan due to the adjustments to the Mortgage Interest Rate on
each Interest Rate Adjustment Date, with interest calculated and
payable in arrears, sufficient to amortize the Mortgage Loan fully by
the stated maturity date, over an original term of not more than
thirty years from commencement of amortization.
(u) Customary Provisions. The Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the holder
thereof adequate for the realization against the Mortgaged Property of
the benefits of the security provided thereby, including, (i) in the
case of a Mortgage designated as a deed of trust, by trustee's sale,
and (ii) otherwise by judicial foreclosure. For Mortgage Loans
secured by Mortgage Property in California, there is no homestead or
other exemption available to a Mortgagor which would interfere with
the right to sell the Mortgaged Property at a trustee's sale or the
right to foreclose the Mortgage, subject to applicable federal and
state laws and judicial precedent with respect to bankruptcy and right
of redemption or similar law;]
(v) Conformance with Underwriting Standards. The Mortgage Loan was
underwritten in accordance with the underwriting standards of the
Seller or one of its predecessors in interest in effect at the time
the Mortgage Loan was originated. The Mortgage Note and Mortgage are
on forms acceptable to the Purchaser, in the Purchaser's sole
discretion, as evidenced by the Purchaser's purchase of the related
Mortgage Loans, and, the Seller has not made any representations to a
Mortgagor that are inconsistent with the Mortgage and the Mortgage
Note;
(w) Occupancy of the Mortgaged Property. As of the Closing Date, to the
best of Seller's knowledge, the Mortgaged Property is lawfully
occupied under applicable law. To the best knowledge of Seller, all
inspections, licenses and certificates required to be made or issued
with respect to all occupied portions of the Mortgaged Property and,
with respect to the use and occupancy of the same, including but not
limited to certificates of occupancy and fire underwriting
certificates, have been made or obtained from the appropriate
authorities;
(x) No Additional Collateral. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding
Mortgage and the security interest of any applicable security
agreement or chattel mortgage referred to in clause (j) above;
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(y) Deeds of Trust. In the event the Mortgage constitutes a deed of trust,
a trustee, authorized and duly qualified under applicable law to serve
as such, has been properly designated and currently so serves and is
named in the Mortgage, and no fees or expenses are or will become
payable by the Purchaser to the trustee under the deed of trust,
except in connection with a trustee's sale after default by the
Mortgagor;
(z) Value and Marketability. The Seller has no actual knowledge of any
circumstances or conditions with respect to the Mortgage, the
Mortgaged Property, the Mortgagor, the Mortgage File or the
Mortgagor's credit standing that can reasonably be expected to cause
the Mortgage Loan to become delinquent, or adversely affect the value
or marketability of the Mortgage Loan;
(aa) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage, the
Assignment of Mortgage and any other Mortgage Loan Documents for each
Mortgage Loan have been delivered to the Purchaser or its designee.
The Seller is in possession of a complete, true and accurate Mortgage
File in compliance with Exhibit A hereto, except for such documents
the originals of which have been delivered to the Purchaser or its
designee;
(bb) [Reserved]
(cc) Transfer of Mortgage Loans. The Assignment of Mortgage or a blanket
assignment for all of the Mortgage Loans is in recordable form and is
acceptable for recording under the laws of the jurisdiction in which
the Mortgaged Property is located;
(dd) Assumability. Either (i) the Mortgage Loan Documents provide that a
related Mortgage Loan may only be assumed if the party assuming such
Mortgage Loan meets certain credit requirements stated in the Mortgage
Loan Documents, or (ii) the Mortgage Note with respect to such
Mortgage Loan contains a "due-on-sale" provision which prevents the
assumption of the Mortgage Loan by a proposed transferee and
accelerates the payment of the outstanding principal balance of such
Mortgage Loan;
(ee) No Buydown Provisions; No Graduated Payments or Contingent Interests.
The Mortgage Loan does not contain provisions pursuant to which
Monthly Payments are paid or partially paid with funds deposited in
any separate account established by the Seller, the Mortgagor, or
anyone on behalf of the Mortgagor, or paid by any source other than
the Mortgagor nor does it contain any other similar provisions which
may constitute a "buydown" provision. The Mortgage Loan is not a
graduated payment mortgage loan and the Mortgage Loan does not have a
shared appreciation or other contingent interest feature;
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(ff) [Reserved]
(gg) Mortgaged Property Undamaged; No Condemnation Proceedings. There is no
proceeding pending or, to the best knowledge of Seller, threatened for
the total or partial condemnation of the Mortgaged Property. The
Mortgaged Property is undamaged by waste, fire, earthquake or earth
movement, windstorm, flood, tornado or other casualty so as to affect
adversely the value of the Mortgaged Property as security for the
Mortgage Loan or the use for which the premises were intended and
each Mortgaged Property is in good repair;
(hh) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The
origination and collection practices used by the Seller with respect
to the Mortgage Loan have been in all material respects in compliance
with Accepted Servicing Practices, applicable laws and regulations,
and have been in all material respects legal and proper. With respect
to escrow deposits and Escrow Payments, all such payments are in the
possession of, or under the control of, the Seller and there exist no
deficiencies in connection therewith for which customary arrangements
for repayment thereof have not been made. All Escrow Payments have
been collected in full compliance with state and federal law and the
provisions of the related Mortgage Note and Mortgage. An escrow of
funds is not prohibited by applicable law and has been established in
an amount sufficient to pay for every item that remains unpaid and has
been assessed but is not yet due and payable if required under the
Mortgage Loan. No escrow deposits or Escrow Payments or other charges
or payments due the Seller have been capitalized under the Mortgage or
the Mortgage Note. All Mortgage Interest Rate adjustments to the
Monthly Payment, if the Mortgage Loan is an Variable Rate Mortgage
Loan, have been made in strict compliance with state and federal law
and the terms of the related Mortgage and Mortgage Note on the related
Interest Rate Adjustment Date. With respect to each Variable Rate
Mortgage Loan, the Mortgage Interest Rate adjusts monthly,
semi-annually or annually as set forth in the Mortgage Note. If,
pursuant to the terms of the Mortgage Note, another index was selected
for determining the Mortgage Interest Rate, the same index was used
with respect to each Mortgage Note which required a new index to be
selected, and such selection did not conflict with the terms of the
related Mortgage Note. The Seller executed and delivered any and all
notices required under applicable law and the terms of the related
Mortgage Note and Mortgage regarding the Mortgage Interest Rate and
the Monthly Payment adjustments. Any interest required to be paid
pursuant to state, federal and local law has been properly paid and
credited;
(ii) Other Insurance Policies. In connection with the placement of any
hazard insurance, no commission, fee, or other compensation has been
or will be received by the Seller or by any officer, director, or
employee of the Seller or any designee of the Seller or any
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corporation in which the Seller or any officer, director, or employee
had a financial interest at the time of placement of such insurance;
(jj) No Violation of Environmental Laws. To the best knowledge of Seller,
there is no pending action or proceeding directly involving the
Mortgaged Property in which compliance with any environmental law,
rule or regulation is an issue, there is no violation of any
environmental law, rule or regulation with respect to the Mortgaged
Property, and nothing further remains to be done to satisfy in full
all requirements of each such law, rule or regulation constituting a
prerequisite to use and enjoyment of said property;
(kk) [Reserved]
(ll) Appraisal. The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan
by a Qualified Appraiser who had no interest, direct or indirect in
the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or disapproval
of the Mortgage Loan and, if applicable on the date the Mortgage Loan
was originated, the appraisal and appraiser both satisfy the
requirements of Title XI of the Federal Institutions Reform, Recovery,
and Enforcement Act of 1989 and the regulations promulgated thereunder.
(mm) [Reserved]
(nn) [Reserved]
(oo) [Reserved]
(pp) [Reserved]
(qq) Prior Servicing. Each Mortgage Loan has been serviced in all
material respects in compliance with Accepted Servicing Practices;
provided that, in the event of any breach of the representation and
warranty set forth in this Subsection (qq), the Seller shall not be
required to repurchase any such Mortgage Loan unless such breach had,
and continues to have, a material and adverse effect on the value of
the related Mortgage Loan or the interest of the Purchaser therein.
Subsection 8.3 Remedies for Breach of Representations and Warranties.
It is understood and agreed that the representations and warranties set
forth in Subsections 8.1 and 8.2 shall survive the sale of the Mortgage Loans to
the Purchaser and shall inure to the benefit of the Purchaser, notwithstanding
any restrictive or qualified endorsement on any Mortgage Note or Assignment of
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Mortgage or the examination or failure to examine any Mortgage File. Upon
discovery by either the Seller or the Purchaser of a breach of any of the
foregoing representations and warranties which materially and adversely affects
the interests of the Purchaser in the related Mortgage Loan, the party
discovering such breach shall give prompt written notice to the other.
The Seller, promptly after discovery of a breach of any such representation
or warranty, shall notify the Purchaser of such breach and the details thereof.
Within sixty (60) days of the earlier of (i) notice by the Seller pursuant to
the immediately preceding sentence or (ii) notice by the Purchaser to the Seller
of any breach of a representation or warranty with respect to a Mortgage Loan,
the Seller shall use its best efforts promptly to cure such breach in all
material respects. If such breach can ultimately be cured but is not reasonably
expected to be cured within the 60 day period, Seller shall have such additional
time as is reasonably determined by Purchaser (not to exceed 120 days) to cure
or correct such breach provided Seller has commenced curing or correcting such
breach and is diligently pursuing same. If such breach cannot be or has not been
cured, the Seller shall, upon the expiration of the cure period described above,
at the Purchaser's option and subject to the provisions of this Subsection 8.3,
repurchase such Mortgage Loan at the Repurchase Price, unless the Seller elects
to substitute a Qualified Substitute Mortgage Loan for such Mortgage Loan
pursuant to this Subsection 8.3. The Seller may, at the Seller's option and
provided that the Seller has a Qualified Substitute Mortgage Loan, rather than
repurchase the Mortgage Loan as provided above, remove such Mortgage Loan (a
"Deleted Mortgage Loan") and substitute in its place a Qualified Substitute
Mortgage Loan or Loans. If the Seller has no Qualified Substitute Mortgage Loan,
it shall repurchase the deficient Mortgage Loan. Any repurchase of a Mortgage
Loan or Mortgage Loans pursuant to the foregoing provisions of this Subsection
8.3 shall be accomplished by either (a) if the Commercial Servicing Agreement is
in effect, deposit in the Custodial Account of the amount of the Repurchase
Price for payment to the Purchaser on the next scheduled Remittance Date, after
deducting therefrom any amount received in respect of such repurchased Mortgage
Loan or Loans and being held in the Custodial Account for future distribution or
(b) if the Commercial Servicing Agreement is no longer in effect, by direct
remittance of the Repurchase Price to the Purchaser or its designee in
accordance with the Purchaser's instructions.
At the time of repurchase or substitution, the Purchaser and the Seller
shall arrange for the reassignment of the Deleted Mortgage Loan to the Seller
and the delivery to the Seller of any documents held by the Purchaser or its
designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to such
Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the related Mortgage Loan Schedule to
reflect the withdrawal of the Deleted Mortgage Loan from this Agreement, and,
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in the case of substitution, identify a Qualified Substitute Mortgage Loan
and amend the related Mortgage Loan Schedule to reflect the addition of such
Qualified Substitute Mortgage Loan to this Agreement. In connection with any
such substitution, the Seller shall be deemed to have made as to such
Qualified Substitute Mortgage Loan the representations and warranties set
forth in this Agreement except that all such representations and warranties
set forth in this Agreement shall be deemed made as of the date of such
substitution. The Seller shall effect such substitution by delivering to the
Purchaser or its designee for such Qualified Substitute Mortgage Loan the
documents required by Subsection 6.3, with the Mortgage Note endorsed as
required by Subsection 6.3. The Seller shall deposit in the Custodial
Account the Monthly Payment, or in the event that the Commercial Servicing
Agreement is no longer in effect, remit directly to the Purchaser or its
designee in accordance with the Purchaser's instructions the Monthly Payment
less the Servicing Fee due, if any, on such Qualified Substitute Mortgage
Loan or Loans in the month following the date of such substitution. Monthly
Payments due with respect to Qualified Substitute Mortgage Loans in the month
of substitution shall be retained by the Seller. For the month of
substitution, payments to the Purchaser shall include the Monthly Payment due
on any Deleted Mortgage Loan in the month of substitution, and the Seller
shall thereafter be entitled to retain all amounts subsequently received by
the Seller in respect of such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the amount
(if any) by which the aggregate principal balance of all Qualified Substitute
Mortgage Loans as of the date of substitution is less than the aggregate Stated
Principal Balance of all Deleted Mortgage Loans (after application of scheduled
principal payments due in the month of substitution). The amount of such
shortfall shall be distributed by the Seller directly to the Purchaser or its
designee in accordance with the Purchaser's instructions within two (2) Business
Days of such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses,
damages, penalties, fines, forfeitures, reasonable and necessary legal fees
and related costs, judgments, and other costs and expenses (but excluding any
consequential, indirect damages, special, exemplary or punitive damages
("Special Damages"), except for such Special Damages which Purchaser is
required by law to pay to a Third party, resulting from any claim, demand,
defense or assertion based on or grounded upon, or resulting from, a breach
of the Seller representations and warranties contained in this Agreement. It
is understood and agreed that the obligations of the Seller set forth in this
Subsection 8.3 to cure, substitute for or repurchase a defective Mortgage
Loan and to indemnify the Purchaser as provided in this Subsection 8.3
constitute the sole remedies of the Purchaser respecting a breach of the
foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of the
breach of any representations and warranties made in Subsections 8.1 and 8.2
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with this
Agreement.
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SECTION 9. Closing.
The closing for the purchase and sale of any Mortgage Loans shall take
place on (i) the Initial Closing Date with respect to the purchase and sale of
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
(ii) on the Closing Date set forth in a duly executed Commitment Letter with
respect to the purchase and sale of Mortgage Loans pursuant thereto. At the
Purchaser's option, any closing shall be either: by telephone, confirmed by
letter or wire as the parties shall agree, or conducted in person, at such place
as the parties shall agree.
The closing for the purchase and sale of Mortgage Loans to be purchased on
any Closing Date shall be subject to each of the following conditions:
(a) all of the representations and warranties of the Seller under this
Agreement shall be true and correct as of such Closing Date, no
default shall have occurred and no event shall have occurred which,
with notice or the passage of time or both, would constitute a default
under this Agreement;
(b) the Purchaser shall have received, or the Purchaser's attorneys shall
have received in escrow, all closing documents as specified in Section
10 of this Agreement, in such forms as are agreed upon and acceptable
to the Purchaser, duly executed by all signatories other than the
Purchaser as required pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the Purchaser or its
designee all Mortgage Loan Documents with respect to each Mortgage
Loan not otherwise required under the Commercial Servicing Agreement
to be in possession of, and actually in the possession of the Seller
in its capacity as servicer; and
(d) all other terms and conditions of this Agreement shall have been
complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the Seller
on the applicable Closing Date the applicable Purchase Price, plus accrued
interest pursuant to Section 4 of this Agreement, by wire transfer of
immediately available funds to the account designated by the Seller.
SECTION 10. Closing Documents.
The closing documents for the Mortgage Loans to be purchased on any Closing
Date shall consist of fully executed originals of the following documents:
1. this Agreement (and on all subsequent Closing Dates, a Commitment
Letter in the form of Exhibit I hereto);
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2. on the Initial Closing Date only, the Commercial Servicing Agreement,
dated as of the applicable Cut-off Date, in the form of Exhibit B
hereto;
3. on the Initial Closing Date only, a Custodial Account Letter Agreement
or a Custodial Account Certification, as applicable, as required under
the Commercial Servicing Agreement;
4. on the Initial Closing Date only, an Escrow Account Letter Agreement
or an Escrow Account Certification, as applicable, as required under
the Commercial Servicing Agreement;
5. an Officer's Certificate, in the form of Exhibit C hereto, including
all attachments thereto;
6. an Opinion of Counsel of the Seller (who may be an employee of the
Seller), in the form of Exhibit D hereto;
7. a Security Release Certification, in the form of Exhibit F hereto
executed by any person, as requested by the Purchaser, if any of the
Mortgage Loans have at any time been subject to any security interest,
pledge or hypothecation for the benefit of such person; and
8. a certificate or other evidence of merger or acquisition, if any of
the Mortgage Loans being purchased were acquired by Seller by merger
or acquisition.
The Seller shall bear the risk of loss of any closing documents and
Mortgage Loan documents until such time as they are received by the Purchaser or
its attorneys or designees, as applicable.
SECTION 11. Costs.
The Purchaser shall pay any commissions due its salesmen and the legal fees
and expenses of its attorneys. All other costs and expenses incurred in
connection with the transfer and delivery of the Mortgage Loans including
recording fees, fees for recording Assignments of Mortgages, fees for title
policy endorsements and continuations and, if applicable, the Seller's
attorney's fees, shall be paid by the Seller.
SECTION 12. Merger or Consolidation of the Seller.
The Seller will keep in full effect its existence, rights and franchises
as a corporation under the laws of the state of its incorporation except as
permitted herein, and will obtain and preserve its qualification to do
business as a foreign corporation in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, or any of the Mortgage Loans and to perform
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its duties under this Agreement. In the event Seller or any of its
successors or assigns (i) consolidates with or merges into any other Person
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or substantially
all of its properties and assets to any Person, then, and in each such case,
proper provision shall be made so that the successors and assigns of Seller
assume the obligations of Seller set forth in this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the Seller,
shall be the successor of the Seller hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided, however, that the
successor or surviving Person shall have a tangible net worth of at least
$30,000,000.
SECTION 13. Mandatory Delivery; Grant of Security Interest.
The sale and delivery on any Closing Date of the Mortgage Loans described
on the applicable Mortgage Loan Schedule is mandatory from and after the date of
the execution of this Agreement or a Commitment Letter, as the case may be, it
being specifically understood and agreed that each Mortgage Loan is unique and
identifiable and that an award of money damages would be insufficient to
compensate the Purchaser for the losses and damages incurred by the Purchaser
(including damages to prospective purchasers of the Mortgage Loans) in the event
of the Seller's failure to deliver (i) each of the Mortgage Loans or (ii) one or
more Qualified Substitute Mortgage Loans or (iii) one or more Mortgage Loans
otherwise acceptable to the Purchaser on or before such Closing Date. The Seller
hereby grants to the Purchaser a lien on and a continuing security interest in
each Mortgage Loan set forth on the Initial Portfolio Mortgage Loan Schedule and
each document and instrument evidencing each such Mortgage Loan to secure the
performance by the Seller of its obligations under this Agreement, and the
Seller agrees that it shall hold such Mortgage Loans in custody for the
Purchaser subject to the Purchaser's (i) right to reject any Mortgage Loan (or
Qualified Substitute Mortgage Loan) under the terms of this Agreement and to
require another Mortgage Loan (or Qualified Substitute Mortgage Loan) to be
substituted therefor, and (ii) obligation to pay the Initial Purchase Price plus
accrued interest as set forth in Section 4 hereof for the Mortgage Loans. All
rights and remedies of the Purchaser under this Agreement are distinct from, and
cumulative with, any other rights or remedies under this Agreement or afforded
by law or equity and all such rights and remedies may be exercised concurrently,
independently or successively.
SECTION 14. Notices.
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed, by registered or certified
mail, return receipt requested, or, if by other means, when received by the
other party at the address as follows:
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(i) if to the Seller:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
(ii) if to the Purchaser:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. Severability Clause.
Any part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be conferred by this Agreement, the
parties shall negotiate, in good faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Agreement without regard to such invalidity.
SECTION 16. Counterparts.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. Governing Law.
This Agreement shall be deemed to have been made in the State of
California. The Agreement shall be construed in accordance with the laws of
the State of California and the obligations, rights and remedies of the
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parties hereunder shall be determined in accordance with the substantive laws
of the State of California (without regard to conflicts of laws principles),
except to the extent preempted by Federal law.
SECTION 18. Intention of the Parties.
It is the intention of the parties that the Purchaser is purchasing, and
the Seller is selling the Mortgage Loans and not a debt instrument of the Seller
or another security. Accordingly, the parties hereto each intend to treat the
transaction for Federal income tax purposes as a sale by the Seller, and a
purchase by the Purchaser, of the Mortgage Loans.
SECTION 19. Successors and Assigns; Assignment of Purchase Agreement.
This Agreement shall bind and inure to the benefit of and be enforceable
by the Seller and the Purchaser and the respective permitted successors and
assigns of the Seller and the successors and assigns of the Purchaser. This
Agreement shall not be assigned, pledged or hypothecated by the Seller to a
third party without the consent of the Purchaser. Subject to any applicable
requirement in the Commercial Servicing Agreement, this Agreement may be
assigned, pledged or hypothecated by the Purchaser without the prior consent
of the Seller. If the Purchaser assigns all or any of its rights as Purchaser
hereunder, the assignee of the Purchaser will become the "Purchaser"
hereunder to the extent of such assignment, provided that at no time shall
there be more than fifteen (15) persons having the status of "Purchaser"
hereunder. Any assignment by the Purchaser shall be accompanied by the
delivery and execution of an Assignment and Assumption Agreement (the
"Assignment and Assumption Agreement") substantially in the form attached
hereto as Exhibit G. Subject to any applicable requirement in the Commercial
Servicing Agreement, the Servicer shall be required to remit all amounts
required to be remitted to the Purchaser hereunder to said assignee
commencing with the first Remittance Date falling after receipt of said copy
of the related Assignment and Assumption Agreement provided that the Seller
receives said copy no later than three (3) Business Days immediately prior to
the first day of the month of the related Remittance Date.
SECTION 20. Waivers.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
SECTION 21. Entire Agreement; Amendment.
This Agreement (including the Schedules and Exhibits annexed hereto or
referred to herein) and any Commitment Letter duly executed by the parties
hereto contain the entire agreement between the parties with respect to the
transactions contemplated hereby and supersede all prior agreements, written or
oral, with respect thereto. No amendment, modification or alteration of the
terms or provisions of this Agreement shall be binding unless the same shall be
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in writing and duly executed by the authorized representatives of the parties
hereto, provided, however, that as long as any Series A Preferred Shares remain
outstanding, no material amendment to or modification or alteration of this
Agreement may be entered into or approved by the Purchaser without the approval
of a majority of the Independent Directors.
SECTION 22. General Interpretive Principles.
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to them
in this Agreement and include the plural as well as the singular, and the use of
any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a document are to
designated Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
(d) reference to a Subsection without further reference to a Section is a
reference to such Subsection as contained in the same Section in which the
reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular provision;
and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
SECTION 23. Reproduction of Documents.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at any closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process but solely for the
purposes set forth in this Agreement. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
33
<PAGE>
SECTION 24. Further Agreements.
The Seller and the Purchaser each agree to execute and deliver to the other
such reasonable and appropriate additional documents, instruments or agreements
as may be necessary or appropriate to effectuate the purposes of this Agreement.
SECTION 25. Recordation of Assignments of Mortgage.
The Seller shall execute a blanket assignment of the Mortgages underlying
each Mortgage Loan sold to the Purchaser pursuant to this Agreement or a duly
executed Commitment Letter. Upon the written request of Purchaser (whether due
to the proposed sale of any Mortgage Loan by Purchaser or otherwise), or to the
extent deemed necessary by the servicer in connection with servicing a Mortgage
Loan pursuant to the terms of the Commercial Servicing Agreement, the Seller
shall promptly prepare and execute individual Assignments of Mortgage to be
recorded in all appropriate public offices for real property records in all the
counties or other comparable jurisdictions in which any or all of the Mortgaged
Properties are situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Purchaser or Purchaser's
designee, but in any event, at the Seller's expense for a single recordation
with respect to each Assignment of Mortgage.
34
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL CORPORATION
By: ____________________________
Name: ____________________________
Title: ____________________________
PEOPLE'S BANK OF CALIFORNIA
By: ____________________________
Name: ____________________________
Title: ____________________________
By: ____________________________
Name: ____________________________
Title: ____________________________
35
<PAGE>
EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include each
of the following items (to the extent such items are applicable and exist,
within the Seller's Mortgage File), which shall be available for inspection by
the Purchaser and any prospective Purchaser, and which shall be delivered to
the Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan
Purchase and Warranties Agreement to which this Exhibit is attached (the
"Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I hereto, a lost note affidavit, executed by an
officer of the Seller, with a copy of the original note attached
thereto) bearing all intervening endorsements, endorsed "Pay to the
order of ____________ without recourse" (except as otherwise provided
in the Agreement) and signed in the name of the Seller by an
authorized officer. To the extent that there is no room on the face of
the Mortgage Notes for endorsements, the endorsement may be contained
on an allonge, if state law so allows. If the Mortgage Loan was
acquired by the Seller in a merger, the endorsement must be by
"[Seller], successor by merger to [name of predecessor]". If the
Mortgage Loan was acquired or originated by the Seller while doing
business under another name, the endorsement must be by "[Seller],
formerly known as [previous name]".
2. The original of any guarantee executed in connection with the Mortgage
Note.
3. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or cause
to be delivered the original Mortgage with evidence of recording
thereon on or prior to the Closing Date because of a delay caused by
the public recording office where such Mortgage has been delivered for
recordation, a photocopy of such Mortgage certified by the Seller to
be true and correct will be delivered; if such Mortgage has been lost
or if such public recording office retains the original recorded
Mortgage, the Seller shall deliver or cause to be delivered to the
Purchaser, a photocopy of such Mortgage, certified by such public
recording office to be a true and complete copy of the original
recorded Mortgage.
4. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon or
certified copies of such documents if the originals thereof are
unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all Mortgage Loans endorsed and signed in the
name of the Seller by an authorized officer. If the Mortgage Loan was
acquired by the Seller in
A-1
<PAGE>
a merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage Loan
was acquired or originated by the Seller while doing business under
another name, the Assignment of Mortgage must be by "[Seller],
formerly known as [previous name]".
6. Originals of all intervening assignments of the Mortgage with evidence
of recording thereon if such intervening assignment has been recorded.
7. The original mortgagee policy of title insurance or, in the event such
original title policy is unavailable, a certified true copy of the
related policy binder or commitment for title certified to be true and
complete by the title insurance company.
8. Any original security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
9. The original hazard insurance policy and, if required by law, flood
insurance policy, in accordance with Section 8.02(f) of the Agreement.
10. Mortgage Loan closing statement.
11. Credit report on the Mortgagor.
12. Appraisal and inspection reports and any such later reports of
applicable.
13. Photograph of the Mortgaged Property.
14. To the extent applicable, copy of each instrument necessary to
complete identification of any exception set forth in the exception
schedule in the title policy, i.e., map or plat, restrictions,
easements, sewer agreements, home association declarations, etc.
15. All required disclosure statements.
16. Sales contract, if any.
17. Tax receipts, insurance premium receipts, ledger sheets, insurance
claim files, correspondence, current and historical computerized data
files, and all other processing, underwriting and closing papers and
records which are customarily contained in a mortgage loan file and
which are required to document the Mortgage Loan or to service the
Mortgage Loan.
18. Property operating statements in Seller's possession.
A-2
<PAGE>
19. Corporate authorization documents and good standing certifications in
Seller's possession.
20. Borrower and key principal financial statements in Seller's
possession.
