<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1997
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
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:
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
------------------------
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 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
<PAGE>
<TABLE>
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Proposed Maximum Proposed Aggregate
Amount Being Offering Offering Amount of
TITLE OF SECURITIES BEING REGISTERED Registered(1) Price Per Share(1) Price(1) Registration Fee
<S> <C> <C> <C> <C>
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% Noncumulative Exchangeable Preferred Stock,
Series A, par value $0.01 per share 1,426,000 shares $25.00 $35,650,000 $10,803.03
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
------------------------
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.
<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.
PROSPECTUS SUBJECT TO COMPLETION, DATED JULY 10, 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 "RISK FACTORS" COMMENCING ON PAGE 18 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, and such investment in the Bank would have risks that
are distinct from those associated with an investment in 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;
- Risks associated with investments in real estate mortgages, including
changes in interest rates and geographic concentration;
- 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
- Risk that 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 per share set forth herein, 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 PARI PASSU 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
<PAGE>
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 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 applied for listing of 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>
<CAPTION>
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..............................................................................................
Risk Associated with the Bank's Capital Position and with Possible Receivership of the Bank..............
Dividend and Other Regulatory Restrictions on Operations of the Company..................................
Interest Rate Risk.......................................................................................
Dividends Not Cumulative.................................................................................
Risks Associated with Mortgage Loans Generally...........................................................
Structural Risks of Mortgage Loans.....................................................................
Real Estate Market Conditions..........................................................................
Delays in Liquidating Defaulted Mortgage Loans.........................................................
Legal Considerations...................................................................................
Environmental Considerations...........................................................................
Special Risks Relating to Commercial Real Estate Loans.................................................
Geographic Concentration...............................................................................
Risk of Future Revisions in Policies and Strategies By Board of Directors................................
Risks Associated with Leverage...........................................................................
Relationship with the Bank; Conflicts of Interest........................................................
Tax Risks................................................................................................
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............................................................................................
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................................................................................................
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Employees................................................................................................
Competition..............................................................................................
Legal Proceedings........................................................................................
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....................................................................................
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...........................................................................
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Selected Consolidated Financial and Other Data...........................................................
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>
5
<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.
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
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 $31.0 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 $62.0 million received in connection with 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 with the remainder included in
supplemental (Tier II) capital, (ii) the Offering will provide the Bank with
the opportunity to expand its business and thereby increase its earnings,
which would permit accelerated
1
<PAGE>
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. For the quarter ended March 31, 1997 and the fiscal
years ended December 31, 1996, 1995 and 1994, the Bank's core capital (or
leverage) ratio was 4.91%, 4.57%, 4.18% and 1.08%, respectively, its Tier 1
risk-based capital ratio was 9.42%, 9.15%, 7.56% and 2.01%, respectively, and
its total risk-based capital ratio was 10.68%, 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 March 31, 1997 would have been 6.55%, 12.56% and
14.10%, 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
2
<PAGE>
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.
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 March 31, 1997, SOCAL had
total assets of $1.7 billion and total stockholders' equity of $63.7 million.
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 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, 1996, Brierley Investments Limited had approximately $6.62 billion in
total assets, $3.24 billion in total liabilities and $3.38 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 March 31, 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 March 31, 1997, the Bank had total assets
of $1.7 billion, total deposits of $1.4 billion and total stockholder's
equity of $75.8 million. As of March 31, 1997, 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 three months ended
March 31, 1997 and the year ended December 31, 1996, the Bank had net income
of $5.4 million and $13.6 million and a return on average
3
<PAGE>
assets of 1.20% 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.
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
is subject to certain risks that are distinct from the risks associated
with an investment in the Company. An investment in the Bank would involve
risks relating to, among other things, the capital levels of and other
federal regulatory requirements applicable to the Bank, 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 risk 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.
4
<PAGE>
- 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. 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.
- Risks associated with Mortgage Loans generally, and particularly the
geographic concentration of the Company's Mortgage Loan portfolio in
California, 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.
- 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
5
<PAGE>
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 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>
<CAPTION>
<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
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 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
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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. See "Description of Series A
Preferred Shares--Dividends."
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 prices per share set
forth herein, plus authorized, declared and
unpaid dividends, if any, to the date fixed
for redemption, without interest.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
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
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
pari passu 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
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 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
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
by such trust. See "Description of
Capital Stock--Restrictions on Ownership and
Transfer."
Trading................................ The Company has applied for listing of 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.
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).