A-3
<PAGE>
EXHIBIT B
B-1
<PAGE>
EXHIBIT C
FORM OF SELLER'S OFFICER'S CERTIFICATE
I, _____________, hereby certify that I am the duly elected Executive Vice
President of People's Bank of California, a federal savings bank organized under
the laws of the United States (the "Seller") and further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete copy of
the restated Federal Stock Charter of the Seller which is in full force and
effect on the date hereof and which has been in effect without amendment,
waiver, rescission or modification since
2. Attached hereto as Exhibit 2 is a true, correct and complete copy of
the bylaws of the Seller which are in effect on the date hereof and which have
been in effect without amendment, waiver, rescission or modification since
_____________.
3. Attached hereto as Exhibit 3 is an original certificate of good
standing of the Seller issued within ten days of the date hereof, and no event
has occurred since the date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete copy of
the corporate resolutions of the Board of Directors of the Seller authorizing
the Seller to execute and deliver each of the Commercial Mortgage Loan Purchase
and Warranties Agreement, dated as of __________, 1997, by and between People's
Preferred Capital Corporation (the "Purchaser") and the Seller (the "Purchase
Agreement"), the Commitment Letter, dated as of _______, by and between the
Purchaser and the Seller [if applicable] and to endorse the mortgage notes and
execute the assignments of mortgages by original or facsimile signature, and
such resolutions are in effect on the date hereof and have been in effect
without amendment, waiver, rescission or modification since
5. Either (i) no consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery and
performance by the Seller of or compliance by the Seller with the Purchase
Agreement [and the Commitment Letter], the sale of the mortgage loans or the
consummation of the transactions contemplated by the Purchase Agreement; or (ii)
any required consent, approval, authorization or order has been obtained by the
Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement [or the Commitment Letter]
conflicts or will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws of the
Seller, the terms of any indenture or other agreement or instrument to which the
Seller is a party or by which it is bound or to which it is subject, or any
statute or order, rule, regulations, writ, injunction or decree of any court,
governmental authority or regulatory body to which the Seller is subject or by
which it is bound.
C-1
<PAGE>
7. To the best of my knowledge, there is no action, suit, proceeding or
investigation pending or threatened against the Seller which, in my judgment,
either in any one instance or in the aggregate, may result in any material
adverse change in the business, operations, financial condition, properties or
assets of the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted or in any
material liability on the part of the Seller or which would draw into question
the validity of the Purchase Agreement [or the Commitment Letter] or the
mortgage loans or of any action taken or to be taken in connection with the
transactions contemplated hereby, or which would be likely to impair materially
the ability of the Seller to perform under the terms of the Purchase Agreement
[and the Commitment Letter].
8. Each person listed on Exhibit 5 attached hereto who, as an officer or
representative of the Seller, signed the Purchase Agreement [and the Commitment
Letter] and any other document delivered prior to or on the date hereof in
connection with any purchase described in the Purchase Agreement was, at the
respective times of such signing and delivery, and is now, a duly elected or
appointed, qualified and acting officer or representative of the Seller, who
holds the office set forth opposite his or her name on Exhibit 5, and the
signatures of such persons appearing on such documents are their genuine
signatures.
9. The Seller is duly authorized to engage in the transactions described
and contemplated in the Purchase Agreement [and the Commitment Letter].
C-2
<PAGE>
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of
the Seller.
Dated:____________, 1997 By: ___________________________
Name: J. Michael Holmes
[Seal] Title: Executive Vice President
I, William W. Flader, an Executive Vice President of People's Bank of
California, hereby certify that J. Michael Holmes is the duly elected,
qualified and acting Executive Vice President of the Seller and that the
signature appearing above is his genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:____________, 1997 By:_____________________________
Name: William W. Flader
Title: Executive Vice President
C-3
<PAGE>
EXHIBIT 5
to Seller's Officer's Certificate
Name Title Signature
------------ -------------- ----------------
C-4
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER
_________________, 1997
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Dear Sirs:
You have requested my opinion, as General Counsel to People's Bank of
California (the "Seller"), with respect to certain matters in connection with
the sale by the Seller of the Mortgage Loans pursuant to that certain Commercial
Mortgage Loan Purchase and Warranties Agreement by and between the Seller and
People's Preferred Capital Corporation (the "Purchaser"), dated as of
__________, 1997 (the "Purchase Agreement") which sale is in the form of whole
loans, delivered pursuant to the Purchase Agreement and serviced pursuant to a
Commercial Servicing Agreement, dated as of __________, 1997, by and between
Temple-Inland Mortgage Corporation and the Purchaser (the "Servicing
Agreement"). Capitalized terms not otherwise defined herein have the meanings
set forth in the Purchase Agreement and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement and, if applicable, the Commitment Letter;
2. the Commercial Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as I have deemed necessary
and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon the
representations and warranties of the Seller contained in the Purchase
Agreement. I have assumed the authenticity of all documents submitted to me as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents.
Based upon the foregoing, it is my opinion that:
1. The Seller is a federal savings bank duly organized, validly existing
and in good standing under the laws of the United States and is
qualified to transact business in, and is in good standing under, the
laws of the United States.
D-1
<PAGE>
2. The Seller has the power to engage in the transactions contemplated by
the Purchase Agreement and, if applicable, the Commitment Letter, and
all requisite power, authority and legal right to execute and deliver
the Purchase Agreement and to perform and observe the terms and
conditions of such agreements.
3. The Purchase Agreement has been duly authorized, executed and
delivered by the Seller and is a legal, valid and binding agreement
enforceable in accordance with its respective terms against the
Seller, subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder or
with the Purchaser's ownership of the Mortgage Loans.
4. The Seller has been duly authorized to allow certain specified
officers to execute any and all documents by original signature in
order to complete the transactions contemplated by the Purchase
Agreement and by original or facsimile signature in order to execute
the endorsements to the Mortgage Notes and the Assignments of
Mortgages, and the original or facsimile signature of the officer of
the Seller executing the endorsements to the Mortgage Notes and the
Assignments of Mortgages represents the legal and valid signature of
said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery
and performance by the Seller of or compliance by the Seller with the
Purchase Agreement and the sale of the Mortgage Loans or the
consummation of the transactions contemplated by the Purchase
Agreement or (ii) any required consent, approval, authorization or
order has been obtained by the Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement conflicts or will
conflict with or results or will result in a breach of or constitutes
or will constitute a default under the charter or bylaws of the
Seller, the terms of any indenture or other agreement or instrument to
which the Seller is a party or by which it is bound or to which it is
subject, or violates any statute or order, rule, regulations, writ,
injunction or decree of any court, governmental authority or
regulatory body to which the Seller is subject or by which it is
bound.
7. There is no action, suit, proceeding or investigation pending or, to
the best of my knowledge, threatened against the Seller which, in my
judgment, either in any one instance or in the aggregate, may result
in any material adverse change in the business, operations, financial
condition, properties or assets of the Seller or in any material
impairment of the right or ability of the Seller to carry on its
business substantially as now conducted or in any material liability
D-2
<PAGE>
on the part of the Seller or which would draw into question the
validity of the Purchase Agreement or the Mortgage Loans or of any
action taken or to be taken in connection with the transactions
contemplated thereby, or which would be likely to impair materially
the ability of the Seller to perform under the terms of the Purchase
Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the manner
contemplated by the Purchase Agreement is sufficient to fully transfer
to the Purchaser all right, title and interest of the Seller thereto
as noteholder and mortgagee.
This opinion is given to you for your sole benefit, and no other person or
entity is entitled to rely hereon.
Very truly yours,
________________________________
Doreen J. Blauschild
General Counsel
D-3
<PAGE>
EXHIBIT E
______________________, 1997
Federal Home Loan Bank of
San Francisco (the "Association")
600 California Street
San Francisco, California 94108
Attention: _________________________
_________________________
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that People's Bank of California, a banking
corporation, organized pursuant to the laws of the United States (the "Bank")
has committed to sell to People's Preferred Capital Corporation under a
Commercial Mortgage Loan Purchase and Warranties Agreement, dated as of
__________, 1997, certain mortgage loans owned by the Bank. The Bank warrants
that the mortgage loans to be sold to People's Preferred Capital Corporation are
in addition to and beyond any collateral required to secure advances made by the
Association to the Bank.
The Bank acknowledges that the mortgage loans to be sold to People's
Preferred Capital Corporation shall not be used as additional or substitute
collateral for advances made by the Association. People's Preferred Capital
Corporation understands that the balance of the Bank's mortgage loan portfolio
may be used as collateral or additional collateral for advances made by the
Association, and confirms that it has no interest therein.
E-1
<PAGE>
Execution of this letter by the Association shall constitute a full and
complete release of any security interest, claim, or lien which the Association
may have against the mortgage loans to be sold to People's Preferred Capital
Corporation.
Very truly yours,
--------------------------------------------
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Date:
--------------------------------------
Acknowledged and approved:
FEDERAL HOME LOAN BANK OF
SAN FRANCISCO
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
Date:
-------------------------
E-2
<PAGE>
EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. Release of Security Interest
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased
by People's Preferred Capital Corporation from People's Bank of California
pursuant to that certain Commercial Mortgage Loan Purchase and Warranties
Agreement, dated as of __________, 1997, and certifies that all notes,
mortgages, assignments and other documents in its possession relating to such
Mortgage Loans have been delivered and released to People's Bank of
California or its designees, as of the date and time of the sale of such
Mortgage Loans to People's Preferred Capital Corporation.
Name and Address of Financial Institution
- -----------------------------------------
(name)
- -----------------------------------------
(Address)
By:
-------------------------------------
II. Certification of Release
People's Bank of California hereby certifies to People's Preferred Capital
Corporation that, as of the date and time of the sale of the above-mentioned
Mortgage Loans to People's Preferred Capital Corporation, the security interests
in the Mortgage Loans released by the above-named financial institution comprise
all security interests relating to or affecting any and all such Mortgage Loans.
Peoples's Bank of California warrants that, as of such time, there are and will
be no other security interests affecting any or all of such Mortgage Loans.
-----------------------------------
By:
------------------------------
Title:
------------------------------
Date:
------------------------------
F-1
<PAGE>
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT, dated _____________, between
______________________, a ________________ corporation ("Assignor") and
_______________, a ________________ corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of which
hereby are acknowledged, and of the mutual covenants herein contained, the
parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee, as
purchaser, all of the right, title and interest of Assignor with respect to the
mortgage loans listed on Exhibit A attached hereto (the "Mortgage Loans"), and
with respect to such Mortgage Loans, in, to and under (a) that certain
Commercial Mortgage Loan Purchase and Warranties Agreement dated __________,
1997 by and between People's Bank of California (the "Seller") and People's
Preferred Capital Corporation (the "Purchaser") (the "Purchase Agreement"), and
(b) that certain Commercial Servicing Agreement dated as of _______, 1997, by
and between the Purchaser and the Seller ("Servicer") (the "Commercial Servicing
Agreement"; the Commercial Servicing Agreement and the Purchase Agreement are
collectively referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with, the
Assignee that:
a. The Assignor is the lawful owner of the Mortgage Loans with the
full right to transfer the Mortgage Loans free from any and all
claims and encumbrances whatsoever;
b. The Assignor has not received notice of, and has no knowledge of,
any offsets, counterclaims or other defenses available to the
Seller with respect to the Agreements or the Mortgage Loans;
c. The Assignor has not waived or agreed to any waiver under, or
agreed to any amendment or other modification of, the Agreements.
The Assignor has no knowledge of, and has not received notice of,
any waivers under or amendments or other modifications of, or
assignments of rights or obligations under, the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Mortgage
Loans or any interest in the Mortgage Loans, or solicited any
offer to buy or accept a transfer, pledge or other disposition of
the Mortgage Loans, or any interest in the Mortgage Loans or
otherwise approached or negotiated with respect to the Mortgage
Loans, or any interest in the Mortgage with any person in any
manner, or made any general solicitation by means of general
advertising or in any other manner, or taken any other action
G-1
<PAGE>
which would constitute a distribution of the Mortgage Loans under
the Securities Act of 1933, as amended (the "1933 Act") or which
would render the disposition of the Mortgage Loans a violation of
Section 5 of the 1933 Act or require registration pursuant
thereto.
3. The Assignee warrants and represents to, and covenants with, the
Assignor and the Seller pursuant to the Agreements that:
a. The Assignee is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, and has all requisite corporate power and
authority to acquire, own and purchase the Mortgage Loans;
b. The Assignee has full corporate power and authority to execute,
deliver and perform under this Assignment and Assumption
Agreement, and to consummate the transactions set forth herein.
The execution, delivery and performance of the Assignee of this
Assignment and Assumption Agreement, and the consummation by it
of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action of the Assignee.
This Assignment and Assumption Agreement has been duly executed
and delivered by the Assignee and constitutes the valid and
legally binding obligation of the Assignee enforceable against
the Assignee in accordance with its respective terms;
c. To the best of Assignee's knowledge, no material consent,
approval, order or authorization of, or declaration, filing or
registration with, any governmental entity is required to be
obtained or made by the Assignee in connection with the
execution, delivery or performance by the Assignee of this
Assignment and Assumption Agreement, or the consummation by it of
the transactions contemplated hereby;
d. The Assignee agrees to be bound, as Purchaser, by all of the
terms, covenants and conditions of the Agreements, the Mortgage
Loans, and from and after the date hereof, the Assignee assumes
for the benefit of each of the Seller and the Assignor all of the
Assignor' s obligations as Purchaser thereunder, including,
without limitation, the limitation on assignment set forth in
Section 19 of the Purchase Agreement;
e. The Assignee understands that the Mortgage Loans have not been
registered under the 1933 Act or the securities laws of any
state;
f. The purchase price being paid by the Assignee for the Mortgage
Loans is in excess of $250,000 and will be paid by cash
remittance of the full purchase price within sixty (60) days of
the sale;
G-2
<PAGE>
g. The Assignee is acquiring the Mortgage Loans for investment for
its own account only and not for any other person;
h. The Assignee considers itself a sophisticated institutional
investor having such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and
risks of investment in the Mortgage Loans;
I. The Assignee has been furnished with all information regarding
the Mortgage Loans that it has requested from the Assignor or the
Seller;
j. Neither the Assignee nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Mortgage
Loans or any interest in the Mortgage Loans, or solicited any
offer to buy or accept a transfer, pledge or other disposition of
the Mortgage Loans or any interest in the Mortgage Loans, or
otherwise approached or negotiated with respect to the Mortgage
Loans or any interest in the Mortgage Loans with any person in
any manner which would constitute a distribution of the Mortgage
Loans under the 1933 Act or which would render the disposition of
the Mortgage Loans a violation of Section 5 of the 1933 Act or
require registration pursuant thereto, nor will it act, nor has
it authorized or will it authorize any person to act, in such
manner with respect to the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit plan ("Plan")
within the meaning of section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or a plan (also
"Plan") within the meaning of section 4975(e)(1) of the Internal
Revenue Code of 1986 ("Code"), and the Assignee is not directly
or indirectly purchasing the Mortgage Loans on behalf of,
investment manager of, as named fiduciary of, as Trustee of, or
with assets of, a Plan; or (2) the Assignee's purchase of the
Mortgage Loans will not result in a prohibited transaction under
section 406 of ERISA or section 4975 of the Code.
4. (a) The Assignee's address for purposes of all notices and
correspondence related to the Mortgage Loans and the Agreements is:
---------------------------
---------------------------
---------------------------
G-3
<PAGE>
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are:
---------------------------
---------------------------
---------------------------
(b) The Assignor's address for purposes for all notices and correspondence
related to the Mortgage Loans and this Agreement is:
---------------------------
---------------------------
---------------------------
5. This Agreement shall be construed in accordance with the substantive
laws of the State of California (without regard to conflicts of laws principles)
and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with such laws, except to the extent preempted by
federal law.
6. This Agreement shall inure to the benefit of the successors and
assigns of the parties hereto. This Agreement may not be assigned by the
Assignee without the express written consent of the Assignor. Any entity into
which the Assignor or Assignee may be merged or consolidated shall, without the
requirement for any further writing, be deemed the Assignor or Assignee,
respectively, hereunder.
7. No term or provision of this Agreement may be waived or modified
unless such waiver or modification is in writing and signed by the party against
whom such waiver or modification is sought to be enforced.
8. This Agreement shall survive the conveyance of the Mortgage Loans and
the assignment of the Agreements by the Assignor.
9. Notwithstanding the assignment of the Agreements by either the
Assignor or Assignee, this Agreement shall not be deemed assigned by the
Assignor or the Assignee unless assigned by separate written instrument.
10. For the purpose for facilitating the execution of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute and be one
and the same instrument.
G-4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be executed by their duly authorized officers as of the date first
above written.
- -------------------------------- ----------------------------------
Assignor Assignee
By: By:
---------------------------- -----------------------------
Its: Its:
---------------------------- -----------------------------
Taxpayer Identification Taxpayer Identification
No.: No.:
---------------------------- -----------------------------
G-5
<PAGE>
EXHIBIT H
INITIAL PORTFOLIO MORTGAGE LOAN SCHEDULE
H-1
<PAGE>
EXHIBIT I
FORM OF COMMITMENT LETTER
[Date]
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Ladies and Gentlemen:
People's Preferred Capital Corporation, a Maryland corporation
("Purchaser"), hereby agrees to purchase from you ("Seller"), and you hereby
agree to sell, transfer, assign and convey to Purchaser, on ________________
(the "Closing Date"), all of your right, title and interest in and to those
commercial mortgage loans (the "Mortgage Loans") set forth on Schedule I (the
"Mortgage Loan Schedule") attached hereto, the related Mortgage Files and all
rights and obligations of Seller arising under the documents contained therein,
subject to the terms and conditions set forth in this Commitment Letter and in
that certain Commercial Mortgage Loan Purchase and Warranties Agreement, dated
as of ______________, 1997 (the "Purchase Agreement"), by and between Purchaser
and Seller.
The Mortgage Loans shall have an aggregate principal balance on
____________ (the "Cut-off Date") of $_______, or such amount as Purchaser and
Seller shall agree upon as evidenced by the aggregate principal balance of the
Mortgage Loans accepted by Purchaser on the Closing Date. The purchase price
payable by Purchaser to Seller at the Closing in consideration for the Mortgage
Loans set forth on the Mortgage Loan Schedule shall be $_______ (the "Purchase
Price"), or such other amount as Purchaser and Seller shall agree upon as
evidenced by the aggregate principal balance of the Mortgage Loans accepted by
Purchaser on the Closing Date.
I-1
<PAGE>
The purchase and sale of the Mortgage Loans contemplated hereby
shall be consummated by Purchaser and Seller subject to and in
accordance with the terms and conditions of the Purchase Agreement,
including, without limitation, the representations and warranties of
Seller contained in Section 8 thereof and the provisions relating to
the purchase and sale of Mortgage Loans and delivery of related
documents in connection therewith set forth in Sections 4, 5, 6, 9 and
10 thereof. Capitalized terms used but not defined herein shall have
the meanings ascribed to such terms in the Purchase Agreement.
Very truly yours,
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By:
-----------------------
Name:
Title:
Agreed and accepted as of the day
first written above:
PEOPLE'S BANK OF CALIFORNIA
By:
----------------------------
Name:
Title:
I-2
<PAGE>
STOCK PURCHASE AND SALE AGREEMENT
This Stock Purchase and Sale Agreement (the "Agreement") dated
September __, 1997 is made and entered into by and among Progress Financial
Corporation (the "Purchaser") and JAG Financial Services, L.P. (the "Seller")
and Progress Realty Advisors, Inc. (the "General Partner"), and sets forth the
understanding of the parties hereto with respect to the sale by the Seller of
100% of its ownership interest in Progress Realty Advisors, L.P. ("PRALP"),
consisting of a limited partnership interest equal to 25% of PRALP, to the
Purchaser.
The Seller hereby represents and warrants the following:
(1) it is a limited partnership duly organized, validly existing and
under the laws of the Commonwealth of Pennsylvania and has full power
and authority to execute and deliver this Agreement and to perform
the transactions contemplated hereby;
(2) the execution, delivery and performance of this Agreement and the
transactions contemplated hereby by Seller has been duly and
effectively authorized by all necessary actions of Seller and the
General Partner and this Agreement is a valid and legally binding
obligation of the Seller;
(3) it did purchase a 25% limited partnership interest in PRALP as of
January 1, 1995 pursuant to the terms and conditions of that certain
Partnership Agreement, dated January 1, 1995 (the "Partnership
Agreement");
(4) it does now wish to sell 100% of its interest in PRALP consisting
of its 25% limited partnership interest;
(5) it is satisfied that the provisions of the Partnership Agreement
pertaining to the ability of a holder of limited partnership interests
to sell or transfer all or any portion thereof, have been materially
complied with by the parties to this Agreement to the extent such is
necessary or required;
(6) it has such knowledge and experience in financial and business
matters as to be fully capable of protecting its own interest in
connection with the sale of its limited partnership interest in PRALP
as contemplated by this Agreement;
(7) it has carefully read and fully understands all provisions of this
Agreement, is voluntarily selling its limited partnership interest in
PRALP and entering into this Agreement and has sought and received
such legal and other professional advice as it considers necessary to
effect the sale of its limited partnership interest in PRALP as
contemplated by this Agreement;
<PAGE>
(8) it accepts as full consideration, in satisfaction of any and all
obligations of the Purchaser presently existing or which may exist
in the future, the payment of shares of Purchaser's common stock in
exchange for its 25% limited partnership interest in PRALP. Shares
of Purchaser's common stock is the equivalent of $300,000 in value
based upon the average of the closing ask prices of Purchaser's
common stock as reported by the NASDAQ National Market System for
the 20 consecutive trading days ending with (and including) the
fifth trading day immediately preceding the date hereof; and
(9) it is transferring its limited partnership interest i PRALP free
and clear of all liens, charges or encumbrances of any nature
whatsoever and it has good, marketable and valid title to such
interests.
The Purchaser hereby represents and warrants the following:
(1) it is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, has full power
and authority to carry on its business as it is now conducted and
to own, lease and operate the property and assets that it now owns,
leases and operates and to execute and deliver this Agreement and
to perform the transactions contemplated hereby;
(2) the execution, delivery and performance of this Agreement and the
transactions contemplated hereby by Purchaser has been duly and
effectively authorized by all necessary corporate action of
Purchaser and this Agreement is a valid and legally binding
obligation of the Purchaser;
(3) it has sufficient authorized shares of common stock in order to
issue the shares to Seller as contemplated by this Agreement. The
shares of common stock of the Purchaser to be issued to the Seller
as contemplated by this Agreement shall, as of the date hereof, be
duly authorized, validly issued, fully paid and non-assessable;
(4) it is satisfied that the provisions of the Partnership Agreement
pertaining to the ability of a holder of limited partnership
interests to sell or transfer all or any portion thereof, have been
materially complied with by the parties to this Agreement to the
extent such is necessary or required;
(5) it has such knowledge and experience in financial and business
matters as to be fully capable of protecting its own interest in
connection with the purchase of the limited partnership interest in
PRALP as contemplated by this Agreement; and
(6) it has carefully read and fully understands all provisions of this
Agreement, is voluntarily entering into this Agreement and
purchasing the limited partnership
2
<PAGE>
interest and has sought and received such legal and other professional
advice as it may consider necessary to effect the sale of its limited
partnership interest as contemplated by this Agreement.
The shares of Purchaser's common stock to be issued to Seller as
contemplated by this agreement shall not be sold, transferred, pledged,
hypothecated or otherwise disposed of, except in accordance with and subject
to the provisions of the Securities Act of 1933, as amended, and the rules
and regulations of the Securities and Exchange Commission (the "Commission")
promulgated thereunder.
The Purchaser shall, at the Purchaser's cost, within one year of the
date hereof, file with the Commission, and thereafter use its best efforts to
cause to be declared effective as promptly as practicable, a registration
statement relating to the offer and sale by Seller from time to time of the
shares of the Purchaser's common stock to be issued to Seller as contemplated
by this Agreement.
Pursuant to Section 9.2.1 of the Partnership Agreement, the General
Partner hereby consented to the sale of Seller's limited partnership interest
to Purchaser.
The parties to this Agreement agree to execute and deliver all
instruments and to take all other actions as may be required to consummate
the purchase and sale of the limited partnership interest in PRALP as
contemplated by this Agreement. The parties to this Agreement hereby agree
to cooperate fully with each other and with their counsel in connection with
any steps required to be taken as part of their respective obligations under
this Agreement.
The Seller represents and acknowledges that in executing this
Agreement, it is not relying and has not relied upon any representation or
statement made by the Purchaser or the General Partner with regard to the
subject matter, basis or effect of this Agreement or the purchase and sale of
the limited partnership interest in PRLAP contemplated hereby.
This Agreement constitutes the entire agreement of the parties with
respect to this subject matter and supersedes all negotiations, discussions
and understandings with respect to such subject matter.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall be deemed
to be one and the same instrument.
This Agreement shall be binding upon the parties hereto and their
respective successors and assigns and shall inure to the benefit thereof.
This Agreement shall be governed by and interpreted according to the
substantive law of the Commonwealth of Pennsylvania without regard to the
conflicts of law principles of such State.
3
<PAGE>
This Agreement may not be changed orally and may be amended only in
writing signed by each of the parties hereto.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Agreement as of the date first above written.
PROGRESS FINANCIAL CORPORATION
___________________________ By:___________________________
Witness
JAG FINANCIAL SERVICES, L.P.
___________________________ By:___________________________
Witness
PROGRESS REALTY ADVISORS, INC.
___________________________ By:___________________________
Witness
<PAGE>
LOAN SERVICING AGREEMENT
BY AND BETWEEN
SOUTHERN CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION
"INVESTOR"
and
TEMPLE-INLAND MORTGAGE CORPORATION
"SERVICER"
<PAGE>
LOAN SERVICING AGREEMENT
____________________
This Loan Servicing Agreement (the "Servicing Agreement") is dated as of the
31st day of March, 1997 for references purposes only, and is effective on the
Closing Date, by and between TEMPLE-INLAND MORTGAGE CORPORATION, a Nevada
corporation located at 1300 S. Mopac, Austin, Texas 78746 ("SERVICER"), and
SOUTHERN CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION, a federal savings
bank whose primary place of business is located at 5900 Wilshire Boulevard,
Los Angeles, CA ("INVESTOR").
WHEREAS INVESTOR and SERVICER have entered into a Mortgage Servicing Purchase
and Sale Agreement dated as of March 31, 1997 (the "Sale Agreement")
pursuant to which SERVICER agreed to purchase from INVESTOR and INVESTOR
agreed to sell to SERVICER the Servicing;
WHEREAS the Parties desire to provide the mechanics under which SERVICER will
service the Mortgage Loans for INVESTOR and the rights and remedies of the
parties in connection therewith;
NOW, THEREFORE, in consideration of the mutual covenants made herein and for
other good and valuable consideration, the sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE ONE
____________________
Definitions
For purposes of this Servicing Agreement the following capitalized
terms shall have the respective meanings set forth below. All terms used in
this Servicing Agreement and defined in the Sale Agreement shall, unless
otherwise defined herein, be understood to have the meanings ascribed to them
in the Sale Agreement.
Adjustable Rate Mortgage Loan: Any individual Mortgage Loan whose
Servicing was purchased pursuant to the Sale Agreement whose Mortgage Note
contains a provision whereby the interest rate on such Mortgage Loan provides
for a potential periodic change in the Mortgage Interest Rate which the
Mortgagor is obligated to pay and is adjusted based upon an Index.
Appraised Value: With respect to any Mortgage Loan, the value of
the related Mortgaged Property based upon the lesser of (i) the appraisal
made for the originator of the Mortgage Loan at the time of origination of
the Mortgage Loan or (ii) the purchase price of the Mortgaged Property at the
time of origination of the Mortgage Loan.
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<PAGE>
Balloon Mortgage Loan: Any individual Mortgage Loan whose Servicing
was purchased pursuant to the Sale Agreement wherein the Mortgage Note
matures prior to full amortization.
Business Day: Any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking and savings and loan institutions in the State of
California or the state in which SERVICER's servicing operations are located,
are authorized or obligated by law or executive order to be closed.
Servicer: Temple-Inland Mortgage Corporation or its successor in
interest or any successor under this Servicing Agreement appointed as herein
provided.
Cash Liquidation: Recovery of all cash proceeds by SERVICER with
respect to the termination of any defaulted Mortgage Loan other than a
Mortgage Loan which became an REO Property, including all Primary Mortgage
Insurance Proceeds, Other Insurance Proceeds, Liquidation Proceeds,
Condemnation Proceeds and other payments or recoveries whether made at one
time or over a period of time which SERVICER deems to be finally recoverable,
in connection with the sale or assignment of such Mortgage Loan, trustee's
sale, foreclosure sale or otherwise.