SOCAL
<TABLE>
<S> <C>
100% Common Stock
THE BANK
$62 million of $31.0 million of cash, --Advisory Agreement
Mortgage $31.0 million of
Loans Common Stock plus --Commercial Loan
Additional paid-in capital Servicing Agreement
--Mortgage Loan Purchase
Agreements
$31.0 million Cash Public
Preferred
PEOPLE'S PREFERRED CAPITAL CORPORATION $31.0 million Series A Stockholders
Preferred Shares (100%)
</TABLE>
12
<PAGE>
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 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 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 $ 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, prepayment fees, 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 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.
13
<PAGE>
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"). 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 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 secondary market standards. 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 $62.0
million (as of March 31, 1997). The Initial Portfolio consists of
approximately 64% (measured by outstanding principal balance) of Residential
Mortgage Loans and approximately 36% 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
14
<PAGE>
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. Temple-Inland Inc. is a Texas-based holding company
with $9.3 billion in assets which is engaged in several business lines,
including financial services. For the year ended December 31, 1996,
Temple-Inland Inc. generated income of $156.0 million on revenues of $3.5
billion. 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.
In connection with the Bank's sale of servicing, the Bank in March 1997
entered into a servicing agreement with the Servicing Agent (the "Initial
Residential Servicing Agreement"), pursuant to which the Servicing Agent will
service substantially all of the Bank's Residential Mortgage Loans. Pursuant
to an agreement expected to be entered into between the Company and the
Servicing Agent, the Servicing Agent will service the Residential Mortgage
Loans which will be sold by the Bank to the Company, substantially in
accordance with the terms of the Initial Residential Servicing Agreement.
Pursuant to a forward production servicing purchase and sale agreement, which
the Bank is expected to enter into with the Servicing Agent in July 1997, the
Bank will sell the servicing rights associated with (i) Residential Mortgage
Loans owned by the Bank and closed and funded subsequent to the closing of
the Initial 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 "Forward
Production Servicing Purchase and Sale Agreement" and, collectively with the
Initial Residential Servicing Agreement, the "Residential Servicing
Agreements.")
The Servicing Agent will be entitled to receive fees in connection with
the servicing of such Residential Mortgage Loans. The Residential Servicing
Agreements 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 Agreements, 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 $62.0 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."
15
<PAGE>
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 (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) holding documents relating to the
Mortgage Assets and Other Authorized Investments as custodian on behalf of
the Company. 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 $ . 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 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.
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The Company currently has three 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 $62.0 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.
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A REIT is subject to a number of organizational and operational
requirements, including a requirement that it distribute annually to
stockholders at least 95% of its "REIT taxable income" (excluding capital
gains). 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."
Risk Associated with the Bank's Capital Position and with Possible Receivership
of the Bank
The purchase of Series A Preferred Shares involves a high degree of risk
with respect to 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
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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 is also subject to certain risks
that are distinct from the risks associated with an investment in the
Company. An investment in the Bank involves, among other things, risks
relating to the capital levels of, and other regulatory requirements
applicable to, the Bank and the performance of the Bank's loan portfolio. An
investment in the Bank is also subject to the general risks inherent in
equity investments in depository institutions. 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 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. 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
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."
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
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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 March 31, 1997, the Bank's total risk-based capital ratio was
10.68%, its Tier 1 risk-based capital ratio was 9.42% and its core capital
(or leverage) ratio was 4.91%. Such ratios, on a pro forma basis as of March
31, 1997 after giving effect to the Offering, would have been 14.10%, 12.56%
and 6.55%, 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.
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 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
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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 March 31, 1997, the Bank had sufficient levels of capital to be 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.
Interest Rate Risk
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. In a
declining interest rate environment, the Company may experience an increase in
prepayments on its Mortgage Loans and 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 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.
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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."
Risks 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 Risks of 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
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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 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 not permitted following a nonjudicial
sale of a mortgaged property. 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. 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.
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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 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 Risks Relating to Commercial Mortgage Loans. The Company
anticipates that approximately 36% (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
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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.
Risk 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, certain of 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 (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. 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."
Risk Associated with 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 risks associated with leverage, including, without
limitation, changes in interest rates, prepayment risk and risks of various
hedging strategies. In addition, if the Company were to become a Pension-Held
REIT and to incur indebtedness, then a certain percentage of distributions may
be taxed as unrelated business taxable income. See "Federal Income Tax
Considerations--Taxation of United States Stockholders.
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Relationship with the Bank; Conflicts of Interest
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.
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
Agreements with a non-affiliated party with respect to the Residential Mortgage
Loans.
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 become Classified or are placed in Nonaccrual Status or which have
been, more than once during the preceding twelve months, more than 30 days past
due in the payment of principal and interest; future dispositions of Mortgage
Loans to the Bank; and the modification of the Advisory Agreement or the
Servicing Agreements.
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 becomes
Classified or placed in Nonaccrual Status or otherwise past due in the payment
of principal and interest. 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.
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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 Risks
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. There is presently pending proposed legislation
("Revenue Reconciliation Act of 1997") which, if enacted, would liberalize
certain of the requirements to qualify as a REIT. See "Federal Income Tax
Consequences." Such legislation, if enacted, would have neither a material
beneficial nor adverse effect on the Company's ability to operate as a REIT. No
assurance can be given, however, that new legislation or new regulations,
administrative interpretations or court decisions 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 for federal (and California state) income tax purposes, resulting in
greater tax liability for the consolidated group of which the Bank is a member
and resulting in a reduction in the Bank's net income. A reduction in the
Bank's net income 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
28
<PAGE>
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) or during a proportionate
part of a shorter taxable 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. SOCAL is
owned 60% by the Bishop Estate, 30% by BIL Securities, and 10% by Arbur. To
determine whether the REIT satisfies the Five or Fewer Test, the constructive
ownership rules are applied to SOCAL's three stockholders.
On the basis of the application of these rules, 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, which is a
charitable organization operated for educational purposes and not a private
foundation, nor BIL Securities, which is a wholly owned subsidiary of Brierley
Investments Limited, a widely held public corporation, is considered
29
<PAGE>
an "individual" for purposes of the Five or Fewer Test. Thus, immediately
after the Offering, Arbur will be considered, for purposes of the Five or
Fewer Test, to be the owner of 10% of the Company's Common Stock and of
approximately 5% of the value of all of the classes of issued and outstanding
shares of capital stock of the Company (based on the Common Stock of the
Company constituting approximately 50% of the value of the Company). For
purposes of the Five or Fewer Test, (i) the Bishop Estate's 60% ownership of
the Company's Common Stock and approximately 30% interest in the value of all
of the classes of issued and outstanding shares of capital stock in the
Company will be attributable to its beneficiaries, and (ii) BIL Securities'
30% ownership of the Company's Common Stock and approximately 15% interest in
the value of all of classes of issued and outstanding shares of stock of the
Company will be attributable to its stockholders.
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 Bishop Estate, BIL
Securities or Arbur (the "Significant Stockholders"), ownership of the Company's
Common Stock or the transfer of shares of common 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 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."
30
<PAGE>
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 one year prior to the Automatic Exchange, any gain or loss will be
long-term capital gain or loss. See "Federal Income Tax Considerations--Tax
Treatment of Automatic Exchange."
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 $62.0 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
31
<PAGE>
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 applied to have the Series A Preferred Shares
approved for listing 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.
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 64% of its
portfolio of Mortgage Assets will represent interests in Residential Mortgage
Loans and that approximately 36% of its
32
<PAGE>
portfolio of Mortgage Assets will represent interests in Commercial Mortgage
Loans (in each case measured by aggregate outstanding principal amounts).
The Company expects that substantially all of its Mortgage Assets will be
acquired as whole loans from the Bank, although the Company may purchase
Mortgage Assets 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. 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 March 31, 1997, the Bank had
total assets of $1.7 billion, total deposits of $1.4 billion and stockholder's
equity of $75.8 million. For the three months ended March 31, 1997 and the year
ended December 31, 1996, the Bank had net income of $5.4 million and $13.6
million and a return on average assets of 1.20% 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."
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<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 $31.0 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 $62.0 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.
34
<PAGE>
USE OF FUNDS
(In Thousands)
<TABLE>
<S> <C>
Purchase of Mortgage Assets from the Bank.......................... $ 62,000
---------
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.
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 $31.0 million plus an
amount sufficient to pay the aggregate Offering and organization expenses,
currently estimated by the Company to be approximately $ million.
35
<PAGE>
BUSINESS AND STRATEGY
General
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to
stockholders. The Company will acquire the Initial Portfolio of Mortgage
Loans from the Bank for an aggregate purchase price of approximately $62.0
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 March 31, 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
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<PAGE>
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 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 March 31, 1997,
the Bank's total risk-based capital ratio was 10.68%, its Tier 1 risk-based
capital ratio was 9.42% and core capital (or leverage) ratio was 4.91%. Such
ratios, on a pro forma basis as of March 31, 1997 after giving effect to the
sale of Series A Preferred Shares in the Offering, would be 14.10%, 12.56%
and 6.55%, 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
37
<PAGE>
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.