Closing Date: The date on which SERVICER begins the Servicing, and
INVESTOR ceases the Servicing. The Closing Date shall be June 1, 1997.
Condemnation Proceeds: All awards or settlements in respect of a
taking of an entire Mortgaged Property by exercise of the power of eminent
domain or condemnation.
Convertible Mortgage Loan: Any individual Adjustable Rate Mortgage
Loan whose Servicing was purchased pursuant to this Servicing Agreement which
contains a provision whereby the Mortgagor is permitted to convert the
Mortgage Loan to a fixed-rate mortgage loan in accordance with the terms of
the related Mortgage Note.
Custodial Account: The separate account or accounts created and
maintained pursuant to this Servicing Agreement with respect to a Mortgage
Loan into which various funds received by the SERVICER shall be deposited.
Such funds shall include principal and interest payment collections, payoff
proceeds collected, and various other amounts as described in Section 2.4
herein. Each Custodial Account shall be an Eligible Account.
Cut off Date: The last Business Day of each calendar month.
Due Date: The day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
Eligible Account: An account or accounts (i) maintained with a
depository institution the short term debt obligations of which are rated by
Standard & Poor's
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<PAGE>
Ratings Group in one of its two (2) highest rating categories at the time of
any deposit therein, (ii) the deposits of which are as fully insured as
permitted by the FDIC, (iii) maintained in a parent, affiliate or subsidiary
of SERVICER provided that such account satisfies the requirements of (i) or
(ii) above or (iv) maintained with a Bank specifically approved in writing by
INVESTOR.
Escrow Account: The separate trust account or accounts created and
maintained pursuant to this Servicing Agreement with respect to a Mortgage
Loan into which Escrow Payments shall be deposited and from which related
disbursements shall be made as provided by Section 3.6 and 3.7 herein. Each
Escrow Account shall be an Eligible Account.
Escrow Payments: The amounts constituting ground rents, taxes,
assessments, water rates, mortgage insurance premiums, fire and hazard
insurance premiums and other payments required to be escrowed by the
Mortgagor with the Mortgagee pursuant to any Mortgage Loan.
Event of Default: Any one of the conditions or circumstances
enumerated in Section 5.1 of this Servicing Agreement.
FDIC: The Federal Deposit Insurance Corporation, or any successor
thereto.
FHLMC: The Federal Home Loan Mortgage Corporation or any successor
organization.
Fidelity Bond: A fidelity bond to be maintained by SERVICER
pursuant to Section 2.12 of this Servicing Agreement.
Fixed Rate Mortgage Loan: Any individual Mortgage Loan whose
Servicing was purchased pursuant to the Sale Agreement wherein the Mortgage
Interest Rate set forth in the Mortgage Note is fixed for the term of such
Mortgage Loan.
FNMA: The Federal National Mortgage Association or any successor
organization.
Gross Margin: With respect to each Adjustable Rate Mortgage Loan,
the fixed percentage amount set forth in the related Mortgage Note which
amount is added to the Index in accordance with the terms of the related
Mortgage Note to determine on each Interest Adjustment Date, the Mortgage
Interest Rate for such Mortgage Loan.
Servicing Agreement: This Servicing Agreement and all amendments
hereof and supplements hereto.
HUD: The Department of Housing and Urban Development or any federal
agency or official thereof which may from time to time succeed to the
functions thereof.
3
<PAGE>
Index: With respect to any Adjustable Rate Mortgage Loan, Index
means that rate per annum provided for in the Mortgage Note, which when added
with the Gross Margin on such Mortgage Loan will determine the new Mortgage
Interest Rate on an Adjustable Rate Mortgage Loan.
Insurance Proceeds: With respect to each Mortgage Loan, proceeds of
insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
Interest Adjustment Date: With respect to an Adjustable Rate
Mortgage Loan, the date on which an adjustment to the Mortgage Interest Rate
on a Mortgage Note becomes effective.
Lifetime Mortgage Interest Rate Cap: With respect to each
Adjustable Rate Mortgage Loan, the absolute maximum Mortgage Interest Rate
payable, above which the Mortgage Interest Rate shall not be adjusted as
provided for in the Mortgage Note.
Liquidation Proceeds: Amounts, other than Primary Mortgage
Insurance Proceeds, Condemnation Proceeds and Other Insurance Proceeds,
received by SERVICER in connection with the liquidation of a defaulted
Mortgage Loan through trustee's sale, foreclosure sale or otherwise, other
than amounts received following the acquisition of an REO Property pursuant
to Section 2.13 of this Servicing Agreement.
Loan-to-Value Ratio or LTV: With respect to any Mortgage Loan, the
ratio of the outstanding principal amount of the Mortgage Loan as of the date
of determination to the Appraised Value of the related Mortgaged Property as
of the date of determination.
Monthly Payment: The scheduled monthly payment of principal and
interest on a Mortgage Loan.
Mortgage: The mortgage, deed of trust or other instrument securing
a Mortgage Note, which creates a first lien on an unsubordinated estate in
fee simple in real property securing the Mortgage Note or a first lien upon a
leasehold estate of the Mortgagor, as the case may be.
Mortgage File: The items pertaining to a particular Mortgage Loan
referred to in Exhibit "D" attached to the Sale Agreement, and any additional
documents required to be added to the Mortgage File pursuant to this
Servicing Agreement which Mortgage File may be maintained by SERVICER on
microfilm or image.
Mortgage Interest Rate: The annual rate at which interest accrues
on any Mortgage Loan, exclusive of any primary mortgage insurance premium
and, with respect to an Adjustable Rate Mortgage Loan, as adjusted from time
to time in accordance with the provisions of the related Mortgage Note and in
compliance with the related Lifetime Mortgage Interest Rate Cap and Periodic
Rate Cap.
4
<PAGE>
Mortgage Loan: An individual Convertible or Non-Convertible,
Balloon, Adjustable Rate or Fixed Rate Mortgage Loan whose Servicing was
purchased by SERVICER pursuant to the Sale Agreement or which may be
purchased by SERVICER from INVESTOR after the Closing Date and which will be
serviced by SERVICER pursuant to this Servicing Agreement, each such Mortgage
Loan subject to this Servicing Agreement being identified on the attached
Mortgage Loan Schedule (Addendum 2), which Mortgage Loan includes without
limitation the Mortgage File, the Monthly Payments, Principal Prepayments,
Cash Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds, Primary
Mortgage Insurance Proceeds, REO Disposition proceeds, and all other rights,
benefits, proceeds and obligations arising from or in connection with such
Mortgage Loan. Addendum 2 attached hereto may be amended from time to time to
add additional Mortgage Loans whose Servicing has been purchased by mutual
agreement by SERVICER from INVESTOR after the Closing Date.
Mortgage Loan Documents: The following documents pertaining to any
Mortgage Loan:
(a) The original Mortgage Note bearing all intervening endorsements.
(b) The original Mortgage with evidence of recording thereon. If in
connection with any Mortgage Loan, INVESTOR has not delivered or caused
to be delivered the original Mortgage with evidence of recording thereon
on or prior to the Closing Date because of a delay caused by the public
recording office where such Mortgage has been delivered for recordation
or because such Mortgage has been lost or because such public recording
office retains the original recorded Mortgage, INVESTOR shall deliver or
cause to be delivered to the SERVICER or the SERVICER's designee, (a) in
the case of a delay caused by the public recording office, a copy of such
Mortgage certified by INVESTOR to be a true and complete copy of the
original recorded Mortgage and (b) in the case where a public recording
office retains the original recorded Mortgage or in the case where a
Mortgage is lost after recordation in a public recording office, a copy
of such Mortgage certified by such public recording office to be a true
and complete copy of the original recorded Mortgage.
(c) The originals of all assumption, modification, consolidation or
extension agreements, with evidence of recording thereon, if any.
(d) The originals of all intervening assignments of mortgage with
evidence of recording thereon, or if any such intervening assignment has
not been returned from the applicable recording office or has been lost
or if such public recording office retains the original recorded
assignments of mortgage, INVESTOR shall deliver or cause to be delivered
to the SERVICER or the SERVICER's designee (a) in the case of a delay
caused by the public recording office, a copy of such intervening
assignment of mortgage certified by INVESTOR to be a true and complete
copy of the original recorded intervening assignment of mortgage and (b)
in the case where a public recording office retains the original recorded
intervening assignment or in the case where an intervening assignment is
lost
5
<PAGE>
after recordation in a public recording office, a copy of such
intervening assignment certified by such public recording office to be a
true and complete copy of the original recorded intervening assignment.
(e) The original mortgagee title insurance policy; if the policy has not
yet been issued, such title insurance policy shall be delivered to the
SERVICER or its designee promptly upon receipt thereof by INVESTOR.
Mortgage Loan Investor Remittance Rate: With respect to each
Mortgage Loan, the interest rate payable to the INVESTOR on each Remittance
Date which shall equal the Mortgage Interest Rate less the Servicing Fee.
Mortgage Loan Schedule: The schedule of Mortgage Loans provided by
INVESTOR to the SERVICER and attached to this Servicing Agreement as Addendum
2.
Mortgage Note: The note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage.
Mortgaged Property: The real property (or leasehold estate, if
applicable) securing repayment of the debt evidenced by a Mortgage Note.
Mortgagee: The mortgagee or beneficiary named in the Mortgage and
the successors and assigns of such mortgagee or beneficiary.
Mortgagor: The obligor on a Mortgage Note.
Non-Convertible Mortgage Loan: Any individual Adjustable Rate
Mortgage Loan which does not contain a provision whereby the Mortgagor may
convert the Mortgage Loan to a Fixed Rate Mortgage Loan.
Officer's Certificate: A certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President or
the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of SERVICER, and delivered to the INVESTOR.
Opinion of Counsel: A written opinion of counsel, who may be an
employee of the party on behalf of whom the opinion is being given,
reasonably acceptable to the INVESTOR.
Other Insurance Proceeds: Proceeds of any title policy, hazard
policy, pool policy or other insurance policy covering a Mortgage Loan, other
than the Primary Mortgage Insurance Policy, if any, to the extent such
proceeds are not to be applied to the restoration of the related Mortgaged
Property or released to the Mortgagor in accordance with the terms of the
applicable Mortgage and procedures that SERVICER would follow in servicing
mortgage loans held for its own account.
6
<PAGE>
Payment Adjustment Date: As to each Mortgage Loan, the date on
which an adjustment to the Monthly Payment on a Mortgage Note becomes
effective.
Periodic Rate Cap: With respect to each Adjustable Rate Mortgage
Loan, the provision of each Mortgage Note which provides for an absolute
maximum amount by which the Mortgage Interest Rate therein may increase or
decrease on an Interest Adjustment Date above the Mortgage Interest Rate
previously in effect.
Person: Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
Primary Mortgage Insurance Policy: A policy of primary mortgage
guaranty insurance issued by a Qualified Insurer.
Primary Mortgage Insurance Proceeds: Proceeds of any Primary
Mortgage Insurance Policy.
Principal Prepayment: Any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon.
Qualified Insurer: An insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact the applicable
insurance business and to write the insurance provided, approved as an
insurer by FNMA and FHLMC.
Remittance Date: The eighteenth (18th) day of the month following
each Cutoff Date, or if the eighteenth (18th) is not a Business Day, than the
first Business Day following the eighteenth (18th) day of the month following
each Cutoff Date.
SAIF: The Savings Association Insurance Fund, or any successor
thereto.
Servicing Advances: All customary, reasonable and necessary "out of
pocket" costs and expenses incurred in the performance by SERVICER of its
servicing obligations, including, but not limited to, the cost of (i) the
preservation, restoration and protection of the Mortgaged Property, and (ii)
any enforcement or judicial proceedings to protect Mortgagee's interest in
the Mortgaged Property, including foreclosures.
Servicing Fee: With respect to each Mortgage Loan, the amount of
the annual fee the INVESTOR shall pay to SERVICER, which shall, for a period
of one full month, be equal to one-twelfth of the product of (a) the
Servicing Fee Rate and (b) the Stated Principal Balance of such Mortgage
Loan. Such fee shall be payable monthly, computed on the basis of the same
principal amount and period respecting which any related interest payment on
a Mortgage Loan is computed. The obligation of the INVESTOR to pay the
Servicing Fee is limited to, and the Servicing Fee is payable
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<PAGE>
solely from, the interest portion of such Monthly Payment actually collected
by SERVICER, or as otherwise provided under Section 3 hereof.
Servicing Fee Rate: With respect to each transaction contemplated
herein and unless otherwise provided to the contrary, (i) for an Adjustable
Rate Mortgage Loan, 0.375% per annum and (ii) for all other Mortgage Loans
including Fixed Rate Mortgage Loans and Balloon Mortgage Loans, 0.25% per
annum.
Servicing File: With respect to each Mortgage Loan, the file
maintained by SERVICER consisting of the items described on Exhibit "C"
attached to the Sale Agreement.
Servicing Guide: INVESTOR's written servicing guide which sets
forth the procedures INVESTOR requires for the servicing of Mortgage Loans
owned by INVESTOR, as same may be amended from time to time.
Servicing Officer: Any officer of SERVICER involved in, or
responsible for, the administration and servicing of the Mortgage Loans whose
name appears on a list of servicing officers furnished by SERVICER to the
INVESTOR upon request, as such list may from time to time be amended.
Stated Principal Balance: With respect to each Mortgage Loan as of
any date of determination: the unpaid principal balance of the Mortgage Loan.
Termination Fee: The amount paid to SERVICER by the INVESTOR in the
event of INVESTOR's termination of SERVICER without cause, as servicer. Such
fee shall equal 1.10% (the "Termination Fee Percentage") of the then current
unpaid principal balance of the Mortgage Loans for the first seven (7) years
from the Closing Date and thereafter the Termination Fee Percentage shall be
1.0%.
Updated Loan-to-Value Ratio: With respect to any Mortgage Loan, the
outstanding principal balance of such Mortgage Loan as of the date of
determination divided by the value of the related Mortgaged Property as
determined by a recent appraisal of the Mortgaged Property. Such appraisal
shall be in a form acceptable to FNMA and FHLMC.
ARTICLE TWO
____________________
Servicing Procedures
This section of the Servicing Agreement specifies the procedures
that are to be used by SERVICER in connection with the administration and
servicing of the Mortgage Loans.
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<PAGE>
Section 2.1 SERVICER to Act as Servicer. SERVICER, as independent
contract servicer, shall service and administer the Mortgage Loans on the
Mortgage Loan Schedule in accordance with the terms of this Servicing
Agreement and the Servicing Guide, unless otherwise provided herein, shall
have full power and authority, acting alone, to do or cause to be done any
and all things in connection with such servicing and administration which
SERVICER may deem necessary or desirable and consistent with the terms of
this Servicing Agreement and the Servicing Guide. In the event of any
conflict between the procedures set forth in the Servicing Guide and the
terms of this Servicing Agreement relating to the SERVICER's servicing of the
Mortgage Loans, the provisions of the Servicing Agreement shall control.
Consistent with the terms of this Servicing Agreement and the
Servicing Guide, SERVICER may waive, modify or vary any term of any Mortgage
Loan or consent to the postponement of compliance with any such term or in
any manner grant indulgence to any Mortgagor if in SERVICER's reasonable and
prudent determination such waiver, modification, postponement or indulgence
is not materially adverse to the INVESTOR; provided, however, that SERVICER
shall not permit any modification with respect to any Mortgage Loan that
would decrease the Mortgage Interest Rate (other than by adjustments required
by the terms of the Mortgage Note), defer or forgive the payment thereof or
of any principal or interest payments, reduce the outstanding principal
amount (except for actual payments of principal), make future advances or
extend the final maturity date on such Mortgage Loan without the INVESTOR's
prior written consent and any such waiver, modifications postponement or
indulgence shall be in writing signed by the Mortgagor and Mortgagee as
applicable. Subject to the provisions in the Servicing Guide on forbearances,
SERVICER may permit forbearance or allow for suspension of Monthly Payments
in either case if the Mortgagor is in default or SERVICER determines in its
reasonable discretion that default is imminent and if SERVICER determines
that granting such forbearance or suspension is in the best interest of the
INVESTOR. Without limiting the generality of the foregoing, SERVICER shall
continue, and is hereby authorized and empowered to execute and deliver on
behalf of itself, and the INVESTOR, all instruments of satisfaction or
cancellation, or of partial or full release, discharge and all other
comparable instruments, with respect to and in accordance with the terms of
the Mortgage Loans and with respect to the Mortgaged Property. If reasonably
required by SERVICER, the INVESTOR shall furnish SERVICER with any powers of
attorney and other documents necessary or appropriate to enable SERVICER to
carry out its servicing and administrative duties under this Servicing
Agreement.
In servicing and administering the Mortgage Loans, SERVICER shall
comply with all applicable laws and regulations and shall employ procedures
including collection procedures and exercise the same care as is required by
FNMA and FHLMC on loans serviced for them, and that are customarily employed
and exercised by SERVICER in servicing and administering mortgage loans for
its own account.
The Servicing File maintained by SERVICER pursuant to this Servicing
Agreement shall be appropriately identified in SERVICER's computer system to
clearly reflect the ownership of the related Mortgage Loan by INVESTOR.
SERVICER shall
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<PAGE>
release from its custody the contents of any Servicing File maintained by it
only in accordance with the terms of this Servicing Agreement.
Section 2.2 Collection of Mortgage Loan Payments. Continuously
from the Closing Date until the principal and interest on all Mortgage Loans
on the Mortgage Loan Schedule are paid in full, SERVICER will proceed
diligently to collect all payments due under each Mortgage Loan when the same
shall become due and payable and shall, to the extent such procedures shall
be consistent with this Servicing Agreement and the terms and provisions of
any related Primary Mortgage Insurance Policy, follow such collection
procedures as it follows with respect to mortgage loans comparable to the
Mortgage Loans held for its own account or serviced by SERVICER for FNMA and
FHLMC.
Section 2.3 Realization Upon Defaulted Mortgage Loans. SERVICER
shall use its best efforts, consistent with the procedures that SERVICER
would use in servicing loans for its own account, to foreclose upon or
otherwise comparably convert the ownership of properties securing such of the
Mortgage Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments
pursuant to Section 2.1. SERVICER shall use its best efforts to realize upon
defaulted Mortgage Loans in such manner as will maximize the receipt of
principal and interest by the INVESTOR, taking into account, among other
things, the timing of foreclosure proceedings. SERVICER shall notify the
INVESTOR in writing of the commencement of foreclosure proceedings. SERVICER
shall obtain INVESTOR's prior written consent before accepting any
deed-in-lieu of foreclosure and shall follow INVESTOR's bidding instructions
set forth in the Servicing Guide. Such notice may be contained in the reports
prepared by SERVICER and delivered to INVESTOR pursuant to the terms and
conditions of this Servicing Agreement. In such connection, SERVICER shall be
responsible for all costs and expenses incurred by it in any such
proceedings; provided, however, that it shall be entitled to reimbursement
from the INVESTOR as set forth in this Agreement.
Notwithstanding anything to the contrary in the Sale Agreement,
INVESTOR, in its sole discretion, shall have the right to direct SERVICER to
transfer back to INVESTOR the Servicing associated with any Mortgage Loan
which is ninety-one (91) days or more delinquent at any time after the 90th
day of delinquency. Upon receipt of such written direction from INVESTOR,
SERVICER shall promptly transfer the Servicing for any such Mortgage Loan
back to INVESTOR at no cost to INVESTOR in accordance with INVESTOR's
reasonable directions, and in accordance with all regulatory requirements.
In the event INVESTOR thereafter transfers the Servicing for such Mortgage
Loan back to SERVICER, SERVICER shall have no obligation at that time to pay
to INVESTOR a purchase price for the Servicing for such Mortgage Loan.
Section 2.4 Establishment of Custodial Accounts; Deposits in
Custodial Accounts. SERVICER shall segregate and hold all funds collected and
received pursuant to each Mortgage Loan separate and apart from any of its
own funds and general assets and shall establish and maintain one (1) or more
Custodial Accounts, in the form of time deposit or demand accounts which
accounts shall be Eligible
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Accounts. Written evidence of the creation of such Custodial Account(s) shall
be provided to the INVESTOR by SERVICER upon the request of the INVESTOR.
SERVICER shall deposit in the Custodial Account on a daily basis,
and retain therein the following payments and collections received or made by
it subsequent to the Closing Date:
(i) all payments on account of principal, including Principal
Prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans net
of the Servicing Fee;
(iii) all proceeds from a Cash Liquidation;
(iv) all Primary Mortgage Insurance Proceeds and Other Insurance
Proceeds including amounts required to be deposited pursuant to Sections 2.8,
2.10 and 2.11, other than proceeds to be held in the Escrow Account and
applied to the restoration or repair of the Mortgaged Property or released to
the Mortgagor in accordance with the terms of the Mortgage, SERVICER's
normal servicing procedures, and applicable law;
(v) all Condemnation Proceeds affecting any Mortgaged Property
which are not released to the Mortgagor in accordance with the terms of the
mortgage or applicable law;
(vi) any amounts required to be deposited in the Custodial Account
pursuant to Section 2.1, 2.14, 2.16 or 2.17.
The foregoing requirements for deposit in the Custodial Account are
exclusive, it being understood and agreed that, without limiting the
generality of the foregoing, payments in the nature of late payment charges
and assumption fees, to the extent permitted by Section 2.16, need not be
deposited by SERVICER in the Custodial Account. Any interest paid on funds
deposited in the Custodial Account by the depository institution shall accrue
to the benefit of SERVICER and SERVICER shall be entitled to retain and
withdraw such interest from the Custodial Account pursuant to Section
2.5(iii).
Section 2.5 Permitted Withdrawals From the Custodial Account.
SERVICER may, from time to time, withdraw from the Custodial Account for the
following purposes:
(i) to make payments to the INVESTOR in the amounts and in the
manner provided for in Section 3.1;
(ii) to pay to itself as servicing compensation any interest earned
on funds in the Custodial Account (all such interest to be withdrawn monthly
not later than each Remittance Date);
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(iii) to reimburse itself for any amounts deposited in the Custodial
Account in error and not consistent with the terms of this Servicing
Agreement;
(iv) to reimburse itself for unreimbursed Servicing Advances with
respect to any Mortgage Loan for which the Servicing is either transferred
back to INVESTOR pursuant to Section 2.3 or Section 2.13.
Section 2.6 Establishment of Escrow Accounts; Deposits in Escrow
Accounts. SERVICER shall segregate and hold all funds collected and received
pursuant to each Mortgage Loan which constitute Escrow Payments separate and
apart from any of its own funds and general assets and shall establish and
maintain one (1) or more Escrow Accounts which accounts shall be Eligible
Accounts, in the form of time deposit or demand accounts. Written evidence of
the creation of such Escrow Account(s) shall be provided to the INVESTOR by
SERVICER upon the request of the INVESTOR.
SERVICER shall deposit in the Escrow Account or Accounts on a daily
basis, and retain therein, (i) all Escrow Payments collected on account of
the Mortgage Loans, for the purpose of effecting timely payment of any such
items as required under the terms of this Servicing Agreement, and (ii) all
Other Insurance Proceeds which are to be applied to the restoration or repair
of any Mortgaged Property in accordance with the terms of the applicable
Mortgage. SERVICER shall make withdrawals therefrom only to effect such
payments as are required under this Servicing Agreement, and for such other
purposes in accordance with Section 2.8. SERVICER shall be entitled to retain
any interest paid on funds deposited in the Escrow Account by the depository
institution other than interest on escrowed funds required by law to be paid
to the Mortgagor and, to the extent required by law, SERVICER shall pay
interest on escrowed funds to the Mortgagor notwithstanding that the Escrow
Account is non-interest bearing or that interest paid thereon is insufficient
for such purposes.
Section 2.7 Permitted Withdrawals From Escrow Account.
Withdrawals from the Escrow Account may be made by SERVICER (i) to effect
timely payments of ground rents, taxes, assessments, water rates, mortgage
insurance premiums, Primary Mortgage Insurance Policy premiums, if
applicable, and comparable items all in accordance with the terms of the
Mortgage Loans, (ii) to reimburse SERVICER for any Servicing Advance made by
SERVICER with respect to a related Mortgage Loan but only from amounts
received on the related Mortgage Loan which represent late payments or
collections of Escrow Payments thereunder if and only to the extent permitted
by applicable law, (iii) to refund to the Mortgagor any funds as may be
determined to be overages, (iv) for transfer to the Custodial Account in
accordance with the terms of this Servicing Agreement, (v) for application to
restoration or repair of the Mortgaged Property all in accordance with the
terms of the Mortgage Loans, (vi) to pay to SERVICER, or to the Mortgagors to
the extent required by law, any interest paid on the funds deposited in the
Escrow Account, (vii) to reimburse itself for any amounts deposited in the
Escrow Account in error, or (viii) to clear and terminate the Escrow Account
on the termination of this Servicing Agreement. As part of its servicing
duties, SERVICER shall pay to the Mortgagors interest on funds in the Escrow
Account, to the extent required by law, and to the extent that interest
earned on funds in the Escrow
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Account is insufficient, shall pay such interest from its own funds, without
any reimbursement therefor.
Section 2.8 Payment of Taxes, Insurance and Other Charges;
Maintenance of Pool Insurance Certificate and Primary Mortgage Insurance
Policies; Collections Thereunder. With respect to each Mortgage Loan,
SERVICER shall maintain accurate records reflecting the status of ground
rents, taxes, assessments, water rates and other charges which are or may
become a lien upon the Mortgaged Property and the status of primary mortgage
insurance premiums and fire and hazard insurance coverage and shall obtain,
from time to time, all bills for the payment of such charges, including
renewal premiums and shall effect payment thereof prior to the applicable
penalty or termination date and at a time appropriate for securing maximum
discounts allowable, employing for such purpose deposits of the Mortgagor in
the Escrow Account which shall have been estimated and accumulated by
SERVICER in amounts sufficient for such purposes, as allowed under the terms
of the Mortgage or applicable law. To the extent that the Mortgage does not
provide for Escrow Payments, SERVICER shall determine that any such payments
are made by the Mortgagor at the time they first become due except as
otherwise set forth in the Servicing Guide. For all Mortgage Loans that have
Escrow Payments, SERVICER assumes full responsibility for the timely payment
of all such bills and shall effect timely payments of all such bills
irrespective of the Mortgagor's faithful performance in the payment of same
or the making of the Escrow Payments and shall make advances from its own
funds to effect such payments. SERVICER shall be responsible for any late
charges or tax penalties incurred due to its failure to timely pay such bills
as provided for herein.
SERVICER will maintain in full force and effect, each Primary
Mortgage Insurance Policy in effect on the Closing Date,provided that the
insurer under such Primary Mortgage Insurance Policy remains in business.
Such coverage will be maintained until the Loan-to-Value Ratio or the Updated
Loan-to-Value Ratio of the related Mortgage Loan is reduced to 80% or less in
the case of a Mortgage Loan having a Loan-to-Value Ratio at origination in
excess of 80%. SERVICER will not cancel or refuse to renew any Primary
Mortgage Insurance Policy in effect on the Closing Date that is required to
be kept in force under this Servicing Agreement unless a replacement Primary
Mortgage Insurance Policy for such cancelled or nonrenewed policy is obtained
from and maintained with an insurer that is FNMA or FHLMC approved. SERVICER
shall not take any action which would result in non-coverage under any
applicable Primary Mortgage Insurance Policy of any loss which, but for the
actions of SERVICER would have been covered thereunder. In connection with
any assumption or substitution agreement entered into or to be entered into
pursuant to Section 2.16, SERVICER shall promptly notify the insurer under
the related Primary Mortgage Insurance Policy, if any, of such assumption or
substitution of liability in accordance with the terms of such policy and
shall take all actions which may be required by such insurer as a condition
to the continuation of coverage under the Primary Mortgage Insurance Policy.
If such Primary Mortgage Insurance Policy is terminated as a result of such
assumption or substitution of liability, SERVICER shall obtain a replacement
Primary Mortgage Insurance Policy as provided above.
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No mortgage pool insurance policy is in effect as of the Closing
Date and SERVICER shall not be required to take into consideration the
existence of any such policy for the purposes of performing its servicing
obligations hereunder, notwithstanding anything else contained in this
Servicing Agreement to the contrary. If the INVESTOR shall at any time after
the related Closing Date notify SERVICER in writing of its desire to obtain
any such pool policy, the SERVICER and INVESTOR shall thereafter negotiate in
good faith for the procurement and servicing of such policy.
Section 2.9 Transfer of Accounts. SERVICER may transfer the
Custodial Account or the Escrow Account to a different depository institution
from time to time provided that such Custodial Account and Escrow Account
shall at all times be Eligible Accounts.
Section 2.10 Maintenance of Hazard Insurance. SERVICER shall cause
to be maintained for each Mortgage Loan fire and hazard insurance with
extended coverage as is customary in the area where the Mortgaged Property is
located in an amount which is equal to the lesser of (i) the replacement
value of the improvements securing such Mortgage Loan or (ii) the greater of
(a) the unpaid principal balance of the Mortgage Loan, and (b) the percentage
such that the proceeds thereof shall be sufficient to prevent the Mortgagor
and/or the Mortgagee from becoming a co-insurer. SERVICER shall follow the
procedures set forth in the Servicing Guide for force ordering such insurance
if necessary. If the Mortgaged Property is in an area identified in the
Federal Register by the Flood Emergency Management Agency as having special
flood hazards and such flood insurance has been made available, SERVICER will
cause to be maintained a flood insurance policy meeting the requirements of
the current Servicing Guide Lines of the Federal Insurance Administration (or
any successor thereto) with a generally acceptable insurance carrier, in an
amount representing coverage not less than the least of (i) the unpaid
principal balance of the Mortgage Loan, (ii) the maximum insurable value of
the improvements securing such Mortgage Loan or (iii) the maximum amount of
insurance which is available under the Flood Disaster Protection Act of 1973,
as amended; provided that such coverage shall comply with applicable laws and
regulations. Any amounts collected by SERVICER under any such policies other
than amounts to be deposited in the Escrow Account and applied to the
restoration or repair of the Mortgaged Property , or released to the
Mortgagor in accordance with the terms of the Mortgage, shall be deposited in
the Custodial Account, subject to withdrawal pursuant to Section 2.5. It is
understood and agreed that no earthquake or other additional insurance need
be required by SERVICER or the Mortgagor or maintained on property acquired
in respect of the Mortgage Loan, other than pursuant to such applicable laws
and regulations as shall at any time be in force and as shall require such
additional insurance. All such policies shall be endorsed with standard
mortgagee clauses with loss payable to INVESTOR and shall provide for at
least thirty days prior written notice of any cancellation, reduction in the
amount or material change in coverage to SERVICER. SERVICER shall not
interfere with the Mortgagor's freedom of choice in selecting either his
insurance carrier or agent, provided, however, that SERVICER shall not accept
any such insurance policies from insurance companies unless such companies
are acceptable to FNMA or FHLMC and are licensed to do business in the state
wherein the property subject to the policy is located.
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Section 2.11 Intentionally Omitted
Section 2.12 Fidelity Bond; Errors and Omissions Insurance.
SERVICER shall maintain, at its own expense without reimbursement from
INVESTOR, a blanket Fidelity Bond and an errors and omissions insurance
policy, with broad coverage with responsible companies on all officers,
employees or other persons acting in any capacity with regard to the Mortgage
Loan in handling funds, money, documents and papers relating to the Mortgage
Loan, including all Servicing Officers. The Fidelity Bond and errors and
omissions insurance shall be in the form of the Mortgage Banker's Blanket
Bond and shall protect and insure SERVICER against losses, including forgery,
theft, embezzlement, fraud, errors and omissions and negligent acts of such
persons. Such Fidelity Bond shall also protect and insure SERVICER against
losses in connection with the failure to maintain any insurance policies and
any failure to pay taxes before the Mortgaged Property shall be subject to
tax sale by the applicable Tax Collector required pursuant to this Servicing
Agreement and the release or satisfaction of a Mortgage Loan without having
obtained payment in full of the indebtedness secured thereby. No provision of
this Section 2.12 requiring the Fidelity Bond and errors and omissions
insurance shall diminish or relieve SERVICER from its duties and obligations
as set forth in this Servicing Agreement. The minimum coverage under any such
Fidelity Bond and insurance policy shall be at least equal to the
corresponding amounts required by FNMA in the FNMA Servicing Agreement or by
FHLMC in the FHLMC Sellers' and Servicers' Servicing Agreement. Upon request
of the INVESTOR, SERVICER shall cause to be delivered to the INVESTOR a
certified true copy of the Fidelity Bond and insurance policy and shall use
its best efforts to obtain a statement from the surety. SERVICER shall
notify the INVESTOR within five (5) business days of receipt of notice that
such Fidelity Bond or insurance policy will be, or has been, materially
modified or terminated.
Section 2.13 Title, Management and Disposition of REO Property. In
the event that title to the Mortgaged Property is acquired in foreclosure or
by deed in lieu of foreclosure, the deed or certificate of sale shall be
taken in the name of INVESTOR and the Servicing with respect to such Mortgage
Loan shall be transferred to INVESTOR effective upon such foreclosure, in
which event SERVICER shall notify INVESTOR in writing within two (2) Business
Days of the completion of the foreclosure and shall deliver to INVESTOR (i)
the "FHLMC package" (which shall include the trustee's deed or certificate of
sale) within ten (10) days of the foreclosure, (ii) the completed and filed
claim under the Primary Mortgage Insurance Policy within fifteen (15) days of
foreclosure and (iii) the remainder of the Mortgage Loan file within thirty
(30) days of foreclosure. Upon such foreclosure, SERVICER shall have no
further rights or obligations with respect to such Mortgage Loan.
Section 2.14 Notification of Adjustments. With respect to each
Adjustable Rate Mortgage Loan, SERVICER shall adjust the Mortgage Interest
Rate on the related Interest Adjustment Date and shall adjust the Monthly
Payment on the related Payment Adjustment Date in compliance with the
requirements of applicable law and the related Mortgage and Mortgage Note.
If, pursuant to the terms of the Mortgage Note, another index is selected for
determining the Mortgage Interest Rate because the original Index is no
longer available, the same index will be used with respect to each Mortgage
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Note which requires a new index to be selected, provided that such selection
does not conflict with the terms of the related Mortgage Note. SERVICER shall
execute and deliver any and all necessary notices required under applicable
law and the terms of the related Mortgage Note and Mortgage regarding the
Mortgage Interest Rate and the related adjustments to the interest rate and
payment thereon. SERVICER shall promptly upon written request thereof,
deliver to the INVESTOR such notifications and any additional applicable data
regarding such adjustments and the methods used to calculate and implement
such adjustments. Upon the discovery by SERVICER or the INVESTOR that
SERVICER has failed to adjust a Mortgage Interest Rate or a Monthly Payment
pursuant to the terms of the related Mortgage Note and Mortgage, SERVICER
shall immediately deposit in the Custodial Account from its own funds the
amount of any interest loss caused the INVESTOR thereby without reimbursement
therefor and shall indemnify and hold INVESTOR harmless from and against any
claims, losses, liability, damages and expenses (including attorneys' fees)
related to such failure to properly adjust the Mortgage Interest Rate or
Monthly Payment. In the event of such failure to properly adjust the Mortgage
Interest Rate or Monthly Payment and SERVICER remits to INVESTOR interest in
excess of the amount due INVESTOR, INVESTOR shall upon SERVICER's demand,
return to SERVICER such excess interest.
Section 2.15 Notification of Maturity Date. With respect to each
Balloon Mortgage Loan, SERVICER shall execute and deliver to the Mortgagor
any and all necessary notices required under applicable law and the terms of
the related Mortgage Note and Mortgage regarding the maturity date and final
balloon payment.
Section 2.16 Assumption Agreements. SERVICER will, to the extent
it has knowledge of any conveyance or prospective conveyance by any Mortgagor
of the Mortgaged Property (whether by absolute conveyance or by contract of
sale, and whether or not the Mortgagor remains or is to remain liable under
the Mortgage Note and/or the Mortgage), subject to INVESTOR's prior approval,
exercise its rights to accelerate the maturity of such Mortgage Loan under
any "due-on-sale" clause to the extent permitted by law; provided, however,
that SERVICER shall not exercise any such rights if prohibited by law or the
terms of the Mortgage Note from doing so or if the exercise of such rights
would impair or threaten to impair any recovery under the related Primary
Mortgage Insurance Policy, if any. If SERVICER reasonably believes it is
unable under applicable law to enforce such "due-on-sale" clause, SERVICER
will negotiate an assumption agreement with the person to whom the Mortgaged
Property has been conveyed or is proposed to be conveyed, pursuant to which
such person becomes liable under the Mortgage Note and, to the extent
permitted by applicable state law, the Mortgagor remains liable thereon. Such
assumption agreement shall be signed by the Mortgagor and the INVESTOR. Where
an assumption is allowed pursuant to this Section 2.16, SERVICER, with the
prior written consent of the primary mortgage insurer, if any, and SERVICER
is authorized to negotiate a substitution of liability agreement with the
person to whom the Mortgaged Property has been conveyed or is proposed to be
conveyed pursuant to which the original Mortgagor is released from liability
and such Person is substituted as Mortgagor and becomes liable under the
related Mortgage Note. Any such substitution of liability agreement shall be
in lieu of an assumption agreement and shall be executed by Mortgagor and
INVESTOR. In connection with any such
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assumption or substitution of liability, SERVICER shall follow the
underwriting practices and procedures employed by INVESTOR for mortgage loans
serviced by INVESTOR for its own account as set forth in the Servicing Guide.
With respect to an assumption or substitution of liability, the Mortgage
Interest Rate borne by the related Mortgage Note, the term of the Mortgage
Loan and the outstanding principal amount of the Mortgage Loan shall not be
changed. SERVICER shall notify the INVESTOR that any such substitution of
liability or assumption agreement has been negotiated by forwarding to the
INVESTOR or its designee the original of any such substitution of liability
or assumption agreement for INVESTOR's execution, which document shall be
added to the related Mortgage File and shall, for all purposes, be considered
a part of such Mortgage File to the same extent as all other documents and
instruments constituting a part thereof. SERVICER shall only collect and
retain such assumption fees as are permitted by the terms of the Mortgage
Loan Documents and applicable law.
Notwithstanding the foregoing paragraphs of this Section or any
other provision of this Servicing Agreement, SERVICER shall not be deemed to
be in default, breach or any other violation of its obligations hereunder by
reason of any assumption of a Mortgage Loan by operation of law or any
assumption which SERVICER may be restricted by law from preventing, for any
reason whatsoever. For purposes of this Section 2.16, the term "assumption"
is deemed to also include a sale of the Mortgaged Property subject to the
Mortgage that is not accompanied by an assumption or substitution of
liability agreement.
Section 2.17 Satisfaction of Mortgages and Release of Mortgage
Files. Upon the payment in full of any Mortgage Loan, SERVICER shall request
delivery to it of the portion of the Mortgage File held by the INVESTOR, if
necessary. Upon receipt of such notice and request, the INVESTOR or its
designee shall within five (5) Business Days release or cause to be released
the related Mortgage Loan Documents to SERVICER and SERVICER shall prepare
and process any satisfaction or release and record the same within the time
period required by law. No expense incurred in connection with any instrument
of satisfaction or deed of reconveyance shall be chargeable to the Custodial
Account or reimbursable to SERVICER. SERVICER shall collect from the
Mortgagor any applicable prepayment penalties and deposit same in the
Custodial Account for the benefit of INVESTOR.
In the event SERVICER satisfies or releases a Mortgage without
having obtained payment in full of the indebtedness secured by the Mortgage
or should it otherwise prejudice any right the INVESTOR may have under the
mortgage instruments, SERVICER, upon written demand, shall remit to the
INVESTOR the then unpaid principal balance of the related Mortgage Loan by
deposit thereof in the Custodial Account and release same to INVESTOR on the
next Remittance Date. SERVICER shall maintain the Fidelity Bond insuring
SERVICER against any loss it may sustain with respect to any Mortgage Loan
not satisfied in accordance with the procedures set forth herein.
From time to time and as appropriate for the service or foreclosure
of a Mortgage Loan, including for the purpose of collection under any Primary
Mortgage Insurance Policy, the INVESTOR shall, upon request of SERVICER and
delivery to the
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INVESTOR or INVESTOR's designee of a servicing receipt signed by a Servicing
Officer, release or cause to be released the portion of the Mortgage File
held by the INVESTOR or its designee to SERVICER. Such servicing receipt
shall obligate SERVICER to return the related Mortgage documents to the
INVESTOR when the need therefor by SERVICER no longer exists, unless the
Mortgage Loan has been liquidated and the Liquidation Proceeds relating to
the Mortgage Loan have been deposited in the Custodial Account or the
Mortgage File or such document has been delivered to an attorney, or to a
public trustee or other public official as required by law, for purposes of
initiating or pursuing legal action or other proceedings for the foreclosure
of the Mortgaged Property either judicially or non-judicially. Upon receipt
of notice from SERVICER stating that such Mortgage Loan was liquidated, the
servicing receipt shall be released by the INVESTOR to SERVICER.
Section 2.18 Servicing Compensation. As compensation for its
services hereunder, SERVICER shall be entitled to retain from the interest
portion of the Monthly Payment actually collected by SERVICER for each
Mortgage Loan the amounts provided for as SERVICER's Servicing Fees.
Additional servicing compensation in the form of assumption fees, as provided
in Section 2.16, and late payment charges, and such ancillary income
associated with Servicing the Mortgage Loans (e.g., optional insurance, NSF
charges) shall be retained by SERVICER to the extent not required to be
deposited in the Custodial Account. SERVICER shall be required to pay all
expenses incurred by it in connection with its servicing activities hereunder
and shall not be entitled to reimbursement therefor except as specifically
provided for in this Servicing Agreement.
Section 2.19 Escrow Analysis; Tax Reporting. SERVICER shall be
responsible for providing each Mortgagor with an escrow analysis and IRS 1098
and 1099 forms (excluding 1099A and 1099C) for that portion of the year of
1997 which SERVICER serviced the Mortgage Loans and thereafter, in accordance
with applicable laws and regulations.
Section 2.20 Notification to INVESTOR of Material Change. SERVICER
shall notify INVESTOR in writing no less than monthly of the following items
as SERVICER becomes aware of such: (i) Mortgagor's material default under the
terms of the Mortgage Loan Documents, (ii) the abandonment or change in
occupancy of the Mortgaged Property, (iii) the sale, transfer or conveyance
of all or any portion of the Mortgaged Property, (iv) the death of the
Mortgagor, (v) the filing of any bankruptcy proceeding by or against the
Mortgagor which results in the Mortgagor missing a Monthly Payment, and (vi)
the material deterioration of or damage to the Mortgaged Property. SERVICER
shall also provide INVESTOR within ten (10) Business Days of INVESTOR's
demand, a report of the filing of any bankruptcy proceeding by or against the
Mortgagor regardless of whether the Mortgage Loan is delinquent.
Section 2.21 Payment of FHA and VA Fees. SERVICER shall be
responsible for the collection and payment of any applicable FHA Insurance
Premiums or VA Fees in compliance with all FHA and VA contracts.
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ARTICLE THREE
____________________
Provisions of Payments
and Reports to the INVESTOR
This Section of the Servicing Agreement outlines the procedures used
by SERVICER in connection with the distribution to INVESTOR of amounts held
by SERVICER in the Custodial Account and in connection with SERVICER's
provision of reports to INVESTOR with respect to such distributions and the
Mortgage Loans.
Section 3.1 Distributions. On each Remittance Date, SERVICER
shall distribute to the INVESTOR all amounts credited to the Custodial
Account as of the close of business on the Cutoff Date, net of charges
against or withdrawals from the Custodial Account pursuant to Section 2.5.
Notwithstanding the foregoing, SERVICER shall distribute to INVESTOR from the
Custodial Account any amounts attributable to Principal Prepayments which are
sufficient to pay a Mortgage Loan in full received within five (5) Business
Days after receipt by SERVICER. In the event such amounts are not timely
distributed to INVESTOR and such delay was directly attributable to the
SERVICER, SERVICER shall pay on demand to INVESTOR a late charge of 8% per
annum on the late payment amount.
Section 3.2 Statements to the INVESTOR; Books and Records. Not
later than five (5) Business Days after each Cutoff Date, SERVICER will
furnish to the INVESTOR via hard copy and any electronic medium a monthly
report in the form of Addendum 1 hereto. SERVICER shall maintain a complete
set of books and records as to all the Mortgage Loans serviced pursuant
hereto, including, but not limited to, a record of each receipt and each
disbursement and shall retain such records for the period of time required by
applicable law.
SERVICER shall prepare and file any and all tax returns, information
statements or other filings required to be delivered to any governmental
taxing authority or to the INVESTOR pursuant to any applicable law with
respect to the Mortgage Loans and the transactions contemplated hereby. In
addition, SERVICER shall provide the INVESTOR with such information
concerning the Mortgage Loans as is necessary for the INVESTOR to prepare its
federal income tax return as the INVESTOR may reasonably request from time to
time.
Section 3.3 Intentionally Omitted
Section 3.4 Annual Statement as to Compliance. SERVICER will
deliver to the INVESTOR on or before March 31st of each year, beginning in
the year following the Closing Date, an Officers' Certificate stating, as to
each signatory thereof, that (i) a review of the activities of SERVICER
during the preceding calendar year and of performance under this Servicing
Agreement has been made under such officers' supervision, and (ii) to the
best of such officers' knowledge, based on such review,
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SERVICER has fulfilled all of its obligations under this Servicing Agreement
throughout such year, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default known to such officers and
the nature and status thereof. SERVICER to provide by March 31st of each year
a certification of the accounting of the balances in each Escrow and
Custodial Account together with an Officer Certificate that all disbursements
were made for proper purposes consistent with the terms hereof, that all
payments required to be made hereunder have been made and specifically notify
all exceptions to the above, if any.
Section 3.5 Annual Independent Certified Public Accountants'
Servicing Report. On or before March 31st of each year beginning in the year
following the Closing Date, SERVICER at its expense shall cause a firm of
independent public accountants which is a member of the American Institute of
Certified Public Accountants to furnish a statement to the INVESTOR to the
effect that such firm has examined certain documents and records relating to
SERVICER's servicing of mortgage loans of the same type as the Mortgage Loans
pursuant to this Servicing Agreement or servicing agreements substantially
similar to this Servicing Agreement, and that, on the basis of such an
examination, conducted substantially in the uniform single audit program for
mortgage bankers, such firm is of the opinion that SERVICER's servicing has
been conducted in compliance with this Servicing Agreement, except for (i)
such exceptions as such firm shall believe to be immaterial, and (ii) such
other exceptions as shall be set forth in such statement.
Section 3.6 INVESTOR's Right to Examine Company Records. The
INVESTOR shall have the right to examine and audit upon reasonable notice to
SERVICER, during business hours or at such other times as might be reasonable
under applicable circumstances, any and all of the books, records,
documentation or other information of SERVICER, or held by another for
SERVICER or on its behalf or otherwise, which relates to the performance or
observance by SERVICER of the terms, covenants or conditions of this
Servicing Agreement.
SERVICER shall provide to the INVESTOR and any supervisory agents or
examiners representing a state or federal governmental agency having
jurisdiction over the INVESTOR, including but not limited to OTS, FDIC and
other similar entities, access to any documentation regarding the Mortgage
Loans in the possession of SERVICER which may be required by any applicable
regulations. Such access shall be afforded without charge, upon reasonable
request, during normal business hours and at the offices of SERVICER, and in
accordance with the federal government, FDIC, OTS, or any other similar
regulations.
Section 3.7 SERVICER Shall Provide Information as Reasonably
Required. SERVICER shall furnish to the INVESTOR, such periodic, special or
other reports, information or documentation, whether or not provided for
herein, as shall be necessary, reasonable or appropriate in respect to the
INVESTOR, or otherwise in respect to the Mortgage Loans and the performance
of SERVICER under this Servicing Agreement, including any reports,
information or documentation reasonably required to
20
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comply with any regulations regarding any supervisory agents or examiners of
the INVESTOR and the Federal Home Loan Bank of San Francisco, all such
reports or information to be as provided by and in accordance with such
applicable instructions and directions as the INVESTOR may reasonably request
in relation to the performance of SERVICER under this Servicing Agreement.
SERVICER agrees to execute and deliver all such instruments and take all such
action as the INVESTOR, from time to time, may reasonably request in order to
effectuate the purpose and to carry out the terms of this Servicing
Agreement; provided, that INVESTOR shall reimburse SERVICER for third party
costs actually incurred by SERVICER in complying with such INVESTOR request.
Section 3.8 Financial Statements. SERVICER hereby agrees to
provide INVESTOR with audited financial statements of SERVICER and SERVICER's
parent company annually and promptly upon such statements being made
available. SERVICER hereby authorizes the INVESTOR, in connection with a sale
of the Mortgage Loans which shall be subject to Article Seven, to make
available to prospective purchasers audited financial statements of SERVICER
and its parent company prepared by or at the request of SERVICER for the most
recently completed three (3) fiscal years for which such a statement is
available, as well as a Consolidated Statement of Condition at the end of the
last two (2) fiscal years covered by such Consolidated Statement of
Operations. Alternatively, if SERVICER does not itself have a Consolidated
Statement of Operations or a Consolidated Statement of Condition, but is a
subsidiary of a parent company which does have such statements, SERVICER will
make available to the INVESTOR a Consolidated Statement of Operations and
Consolidated Statement of Condition of the parent company, which set forth a
consolidating statement of the financial condition of SERVICER. SERVICER will
also make available to the INVESTOR any comparable interim statements to the
extent any such statements have been prepared by SERVICER or its parent, as
the case may be (and are available to its stockholders or the public at
large). SERVICER, if it has not already done so, agrees to promptly furnish
upon request to the INVESTOR copies of the statements specified above.
SERVICER also agrees to make available upon reasonable notice and
during normal business hours to any prospective purchaser a knowledgeable
financial or accounting officer for the purpose of answering questions
respecting recent developments affecting, directly or indirectly, SERVICER's
ability to perform under this Servicing Agreement and to permit any
prospective purchaser upon reasonable notice and during normal business hours
to inspect SERVICER's servicing facilities for the purpose of satisfying such
prospective purchaser that SERVICER has the ability to service the Mortgage
Loans in accordance with the terms of this Servicing Agreement.
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ARTICLE FOUR
____________________
Covenants by SERVICER
This section of the Servicing Agreement specifies certain covenants
that are made by SERVICER in connection with the purchase of the Servicing
pursuant to the Sale Agreement and the servicing of Mortgage Loans pursuant
to this Servicing Agreement.
Section 4.1 Additional Indemnification by SERVICER; Third Party
Claims. SERVICER shall indemnify and hold harmless INVESTOR and its parent,
subsidiaries, officers, directors, affiliates, employees and agents
(collectively, "INVESTOR Affiliates")against any and all claims, losses,
damages, penalties, fines, forfeitures, reasonable and necessary legal fees
and related costs, judgments, and any other costs, fees and expenses that the
INVESTOR and/or INVESTOR'S Affiliates may sustain in any way related to the
failure of SERVICER to perform its duties and service the Mortgage Loans in
compliance with the terms of this Servicing Agreement. SERVICER and the
INVESTOR shall immediately notify the other if a claim is made upon such
party by a third party with respect to this Servicing Agreement or the
Mortgage Loans. Upon the prior written consent of INVESTOR, which consent
shall not be unreasonably withheld, SERVICER shall assume the defense of any
such claim and pay all expenses in connection therewith, including counsel
fees, and promptly pay, discharge and satisfy any settlement, judgment or
decree which may be entered against it or the INVESTOR and/or INVESTOR's
Affiliates in respect of such claim provided that if any such settlement,
judgment or decree provides for other than the payment of money SERVICER
shall obtain INVESTOR's prior written consent prior to satisfying any such
settlement, judgment or decree. The INVESTOR promptly shall reimburse
SERVICER for all amounts advanced by it pursuant to the preceding sentence
except when the claim is in any way related to SERVICER's indemnification
pursuant to the Sale Agreement or this Servicing Agreement; or the failure of
SERVICER to service and administer the Mortgage Loans in compliance with the
terms of this Servicing Agreement.
Section 4.2 Merger or Consolidation of SERVICER. SERVICER will
keep in full effect its existence, rights and franchises as a corporation
under the laws of the state of its incorporation except as permitted herein,
and will obtain and preserve its qualification to do business as a foreign
corporation in each jurisdiction in which such qualification is or shall be
necessary to protect the validity and enforceability of this Servicing
Agreement, or any of the Mortgage Loans and to perform its duties under this
Servicing Agreement.
Any Person into which SERVICER may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which
SERVICER shall be a party, or any Person succeeding to the business of
SERVICER, shall be the successor of SERVICER hereunder, without the execution
or filing of any paper or any
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further act on the part of any of the parties hereto, anything herein to the
contrary notwithstanding; provided, however, that the successor or surviving
Person shall be an institution whose deposits are insured by FDIC or a
company whose business is the origination and servicing of mortgage loans,
unless otherwise consented to by the INVESTOR, which consent shall not be
unreasonably withheld, shall be qualified to service mortgage loans on behalf
of FNMA or FHLMC and shall satisfy the requirements of Section 6.4 with
respect to the qualifications of a successor to SERVICER.
Section 4.3 Limitation on Liability of SERVICER and Others.
Neither SERVICER nor any of the officers, employees or agents of SERVICER
shall be under any liability to the INVESTOR for any action taken or for
refraining from the taking of any action in good faith pursuant to this
Servicing Agreement, or for errors in judgment; provided, however, that this
provision shall not protect SERVICER or any such person against any breach of
warranties or representations made herein, or failure to perform its
obligations in compliance with any standard of care set forth in this
Servicing Agreement, or any liability which would otherwise be imposed by
reason of any breach of the terms and conditions of this Servicing Agreement.
SERVICER and any officer, employee or agent of SERVICER may rely in good
faith on any document of any kind prima facie properly executed and submitted
by any Person respecting any matters arising hereunder. SERVICER shall not be
under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its duties to service the Mortgage Loans in accordance
with this Servicing Agreement and which in its opinion may involve it in any
expenses or liability; provided, however, that SERVICER may, with the consent
of the INVESTOR, undertake any such action which it may deem necessary or
desirable in respect to this Servicing Agreement and the rights and duties of
the parties hereto. In such event, the legal expenses and costs of such
action and any liability resulting therefrom shall be expenses, costs and
liabilities for which the INVESTOR will be liable, SERVICER shall be entitled
to be reimbursed therefor from the INVESTOR upon written demand except if
such action arises from SERVICER's breach of this Servicing Agreement or the
Sale Agreement or if SERVICER is obligated to indemnify INVESTOR pursuant to
Section 4.1 hereof.
Section 4.4 SERVICER Not to Resign. SERVICER shall not assign
this Servicing Agreement or resign from the obligations and duties hereby
imposed on it except by mutual consent of SERVICER and the INVESTOR or upon
the determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by SERVICER. Any such
determination permitting the resignation of SERVICER shall be evidenced by an
Opinion of Counsel to such effect delivered to the INVESTOR which Opinion of
Counsel shall be in form and substance acceptable to the INVESTOR. No such
resignation shall become effective until a successor shall have assumed
SERVICER's responsibilities and obligations hereunder in the manner provided
in Section 5.4.