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
38
<PAGE>
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 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 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 the Eleventh
District Cost of Funds ("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"). 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.
39
<PAGE>
Commercial Mortgage Loans. The Company may from time to time acquire
Commercial Mortgage Loans secured by apartment buildings, industrial and
warehouse properties, office buildings, retail space and strip shopping
centers, hotels and motels. 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. The Company will sell any foreclosed mortgage
assets. 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
40
<PAGE>
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 (other than government
securities). 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.
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"), each to be dated as
of ___________, 1997. 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 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 assignments of mortgage 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
41
<PAGE>
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 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. 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.
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
42
<PAGE>
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 64% of
Mortgage Assets in Residential Mortgage Loans and approximately 36% 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 or doubtful with
respect to collectibility.
The Company may choose, at any time subsequent to its acquisition of any
Mortgage Loan, to require the Servicer of the Mortgage Loan to dispose of any
Mortgage Loan, for any reason, including as a result of such mortgage loan
(i) becoming Classified, (ii) being placed in Nonaccrual Status, (iii) having
to be renegotiated due to the financial deterioration of the borrower, or
(iv) having been, more than once during the preceding 12 months, more than 30
days past due in the payment of principal or interest. The Bank has
indicated to the Company that it does not intend to purchase any Mortgage
Loans of the Company that fall into any of the foregoing categories;
accordingly, the Company currently anticipates that any such Mortgage Loan
may be sold at its then current fair value by the Company to an unrelated
third party.
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.
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<PAGE>
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 accepted secondary market standards, with any servicing
guidelines promulgated by the Company and, in the case of Residential
Mortgage Loans, with FNMA and FHLMC guidelines and procedures. The Company
may also choose, at any time subsequent to its acquisition of any Mortgage
Loan, to require the Servicer of such Mortgage Loans to dispose of any
Mortgage Loan for any reason, including as a result of such Mortgage Loan
becoming Classified or being placed in Nonaccrual Status or having been, more
than once during the preceding 12 months, more than 30 days past due in the
payment of principal and interest. The Bank has indicated to the Company
that it will not purchase any Mortgage Loans of the Company that fall into
any of the foregoing categories; accordingly, the Company currently
anticipates that any such Mortgage Loan would be sold at its then current
fair value by the Company only to an unrelated third party.
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<PAGE>
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 of 1940 (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
45
<PAGE>
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
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.
46
<PAGE>
Information with respect to the Residential Mortgage Loans and the
Commercial Mortgage Loans in the Initial Portfolio is presented as of March
31, 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 March 31, 1997, based on the outstanding principal balances of such
Mortgage Loans as of such date, after giving effect to scheduled monthly
payments due on or prior to such date, whether or not received.
General. The Initial Portfolio contains 271 Residential Mortgage Loans,
representing approximately 64% of the unpaid principal balance of the
Mortgage Loans contained in the Initial Portfolio, and 91 Commercial Mortgage
Loans, representing approximately 36% of the unpaid principal balance of the
Mortgage Loans contained in the Initial Portfolio. On March 31, 1997, the
Mortgage Loans included in the Initial Portfolio had an aggregate outstanding
principal balance of $62,024,222.
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 originated and/or purchased in a manner generally
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 March 1972 and March 1997, and had
original terms to stated maturity of primarily 15, 20, 25 or 30 years. As of
March 31, 1997, the average outstanding principal balance of a Residential
Mortgage Loan was $147,054. The weighted average number of months since
origination of the Residential Mortgage Loans included in the Initial
Portfolio (calculated as of March 31, 1997) was approximately 53 months and
the weighted average expected remaining maturity was 270 months. The
weighted average Loan-to-Value Ratio (defined below) of the Residential
Mortgage Loans included in the Initial Portfolio is 71.8%; however, 11.8% 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)
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<PAGE>
if the Mortgage Loan was made to finance the acquisition of property, the
purchase price of the mortgaged property.
Except as described below, upon transfer of the mortgaged property
underlying a Residential Mortgage Loan included in the Initial Portfolio, the
mortgage note generally will not preclude assumption of the related
Residential Mortgage Loan by the proposed transferee if the proposed
transferee satisfies certain criteria with respect to its ability to repay
the Mortgage Loan. The mortgage notes with respect to certain 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.