Section 4.5 No Transfer of Servicing. SERVICER acknowledges that
INVESTOR is acting in reliance upon SERVICER's independent status, the
adequacy of its servicing facilities, plant, personnel, records and
procedures, its integrity, reputation and financial standing and the
continuance thereof. Without in any way limiting the
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<PAGE>
generality of this Section, SERVICER shall not either assign this Servicing
Agreement or the Servicing hereunder or delegate its rights or duties
hereunder or any portion thereof, or sell or otherwise dispose of all or
substantially all of its property or assets which result in the sale of
Servicing, without the prior written approval of the INVESTOR, which consent
may not be unreasonably withheld.
ARTICLE FIVE
____________________
Termination of SERVICER as Servicer
This section of the Servicing Agreement specifies the terms and
conditions pursuant to which SERVICER may be terminated as the servicer of
the Mortgage Loans.
Section 5.1 Termination Due to an Event of Default.
(a) In case one or more of the following Events of Default by
SERVICER shall occur and be continuing:
(i) any failure by SERVICER to remit to the INVESTOR any
payment required to be made under the terms of this Servicing Agreement
which continues unremedied for a period of five (5) Business Days after
the date upon which written notice of such failure, requiring the same to
be remedied, shall have been given to SERVICER by the INVESTOR; or
(ii) failure on the part of SERVICER duly to observe or perform
in any material respect any other of the covenants or agreements on the
part of SERVICER set forth in this Servicing Agreement, if any, which
continues unremedied for a period of thirty (30) days after the date on
which written notice of such failure, requiring the same to be remedied,
shall have been given to SERVICER by the INVESTOR or
(iii) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or
receiver or liquidator in any insolvency, bankruptcy, readjustment of
debt, marshalling of assets and liabilities or similar proceedings, or
for the winding-up or liquidation of its affairs, shall have been entered
against SERVICER and such decree or order shall have remained in force
undischarged or unstayed for a period of sixty (60) days; or
(iv) SERVICER shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, bankruptcy, readjustment of
debt, marshalling of assets and liabilities or similar proceedings of or
relating to SERVICER or of or relating to all or substantially all of its
property; or
(v) SERVICER shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of
any applicable
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<PAGE>
insolvency or reorganization statute, make an assignment for the benefit
of its creditors, or voluntarily suspend payment of its obligations;
then, and in each and every such case, so long as an Event of Default shall
not have been remedied in the time provided above, the INVESTOR, by notice in
writing to SERVICER may without any Termination Fee payable, in addition to
whatever rights the INVESTOR may have at law or equity to damages, including
injunctive relief and specific performance, terminate all the rights and
obligations of SERVICER under this Servicing Agreement and in and to the
Servicing, the Mortgage Loans and the proceeds thereof. On or after the
receipt by SERVICER of such written notice, all authority and power of
SERVICER under this Servicing Agreement, whether with respect to the
Servicing, the Mortgage Loans or otherwise, shall pass to and be vested in
the successor appointed pursuant to Section 5.4. Upon written request from
the INVESTOR, SERVICER shall prepare, execute and deliver, any and all
documents and other instruments, place in such successor's possession all
Mortgage Files, and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at SERVICER's sole expense. SERVICER agrees
to fully cooperate with the INVESTOR and such successor in effecting the
termination of SERVICER's responsibilities and rights hereunder, including,
without limitation, the transfer to such successor for administration by it
of all cash amounts which shall at the time be credited by SERVICER to the
Custodial Account, or Escrow Account or thereafter received with respect to
the Mortgage Loans.
(b) The INVESTOR may waive any default by SERVICER in the
performance of its obligations hereunder and its consequences. Upon any such
waiver of a past default, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been remedied for every
purpose of this Servicing Agreement. No such waiver shall extend to any
subsequent or other default or impair any right consequent thereon except to
the extent expressly so waived.
(c) In the event of such termination by INVESTOR due to an Event of
Default, provided that SERVICER has (i) delivered to INVESTOR all funds due
INVESTOR under this Servicing Agreement, whether or not such funds have been
deposited into the Custodial Account, (ii) delivered to INVESTOR the Escrow
Account for each Mortgage Loan and any Escrow Payments made by a Mortgagor
but not yet deposited into the Escrow Account, (iii) complied with the last
paragraph of Section 5.1(a), including, without limitation, delivery to
INVESTOR or such successor servicer of all Mortgage Files, Servicing Files
and other documentation and information as is necessary to enable INVESTOR or
such successor servicer to service the Mortgage Loans consistent with prudent
mortgage banking practices, and (iv) complied with SERVICER's contractual
obligations under Section 4.1 above; then and only then, INVESTOR shall
reimburse SERVICER for any unreimbursed Servicing Advances which (x) were
actually advanced by SERVICER in accordance with the terms of this Servicing
Agreement (excluding any late charges or penalities incurred due to
SERVICER's failure to timely pay any bill payable by SERVICER under this
Servicing Agreement) and (y) as of the date thirty (30) days after such
termination remain unreimbursed to SERVICER.
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Section 5.2 Termination Without Cause. The INVESTOR may, at its
sole option, terminate any rights SERVICER may have hereunder, without cause,
upon written notice. Any such notice of termination shall be in writing and
delivered to SERVICER as provided in Section 6.1 of this Servicing Agreement.
In the event of such termination, SERVICER shall be entitled to (i) a
Termination Fee and (ii) payment for unreimbursed Servicing Advances payable
to SERVICER pursuant to this Agreement, which shall be paid to SERVICER
within five Business Days of the transfer of the Servicing from SERVICER to
the successor appointed pursuant to Section 5.4.
Section 5.3 Termination. The respective obligations and
responsibilities of SERVICER shall terminate with respect to the Mortgage
Loans upon the first to occur of: (i) the later of the final payment or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan and the remittance of all funds due hereunder, (ii) by mutual consent of
SERVICER and the INVESTOR in writing or (iii) in accordance with Sections 5.1
and 5.2 above.
Section 5.4 Successor to SERVICER. Upon the termination of
SERVICER's responsibilities and duties under this Servicing Agreement
pursuant to Subsection 4.4, 5.1, 5.2 or 5.3 INVESTOR shall (i) succeed to and
assume all of SERVICER's responsibilities, rights, duties and obligations
under this Servicing Agreement with respect to the Mortgage Loans, or (ii)
appoint a successor which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of SERVICER under this Servicing
Agreement upon to the termination of SERVICER's responsibilities, duties and
liabilities under this Servicing Agreement. In the event that SERVICER's
duties, responsibilities and liabilities under this Servicing Agreement
should be terminated pursuant to the aforementioned Sections, SERVICER shall
discharge such duties and responsibilities during the period from the date it
acquires knowledge of such termination until the effective date thereof with
the same degree of diligence and prudence which it is obligated to exercise
under this Servicing Agreement, and shall take no action whatsoever that
might impair or prejudice the rights or financial condition of its successor.
The resignation or removal of SERVICER pursuant to the aforementioned
Sections shall in no event relieve SERVICER of the representations and
warranties made pursuant to the Sale Agreement or SERVICER's indemnification
obligations thereunder or hereunder, it being understood and agreed that the
provisions of the Sale Agreement shall be applicable to SERVICER
notwithstanding any such resignation or termination of SERVICER as servicer
of the Mortgage Loans and such indemnification provisions shall survive the
termination of SERVICER's responsibilities and duties hereunder.
Any successor appointed as provided herein shall execute,
acknowledge and deliver to SERVICER and to the INVESTOR an instrument
accepting such appointment, whereupon such successor shall become fully
vested with all the rights, powers, duties, responsibilities, obligations and
liabilities of SERVICER, with like effect as if originally named as a party
to this Servicing Agreement. Any termination of SERVICER as servicer of the
Mortgage Loans pursuant to Section 4.4, 5.1, 5.2, or 5.3 shall not affect any
claims that the INVESTOR may have against SERVICER arising prior to any such
termination or resignation.
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SERVICER shall timely deliver to the successor the funds in the
Custodial Account, and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and SERVICER shall account for
all funds. SERVICER shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely
vest and confirm in the successor all such rights, powers, duties,
responsibilities, obligations and liabilities of SERVICER. SERVICER shall
notify all interested parties including, but not limited to, the Mortgagor,
mortgage insurance companies, tax authorities, and hazard insurance companies
of the transfer of the servicing of the Mortgage Loans to the successor
servicer. The successor shall be required to make arrangements at the time of
transfer of the servicing responsibilities to the successor servicer to
reimburse SERVICER for amounts SERVICER actually expended pursuant to this
Servicing Agreement (provided that SERVICER shall provide the successor
servicer with written evidence of such amounts) which the successor is
entitled to retain hereunder and which would otherwise have been recovered by
SERVICER pursuant to this Servicing Agreement but for the appointment of the
successor servicer. Upon a successor's acceptance of appointment as such,
SERVICER shall notify by mail the INVESTOR of such appointment.
ARTICLE SIX
____________________
Miscellaneous
Section 6.1 Notices. All demands, notices and communications
required to be provided hereunder shall be in writing and shall be deemed to
have been duly given if mailed, by registered or certified mail, postage
prepaid, and return receipt requested, or, if by other means, when received
by the other party at the address as follows:
(i) if to SERVICER:
TEMPLE-INLAND Mortgage Corporation
301 Congress
Austin, Texas 78701
Attn: Richard Magel
(ii) if to INVESTOR:
SOUTHERN CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION
5900 Wilshire Boulevard
Los Angeles, CA 90036
Attn: J. Michael Holmes, CFO and
Attn: Doreen J. Blauschild, General Counsel
or such other address as may hereafter be furnished to the other party by
like notice. Any such demand, notice or communication hereunder shall be
deemed to have been
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received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
Section 6.2 Addenda. The addenda to this Servicing Agreement are
hereby incorporated and made a part hereof and are an integral part of this
Servicing Agreement.
Section 6.3 General Interpretive Principles. For purposes of this
Servicing Agreement, except as otherwise expressly provided or unless the
context otherwise requires:
a. the terms defined in this Servicing Agreement have the meanings
assigned to them in this Servicing Agreement and include the
plural as well as the singular, and the use of any gender
herein shall be deemed to include the other gender;
b. accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted
accounting principles;
c. references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other Subdivisions without reference to a
document are to designated Articles, Sections, Subsections,
Paragraphs and other subdivisions of this Servicing Agreement;
d. reference to a Subsection without further reference to a
Section is a reference to such Subsection as contained in the
same Section in which the reference appears, and this rule
shall also apply to Paragraphs and other subdivisions;
e. the words "herein," "hereof," "hereunder" and other words of
similar import refer to this Servicing Agreement as a whole and
not to any particular provision; and
f. the term "include" or "including" shall mean without limitation
by reason of enumeration.
Section 6.4 Further Agreements. SERVICER shall execute and
deliver to the INVESTOR and the INVESTOR shall be required to execute and
deliver to SERVICER such reasonable and appropriate additional documents,
instruments or agreements as may be necessary or appropriate to effectuate
the purposes of this Servicing Agreement.
Section 6.5 Conflicts with Sale Agreement . Except as otherwise
expressly set forth herein, in the event of any conflict or ambiguity between
the terms
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and provisions of the Servicing Agreement and the Sale Agreement, the
Servicing Agreement shall control and be binding upon SERVICER and the
INVESTOR.
Section 6.6 Successors and Assigns. Subject to the provisions of
Section 5.4 hereof, SERVICER may not assign its rights or delegate
substantially all of its obligations hereunder without the prior written
consent of INVESTOR, which consent shall not be unreasonably withheld. In any
event, this Servicing Agreement shall be binding upon and shall inure to the
benefit of the successors and permitted assigns of the parties to this
Servicing Agreement.
Section 6.7 Entire Agreement; No Waiver. This Servicing Agreement
and the Sale Agreement contain all of the covenants, conditions and
agreements between the INVESTOR and SERVICER relating to the subject matter
hereof and shall supersede all prior correspondence, agreements and
understandings, both oral and written. No addition or modification of any
term of provision shall be effective unless set forth in writing and signed
by both INVESTOR and SERVICER. Any waiver, permission, consent or approval of
any kind by INVESTOR or SERVICER of any right or condition hereunder, shall
not be effective against the party purporting to give such waiver,
permission, consent or approval unless the same is made or given in writing
and signed by the party bound thereby, and shall only apply to the extent
described in such writing.
Section 6.8 Attorneys' Fees. In the event of any litigation
regarding the rights and obligations of the parties under this Servicing
Agreement, the prevailing party shall be entitled to reasonable attorneys'
fees and court costs.
Section 6.9 Mutual Representation and Warranty; Authority of
Parties. Each party to this Servicing Agreement hereby represents and
warrants to the other party that this Servicing Agreement has been or shall
be duly authorized, executed and delivered by such party. Each person
executing this Servicing Agreement on behalf of a party to this Servicing
Agreement represents and warrants that he or she has authority to execute
this Servicing Agreement on behalf of such party. Each party to this
Servicing Agreement represents and warrants to the other party that such
party (if a corporation or partnership) is duly organized and validly
existing. SERVICER represents and warrants to INVESTOR that SERVICER is
qualified to do business in all states in which qualification is required for
SERVICER to perform its obligations hereunder.
Section 6.10 Counterparts. This Servicing Agreement may be executed
in counterparts, each of which shall be deemed an original, but all of which,
together, shall constitute one and the same instrument.
Section 6.11 Governing Law. This Servicing Agreement shall be
governed by and construed in accordance with the laws of the State of
California.
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ARTICLE SEVEN
____________________
SALE OF MORTGAGE LOANS
Nothing contained in this Agreement or the Sale Agreement shall
preclude INVESTOR from selling the Mortgage Loans to one or more investors
and INVESTOR shall have the right to sell all or a portion of the Mortgage
Loans to one or more investors without the consent of SERVICER; provided,
however, that (i) if such sale is on a servicing retained basis, then
INVESTOR shall obtain SERVICER's prior written consent, which consent shall
not be unreasonably withheld, if such sale is to more than three (3)
investors or would result in materially increasing the reporting,
notification and/or payment obligations of SERVICER as servicer of the
Mortgage Loans, and (ii) if such sale is on a servicing released basis, then
INVESTOR shall terminate this Agreement and SERVICER's rights hereunder in
accordance with Section 5.2 above with respect to the Mortgage Loans being
sold by INVESTOR on a servicing released basis only and pay to SERVICER the
Termination Fee with respect to such Mortgage Loans being sold servicing
released; provided, however, that for purposes of subparagraph (ii) only, the
Termination Fee shall be the then applicable Termination Fee Percentage at
the time of such Mortgage Loan sale with servicing released times the unpaid
principal balance of such Mortgage Loans plus $50.00 for each of such
Mortgage Loan.
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IN WITNESS WHEREOF, the INVESTOR and SERVICER have caused their names to
be signed hereto by their respective officers thereunto duly authorized as of
the day and year first above written.
SOUTHERN CALIFORNIA FEDERAL SAVINGS
AND LOAN ASSOCIATION
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
TEMPLE-INLAND MORTGAGE CORPORATION
By:
---------------------------------
Name:
Title:
By:
---------------------------------
Name:
Title:
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ADDENDUM 1
FORM OF INVESTOR'S REMITTANCE REPORT
(attached)
<PAGE>
By virtue of the undersigned initials INVESTOR and SERVICER accept this
Exhibit to the Loan Servicing Agreement by and between Southern California
Federal Savings and Loan Association and Temple-Inland Mortgage Corporation
dated as of March 31, 1997.
INVESTOR _____________________________
SERVICER _____________________________
ADDENDUM 2
MORTGAGE LOAN SCHEDULE
(attached)
<PAGE>
FORWARD PRODUCTION SERVICING
PURCHASE AND SALE AGREEMENT
THIS FORWARD PRODUCTION SERVICING PURCHASE AND SALE AGREEMENT (the "Forward
Agreement") is dated as of the day of July, 1997, by and between
Temple-Inland Mortgage Corporation, a Nevada Corporation with offices located at
1300 South MoPac Expressway, Austin, Texas 78746 (the "Purchaser") and People's
Bank of California, formerly known as Southern California Federal Savings and
Loan Association, a federal savings bank with offices located at 5900 Wilshire
Boulevard, 16th Floor, Los Angeles, California 90036 (the "Seller").
WITNESSETH
WHEREAS, Purchaser and Seller entered into the Bulk Agreement (as later
defined) wherein Purchaser purchased from Seller and Seller sold to Purchaser
the servicing rights associated with Mortgage Loans serviced by Seller as of
December 18, 1996 and described in Exhibit AA attached to the Bulk Agreement;
and
WHEREAS, Purchaser and Seller entered into the Servicing Agreement (as
later defined) wherein as of June 1, 1997, Purchaser shall service Mortgage
Loans owned by Seller; and
WHEREAS, the Purchaser desires to purchase from Seller and Seller desires
to sell to Purchaser the servicing rights associated with (i) Mortgage Loans
owned by Seller and closed and funded by Seller after December 18, 1996 and (ii)
Mortgage Loans owned by Seller prior to December 18, 1996 which were serviced by
others and for which Seller has acquired the servicing rights subsequent to
December 18, 1996(collectively, the "Forward Servicing"); and
WHEREAS, Purchaser and Seller intend that except as provided herein, the
purchase, sale and delivery of the Forward Servicing shall be governed by the
terms and conditions contained in the Bulk Agreement and the Servicing
Agreement;
NOW, THEREFORE, in consideration of the foregoing, and the mutual promises
and covenants hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
each party, each party intending to be legally bound hereby does promise,
covenant and agree, as follows:
ARTICLE I - DEFINITIONS
Except as hereinafter defined, all defined terms used in this Forward Agreement
shall have the meanings ascribed to them in the Bulk Agreement or the Servicing
Agreement.
1.1 "Bulk Agreement": That Mortgage Servicing Purchase and Sale Agreement dated
as of March 31, 1997, wherein Purchaser purchased from Seller and Seller sold to
<PAGE>
Purchaser the Servicing associated with Mortgage Loans serviced by Seller as of
December 18, 1996 and described in Exhibit AA attached to the Bulk Agreement
1.2 "Loan Type Purchase Price Percentage":
A. For Fixed Rate and Balloon Mortgage Loans, the Loan Type Purchase
Price Percentage will equal four and one-half (4.5) times the annual
Servicing Fee Rate set forth in the Servicing Agreement for such
Mortgage Loans.
B. For Adjustable Rate Mortgage Loans, the Loan Type Purchase Price
Percentage will equal two and one-half (2.5) times the annual
Servicing Fee Rate set forth in the Servicing Agreement for such
Mortgage Loans.
C. For SBO Mortgage Loans only, Seller and Purchaser shall prior to the
Sale Date for any SBO Mortgage Loan agree to the Loan Type Purchase
Price Percentage for each SBO Mortgage Loan as reflected on the
applicable Sale Schedules.
1.3 "Mortgage Loan": Single Family mortgage or deed of trust loans either (i)
owned by Seller and closed and funded by Seller after December 18, 1996 or (ii)
owned by Seller prior to December 18, 1996, and serviced by others and for which
Seller has acquired the servicing rights subsequent to December 18, 1996 ("SBO
Mortgage Loan").
1.4 "Purchase Price ": An amount equal to the Loan Type Purchase Price
Percentage times the aggregate unpaid principal balance of the Mortgage Loans
aggregated by loan type and listed on the Mortgage Schedule as of each Sale
Date.
1.5 "Sale Date": The Sale Date will occur monthly, on the last Business Day of
the month beginning July 31, 1997, and will be effective with respect to all
Mortgage Loans listed on the Sale Schedule pursuant to this Forward Agreement.
1.6 "Sale Schedules": The Forward Servicing Schedule, the Mortgage Schedule,
and the Purchase Price Calculation Schedule similar in all material respects to
the forms in Exhibit "A" attached hereto.
1.7 "Servicing Agreement": That Loan Servicing Agreement dated as of March 31,
1997, by and between Seller and Purchaser whereby as of June 1, 1997, Purchaser
commenced servicing Mortgage Loans owned by Seller.
1.8 "Transfer Date": (a) The first Transfer Date will occur on August 1, 1997,
and will be effective with respect to all Mortgage Loans for which Servicing has
been sold by Seller and purchased by Purchaser pursuant to this Forward
Agreement through the first Sale Date (July 31, 1997) (b) Subsequent to the
first Transfer Date, Servicing for Mortgage Loans will be transferred from
Seller to Purchaser as Seller closes such Mortgage Loans or acquires Servicing
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for such SBO Mortgage Loans on a flow basis. The Transfer Date for Servicing
for each Mortgage Loan will be within ten Business Days of the Mortgage Loan's
closing date or within twenty Business Days of the date Seller acquires the
Servicing for a Mortgage Loan, as the case may be.
ARTICLE II
SALE, PURCHASE AND TRANSFER
OF FORWARD SERVICING
2.1 Delivery of Forward Servicing: Servicing for all Mortgage Loans owned by
Seller and closed and funded by Seller or for which Seller acquired the
Servicing from December 18, 1996, until May 31, 1997 shall be shipped to
Purchaser in one "mini-bulk" shipment on the first Transfer Date (August 1,
1997). Servicing for all Mortgage Loans owned by Seller and closed and funded by
Seller on or after June 1, 1997, or for which Seller acquired the Servicing on
or after December 18, 1996, shall be shipped to Purchaser on a flow basis on
each Transfer Date subsequent to the first Transfer Date.
2.2 Schedule of Mortgage Loans: At least ten days prior to a Sale Date, Seller
shall provide Purchaser with the Sale Schedules. Within five Business Days of
its receipt of the Sale Schedules, Purchaser shall notify Seller in writing of
any discrepancies it finds in the Sale Schedules. If no written notification is
given to Seller identifying discrepancies in the Sale Schedule, Purchaser shall
be deemed to have approved the Sale Schedules.
2.3 Mortgage Loan Parameters: The Mortgage Loans (other than SBO Mortgage
Loans) delivered to Purchaser pursuant to this Forward Agreement shall on each
Sale Date have the following parameters:
- Aggregate Average Unpaid
Principal Balance $150,000 or greater
- Aggregate Weighted Average
Remaining Term 300 months or greater
- Aggregate Weighted Average
Interest Rate current market interest rates for
similar type loans in the
geographical area where the
secured property is located
2.4 Payment of Purchase Price: Purchaser shall pay to Seller on each Sale Date
one hundred percent (100%) of the Purchase Price for each Mortgage Loan
purchased on such Sale Date less $300 for each Mortgage Loan purchased on such
Sale Date ("Holdback Amount"). Purchaser shall pay to Seller the Holdback
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Amount for each Mortgage Loan at such time as Seller has delivered to Purchaser
all of the Mortgage Loan Documents for such Mortgage Loan.
ARTICLE III - MISCELLANEOUS
3.1 Term of Agreement: This Forward Agreement shall terminate upon sixty (60)
days prior written notice given by either party to the other party.
3.2 Incorporation of Bulk Agreement and Servicing Agreement: Except as
otherwise provided for herein, the purchase, sale and delivery of the Forward
Servicing shall be governed by the terms and conditions contained in the Bulk
Agreement and the Servicing Agreement including, but not limited to, the
purchase price payment obligations of the Purchaser and the servicing delivery
obligations of the Seller together with the representations and warranties
therein applicable to the Mortgage Loans sold pursuant to this Forward
Agreement, which terms and conditions are incorporated herein by this reference
to the extent not inconsistent with the terms of this Forward Agreement.
IN WITNESS WHEREOF, each of the undersigned parties to this Forward Agreement
has caused this Forward Agreement to be duly executed in its corporate name by
its duly authorized officers as of the date first above written.
PURCHASER:
TEMPLE-INLAND MORTGAGE CORPORATION
By: ____________________________
Richard K. Magel
Senior Vice President
SELLER:
PEOPLE'S BANK OF CALIFORNIA
By: _____________________________
Rudolf P. Guenzel
President and CEO
By: _____________________________
J. Michael Holmes
Executive Vice President and
Chief Financial Officer
4
<PAGE>
Exhibit "A"
(Attached)
<PAGE>
COMMERCIAL SERVICING AGREEMENT
between
PEOPLE'S PREFERRED CAPITAL CORPORATION
Purchaser
PEOPLE'S BANK OF CALIFORNIA
Seller
Dated as of ___________, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
Section 1. Definitions......................................................
ARTICLE II
SERVICING
Section 2.01 Seller to Act as Servicer........................................
Section 2.02 Liquidation of Mortgage Loans...... .............................
Section 2.03 Collection of Mortgage Loan Payments.............................
Section 2.04 Establishment of and Deposits to Custodial Account...............
Section 2.05 Permitted Withdrawals From Custodial Account.....................
Section 2.06 Establishment of and Deposits to Escrow Account..................
Section 2.07 Permitted Withdrawals From Escrow Account........................
Section 2.09 Protection of Accounts...........................................
Section 2.10 Maintenance of Hazard Insurance..................................
Section 2.11 Maintenance of Mortgage Impairment Insurance.....................
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions............
Insurance.................................................
Section 2.13 Inspections......................................................
Section 2.14 Restoration of Mortgaged Property................................
Section 2.15 Deteriorating Mortgage Loans.....................................
Section 2.16 Title, Management and Disposition of REO Property................
Section 2.17 Permitted Withdrawals with respect to REO Property...............
Section 2.18 Real Estate Owned Reports........................................
Section 2.19 [Reserved].......................................................
Section 2.20 Reports Of Foreclosures and Abandonments.........................
Section 2.21 Notification of Adjustments......................................
Section 2.22 Notification of Maturity Date....................................
ARTICLE III
PAYMENTS TO PURCHASER
Section 3.01 Remittances......................................................
Section 3.02 Statements to Purchaser..........................................
ARTICLE IV
GENERAL SERVICING PROCEDURES
Section 4.01 Transfers of Mortgaged Property..................................
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files..........
Section 4.03 Servicing Compensation...........................................
<PAGE>
Section 4.04 Annual Statement as to Compliance................................
Section 4.05 Annual Independent Public Accountants' Servicing Report..........
Section 4.06 Right to Examine Seller Records..................................
ARTICLE V
SELLER TO COOPERATE
Section 5.01 Provision of Information.........................................
Section 5.02 Financial Statements; Servicing Facilities.......................
ARTICLE VI
TERMINATION
Section 6.01 Damages..........................................................
Section 6.02 Termination......................................................
Section 6.03 Termination Without Cause........................................
ARTICLE VII
BOOKS AND RECORDS
Section 7.01 Possession of Servicing Files....................................
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
Section 8.01 Indemnification..................................................
Section 8.02 Limitation on Liability of Seller and Others.....................
Section 8.03 Limitation on Registration and Assignment by Seller..............
Section 8.04 Assignment by Purchaser..........................................
Section 8.05 Merger or Consolidation of the Seller............................
Section 8.06 Successor to the Seller..........................................
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
Section 9.01 Due Organization and Authority...................................
Section 9.02 No Conflicts.....................................................
Section 9.03 Ability to Perform...............................................
Section 9.04 No Litigation Pending............................................
Section 9.05 No Consent Required..............................................
Section 9.06 Assistance.......................................................
<PAGE>
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
Section 10.01 Due Organization and Authority...................................
Section 10.02 Ordinary Course of Business......................................
Section 10.03 No Conflicts.....................................................
Section 10.04 Ability to Service...............................................
Section 10.05 Ability to Perform...............................................
Section 10.06 No Litigation Pending............................................
Section 10.07 No Consent Required..............................................
Section 10.08 No Untrue Information............................................
Section 10.09 Reasonable Servicing Fee.........................................
Section 10.10 Financial Statements.............................................
Section 10.11 Conflict of Interest.............................................
ARTICLE XI
DEFAULT
Section 11.01 Events of Default................................................
Section 11.02 Waiver of Defaults...............................................
ARTICLE XII
MISCELLANEOUS PROVISIONS
Section 12.01 Notices..........................................................
Section 12.02 Waivers..........................................................
Section 12.03 Entire Agreement; Amendment......................................
Section 12.04 Execution; Binding Effect........................................
Section 12.05 Headings.........................................................
Section 12.06 Applicable Law...................................................
Section 12.07 Relationship of Parties..........................................
Section 12.08 Severability of Provisions.......................................
Section 12.09 Exhibits.........................................................
<PAGE>
EXHIBITS
EXHIBIT A Form of Monthly Remittance Advice
EXHIBIT B Form of Custodial Account Certification
EXHIBIT C Form of Custodial Account Letter Agreement
EXHIBIT D Form of Escrow Account Certification
EXHIBIT E Form of Escrow Account Letter Agreement
<PAGE>
COMMERCIAL SERVICING AGREEMENT
This Commercial Servicing Agreement (the "Servicing Agreement" or the
"Agreement") is entered into as of ________, 1997, by and between PEOPLE'S
BANK OF CALIFORNIA (the "Seller"), a federal stock savings bank incorporated
under the laws of the United States, and PEOPLE'S PREFERRED CAPITAL
CORPORATION, a Maryland corporation (the "Purchaser").
WHEREAS, the Purchaser and the Seller entered into a Commercial Mortgage
Loan Purchase and Warranties Agreement dated as of ________, 1997 (the
"Purchase Agreement") pursuant to which the Purchaser agreed to purchase from
the Seller certain commercial, first mortgage loans (the "Mortgage Loans") to
be delivered as whole loans, with the Seller retaining servicing rights in
connection with the purchase of such Mortgage Loans; and
WHEREAS, the Purchaser desires to have the Seller service the Mortgage
Loans, the Seller desires to service and administer the Mortgage Loans on
behalf of the Purchaser, and the parties desire to provide the terms and
conditions of such servicing by the Seller.
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein and for other good and valuable consideration, the receipt
and the sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein have the respective meanings set forth in the Purchase Agreement. The
following terms are defined as follows:
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Ancillary Income" means all late charges, reconveyance fees,
not-sufficient funds charges, optional insurance fees, assumption fees,
escrow account benefits, reinstatement fees, and similar types of fees
arising from or in connection with any Mortgage Loan to the extent not
otherwise payable to the Mortgagee under applicable law or pursuant to the
terms of the related Mortgage Note.
"Best's" means Best's Key Rating Guide.
"BIF" means The Bank Insurance Fund, or any successor thereto.
"Closing Date" means the Initial Closing Date and any other date as is
mutually agreed upon by the parties hereto.
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"Cut-off Date" means __________, 1997 and the last business day of each
calendar month.
"Errors and Omissions Insurance Policy" means an errors and omissions
insurance policy to be maintained by the Seller pursuant to Section 2.12.
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.06.
"Escrow Payment" means, with respect to any Mortgage Loan, any payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document (whether referred to as escrow impound or
otherwise, including, without limitation, the amounts constituting ground
rents, taxes, assessments, water rates, sewer rents, municipal charges,
mortgage insurance premiums, fire and hazard insurance premiums.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any successor
thereto.
"Fidelity Bond" means a fidelity bond to be maintained by the Seller
pursuant to Section 2.12.
"Initial Closing Date" means ________________, 1997, or such other date
as the parties hereto may mutually agree.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or
assignment of such Mortgage Loan,
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trustee's sale, foreclosure sale or
otherwise, or the sale of the related Mortgaged Property if the Mortgaged
Property is acquired in satisfaction of the Mortgage Loan.
"Monthly Remittance Advice" means the monthly remittance advice, in the
form of Exhibit A annexed hereto, to be provided to the Purchaser pursuant to
Section 3.02.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Nonrecoverable Advance" means any advance of principal and interest
previously made or proposed to be made in respect of a Mortgage Loan which,
in the good faith judgment of the Seller, will not or, in the case of a
proposed advance of principal and interest, would not, be ultimately
recoverable from related Insurance Proceeds, Liquidation Proceeds or
otherwise. The determination by the Seller that it has made a Nonrecoverable
Advance or that any proposed advance of principal and interest, if made,
would constitute a Nonrecoverable Advance, shall be evidenced by an Officers'
Certificate delivered to the Purchaser.
"OTS" means Office of Thrift Supervision, or any successor thereto.
"Officer's Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President
and by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as
required by this Agreement.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal
on a Mortgage Loan which is received in advance of its scheduled due date,
including any prepayment penalty or premium thereon and which is not
accompanied by an amount of interest representing scheduled interest due on
any date or dates in any month or months subsequent to the month of
prepayment.
"Purchase Agreement" means the Commercial Mortgage Loan Purchase and
Warranties Agreement between the Purchaser and the Seller related to the
purchase of the Mortgage Loans dated as of _________, 1997.
"Qualified Depository" means a depository the accounts of which are
insured by the FDIC through the BIF or the SAIF, and shall include the Seller.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact the applicable
insurance business and to write the insurance provided, and in the two
highest rating categories by Best's with respect to hazard and flood
insurance.
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"Record Date" means the close of business of the last Business Day of the
month preceding the month of the related Remittance Date.
"Remittance Date" means the 18th day (or if such 18th day is not a
Business Day, the first Business Day immediately following) of any month
following a Cut-off Date, beginning with the first Remittance Date on _____
18, 1997.
"REO Property" means a Mortgaged Property acquired by the Seller on
behalf of the Purchaser through foreclosure or by deed in lieu of
foreclosure, as described in Section 2.16.
"SAIF" means the Savings Association Insurance Fund, or any successor
thereto.
"Servicing Advances" means all customary, reasonable and necessary "out
of pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Seller of its servicing
obligations, including, but not limited to, the cost of (a) the preservation,
restoration and protection of the Mortgaged Property, (b) any enforcement or
judicial proceedings, including foreclosures, (c) the management and
liquidation of the Mortgaged Property if the Mortgaged Property is acquired
in satisfaction of the Mortgage and (d) compliance with the obligations under
Sections 2.08, 2.10 and 2.16.
"Servicing Agreement" means this agreement between the Purchaser and the
Seller for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means, with respect to each Mortgage Loan, the amount of
the annual fee the Purchaser shall pay to the Seller, which shall, for a
period of one (1) full month, be equal to one-twelfth of the product of the
Servicing Fee Rate and (2) the Stated Principal Balance of such Mortgage
Loan. Such fee shall be payable monthly, computed on the basis of the same
principal amount and period in respect of which any related interest payment
on a Mortgage Loan is computed and shall be pro rated for any portion of a
month during which the Mortgage Loan is serviced by the Seller under this
Agreement. The obligation of the Purchaser to pay the Servicing Fee is
limited to, and the Servicing Fee is payable solely from, the interest
portion (including recoveries with respect to interest from Liquidation
Proceeds, to the extent permitted by Section 4.03) of such Monthly Payment
collected by the Seller, or as otherwise provided under Section 4.03.
"Servicing Fee Rate" means, with respect to each Mortgage Loan serviced
pursuant to this Agreement 0.25%. per annum.
"Servicing File" means, with respect to each Mortgage Loan, the file
retained by the Seller consisting of originals of all documents in the
Mortgage File which are not delivered to the Purchaser or its designee and
copies of the Mortgage Loan Documents listed on Exhibit A to the Purchase
Agreement.
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<PAGE>
"Servicing Officer" means any officer of the Seller involved in or
responsible for, the administration and servicing of the Mortgage Loans whose
name appears on a list of servicing officers furnished by the Seller to the
Purchaser upon request, as such list may from time to time be amended.
"Termination Fee" means the amount paid by the Purchaser to the Seller in
the event of the Seller's termination, without cause, as servicer. Such fee
shall equal the percentage amount set forth in Section 6.03 hereof of the
then current aggregate unpaid principal balance of the related Mortgage
Loans.
ARTICLE II
SERVICING
Section 2.01 Seller to Act as Servicer. From and after the Closing
Date, the Seller, as an independent contractor, shall service and administer
the Mortgage Loans and shall have full power and authority, acting alone, to
do any and all things in connection with such servicing and administration
which the Seller may deem necessary or desirable, consistent with the terms
of this Agreement and with Accepted Servicing Practices.
Consistent with the terms of this Agreement, the Seller may waive, modify
or vary any term of any Mortgage Loan or consent to the postponement of
compliance with any such term or in any manner grant indulgence to any
Mortgagor if in the Seller's reasonable and prudent determination such
waiver, modification, postponement or indulgence is not materially adverse to
the Purchaser, provided, however, that unless the Seller has obtained the
prior written consent of the Purchaser, the Seller shall not permit any
modification with respect to any Mortgage Loan that would change the Mortgage
Interest Rate, defer or forgive the payment of principal or interest, reduce
or increase the outstanding principal balance (except for actual payments of
principal) or change the final maturity date on such Mortgage Loan. Without
limiting the generality of the foregoing, the Seller shall continue, and is
hereby authorized and empowered, to execute and deliver on behalf of itself
and the Purchaser, all instruments of satisfaction or cancellation, or of
partial or full release, discharge and all other comparable instruments, with
respect to the Mortgage Loans and with respect to the Mortgaged Properties.
If reasonably required by the Seller, the Purchaser shall furnish the Seller
with any powers of attorney and other documents necessary or appropriate to
enable the Seller to carry out its servicing and administrative duties under
this Agreement.
In servicing and administering the Mortgage Loans, the Seller shall
employ procedures (including collection procedures) and exercise the same
care that it customarily employs and exercises in servicing and administering
mortgage loans for its own account, giving due consideration to Accepted
Servicing Practices where such practices do not conflict with the
requirements of this Agreement, and the Purchaser's reliance on the Seller.
5
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The Seller shall keep at its servicing office books and records in which,
subject to such reasonable regulations as it may prescribe, the Seller shall
note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be made
unless such transfer is in compliance with the terms hereof. For the purposes
of this Agreement, Seller shall be under no obligation to deal with any
Person with respect to this Agreement or the Mortgage Loans unless the Seller
has been notified of such transfers as provided in this Section 2.01. The
Purchaser may sell and transfer, in whole or in part, the Mortgage Loans,
provided that no such sale and transfer shall be binding upon the Seller
unless such transferee shall agree in writing in the form of the Assignment
and Assumption Agreement attached to the Purchase Agreement as Exhibit G, to
be bound by the terms of this Agreement and the Purchase Agreement, and an
executed copy of the same shall have been delivered to the Seller. Upon
receipt thereof, the Seller shall mark its books and records to reflect the
ownership of the Mortgage Loans by such assignee, and the previous Purchaser
shall be released from its obligations hereunder, subject to receipt by
Seller of all unpaid but due Servicing Advances, Servicing Fees and other
payments due to Seller on or before the date of such transfer pursuant to
this Agreement. The Seller shall be required to remit all amounts required
to be remitted to the Purchaser hereunder to said transferee commencing with
the first Remittance Date falling after receipt of said copy of the related
Assignment and Assumption Agreement provided that the Seller receives said
copy no later than three (3) Business Days immediately prior to the first day
of the month of the related Remittance Date. This Agreement shall be binding
upon and inure to the benefit of the Purchaser and the Seller and their
permitted successors, assignees and designees.
The Servicing File retained by the Seller pursuant to this Agreement
shall be appropriately marked and identified in the Seller's computer system
to clearly reflect the sale of the related Mortgage Loan to the Purchaser.
The Seller shall release from its custody the contents of any Servicing File
retained by it only in accordance with this Agreement, except when such
release is required in connection with a repurchase of any such Mortgage Loan
pursuant to Section 8.03 of the Purchase Agreement.
The Seller must have an internal quality control program that verifies,
on a regular basis, the existence and accuracy of the legal documents, credit
documents, property appraisals, and underwriting decisions. The program must
be capable of evaluating and monitoring the overall quality of its loan
production and servicing activities. The program is to ensure that the
Mortgage Loans are serviced in accordance with prudent mortgage banking
practices and accounting principles; guard against dishonest, fraudulent, or
negligent acts; and guard against errors and omissions by officers,
employees, or other authorized persons.
Section 2.02 Liquidation of Mortgage Loans. In the event that any
payment due under any Mortgage Loan and not postponed pursuant to Section
2.01 is not paid when the same becomes due and payable, or in the event the
Mortgagor fails to perform any other covenant or obligation under the
Mortgage Loan and such failure continues beyond any applicable grace period,
the Seller shall take such action as (1) the Seller would take under similar
circumstances with respect to a similar mortgage loan held for its own
account for investment, (2) shall be consistent with Accepted Servicing
Practices and (3) the Seller shall determine prudently to be
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in the best interest of Purchaser. In addition to the foregoing, in the
event that any payment due under any Mortgage Loan is not postponed pursuant
to Section 2.01 and remains delinquent for a period of ninety (90) days or
any other default continues for a period of ninety (90) days beyond the
expiration of any grace or cure period (or such other period as is required
by law in the jurisdiction where the related Mortgaged Property is located),
the Seller shall commence and be responsible for the processing of
foreclosure proceedings, provided that, prior to commencing foreclosure
proceedings, the Seller shall notify the Purchaser in writing of the Seller's
intention to do so, and the Seller shall not commence foreclosure proceedings
if the Purchaser objects to such action within ten (10) Business Days of
receiving such notice or, if the provisions of the next two paragraphs apply,
in any event without the prior written consent of Purchaser, and provided,
further, that the Seller may, in its good faith business judgement, determine
to commence foreclosure proceedings earlier than the expiration of the
foregoing grace or cure period, subject to the requirements of the preceding
proviso. In such connection, the Seller shall from its own funds make all
necessary and proper Servicing Advances, provided, however, that the Seller
shall not be required to expend its own funds in connection with any
foreclosure or towards the restoration or preservation of any Mortgaged
Property, unless it shall determine (a) that such preservation, restoration
and/or foreclosure will increase the proceeds of liquidation of the Mortgage
Loan to Purchaser after reimbursement to itself for such expenses and (b)
that such expenses will be recoverable by it either through Liquidation
Proceeds (in respect of which it shall have priority for purposes of
withdrawals from the Custodial Account pursuant to Section 2.05) or through
Insurance Proceeds (in respect of which it shall have similar priority). The
Purchaser shall execute any instruments or documents reasonably necessary in
furtherance of all actions to be taken by Seller pursuant to this Section
2.02.
Notwithstanding anything to the contrary contained herein, in connection
with a foreclosure, in the event the Seller has reasonable cause to believe
that a Mortgaged Property is contaminated by hazardous or toxic substances or
wastes, or if the Purchaser otherwise requests an environmental inspection or
review of such Mortgaged Property to be conducted by a qualified inspector,
the Seller shall cause the Mortgaged Property to be so inspected at the
expense of the Purchaser. Upon completion of the inspection, the Seller shall
promptly provide the Purchaser with a written report of the environmental
inspection.
After reviewing the environmental inspection report, the Purchaser shall
determine how the Seller shall proceed with respect to the Mortgaged
Property. In the event (a) the environmental inspection report indicates that
the Mortgaged Property is contaminated by hazardous or toxic substances or
wastes and (b) the Purchaser directs the Seller to proceed with foreclosure
or acceptance of a deed in lieu of foreclosure, the Seller shall be
reimbursed for all reasonable costs associated with such foreclosure or
acceptance of a deed in lieu of foreclosure and any related environmental
clean up costs, as applicable, from the related Liquidation Proceeds, or if
the Liquidation Proceeds are insufficient to fully reimburse the Seller, the
Seller shall be entitled to be reimbursed from amounts in the Custodial
Account pursuant to Section 2.05 hereof and to the extent amounts in the
Custodial Account are insufficient to fully reimburse the Seller,the Seller
shall be entitled to be reimbursed by the Purchaser for such deficiencies
(upon presentation of evidence of such deficiency). In the event the
Purchaser directs the Seller
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not to proceed with foreclosure or acceptance of a deed in lieu of
foreclosure, the Seller shall be reimbursed for all Servicing Advances made
with respect to the related Mortgaged Property from the Custodial Account
pursuant to Section 2.05 hereof.
Section 2.03 Collection of Mortgage Loan Payments. Continuously from
the Closing Date the Seller shall proceed diligently to collect all payments
due under each of the Mortgage Loans when the same shall become due and
payable and shall take special care in ascertaining and estimating Escrow
Payments and all other charges that will become due and payable with respect
to the Mortgage Loans and each related Mortgaged Property, to the end that
the installments payable by the Mortgagors will be sufficient to pay such
charges as and when they become due and payable.
Section 2.04 Establishment of and Deposits to Custodial Account. The
Seller shall segregate and hold all funds collected and received pursuant to
the Mortgage Loans separate and apart from any of its own funds and general
assets and shall establish and maintain one or more Custodial Accounts, in
the form of time deposit or demand accounts, titled "People's Bank of
California in trust for People's Preferred Capital Corporation". The
Custodial Account shall be established with a Qualified Depository acceptable
to the Purchaser. Any funds deposited in the Custodial Account shall at all
times be fully insured to the full extent permitted under applicable law;
provided, however, that to the extent the Custodial Account is established
with the Seller, the Seller may maintain the Custodial Account as a single
account. Funds deposited in the Custodial Account may be drawn on by the
Seller in accordance with Section 2.05. The creation of any Custodial Account
shall be evidenced by a certification in the form of Exhibit B hereto, in the
case of an account established with the Seller, or by a letter agreement in
the form of Exhibit C hereto, in the case of an account held by a depository
other than the Seller. A copy of such certification or letter agreement shall
be furnished to the Purchaser and, upon request, to any subsequent Purchaser.
The Seller shall deposit in the Custodial Account within one Business Day
of receipt, and retain therein, the following collections received by the
Seller and payments made by the Seller after the Closing Date (other than
payments of principal and interest due on or before the Closing Date) or
received by the Seller prior to the Closing Date but allocable to a period
subsequent thereto:
(i) all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage;
(iii) all Liquidation Proceeds and any amount received with respect to REO
Property;
(iv) all Insurance Proceeds including amounts required to be deposited
pursuant to Section 2.10 (other than proceeds to be held in the
Escrow Account and applied
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to the restoration or repair of the Mortgaged Property or released to
the Mortgagor in accordance with Section 2.14), and Section 2.11;
(v) all Condemnation Proceeds which are not applied to the restoration or
repair of the Mortgaged Property or released to the Mortgagor in
accordance with Section 2.14;
(vi) any amount required to be deposited in the Custodial Account pursuant
to Section 2.16, 3.01, or 4.02;
(vii) any amounts payable in connection with the repurchase of any Mortgage
Loan pursuant to Section 8.03 of the Purchase Agreement; and
(viii) any amounts required to be deposited by the Seller pursuant to
Section 2.11 in connection with the deductible clause in any blanket
hazard insurance policy.
The foregoing requirements for deposit into the Custodial Account shall
be exclusive, it being understood and agreed that, without limiting the
generality of the foregoing, Ancillary Income need not be deposited by the
Seller into the Custodial Account. Any interest paid on funds deposited in
the Custodial Account by the depository institution shall accrue to the
benefit of the Seller and the Seller shall be entitled to retain and withdraw
such interest from the Custodial Account pursuant to Section 2.05.
Section 2.05 Permitted Withdrawals From Custodial Account. Subject to
Section 2.16 hereof, the Seller shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
(i) to make payments to the Purchaser in the amounts and in the manner
provided for in Section 3.01;
(ii) to pay to itself the Servicing Fee;
(iii) to reimburse itself for unreimbursed Servicing Advances (except
to the extent reimbursed pursuant to Section 2.07), any accrued
but unpaid Servicing Fees and for unreimbursed advances of Seller
funds made pursuant to Section 2.16, the Seller's right to
reimburse itself pursuant to this subclause (iii) with respect
to any Mortgage Loan being limited to related Liquidation
Proceeds, Condemnation Proceeds, Insurance Proceeds and such
other amounts as may be collected by the Seller from the
Mortgagor or otherwise relating to the Mortgage Loan, it being
understood that, in the case of any such reimbursement, the
Seller's right thereto shall be prior to the rights of the
Purchaser except that, where the Seller is required to
repurchase a Mortgage Loan pursuant to Section 8.03 of the
Purchase Agreement or Section 4.02 of this Agreement,
respectively, the Seller's right to such reimbursement shall be
subsequent to the payment to the Purchaser of the
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Repurchase Price pursuant to such sections and all other amounts
required to be paid to the Purchaser with respect to such Mortgage
Loan;
(iv) to pay itself any interest earned on funds deposited in the Custodial
Account (all such interest to be withdrawn monthly not later than each
Remittance Date); and
(v) to clear and terminate the Custodial Account upon the termination of
this Agreement.
In the event that the Custodial Account is interest bearing, on each
Remittance Date, the Seller shall withdraw all funds from the Custodial
Account except for those amounts which, pursuant to Section 3.01, the Seller
is not obligated to remit on such Remittance Date. The Seller may use such
withdrawn funds only for the purposes described in this Section 2.05.
Section 2.06 Establishment of and Deposits to Escrow Account. The
Seller shall segregate and hold all funds collected and received pursuant to
a Mortgage Loan constituting Escrow Payments separate and apart from any of
its own funds and general assets and shall establish and maintain one or more
Escrow Accounts, in the form of time deposit or demand accounts. The Escrow
Account or Accounts shall be established with a Qualified Depositary, in a
manner which shall provide maximum available insurance thereunder. Funds
deposited in the Escrow Accounts may be drawn on by the Seller in accordance
with Section 2.07. The creation of any Escrow Account shall be evidenced by a
certification in the form of Exhibit D hereto, in the case of an account
established with the Seller, or by a letter agreement in the form of Exhibit
E hereto, in the case of an account held by a depository other than the
Seller. A copy of such certification shall be furnished to the Purchaser and,
upon request, to any subsequent Purchaser.
The Seller shall deposit in the Escrow Account or Accounts within one
Business Day of receipt, and retain therein:
(i) all Escrow Payments collected on account of the Mortgage Loans, for the
purpose of effecting timely payment of any such items as required under
the terms of the Mortgage Loan Documents; and
(ii) all amounts representing Insurance Proceeds or Condemnation Proceeds
which are to be applied to the restoration or repair of any Mortgaged
Property in accordance with the Mortgage Loan Documents.
The Seller shall make withdrawals from the Escrow Account only to effect
such payments as are required under the Mortgage Loan Documents and this
Agreement as set forth in Section 2.07. The Seller shall be entitled to
retain any interest paid on funds deposited in the Escrow Account by the
depository institution, other than interest on escrowed funds required by law
to be paid to the Mortgagor. To the extent required by law, the Seller shall
pay from its own funds interest on escrowed funds to the Mortgagor
notwithstanding that the Escrow Account may be noninterest bearing or that
interest paid thereon is insufficient for such purposes.
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Section 2.07 Permitted Withdrawals From Escrow Account. Withdrawals
from each Escrow Account may be made by the Seller only:
(i) to effect timely payments of ground rents, taxes, assessments, water
rates, mortgage insurance premiums, condominium charges, fire and
hazard insurance premiums or other items constituting Escrow Payments
for the related Mortgage;
(ii) to reimburse the Seller for any Servicing Advance made by the Seller
pursuant to Section 2.08 (except with respect to any expenses incurred
in procuring or transferring Tax Service Contracts) with respect to a
related Mortgage Loan, but only from amounts received on the related
Mortgage Loan which represent late collections of Escrow Payments
thereunder;
(iii) to refund to the related Mortgagor any funds found to be in
excess of the amounts required under the terms of the related
Mortgage Loan or applicable federal or state law or judicial or
administrative ruling;
(iv) for transfer to the Custodial Account and application to reduce the
principal balance of the Mortgage Loan in accordance with the terms of
the related Mortgage and Mortgage Note;
(v) for application to restoration or repair of the related Mortgaged
Property in accordance with the procedures outlined in Section 2.14;
(vi) to pay to the Seller, or any Mortgagor to the extent required by law,
any interest paid on the funds deposited in the Escrow Account; and
(vii) to clear and terminate the Escrow Account on the termination of
this Agreement.
Section 2.08 Payment of Taxes, Insurance and Other Charges, Tax
Contracts. With respect to each Mortgage Loan, the Seller shall maintain
accurate records reflecting the status of ground rents, taxes, assessments,
water rates, sewer rents, and other charges, as applicable, which are or may
become a lien upon the Mortgaged Property and the status of fire and hazard
insurance coverage to the extent Escrow Payments are required under the
Mortgage Loan Documents, shall obtain, from time to time, all bills for the
payment of such charges (including renewal premiums) and shall effect payment
thereof prior to the applicable penalty or termination date, employing for
such purpose deposits of the Mortgagor in the Escrow Account which shall have
been estimated and accumulated by the Seller in amounts sufficient for such
purposes, as allowed under the terms of the Mortgage. To the extent that a
Mortgage does not provide for Escrow Payments, the Seller shall determine
that any such payments relating to taxes or maintaining insurance policies
are made by the Mortgagor at the time they first become due. The Seller
assumes full responsibility for the payment of all such bills to the extent
it has notice of such bills and shall effect payment of all such charges
irrespective of each Mortgagor's faithful performance in the payment of same
or the making of the Escrow Payments,
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and the Seller shall make advances from its own funds to effect such payments,
such advances to be reimbursable to the same extent as Servicing Advances.
The Seller shall ensure that each of the Mortgage Loans shall be covered
by a Tax Service Contract which shall be assigned to the Purchaser or the
Purchaser's designee at the Seller's expense in the event that the Seller is
terminated as servicer of the related Mortgage Loan(s) hereunder. To the
extent that a Mortgage Loan does not have a Tax Service Contract, the
Purchaser shall procure a Tax Service Contract for such Mortgage Loan and the
Seller shall reimburse the Purchaser upon request for reasonable expenses
incurred in connection therewith.
Section 2.09 Protection of Accounts. The Seller may transfer the
Custodial Account or the Escrow Account to a different Qualified Depository
from time to time. Such transfer shall be made only upon obtaining the
consent of the Purchaser, which consent shall not be withheld unreasonably.
The Seller shall bear any expenses, losses or damages sustained by the
Purchaser because the Custodial Account and/or the Escrow Account are not
demand deposit accounts.
Section 2.10 Maintenance of Hazard Insurance. The Seller shall cause
to be maintained for each Mortgage Loan, hazard insurance such that all
buildings upon the Mortgaged Property are insured by a generally acceptable
insurer rated A:VI or better in the current Best's against loss by fire and
hazards of extended coverage, in an amount which is at least equal to the
lesser of (i) the maximum insurable value of the improvements securing such
Mortgage Loan and (ii) the greater of (a) the outstanding principal balance
of the Mortgage Loan and (b) an amount such that the proceeds thereof shall
be sufficient to prevent the Mortgagor or the loss payee from becoming a
co-insurer.
If required by the Flood Disaster Protection Act of 1973, as amended,
each Mortgage Loan is covered by a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance
Administration in effect with a generally acceptable insurance carrier rated
A:VI or better in Best's in an amount representing coverage not less than the
lesser of (i) the outstanding principal balance of the related Mortgage Loan
and (ii) the maximum amount of insurance which is available under the Flood
Disaster Protection Act of 1973, as amended. If at any time during the term
of the Mortgage Loan, the Seller determines in accordance with applicable law
that a Mortgaged Property is located in a special flood hazard area and is
not covered by flood insurance or is covered in an amount less than the
amount required by the Flood Disaster Protection Act of 1973, as amended, the
Seller shall notify the related Mortgagor that the Mortgagor must obtain such
flood insurance coverage, and if said Mortgagor fails to obtain the required
flood insurance coverage within forty five (45) days after such notification,
the Seller shall immediately purchase the required flood insurance on the
Mortgagor's behalf.
The Seller shall cause to be maintained on each Mortgaged Property such
other or additional insurance as may be required pursuant to such applicable
laws and regulations as shall
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at any time be in force and as shall require such additional insurance, or
pursuant to the requirements of any applicable primary mortgage guaranty
insurer.
All policies required hereunder shall name the Seller and its successors
and assigns as mortgagee and shall be endorsed with non-contributory standard
mortgagee clauses which shall provide for at least thirty (30) days' prior
written notice of any cancellation, reduction in amount or material change in
coverage.
The Seller shall not interfere with the Mortgagor's freedom of choice in
selecting either his insurance carrier or agent, provided, however, that the
Seller shall not accept any such insurance policies from insurance companies
unless such companies are rated A:VI or better in Best's and are licensed to
do business in the jurisdiction in which the Mortgaged Property is located.