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 October 1973 and March 1997, and had original terms to stated
maturity of between 7 and 30 years. As of March 31, 1997, the average
outstanding principal balance of a Commercial Mortgage Loan was $243,653.
The weighted average number of months since origination of the Commercial
Mortgage Loans included in the Initial Portfolio (calculated as of March 31,
1997) was approximately 88 months. The weighted average Loan-to-Value Ratio
of the Commercial Mortgage Loans included in the Initial Portfolio is 74.9%.
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 March 31, 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
Residential Weighted
Aggregate Mortgage Weighted Average
Principal Loans by Average Expected
Balance Aggregate Initial Loan Remaining
(In Principal to Value Maturity
Type Thousands) Balance Ratio (Months)
- ----------------------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
15 Year Fixed Rate..... $ 5,955 15.0% 63.3% 128
Other Fixed Rate....... 33,897 85.0 73.5 300
------- ------ ----- -----
Total............. $39,852 100.0% 71.8% 274
------- ------ ----- -----
------- ------ ----- -----
</TABLE>
All of the Residential Mortgage Loans included in the Initial Portfolio
bear interest at fixed rates. The interest rates of the fixed rate
Residential Mortgage Loans included in the Initial Portfolio range from 7.50%
per annum to 14.0% per annum. The weighted average interest rate of the fixed
rate Residential Mortgage Loans included in the Initial Portfolio is
approximately 8.487% 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:
49
<PAGE>
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%........... 44 $ 8,723 21.9%
7.750%- 7.999%........... 73 12,791 32.1
8.000%- 8.249%........... 21 3,596 9.0
8.250%- 8.499%........... 9 1,714 4.3
8.500%- 8.749%........... 15 1,959 4.9
8.750%- 8.999%........... 14 2,008 5.0
9.000%- 9.249%........... 16 1,139 2.9
9.250%- 9.499%........... 10 662 1.7
9.500%- 9.749%........... 4 348 0.9
9.750%- 9.999%........... 9 939 2.4
10.000%-10.249%........... 9 634 1.6
10.250%-10.499%........... 5 369 0.9
10.500%-10.749%........... 14 2,573 6.5
10.750%-10.999%........... 4 667 1.7
11.000%-11.249%........... 4 380 1.0
11.500%-11.749%........... 1 53 0.1
12.000%-12.249%........... 1 55 0.1
12.250%-12.499%........... 2 219 0.6
12.500%-12.749%........... 4 214 0.5
12.750%-12.999%........... 9 746 1.8
13.500%-13.749%........... 2 50 0.1
14.000%-14.249%........... 1 13 0.0
-------------- -------------- --------------------
Total................ 271 $39,852 100.00%
-------------- -------------- --------------------
-------------- -------------- --------------------
</TABLE>
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. The interest rates of these Residential Mortgage Loans are fixed
prior to origination.
COMMERCIAL MORTGAGE LOANS. The Commercial Mortgage Loans included in the
Initial Portfolio will consist of loans secured by multi-family residential
rental properties, and light industrial, hotel and retail strip shopping center
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. Substantially all 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
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<PAGE>
Mortgage Loans included in the Initial Portfolio ranged from $11,163 to $2.48
million as of March 31, 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>
Percentage of Weighted
Aggregate Commercial Weighted Average
Principal Mortgage Loans by Weighted Average Average Current Expected Months
Balance Aggregate Principal Initial Loan to Loan to Value Remaining to
Type (In Thousands) Balance Value Ratio(1) Ratio(2) Maturity
- -------------------------------------- -------------- ------------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Commercial mortgage-fixed rate
balloon............................ $ 8,386 37.8% 76.0% 75.0% 102
Commercial mortgage-fixed rate....... 1,937 8.7 73.3 50.2 127
Multi-family-fixed rate balloon...... 6,001 27.1 74.2 73.9 112
Multi-family-fixed rate.............. 5,848 26.4 74.8 49.0 122
Total........................... $22,172 100.0% 74.9% 65.7% 112
------- ----- ---- ---- ---
------- ----- ---- ---- ---
</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 March 31, 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 64.9% 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 8.25% 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:
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<PAGE>
INTEREST RATE OF COMMERCIAL 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>
8.250%- 8.499%...... 1 $ 878 4.0%
8.500%- 8.749%...... 4 6,269 28.3
8.750%- 8.999%...... 3 2,698 12.2
9.000%- 9.249%...... 3 550 2.5
9.250%- 9.499%...... 18 1,986 8.9
9.500%- 9.749%...... 34 5,951 26.8
9.750%- 9.999%...... 4 348 1.6
10.000%-10.249%...... 8 2,049 9.2
10.250%-10.499%...... 1 140 0.6
10.500%-10.749%...... 4 350 1.6
10.750%-10.999%...... 4 325 1.5
11.000%-11.249%...... 3 353 1.6
11.500%-11.749%...... 2 118 0.5
13.500%-13.749%...... 1 90 0.4
14.750%-14.999%...... 1 67 0.3
---- -------- -----
Total........... 91 $22,172 100.0%
---- -------- -----
---- -------- -----
</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 current balance
sheet describing assets and liabilities and a statement of 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
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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 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
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<PAGE>
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 unit 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, receipt of acceptable
environmental (including Phase I) and appraisal reports and, if deemed
appropriate, engineering reports. The Bank contracted with approved firms to
prepare these reports for the account of the Bank. Any environmental exceptions
were approved by appropriate officers of the Bank before the loan was funded.