The Seller shall determine that such policies provide sufficient risk
coverage and amounts, that they insure the property owner, and that they
properly describe the property address. To the extent reasonably possible,
the Seller shall furnish to the Mortgagor a formal notice of expiration of
any such insurance in sufficient time for the Mortgagor to arrange for
renewal coverage by the expiration date; provided, however, that in the event
that no such notice is furnished by the Seller, the Seller shall ensure that
replacement insurance policies are in place in the required coverages and the
Seller shall be solely liable to the Purchaser only for any losses in the
event such coverage is not provided.
Pursuant to Section 2.04, any amounts collected by the Seller under any
such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to
the Mortgagor, in accordance with the Seller's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account
subject to withdrawal pursuant to Section 2.05.
Section 2.11 Maintenance of Mortgage Impairment Insurance. In the
event that the Seller shall obtain and maintain a blanket policy insuring
against losses arising from fire and hazards covered under extended coverage
on all of the Mortgage Loans, then, to the extent such policy provides
coverage in an amount equal to the amount required pursuant to Section 2.10
and otherwise complies with all other requirements of Section 2.10, it shall
conclusively be deemed to have satisfied its obligations as set forth in
Section 2.10. Any amounts collected by the Seller under any such policy
relating to a Mortgage Loan shall be deposited in the Custodial Account
subject to withdrawal pursuant to Section 2.05. Such policy may contain a
deductible clause, in which case, in the event that there shall not have been
maintained on the related Mortgaged Property a policy complying with Section
2.10, and there shall have been a loss which would have been covered by such
policy, the Seller shall deposit in the Custodial Account at the time of such
loss the amount not otherwise payable under the blanket policy because of
such deductible clause, such amount to be deposited from the Seller's funds,
without reimbursement therefor. Upon request of the Purchaser, the Seller
shall cause to be delivered to the Purchaser a certified true copy of such
policy and a statement from the insurer thereunder that such policy
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shall in no event be terminated or materially modified without thirty (30)
days' prior written notice to the Purchaser.
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions
Insurance. The Seller shall maintain with responsible companies, at its own
expense, a blanket Fidelity Bond and an Errors and Omissions Insurance
Policy, with broad coverage on all officers, employees or other persons
acting in any capacity requiring such persons to handle funds, money,
documents or papers relating to the Mortgage Loans ("Seller Employees"). Any
such Fidelity Bond and Errors and Omissions Insurance Policy shall be in the
form of the Mortgage Banker's Blanket Bond and shall protect and insure the
Seller against losses, including forgery, theft, embezzlement, fraud, errors
and omissions and negligent acts of such Seller Employees. Such Fidelity Bond
and Errors and Omissions Insurance Policy also shall protect and insure the
Seller against losses in connection with the release or satisfaction of a
Mortgage Loan without having obtained payment in full of the indebtedness
secured thereby. No provision of this Section 2.12 requiring such Fidelity
Bond and Errors and Omissions Insurance Policy shall diminish or relieve the
Seller from its duties and obligations as set forth in this Agreement. Upon
the request of the Purchaser, the Seller shall cause to be delivered to the
Purchaser a certified true copy of such Fidelity Bond and Errors and
Omissions Insurance Policy and a statement from the surety and the insurer
that such Fidelity Bond and Errors and Omissions Insurance Policy shall in no
event be terminated or materially modified without thirty (30) days' prior
written notice to the Purchaser. In the event that the surety or insurer
charges the Seller a fee for providing such evidence, the Purchaser shall
reimburse the Seller for the reasonable expense incurred by the Seller in
furnishing such evidence.
Section 2.13 Inspections. The Seller shall inspect the Mortgaged
Property as often as deemed necessary by the Seller to assure itself that the
value of the Mortgaged Property is being preserved. In addition, if any
Mortgage Loan is more than sixty (60) days delinquent, the Seller immediately
shall inspect the Mortgaged Property and shall conduct subsequent inspections
in accordance with Accepted Servicing Practices. The Seller shall keep a
written report of each such inspection.
Section 2.14 Restoration of Mortgaged Property. The Seller need not
obtain the approval of the Purchaser prior to releasing any Insurance
Proceeds or Condemnation Proceeds to the Mortgagor to be applied to the
restoration or repair of the Mortgaged Property if such release is in
accordance with the terms of the Mortgage Loan Documents. At a minimum, the
Seller shall comply with the following conditions in connection with any such
release of Insurance Proceeds or Condemnation Proceeds:
(i) the Seller shall receive satisfactory independent verification of
completion of repairs and issuance of any required approvals with
respect thereto;
(ii) the Seller shall take all steps necessary to preserve the priority of
the lien of the Mortgage, including, but not limited to requiring
waivers with respect to mechanics' and materialmen's liens;
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(iii) the Seller shall verify that the Mortgage Loan is not in default;
and
(iv) pending repairs or restoration, the Seller shall place the Insurance
Proceeds or Condemnation Proceeds in the Escrow Account.
If the Purchaser is named as an additional mortgagee, the Seller is
hereby empowered to endorse any loss draft issued in respect of such a claim
in the name of the Purchaser.
Section 2.15 Deteriorating Mortgage Loans. If, during the term of this
Agreement, a Mortgage Loan (or interest therein) becomes at any time in
Nonaccrual Status, the Seller shall notify the Purchaser as part of the
Seller's reporting obligations under this Agreement and shall follow the
procedures set forth in Section 2.02 of this Agreement for realizing upon
defaulted Mortgage Loans.
Section 2.16 Title, Management and Disposition of REO Property. In the
event that title to any Mortgaged Property is acquired in foreclosure or by
deed in lieu of foreclosure, the deed or certificate of sale shall be taken
in the name of the Purchaser, or in the event the Purchaser is not authorized
or permitted to hold title to real property in the state where the REO
Property is located, or would be adversely affected under the "doing
business" or tax laws of such state by so holding title, the deed or
certificate of sale shall be taken in the name of such Person or Persons as
shall be designated by the Purchaser. The Person or Persons holding such
title other than the Purchaser shall acknowledge in writing that such title
is being held as nominee for the Purchaser.
The Seller shall manage, conserve, protect and operate each REO Property
for the Purchaser solely for the purpose of its prompt disposition and sale.
The Seller, either itself or through an agent selected by the Seller and
reasonably acceptable to the Purchaser, shall manage, conserve, protect and
operate the REO Property in the same manner that it manages, conserves,
protects and operates other foreclosed property for its own account, and in
the same manner that similar property in the same locality as the REO
Property is managed. The Seller shall attempt to sell the same (and may
temporarily rent the same for a period not greater than one (1) year, except
as otherwise provided below) on such terms and conditions as the Seller deems
to be in the best interest of the Purchaser.
The Seller shall use its best efforts to dispose of the REO Property as
soon as possible and shall sell such REO Property in any event within one
year after title has been taken to such REO Property, unless the Seller
determines, and gives an appropriate notice to the Purchaser to such effect,
that a longer period is necessary for the orderly liquidation of such REO
Property. If a period longer than one (1) year is permitted under the
foregoing sentence and is necessary to sell any REO Property, the Seller
shall report monthly to the Purchaser as to the progress being made in
selling such REO Property.
The Seller shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the
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improvements which are a part of such property, liability insurance and, to the
extent required and available under the Flood Disaster Protection Act of 1973,
as amended, flood insurance in the amount required above.
The disposition of REO Property shall be carried out by the Seller at
such price, and upon such terms and conditions, as the Seller deems to be in
the best interests of the Purchaser. The proceeds of sale of the REO Property
shall be promptly deposited in the Custodial Account. As soon as practical
thereafter the expenses of such sale shall be paid and the Seller shall
reimburse itself pursuant to Section 2.05(iii) hereof, as applicable, for any
related unreimbursed Servicing Advances, unpaid Servicing Fees and
unreimbursed advances made pursuant to this Section, and on the Remittance
Date immediately following the Due Period in which such sale proceeds are
received the net cash proceeds of such sale remaining in the Custodial
Account shall be distributed to the Purchaser; provided that such
distribution shall, in any event, be made within ninety (90) days from and
after the closing of the sale of such REO Property.
In addition to the Seller's obligations set forth in this Section 2.16,
the Seller shall deliver written notice to the Purchaser whenever title to
any Mortgaged Property is acquired in foreclosure or by deed in lieu of
foreclosure together with a copy of the drive-by appraisal of the related
Mortgaged Property obtained by the Seller on or prior to the date of such
acquisition. Notwithstanding anything to the contrary contained herein, the
Purchaser may, at the Purchaser's sole option, terminate the Seller as
servicer of any such REO Property without payment of any Termination Fee with
respect thereto, provided that (i) the Purchaser gives the Seller notice of
such termination within ten (10) Business Days of receipt of said written
notice from the Seller which termination shall be effective no more than
fifteen (15) Business Days from and after the date of said notice from the
Purchaser and (ii) the Seller shall on the date said termination takes effect
be reimbursed by Purchaser for any unreimbursed Servicing Advances in each
case relating to the Mortgage Loan underlying such REO Property. In the event
of any such termination, the provisions of Section 8.06 hereof shall apply to
said termination and the transfer of servicing responsibilities with respect
to such REO Property to the Purchaser or its designee.
With respect to each REO Property, the Seller shall deposit all funds
collected and received in connection with the operation of the REO Property
in the Custodial Account. The Seller shall cause to be deposited on a daily
basis upon the receipt thereof in the Custodial Account all revenues received
with respect to the conservation and disposition of the related REO Property.
Section 2.17 Permitted Withdrawals with respect to REO Property. For
so long as the Seller is acting as servicer of any Mortgage Loan relating to
any REO Property, the Seller shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost
of maintaining any hazard insurance pursuant to Section 2.10 and the fees of
any managing agent acting on behalf of the Seller. The Seller shall make
monthly distributions on each Remittance Date to the Purchaser of the net
cash flow from the REO Property (which shall equal the revenues from such REO
Property net of the expenses described in Section 2.16
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and of any reserves reasonably required from time to time to be maintained to
satisfy anticipated liabilities for such expenses).
Section 2.18 Real Estate Owned Reports. For so long as the Seller is
acting as servicer of any Mortgage Loan relating to any REO Property, the
Seller shall furnish to the Purchaser on or before the 15th day of each month
a statement with respect to any REO Property covering the operation of such
REO Property for the previous month and the Seller's efforts in connection
with the sale of such REO Property and any rental of such REO Property
incidental to the sale thereof for the previous month. That statement shall
be accompanied by such other information as the Purchaser shall reasonably
request.
Section 2.19 [Reserved]
Section 2.20 Reports Of Foreclosures and Abandonments. For so long as
the Seller is acting as servicer of any Mortgage Loan relating to any REO
Property, following the foreclosure sale or abandonment of any Mortgaged
Property, the Seller shall report such foreclosure or abandonment as required
pursuant to Section 6050J of the Code.
Section 2.21 Notification of Adjustments. With respect to each
Variable Rate Mortgage Loan, the Seller shall adjust the Mortgage Interest
Rate on the related Interest Rate Adjustment Date and shall adjust the
Monthly Payment accordingly in compliance with the requirements of applicable
law and the related Mortgage and Mortgage Note. If, pursuant to the terms of
the Mortgage Note, another index is selected for determining the Mortgage
Interest Rate, the same index will be used with respect to each Mortgage Note
which requires a new index to be selected, provided that such selection does
not conflict with the terms of the related Mortgage Note. The Seller shall
execute and deliver any and all necessary notices required under applicable
law and the terms of the related Mortgage Note and Mortgage regarding the
Mortgage Interest Rate and the Monthly Payment adjustments. The Seller shall
promptly upon written request therefor, deliver to the Purchaser such
notifications and any additional applicable data regarding such adjustments
and the methods used to calculate and implement such adjustments. Upon the
discovery by the Seller or the Purchaser that the Seller has failed to adjust
a Mortgage Interest Rate or a Monthly Payment pursuant to the terms of the
related Mortgage Note and Mortgage, the Seller shall immediately deposit in
the Custodial Account from its own funds the amount of any interest loss
actually caused the Purchaser thereby.
Section 2.22 Notification of Maturity Date. With respect to each Fixed
Rate Mortgage Loan, the Purchaser shall execute and deliver to the Mortgagor
any and all necessary notices required under applicable law and the terms of
the related Mortgage Note and Mortgage regarding the maturity date if
required under applicable law.
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ARTICLE III
PAYMENTS TO PURCHASER
Section 3.01 Remittances. On each Remittance Date the Seller shall
remit by wire transfer of immediately available funds to the Purchaser all
amounts deposited in the Custodial Account as of the close of business on the
Cut-off Date immediately preceeding such Remittance Date, except that less
than full Principal Prepayments received on or after the first day of the
month in which the Remittance Date occurs shall be remitted to the Purchaser
on the next following Remittance Date; and minus any amounts attributable to
Monthly Payments collected but due on a Due Date or Dates subsequent to the
first day of the month of the Remittance Date, which amounts shall be
remitted on the next Remittance Date, in each case, net of charges against or
withdrawals from the Custodial Account pursuant to Section 2.05.
With respect to any Principal Prepayment in full, the Seller shall remit
such Principal Prepayment to the Purchaser within five (5) Business Days of
receipt of such Principal Prepayment by the Seller.
With respect to any Seller's remittance received by the Purchaser after
the fifth Business Day following the Business Day on which such payment was
due, the Seller shall pay to the Purchaser interest on any such late payment
at an annual rate equal to the Prime Rate, adjusted as of the date of each
change, plus one (1) percentage point, but in no event greater than the
maximum amount permitted by applicable law. Such interest shall be deposited
in the Custodial Account by the Seller on the date such late payment is made
and shall cover the period commencing with and including the day following
such fifth Business Day and ending with the Business Day on which such
payment is made, exclusive of such Business Day; provided, however, that in
the event that the Seller remits such amounts after 11:00 A.M. (California
time) on any day, such period shall include such day. Such interest shall be
remitted along with the distribution payable on the next succeeding
Remittance Date. The payment by the Seller of any such interest shall not be
deemed an extension of time for payment or a waiver of any Event of Default
by the Seller.
Section 3.02 Statements to Purchaser. Not later than the twentieth day
of each month, the Seller shall furnish by modem and/or diskette to the
Purchaser or its designee a listing of the outstanding Mortgage Loans,
including with respect to each Mortgage Loan: the Mortgage Loan number, the
actual balance, the actual paid-through dates, the Mortgage Interest Rate and
principal and interest payment, and with respect to Variable Rate Mortgage
Loans, the next Interest Rate Adjustment Date, the Mortgage Interest Rate and
the principal and interest payment effective as of the next Interest Rate
Adjustment Date (if available), and shall furnish to the Purchaser manually a
Monthly Remittance Advice, with a trial balance report attached thereto, in
the form of Exhibit A annexed hereto as to the preceding remittance and the
period ending on the preceding Cut-off Date.
In addition, not more than sixty (60) days after the end of each calendar
year, the Seller shall furnish to each Person who was a Purchaser at any time
during such calendar year an annual
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statement in accordance with the requirements of applicable federal income tax
law as to the aggregate of remittances for the applicable portion of such year.
Such obligation of the Seller shall be deemed to have been satisfied to
the extent that substantially comparable information shall be provided by the
Seller pursuant to any requirements of the Code as from time to time are in
force.
The Seller shall prepare and file, with respect to each Mortgage Loan,
any and all tax returns, information statements or other filings required to
be delivered to any governmental taxing authority or to the Purchaser
pursuant to any applicable law with respect to the Mortgage Loans and the
transactions contemplated hereby. In addition, the Seller shall provide the
Purchaser with such information concerning the Mortgage Loans as is necessary
for the Purchaser to prepare its federal income tax return as the Purchaser
may reasonably request from time to time.
ARTICLE IV
GENERAL SERVICING PROCEDURES
Section 4.01 Transfers of Mortgaged Property. The Seller shall be
required to enforce any "due-on-sale" provision contained in any Mortgage or
Mortgage Note and to deny assumption by the person to whom the Mortgaged
Property has been or is about to be sold whether by absolute conveyance or by
contract of sale, whether or not the Mortgagor remains liable on the Mortgage
and the Mortgage Note, unless assumptions are permitted by the Mortgage Loan
Documents. When the Mortgaged Property has been conveyed by the Mortgagor,
the Seller shall, to the extent it has knowledge of such conveyance, exercise
its rights to accelerate the maturity of such Mortgage Loan under the
"due-on-sale" clause applicable thereto, unless assumptions are permitted by
the Mortgage Loan Documents.
If the Seller reasonably believes it is unable under applicable law to
enforce such "due-on-sale" clause, or if the Mortgage Loan Documents permit
an assumption of the Mortgage Loan, the Seller, in the Purchaser's name,
shall, to the extent permitted by applicable law, enter into (i) an
assumption and modification agreement with the person to whom such property
has been conveyed, pursuant to which such person becomes liable under the
Mortgage Note and the original Mortgagor remains liable thereon, unless the
Mortgage Loan Documents provide otherwise or (ii) in the event the Seller is
unable under applicable law or the Mortgage Loan Documents to require that
the original Mortgagor remain liable under the Mortgage Note and the Seller
has the prior consent of any applicable insurer, a substitution of liability
agreement with the purchaser of the Mortgaged Property pursuant to which the
original Mortgagor is released from liability and the purchaser of the
Mortgaged Property is substituted as Mortgagor and becomes liable under the
Mortgage Note. In connection with any such assumption, neither the Mortgage
Interest Rate borne by the related Mortgage Note, the term of the Mortgage
Loan nor the outstanding principal amount of the Mortgage Loan shall be
changed unless approved by the Purchaser.
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To the extent that any Mortgage Loan is assumable, the Seller shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by the Seller with respect to underwriting mortgage
loans of the same type as the Mortgage Loans. If the credit of the proposed
transferee does not meet such underwriting criteria, the Seller diligently
shall, to the extent permitted by the Mortgage or the Mortgage Note and by
applicable law, accelerate the maturity of the Mortgage Loan.
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files.
Upon the payment in full of any Mortgage Loan, or the receipt by the Seller
of a notification that payment in full will be escrowed in a manner customary
for such purposes, the Seller shall notify the Purchaser in the Monthly
Remittance Advice as provided in Section 3.02, and may request the release of
any Mortgage Loan Documents from the Purchaser in accordance with this
Section 4.02 hereof. Upon full satisfaction of the Mortgage Note, the Seller
shall obtain discharge of the related Mortgage Loan as of record within any
related time limit required by applicable law.
If the Seller satisfies or releases a Mortgage without first having
obtained payment in full of the indebtedness secured by the Mortgage, upon
written demand of the Purchaser, the Seller shall repurchase the related
Mortgage Loan at the Repurchase Price by deposit thereof in the Custodial
Account within two (2) Business Days of receipt of such demand by the
Purchaser. Upon such repurchase, all funds maintained in the Escrow Account
with respect to such repurchased Mortgage Loan shall be transferred to the
Seller. The Seller shall maintain the Fidelity Bond and Errors and Omissions
Insurance Policy as provided for in Section 2.12 insuring the Seller against
any loss it may sustain with respect to any Mortgage Loan not satisfied in
accordance with the procedures set forth herein.
Section 4.03 Servicing Compensation. As consideration for servicing
the Mortgage Loans hereunder, the Seller shall withdraw the Servicing Fee
with respect to each Mortgage Loan from the Custodial Account pursuant to
Section 2.05 hereof. Such Servicing Fee shall be payable monthly, computed on
the basis of the same principal amount and period in respect of which any
related interest payment on a Mortgage Loan is computed. The Servicing Fee
shall be pro-rated when servicing is for less than one month. The obligation
of the Purchaser to pay, and the Seller's right to withdraw, the Servicing
Fee is limited to, and the Servicing Fee is payable solely from, the interest
portion (including recoveries with respect to interest from Liquidation
Proceeds, to the extent permitted by Section 2.05), of such Monthly Payment
collected by the Seller, or as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income shall
be retained by the Seller and shall not be required to be deposited in the
Custodial Account. The Seller shall be required to pay all expenses incurred
by it in connection with its servicing activities hereunder and shall not be
entitled to reimbursement thereof except as specifically provided for herein.
Section 4.04 Annual Statement as to Compliance. The Seller shall
deliver to the Purchaser, on or before March 31 each year beginning with
March 31, 1998, an Officer's
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Certificate, stating that (i) a review of the activities of the Seller during
the preceding calendar year and of performance under this Agreement has been
made under such officer's supervision, and (ii) the Seller has complied in
all material respects with the provisions of Article II and Article IV, and
(iii) to the best of such officer's knowledge, based on such review, the
Seller has fulfilled all its obligations under this Agreement throughout such
year or part thereof, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default known to such officer and
the nature and status thereof and the action being taken by the Seller to
cure such default.
Section 4.05 Annual Independent Public Accountants' Servicing Report.
On or before March 31 of each year, beginning March 31, 1998, the Seller at
its expense shall cause a firm of independent public accountants (who may
also render other services to the Seller, or any affiliate thereof) which is
a member of the American Institute of Certified Public Accountants to furnish
a statement to the Purchaser to the effect that such firm has, as part of
their examination of the financial statements of the Seller performed tests
embracing the records and documents relating to mortgage loans serviced by
the Seller in accordance with the requirements of the Uniform Single Audit
Program for Mortgage Bankers and that their examination disclosed no
exceptions that, in their opinion were material, relating to mortgage loans
serviced by the Seller.
Section 4.06 Right to Examine Seller Records. The Purchaser, upon
reasonable notice, shall have the right to examine and audit any and all of
the books, records, or other information of the Seller, whether held by the
Seller or by another on its behalf, with respect to or concerning this
Agreement or the Mortgage Loans, during business hours or at such other times
as may be reasonable under applicable circumstances, upon reasonable advance
notice.
ARTICLE V
SELLER TO COOPERATE
Section 5.01 Provision of Information. During the term of this
Agreement, the Seller shall furnish to the Purchaser such periodic, special,
or other reports or information, whether or not provided for herein, as shall
be necessary, reasonable, or appropriate with respect to the Purchaser or the
purposes of this Agreement. All such reports or information shall be provided
by and in accordance with all reasonable instructions and directions which
the Purchaser may give.
The Seller shall execute and deliver all such instruments and take all
such action as the Purchaser may reasonably request from time to time, in
order to effectuate the purposes and to carry out the terms of this
Agreement.
Section 5.02 Financial Statements; Servicing Facilities. In connection
with disposition of Mortgage Loans, the Purchaser may make available to a
prospective purchaser audited financial statements of the Seller for the most
recently completed two (2) fiscal years for which
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such statements are available, as well as a Consolidated Statement of
Condition at the end of the last two (2) fiscal years covered by any
Consolidated Statement of Operations. If it has not already done so, the Seller
shall furnish promptly to the Purchaser or a prospective purchaser copies of
the statements specified above; provided, however, that prior to furnishing
such statements or information to any prospective purchaser, the Seller may
require such prospective purchaser to execute a confidentiality agreement in
form reasonably satisfactory to it.
The Seller shall make available to the Purchaser or any prospective
Purchaser a knowledgeable financial or accounting officer for the purpose of
answering questions with respect to recent developments affecting the Seller
or the financial statements of the Seller, and to permit any prospective
purchaser to inspect the Seller's servicing facilities for the purpose of
satisfying such prospective purchaser that the Seller has the ability to
service the Mortgage Loans as provided in this Agreement.
ARTICLE VI
TERMINATION
Section 6.01 Damages. The Purchaser shall have the right at any time
to seek and recover from the Seller any damages or losses suffered by it
solely as a result of any failure by the Seller to observe or perform any
duties, obligations, covenants or agreements herein contained.
Section 6.02 Termination. The respective obligations and
responsibilities of the Seller shall terminate upon: (i) the later of the
final payment or other liquidation (or any advance with respect thereto) of
the last Mortgage Loan serviced by the Seller or the disposition of all REO
Property serviced by the Seller and the remittance of all funds due
hereunder; or (ii) by mutual consent of the Seller and the Purchaser in
writing, unless earlier terminated pursuant to this Agreement.
Section 6.03 Termination Without Cause. The Purchaser may, at its sole
option, upon not less than thirty (30) days' prior written notice to the
Seller, terminate any rights the Seller may have hereunder with respect to
any or all of the Mortgage Loans, without cause, upon written notice,
provided that the Seller shall have an additional period of not more than
sixty (60) days from and after the date of said notice from the Purchaser
within which to effect the related transfer of servicing. Any such notice of
termination shall be in writing and delivered to the Seller as provided in
Section 12.01 of this Agreement. In the event of such termination, the Seller
shall be entitled to a Termination Fee, equal to 1.50% of the then current
aggregate unpaid principal balance of the related Mortgage Loans; provided,
however, that no Termination Fee shall be payable if the successor servicer
is an Affiliate of the Seller.
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ARTICLE VII
BOOKS AND RECORDS
Section 7.01 Possession of Servicing Files. The contents of each
Servicing File are and shall be held in trust by the Seller for the benefit
of the Purchaser as the owner thereof. The Seller shall maintain in the
Servicing File a copy of the contents of each Mortgage File and the originals
of the documents in each Mortgage File not delivered to the Purchaser. The
possession of the Servicing File by the Seller is at the will of the
Purchaser for the sole purpose of servicing the related Mortgage Loan,
pursuant to this Agreement, and such retention and possession by the Seller
is in its capacity as Seller only and at the election of the Purchaser. The
Seller shall release its custody of the contents of any Servicing File only
in accordance with written instructions from the Purchaser or other
termination of the Seller with respect to the related Mortgage Loans, unless
such release is required as incidental to the Seller's servicing of the
Mortgage Loans pursuant to this Agreement, or is in connection with a
repurchase of any Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement or Section 4.02 of this Agreement.
The Seller shall be responsible for maintaining, and shall maintain, a
complete set of books and records for each Mortgage Loan which shall be
marked clearly to reflect the ownership of each Mortgage Loan by the
Purchaser. In particular, the Seller shall maintain in its possession,
available for inspection by the Purchaser or its designee during normal
business hours, and shall deliver to the Purchaser or its designee upon
reasonable notice, evidence of compliance with all federal, state and local
laws, rules and regulations, including but not limited to documentation as to
the method used in determining the applicability of the provisions of the
Flood Disaster Protection Act of 1973, as amended, to the Mortgaged Property,
documentation evidencing insurance coverage and periodic inspection reports
as required by Section 2.13. To the extent that original documents are not
required for purposes of realization of Liquidation Proceeds or Insurance
Proceeds, documents maintained by the Seller may be in the form of microfilm
or microfiche.
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
Section 8.01 Indemnification. The Seller agrees to indemnify and hold
the Purchaser harmless from any liability, claim, loss or damage (including,
without limitation, any reasonable legal fees, judgments or expenses relating
to such liability, claim, loss or damage, but excluding consequential
special, exemplary, punitive and indirect damages ("Special Damages") except
for such Special Damages which Purchaser is required by law to pay to a third
party), to the Purchaser directly or indirectly resulting from the Seller's
failure to observe and perform any or all of Seller's duties, obligations,
covenants, agreements, warranties or representations contained in this
Agreement or the Seller's failure to comply with all applicable requirements
with respect to the transfer of servicing rights as set forth herein.
The Seller shall notify the Purchaser as soon as reasonably possible if a
claim is made by a third party with respect to this Agreement.
Section 8.02 Limitation on Liability of Seller and Others. Neither the
Seller nor any of the directors, officers, employees or agents of the Seller
shall be under any liability to the Purchaser for any action taken or for
refraining from the taking of any action in good faith
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pursuant to this Agreement, or for errors in judgment, provided, however, that
this provision shall not protect the Seller or any such person against any
breach of warranties or representations made herein, or failure to perform its
obligations in material compliance with any standard of care set forth in
this Agreement, or any liability which would otherwise be imposed by reason
of any breach of the terms and conditions of this Agreement. The Seller and
any director, officer, employee or agent of the Seller may rely in good faith
on any document of any kind prima facie properly executed and submitted by
any Person with respect to any matter arising hereunder. The Seller shall not
be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its duties to service the Mortgage Loans in
accordance with this Agreement and which in its opinion may involve it in any
expense or liability, provided, however, that the Seller may, with the prior
written consent of the Purchaser, undertake any such action which it may deem
necessary or desirable in respect to this Agreement and the rights and duties
of the parties hereto. In such event, the Seller shall be entitled to prompt
reimbursement from the Purchaser of the reasonable legal expenses and costs
of such action.