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. Loans that were not
originated in conformity with such underwriting standards were not purchased by
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
15.0% are secured by real estate located in Northern California and 85.0% 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 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 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.
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.
All of the commercial mortgaged properties underlying the Company's
Commercial Mortgage Loans will be located in California. Of the Commercial
Mortgage Loans included in the Initial Portfolio, approximately 9.9% are secured
by real estate located in Northern
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<PAGE>
California and 90.1% 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.
LOAN-TO-VALUE RATIOS; INSURANCE. Approximately $3.5 million or 73.6% of
the Residential Mortgage Loans in the Initial Portfolio (calculated as of
March 31, 1997) having Loan-to-Value Ratios of greater than 80% at
origination are currently insured under primary mortgage insurance policies.
Approximately 26.4% of the Residential Mortgage Loans included in the Initial
Portfolio with Loan-to-Value Ratios at origination of greater than 80% do not
currently 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 68.3% and have a weighted average
seasoning since origination (calculated as of March 31, 1997) of 175 months.
As of the date of this Prospectus, not more than approximately 64.4% of the
Residential Mortgage Loans 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. In addition, the standard hazard insurance required to be
maintained with respect to Residential Mortgage Loans does not protect the
Company against losses occurring from natural disasters. 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.
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
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<PAGE>
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.
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 Initial 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 expects to enter into the Forward Production Servicing
Purchase and Sale Agreement in July 1997, 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 Initial 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 an agreement
expected to be entered into between the Company 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 Initial
Residential Servicing Agreement.
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 % (in the case of fixed rate Residential Mortgage Loans) and
% (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. Temple-Inland Inc. is a Texas-based holding
company with $9.3 billion in assets which is engaged in several business
lines, including financial services. For the year ended December 31, 1996,
Temple-Inland generated income of $156.0 million on revenues of $3.5 billion.
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
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<PAGE>
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 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 Servicing Agent also will use its best efforts to
realize upon defaulted Residential Mortgage Loans in such manner as will
maximize the receipt of principal and interest.
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. The Servicing Agent also will be entitled to reimbursement by the
Company for expenses incurred by it in connection with the liquidation of
defaulted Residential Mortgage Loans serviced by it and in connection with the
restoration of mortgaged property.
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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 handled by the Servicing Agent.
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 the date
of the Initial Residential Agreement, shall be equal to % of the aggregate
outstanding principal amount of the loans then serviced and thereafter, % of
the aggregate outstanding principal amount of the loans then serviced. The
Forward Production Servicing Purchase and Sale Agreement is expected to
terminate 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, prepayment fees, 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 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,
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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 and prepayment penalties, 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
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payments. The Bank also will 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
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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
% 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 day of each
month (or the next business day if such day is not a business day) all
principal and interest collected from 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 and
governmental regulations.
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 three 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.
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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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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 three 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 March 31, 1997) are as follows:
Name Age Position and Offices Held
- ------------------ ---- --------------------------------------
Rudolf P. Guenzel 56 President, Chief Executive Officer and
Director
Henry Peters 56 Chairman of the Board of Directors
Gerard Jervis 48 Director
Robert W. MacDonald 50 Director
J. Michael Holmes 51 Executive Vice President, Chief
Financial Officer and Secretary
John T. Wasley 35 Senior Vice President
[Additional three directors to be determined]
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. Mr. Guenzel has served as President, Chief
Executive Officer and Director of SOCAL and 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
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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 to
profitability. The price of BancFlorida Financial's common stock increased
from a low of $2.375 per share during the quarter Mr. Guenzel was hired as
President and Chief Executive Officer 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, the Bank
and SOCAL, 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.
[Disclosure of additional three directors to come]
J. Michael Holmes. Mr. Holmes is the Executive Vice President, Chief
Financial Officer and Secretary of the Company. He has served as Executive
Vice President and Chief Financial Officer of SOCAL and the Bank since March
1995. Mr. Holmes also serves as Secretary and Treasurer of SOCAL. Prior to
SOCAL, Mr. Holmes joined Banc Florida, FSB in 1974 as Comptroller and served
in various capacities, culminating as Executive Vice President and Chief
Financial Officer in 1985, a position he held through the company's
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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.
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.
Each of the executive officers has held his position with the Company
since its inception in June 1997.
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. _____________ and ____________ 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
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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."
Audit Committee
Upon consummation of the Offering, the Company will establish 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. _____________________.
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
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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 (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)
maintaining custody of the documents related to the Company's Mortgage Loans,
Mortgage-Backed Securities and Other Authorized Investments. 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 March 31,
1997, the Advisor held approximately $582.1 million of single-family
residential mortgage loans and approximately $443.5 million and $113.5
million of multi-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
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entitled to receive an annual advisory fee equal to $_______ 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 $31.0
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 $62.0 million
pursuant to the terms of the Residential Mortgage Purchase Agreement
and the Commercial Mortgage
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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."
- 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, become
subject to the Residential Servicing Agreements with the Servicing
Agent, 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 $62.0 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.
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- 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 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 as follows:
Advisory Fee......................... $
---------
Servicing Fee(1)(2)..................
---------
Common Stock Dividend(3).............
---------
$
---------
---------
__________________
(1) Assumes that for the first 12 months 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--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 $_____ of servicing fees to be
paid to the Servicing Agent for the first 12 months 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 12 months
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
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approximately $_______ million. Assuming that (i) the Mortgage
Loans included in the Initial Portfolio are held for the
12-month 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 12-month period, 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 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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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
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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 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
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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 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
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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. 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 pari passu 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.
Holders of Series A Preferred Shares cannot exchange their Series A
Preferred Shares for Bank Preferred Shares voluntarily. In addition, 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.
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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 "--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
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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, (a) 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 (b) 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 prior to the Series A Preferred Shares, either as to
dividend rights or rights on liquidation, dissolution or winding up of the
Company or (c) 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 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 Company
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 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
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date, the Series A Preferred Shares may be redeemable 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 prices
set forth below in cash, plus authorized, declared and unpaid dividends to
the date of redemption, without interest:
If Redeemed During the Redemption Price
12-month Period Per Share of the
Beginning Series A Preferred Shares
- ----------------------------------- --------------------------
2002............................... $
2003...............................
2004...............................
2005...............................
2006...............................
2007 and thereafter................
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
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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.
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 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 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 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
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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 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.
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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.
___________ and _____________ 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
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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 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."
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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 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
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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.
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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 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) or during a
proportionate part of a shorter taxable 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. SOCAL is
owned 60% by the Bishop Estate, 30% by BIL Securities, and 10% by Arbur. To
determine whether the REIT satisfies the Five or Fewer Test, the constructive
ownership rules are applied to SOCAL's three stockholders.
On the basis of the application of these rules, 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, which is
a charitable organization operated for educational purposes and not a private
foundation, nor BIL Securities, which is a wholly owned subsidiary of
Brierley Investments Limited, a widely held public corporation, is considered
an "individual" for purposes of the Five or Fewer Test. Thus, immediately
after the Offering, Arbur will be considered, for purposes of the Five or
Fewer Test, to be the owner
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of 10% of the Company's Common Stock and of approximately 5% of the value of
all of the classes of issued and outstanding shares of capital stock of the
Company (based on the Common Stock of the Company constituting approximately
50% of the value of the Company). For purposes of the Five or Fewer Test,
(i) the Bishop Estate's 60% ownership of the Company's Common Stock and
approximately 30% interest in the value of all of the classes of issued and
outstanding shares of capital stock in the Company will be attributable to
its beneficiaries, and (ii) BIL Securities' 30% ownership of the Company's
Common Stock and approximately 15% interest in the value of all of classes of
issued and outstanding shares of stock of the Company will be attributable to
its stockholders.
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 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 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
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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
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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.
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. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
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
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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 operation for any one 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.
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
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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 Section 501(c)(17) and 509(a) or a portion of a trust
permanently set aside or used for purposes described in Section 642(c), 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."