Section 8.03 Limitation on Registration and Assignment by Seller. The
Purchaser has entered into this Agreement with the Seller in reliance upon
the independent status of the Seller, and the representations as to the
adequacy of its servicing facilities, plant, personnel, records and
procedures, its integrity, reputation and financial standing, and the
continuance thereof. Therefore, the Seller shall not (i) assign this
Agreement or the servicing hereunder (other than to an affiliate of Seller)
or (ii) delegate any substantial part of its rights or duties hereunder
without the prior written consent of the Purchaser, which consent shall not
be unreasonably withheld or conditioned provided that (a) any delegation of
such rights or duties shall not release the Seller from its obligations
hereunder and the Seller shall remain responsible hereunder for all acts and
omissions of any delegee as if such acts or omissions were those of the
Seller and (b) any such assignee or designee shall satisfy the requirements
for a successor or surviving Person set forth in Section 8.05 and Section
8.06 hereof. The Seller shall notify the Purchaser in writing at least 30
days prior to selling or otherwise disposing of all or substantially all of
its assets and receipt of such notice shall entitle the Purchaser to
terminate this Agreement except as set forth in Section 8.06 hereof.
The Seller shall not resign from the obligations and duties hereby
imposed on it except by mutual consent of the Seller and the Purchaser or
upon the determination that its duties hereunder are no longer permissible
under applicable law and such incapacity cannot be cured by the Seller. Any
such determination permitting the resignation of the Seller shall be
evidenced by an Opinion of Counsel to such effect delivered to the Purchaser
which Opinion of Counsel shall be in form and substance acceptable to the
Purchaser. No such resignation shall become effective until a successor shall
have assumed the Seller's responsibilities and obligations hereunder in the
manner provided in Section 8.06.
Without in any way limiting the generality of this Section 8.03, in the
event that the Seller either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without (i) satisfying the requirements set forth herein or (ii) the
prior written consent of the Purchaser, then the Purchaser shall have the
right to terminate this
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Agreement as set forth in Section 6.03, without any additional payment of any
penalty or damages and without any liability whatsoever to the Seller (other
than with respect to accrued but unpaid Servicing Fees and Servicing Advances
remaining unpaid) or any third party.
Section 8.04 Assignment by Purchaser. The Purchaser shall have the
right, without the consent of the Seller, to assign, in whole or in part, its
interest under this Agreement with respect to some or all of the Mortgage
Loans, and designate any person to exercise any rights of the Purchaser
hereunder, by executing an Assignment and Assumption Agreement substantially
in the form of Exhibit G to the Purchase Agreement and the assignee or
designee shall accede to the rights and obligations hereunder of the
Purchaser with respect to such Mortgage Loans. All references to the
Purchaser in this Agreement shall be deemed to include its assignee or
designee. Notwithstanding the foregoing, at any one time there shall not be
more than fifteen (15) separate Purchasers under this Agreement.
Section 8.05 Merger or Consolidation of the Seller. The Seller will
keep in full effect its existence, rights and franchises as a corporation
under the laws of the state of its incorporation except as permitted herein,
and will obtain and preserve its qualification to do business as a foreign
corporation in each jurisdiction in which such qualification is or shall be
necessary to protect the validity and enforceability of this Agreement, or
any of the Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which
the Seller shall be a party, or any Person succeeding to the business of the
Seller, shall be the successor of the Seller hereunder, without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, anything herein to the contrary notwithstanding; provided, however,
that the successor or surviving Person shall be an institution whose deposits
are insured by FDIC or a company whose business includes the origination and
servicing of mortgage loans and shall satisfy the requirements of Section
8.06 with respect to the qualifications of a successor to the Seller.
Section 8.06 Successor to the Seller. Prior to termination of Seller's
responsibilities and duties under this Agreement pursuant to Sections 2.16,
6.03, 8.03 or 11.01, the Purchaser shall (i) succeed to and assume all of the
Seller's responsibilities, rights, duties and obligations under this
Agreement, or (ii) appoint a successor having a tangible net worth of not
less than $30,000,000 and which shall succeed to all rights and assume all of
the responsibilities, duties and liabilities of the Seller under this
Agreement prior to the termination of Seller's responsibilities, duties and
liabilities under this Agreement. In connection with such appointment and
assumption, the Purchaser may make such arrangements for the compensation of
such successor out of payments on Mortgage Loans as it and such successor
shall agree. In the event that the Seller's duties, responsibilities and
liabilities under this Agreement should be terminated pursuant to the
aforementioned sections, the Seller shall discharge such duties and
responsibilities during the period from the date it acquires knowledge of
such termination until the effective date thereof with the same degree of
diligence and prudence which it is obligated to exercise under this
Agreement, and shall take no action whatsoever that might impair or prejudice
the rights or
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financial condition of its successor. The resignation or removal of Seller
pursuant to the aforementioned Sections shall not become effective until a
successor shall be appointed pursuant to this Section and shall in no event
relieve the Seller of the representations, warranties and covenants made
pursuant to and the remedies available to the Purchaser with respect thereto.
Any successor appointed as provided herein shall execute, acknowledge and
deliver to the Seller and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Seller, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.16, 6.03, 8.03 or
11.01 shall not affect any claims that the Purchaser may have against the
Seller arising prior to any such termination or resignation.
The Seller shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and the Seller shall account
for all funds. The Seller shall execute and deliver such instruments and do
such other things all as may reasonably be required to more fully and
definitely vest and confirm in the successor all such rights, powers, duties,
responsibilities, obligations and liabilities of the Seller. The successor
shall make arrangements as it may deem appropriate to reimburse the Seller
for amounts the Seller actually expended pursuant to this Agreement which the
successor is entitled to retain hereunder and which would otherwise have been
recovered by the Seller pursuant to this Agreement but for the appointment of
the successor servicer.
Upon a successor's acceptance of appointment as such, the Seller shall
notify by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of each Closing Date, the Purchaser warrants and represents to, and
covenants and agrees with, the Seller as follows:
Section 9.01 Due Organization and Authority. The Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the state of Maryland. The Purchaser has the full corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith; the execution, delivery and performance of this Agreement by the
Purchaser and the consummation of the transactions contemplated hereby have
been duly and validly authorized; this Agreement evidences the valid, binding
and enforceable obligation of the Purchaser; and all requisite corporate
action has been taken by the Purchaser to make this Agreement valid and
binding upon the Purchaser in accordance with its terms;
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Section 9.02 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions
of this Agreement, will conflict with or result in a breach of any of the
terms, conditions or provisions of the Purchaser's charter or bylaws or any
legal restriction or any agreement or instrument to which the Purchaser is
now a party or by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of any
law, rule, regulation, order, judgment or decree to which the Purchaser or
its property is subject;
Section 9.03 Ability to Perform. The Purchaser does not believe, nor
does it have any reason or cause to believe, that it cannot perform each and
every covenant made by it in this Agreement.
Section 9.04 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Purchaser,
before any court, administrative agency or other tribunal asserting the
invalidity of this Agreement, seeking to prevent the consummation of any of
the transactions contemplated by this Agreement or which, either in any one
instance or in the aggregate, may result in any material adverse change in
the business, operations, financial condition, properties or assets of the
Purchaser, or in any material impairment of the right or ability of the
Purchaser to carry on its business substantially as now conducted, or in any
material liability on the part of the Purchaser, or which would draw into
question the validity of this Agreement or of any action taken or to be taken
in connection with the obligations of the Purchaser contemplated herein.
Section 9.05 No Consent Required. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by the Purchaser of, or compliance by the
Purchaser with, this Agreement as evidenced by the consummation of the
transactions contemplated by this Agreement, or if required, such approval
has been obtained prior to the Closing Date.
Section 9.06 Assistance. To the extent reasonably possible, the
Purchaser shall cooperate with and assist the Seller as requested by the
Seller, in carrying out Seller's covenants, agreements, duties and
responsibilities under this Agreement and in connection therewith shall
execute and deliver all such papers, documents and instruments as nay be
necessary and appropriate in furtherance thereof.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
As of each Closing Date, the Seller warrants and represents to, and
covenants and agrees with, the Purchaser as follows:
Section 10.01 Due Organization and Authority. The Seller is a federal
savings bank duly organized, validly existing and in good standing under the
laws of the United States and is
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licensed, qualified and in good standing in each state where a Mortgaged
Property is located if the laws of such state require licensing or
qualification in order to conduct business of the type conducted by the
Seller, and in any event the Seller is in compliance with the laws of any
such state to the extent necessary to ensure the enforceability of the
related Mortgage Loan in accordance with the terms of this Agreement; the
Seller has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Seller and the consummation of
the transactions contemplated hereby have been duly and validly authorized;
this Agreement evidences the valid, legal, binding and enforceable obligation
of the Seller subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the application of
the rules of equity, including those respecting the availability of specific
performance, none of which will materially interfere with the realization of
the benefits provided thereunder, regardless of whether such enforcement is
sought in a proceeding in equity or at law; and all requisite corporate
action has been taken by the Seller to make this Agreement valid and binding
upon the Seller in accordance with its terms.
Section 10.02 Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Seller;
Section 10.03 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions
of this Agreement, will conflict with or result in a breach of any of the
terms, conditions or provisions of the Seller's charter or bylaws or any
legal restriction or any agreement or instrument to which the Seller is now a
party or by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of any
law, rule, regulation, order, judgment or decree to which the Seller or its
property is subject, or impair the ability of the Purchaser to realize on the
Mortgage Loans, or impair the value of the Mortgage Loans, or impair the
ability of the Purchaser to realize the full amount of any mortgage insurance
benefits accruing pursuant to this Agreement.
Section 10.04 Ability to Service. The Seller is duly qualified,
licensed, registered and otherwise authorized under all applicable federal,
state and local laws and regulations, meets the minimum capital requirements
set forth by OTS or the FDIC, and is in good standing to enforce, originate,
sell mortgage loans, and service mortgage loans in the jurisdiction wherein
the Mortgaged Properties are located.
Section 10.05 Ability to Perform. The Seller does not believe, nor
does it have any reason to believe, that it cannot perform each and every
covenant contained in this Agreement.
Section 10.06 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Seller, before
any court, administrative agency or other tribunal asserting the invalidity
of this Agreement, seeking to prevent the consummation of any of the
transactions contemplated by this Agreement or which, either in any one
instance
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or in the aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or in any material liability on the
part of the Seller, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Seller contemplated herein, or which
would be likely to impair materially the ability of the Seller to perform under
the terms of this Agreement.
Section 10.07 No Consent Required. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or compliance by the
Seller with this Agreement or the servicing of the Mortgage Loans as
evidenced by the consummation of the transactions contemplated by this
Agreement, or if required, such approval has been obtained.
Section 10.08 No Untrue Information. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
Section 10.09 Reasonable Servicing Fee. The Seller acknowledges and
agrees that the Servicing Fee represents reasonable compensation for
performing such services and that the entire Servicing Fee shall be treated
by the Seller, for accounting and tax purposes, as compensation for the
servicing and administration of the Mortgage Loans pursuant to this
Agreement.
Section 10.10 Financial Statements. The Servicer has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations
and changes in financial position for each of such periods and the financial
position at the end of each such period of the Servicer and its subsidiaries
and have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
set forth in the notes thereto. There has been no change in the business,
operations, financial condition, properties or assets of the Servicer since
the date of the Servicer's financial statements that would have a material
adverse effect on its ability to perform its obligations under this Agreement.
Section 10.11 Conflict of Interest. The Seller agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests
of the Purchaser, and without regard to the interests of the Seller or its
other affiliates.
ARTICLE XI
DEFAULT
Section 11.01 Events of Default. The following shall constitute an
Event of Default under this Agreement on the part of the Seller:
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(a) any failure by the Seller to remit to the Purchaser any payment
required to be made under the terms of this Agreement which continues
unremedied for a period of five (5) Business Days after the date upon which
written notice of such failure, requiring the same to be remedied, shall have
been given to the Seller by the Purchaser; or
(b) the failure by the Seller duly to observe or perform in any material
respect any other of the covenants or agreements on the part of the Seller
set forth in this Agreement which continues unremedied for a period of thirty
(30) days (except that such number of days shall be fifteen (15) in the case
of a failure to pay any premium for any insurance policy required to be
maintained under this Agreement) after the date on which written notice of
such failure, requiring the same to be remedied, shall have been given to the
Seller by the Purchaser; or
(c) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, bankruptcy, readjustment of debt, marshaling of
assets and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Seller and
such decree or order shall have remained in force undischarged or unstayed
for a period of sixty (60) days; or
(d) the Seller shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, bankruptcy, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Seller or of or relating to all or substantially all of its property; or
(e) the Seller shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations;
or
(f) the Seller, without the consent of the Purchaser, attempts to assign
this Agreement or the servicing responsibilities hereunder or to delegate any
substantial part of its duties hereunder or any portion thereof; or
(g) the Seller fails to maintain its license to do business or service
commercial mortgage loans in any jurisdiction where the Mortgaged Properties
are located and such failure results in a material adverse effect on the
Mortgage Loans, the servicing of the Mortgage Loans, or the Purchaser's
rights with respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not
have been remedied, in addition to whatsoever rights the Purchaser may have
at law or equity to damages, including injunctive relief and specific
performance, the Purchaser, by notice in writing to the Seller, may terminate
without compensation or reimbursement (other than Servicing Fees previously
earned but remaining unpaid and Servicing Advances remaining unreimbursed)
all the rights and
30
<PAGE>
obligations of the Seller under this Agreement and in and
to the Mortgage Loans and the proceeds thereof.
Upon receipt by the Seller of such written notice, all authority and
power of the Seller under this Agreement, whether with respect to the
Mortgage Loans or otherwise, shall pass to and be vested in the successor
appointed pursuant to Section 8.06. Upon written request from the Purchaser,
the Seller shall prepare, execute and deliver any and all documents and other
instruments reasonably requested by the Purchaser, place in such successor's
possession all Mortgage Files (to the extent not properly delivered to the
Purchaser by the Seller previously), and do or accomplish all other acts or
things necessary or appropriate to effect the purposes of such notice of
termination, whether to complete the transfer and endorsement or assignment
of the Mortgage Loans and related documents, or otherwise, at the Seller's
sole expense. The Seller agrees to reasonably cooperate with the Purchaser
and such successor in effecting the termination of the Seller's
responsibilities and rights hereunder, including, without limitation, the
transfer to such successor for administration by it of all cash amounts which
shall at the time be credited by the Seller to the Custodial Account or
Escrow Account or thereafter received with respect to the Mortgage Loans,
subject to the Seller's right to be paid for unreimbursed Servicing Advances
and earned and unpaid Servicing Fees.
Section 11.02 Waiver of Defaults. The Purchaser may waive any default
by the Seller in the performance of its obligations hereunder and its
consequences. Upon any such waiver of a past default, such default shall
cease to exist, and any Event of Default arising therefrom shall be deemed to
have been remedied for every purpose of this Agreement. No such waiver shall
extend to any subsequent or other default or impair any right consequent
thereon except to the extent expressly so waived.
ARTICLE XII
MISCELLANEOUS PROVISIONS
Section 12.01 Notices. All notices, requests, demands and other
communications which are required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given
upon the delivery or mailing thereof, as the case may be, sent by registered
or certified mail, return receipt requested:
(a) If to Purchaser to:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
31
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(b) If to Seller to:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
Section 12.02 Waivers. Either the Seller or the Purchaser may upon
consent of all parties, by written notice to the others:
(a) Waive compliance with any of the terms, conditions or covenants
required to be complied with by the others hereunder; and
(b) Waive or modify performance of any of the obligations of the others
hereunder.
The waiver by any party hereto of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any other subsequent breach.
Section 12.03 Entire Agreement; Amendment. This Agreement and the
Purchase Agreement constitute the entire agreement between the parties with
respect to servicing of the Mortgage Loans. This Agreement may be amended and
any provision hereof waived, but, only in writing signed by the party against
whom such enforcement is sought.
Section 12.04 Execution; Binding Effect. This Agreement may be
executed in one or more counterparts and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed to be
an original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to
the benefit of and be binding upon the Seller and the Purchaser and their
respective successors and assigns.
Section 12.05 Headings. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
Section 12.06 Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of California and the obligations,
rights and remedies hereunder shall be determined in accordance with the
substantive laws of the State of California (without regard to conflicts of
laws principles), except to the extent preempted by Federal law.
Section 12.07 Relationship of Parties. Nothing herein contained shall
be deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Seller shall be rendered by
it as an independent contractor and not as an agent of the Purchaser. The
Seller shall have full control of all of its acts, doings, proceedings,
relating to or requisite in connection with the discharge of its duties and
responsibilities under this Agreement.
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<PAGE>
Section 12.08 Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements,
provisions or terms shall be deemed severable from the remaining covenants,
agreements, provisions or terms of this Agreement and shall in no way affect
the validity or enforceability of the other provisions of this Agreement.
Section 12.09 Exhibits. The exhibits to this Agreement are hereby
incorporated and made a part hereof and are integral parts of this Agreement.
33
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL CORPORATION
(the Purchaser)
By:_____________________________________________
Name:__________________________________________
Title:___________________________________________
PEOPLE'S BANK OF CALIFORNIA
(the Seller)
By:_____________________________________________
Name:__________________________________________
Title:___________________________________________
By:_____________________________________________
Name:__________________________________________
Title:___________________________________________
34
<PAGE>
EXHIBIT A
MONTHLY REMITTANCE ADVICE
<PAGE>
EXHIBIT B
CUSTODIAL ACCOUNT CERTIFICATION
____________, 1997
_________________ hereby certifies that it has established the account
described below as a Custodial Account pursuant to Section 2.04 of the
Commercial Servicing Agreement, dated as of ______, 1997.
Title of Account: "People's Bank of California, in trust for People's
Preferred Capital Corporation."
Account Number: ___________________________________
Address of office or branch of the Seller at which Account is maintained:
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
PEOPLE'S BANK OF CALIFORNIA
By:________________________________
Name:______________________________
Title:_______________________________
<PAGE>
EXHIBIT C
CUSTODIAL ACCOUNT LETTER AGREEMENT
______________, 1997
To: ____________________
____________________
____________________
(the "Depository")
As Seller under the Commercial Servicing Agreement, dated as of ______,
1997, (the "Agreement"), we hereby authorize and request you to establish an
account, as a Custodial Account pursuant to Section 2.04 of the Agreement, to
be designated as "People's Bank of California, in trust for People's
Preferred Capital Corporation." All deposits in the account shall be subject
to withdrawal therefrom by order signed by the Seller. You may refuse any
deposit which would result in violation of the requirement that the account
be fully insured as described below. This letter is submitted to you in
duplicate. Please execute and return one original to us.
PEOPLE'S BANK OF CALIFORNIA
By:______________________________
Name:____________________________
Title:_____________________________
The undersigned, as Depository, hereby certifies that the above described
accounts has been established under Account Number ___________, at the office
of the Depository indicated above, and agrees to honor withdrawals on such
accounts as provided above. The full amount deposited at any time in the
account will be insured by the Federal Deposit Insurance Corporation through
the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF").
_________________________________
Depository
By:______________________________
Name:____________________________
Title:_____________________________
Date:_____________________________
<PAGE>
EXHIBIT D
ESCROW ACCOUNT CERTIFICATION
____________, 1997
______________________________hereby certifies that it has established
the account described below as an Escrow Account pursuant to Section 2.06 of
the Commercial Servicing Agreement, dated as of ________, 1997.
Title of Account: "People's Bank of California in trust for People's
Preferred Capital Corporation."
Account Number: _____________________________
Address of office or branch
of the Seller at which
Account is maintained:
______________________________
______________________________
______________________________
______________________________
PEOPLE'S BANK OF CALIFORNIA
By: ___________________________________
Name: _________________________________
Title: __________________________________
<PAGE>
EXHIBIT E
ESCROW ACCOUNT LETTER AGREEMENT
______________, 1997
To: __________________________
__________________________
__________________________
(the "Depository")
As Seller under the Commercial Servicing Agreement, dated as of
____________, 1997 (the "Agreement"), we hereby authorize and request you to
establish an account, as an Escrow Account pursuant to Section 2.06 of the
Agreement, to be designated as "People's Bank of California in trust for
People's Preferred Capital Corporation." All deposits in the account shall be
subject to withdrawal therefrom by order signed by the Seller. You may refuse
any deposit which would result in violation of the requirement that the
account be fully insured as described below. This letter is submitted to you
in duplicate. Please execute and return one original to us.
PEOPLE'S BANK OF CALIFORNIA
By: _______________________________
Name: _____________________________
Title: ____________________________
Date:______________________________
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number _______, at the office of
the Depository indicated above, and agrees to honor withdrawals on such
account as provided above. The full amount deposited at any time in the
accounts will be insured by the Federal Deposit Insurance Corporation through
the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF").
_________________________________
Depository
By: _____________________________
Name: ___________________________
Title: __________________________
Date:____________________________
<PAGE>
EXHIBIT 10.F
ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT
This is an Assignment, Assumption and Recognition Agreement (the
"Agreement") made this _____ day of ________________, 1997, among People's
Bank of California (the "Seller"), People's Preferred Capital Corporation
(the "Purchaser"), and Temple-Inland Mortgage Corporation (the "Servicer").
In consideration of the mutual promises contained herein, the parties
hereto agree as follows with respect to the mortgage loans (the "Mortgage
Loans") identified on the Mortgage Loan Schedule attached hereto as Schedule
A. The Mortgage Loans are currently being serviced by the Servicer, pursuant
to that certain Loan Servicing Agreement, dated as of March 31, 1997 (the
"Servicing Agreement"), among the Servicer, and the Seller as Investor
thereunder. A true, accurate and complete copy of the Servicing Agreement is
attached hereto as Exhibit Two.
Warranties
1. The Seller and Purchaser warrant and represent to Servicer that
attached hereto as Exhibit One is a true, accurate and complete copy of the
Residential Mortgage Loan Purchase and Warranties Agreement (the "Purchase
Agreement"), dated as of ________________ __, 1997, between the Seller and
the Purchaser, with respect to Seller's sale and Purchaser's purchase of the
Mortgage Loans. The Purchase Agreement is in full force and effect as of the
date hereof and no notice of termination has been given thereunder.
2. The Seller warrants and represents to Servicer that immediately
prior to payment of the purchase price for the Mortgage Loans as specified in
the Purchase Agreement, the Seller is the lawful owner of the Mortgage Loans
and has the full right to transfer the Mortgage Loans subject to Article
Seven of the Servicing Agreement, free from any and all claims and
encumbrances whatsoever.
Assignment and Assumption
3. (a) Pursuant to the Purchase Agreement, the Seller grants,
transfers and assigns to the Purchaser all of its right, title and interest
in and to the Mortgage Loans as provided therein, and the Purchaser hereby
assumes all of the Seller's obligations as Investor under the Servicing
Agreement with respect to the Mortgage Loans from and after the date hereof.
(b) It is hereby acknowledged and agreed that the Purchaser,
pursuant to this Agreement and the Purchase Agreement, shall be entitled to
all payments of principal and interest and such other payments that the
Investor under the Servicing Agreement shall be entitled to with respect to
the Mortgage Loans collected after ________________ __, 1997.
<PAGE>
Recognition of the Purchaser
4. From and after the date hereof, the Seller and the Servicer shall
recognize the Purchaser as the owner of the Mortgage Loans. The Servicer
shall service the Mortgage Loans for the Purchaser as if the Purchaser and
the Servicer had entered into a separate servicing agreement for the
servicing of the Mortgage Loans in the form of the Servicing Agreement with
the Seller, the terms of which are incorporated herein by reference with
respect to the Mortgage Loans, (and as if the Purchaser is the Investor
thereunder); provided, however, that (i) it is the intention of the Seller,
the Servicer and the Purchaser that this Agreement will be a separate and
distinct servicing agreement, and the entire agreement, among the Servicer,
the Seller and the Purchaser with respect to the servicing of the Mortgage
Loans, shall be binding upon and for the benefit of the respective successors
and assigns of such parties hereto; (ii) the Servicer shall remit all
payments and proceeds (that the Purchaser is entitled to pursuant to the
provisions of this Agreement and the Servicing Agreement) with respect to the
Mortgage Loans to Account Number _________________, ABA Number
________________, Attention: ______________.
Notices
5. All demands, notices and communications hereunder shall be in
writing and shall be deemed to have been duly given if personally delivered
or mailed by registered mail, postage prepaid, return receipt requested, to
the following addressees: if to the Purchaser, addressed to the Purchaser at
5900 Wilshire Boulevard, 16th Floor, Los Angeles, California 90036
Attention:_________________________, or to such other address as the
Purchaser may designate in writing to the Seller; or if to the Seller,
addressed to the Seller at 5900 Wilshire Boulevard, 16th Floor, Los Angeles,
California 90036, Attention: _______, or to such other address as the Seller
may designate in writing; or if to the Servicer, addressed to the Interim
Servicer at 301 Congress Avenue, Suite 375, Austin, Texas 78701, Attention:
Richard Magel or to such other address as the Interim Servicer may designate
in writing.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
PEOPLE'S BANK OF CALIFORNIA,
Seller
By:_____________________________________________
Name:___________________________________________
Title:__________________________________________
By:_____________________________________________
Name:___________________________________________
Title:__________________________________________
PEOPLE'S PREFERRED CAPITAL
CORPORATION
Purchaser
By:_____________________________________________
Name:___________________________________________
Title:__________________________________________
TEMPLE-INLAND MORTGAGE
CORPORATION
Servicer
By:_____________________________________________
Name:___________________________________________
Title:__________________________________________
<PAGE>
SCHEDULE A
MORTGAGE LOAN SCHEDULE
<PAGE>
EXHIBIT ONE
RESIDENTIAL MORTGAGE LOAN PURCHASE AND
WARRANTIES AGREEMENT
<PAGE>
EXHIBIT TWO
LOAN SERVICING AGREEMENT
<PAGE>
Independent Auditors' Consent
The Board of Directors
People's Preferred Capital Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the registration statement.
KPMG Peat Marwick LLP
Los Angeles, California
September 5, 1997
<PAGE>
Independent Auditors' Consent
The Board of Directors
People's Bank of California:
We consent to the inclusion of our report dated February 21, 1997, except as
to Note 20 to the consolidated financial statements, which is as of July 1,
1997, with respect to the consolidated statements of financial condition of
People's Bank of California (formerly Southern California Federal Savings and
Loan Association) as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholder's equity, and cash flows
for the years then ended, which report appears in Annex I of the Preliminary
Offering Circular of Amendment No. 1 to Form S-11 of People's Preferred
Capital Corporation dated September 5, 1997, and to the reference to our firm
under the heading "Experts" in Annex I of the Preliminary Offering Circular.
KPMG Peat Marwick LLP
Los Angeles, California
September 5, 1997
<PAGE>
Exhibit 23(c)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
Report of Independent Public Accountants on the financial statements of
Southern California Federal Savings and Loan Association (the Bank) for the
year ended December 31, 1994 and to the reference to our Firm in the Experts
section of the Preliminary Offering Circular of Peoples Bank of California
which is included as Annex I of the Peoples Preferred Capital Corporation
Series A Preferred Stock Form S-11 Registration Statement to be filed with
the Securities and Exchange Commission and the Office of Thrift Supervision.
It should be noted that we have performed no audit procedures subsequent to
June 9, 1995, the date of our report. Furthermore, we have not made an audit
of any financial statements of the Bank as of any date or for any period
subsequent to December 31, 1994, the date of the latest financial statements
covered by our report.
/s/ Arthur Andersen
--------------------------
Arthur Andersen
Los Angeles, California
September 5, 1997