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
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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.
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.
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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 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 its 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
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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. In the event the Company fails to distribute 100% of
its income and capital gains, the Bank may elect 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 the
Company. 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
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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 one year prior to the Automatic Exchange, any
gain or loss will be long-term capital gain or loss. Long-term capital losses
are deductible, subject to certain limitations. 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
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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's pension trust or other domestic tax-exempt
stockholder will generally not constitute "unrelated business taxable income"
unless the stockholder has borrowed to acquire or carry its shares of the
Company or the shares are used in an unrelated trade or business of the
stockholder. A tax-exempt employee's pension trust that holds more than 10%
of the shares of the capital stock of the Company may under certain
circumstances be required to treat a certain percentage of dividends as
unrelated business taxable income if the Company is "predominantly held" by
qualified trusts. For these purposes, a qualified trust is any trust defined
under Section 401(a) of the Code and exempt from tax under Section 501(a) of
the Code.
Taxation of Foreign Stockholders
The following is a discussion of certain anticipated U.S. federal income
and estate 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 and estate taxation.
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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-U.S. 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 dividends constitute USRPI Capital
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Gains. Distributions subject 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.
Estate Tax. Shares of the Company owned or treated as owned by a
nonresident alien decedent are includible in such individual's gross estate
for United States federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
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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 properly to 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.
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.
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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.
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
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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
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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-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
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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."
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 March 31, 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 March 31, 1997,
the Bank had total assets of $1.7 billion, total deposits of $1.4 billion and
total stockholder's equity of $75.8 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. SOCAL is currently
(i) 60% owned by the Bishop Estate, (ii) 30% owned by BIL Securities and
(iii) 10% owned by Arbur.
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The following chart sets forth in simplified form the ownership of the
common equity of SOCAL, the Bank and the Company.
The Bishop BIL Arbur
Estate Securities
60% 30% 10%
SOCAL Holdings, Inc.
100%
People's Bank of
California
100%
People's Preferred
Capital Corporation
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 and to amortize such goodwill on a straight-line basis over a
25-year period. Under generally accepted accounting principles, the Bank
recorded $79.7 million of goodwill in connection with such acquisition. 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 goodwill, which resulted in the Bank failing to comply with
its minimum regulatory capital requirements during 1990 and 1991. 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
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.
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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, 1997, SOCAL intends to
begin making quarterly interest payments on its senior debt, 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 & 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
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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 assets and troubled debt
restructurings have declined from $78.7 million or 4.6% of total assets at
December 31, 1994 to $47.5 million or 2.8% of total assets at March 31, 1997.
Of the Bank's $47.5 million of problem assets at March 31, 1997, $26.1
million consisted of real estate owned. 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. Decreases in the Bank's non-performing assets have resulted in
reductions in net loan charge-offs and reduced provisions for losses, which
have contributed to improved operating results. During the three months
ended March 31, 1997 and the year ended December 31, 1996, the Bank
recognized net earnings of $5.4 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 March 31, 1997, the Bank
experienced a net reduction of 53 employees. In addition, 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. 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 1.59% during the year ended December 31, 1996 and the three
months ended March 31, 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 $287.0 million or 21.2% of
total deposits at March 31, 1997. Over such period, non-retail jumbo
certificates of deposit declined from $122.2 million to $4.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations" in the Offering Circular.
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- 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 March 31, 1997, the Bank held $468.6 million of mortgage-backed
securities, $214.7 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 substantially increased its commercial business
and consumer loan originations. During the three months ended March 31, 1997
and the year ended December 31, 1996, the Bank originated in the aggregate
$3.5 million and $9.8 million of commercial business and consumer loans,
which amounted to 21.3%, 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 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 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
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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
(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 three months ended March 31, 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 three months ended March 31, 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,
MARCH 31, ------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................ $ 1,727,629 $ 1,747,871 $ 1,579,751 $ 1,720,293 $ 1,829,228 2,046,644
Cash and cash equivalents............... 13,590 14,673 7,249 10,960 18,481 13,022
Federal funds sold...................... 8,132 7,200 11,800 -- -- --
Securities purchased under agreements
to resell............................ -- -- 35,000 -- -- --
Securities available for sale........... 495,873 492,301 241,645 7,677 55,477 35,253
Loans held for sale..................... -- -- -- 28,946 5,500 1,396
Mortgage-backed securities held to
maturity............................... 10,728 20,971 -- 304,620 306,530 --
Loans receivable, net................... 1,121,385 1,141,707 1,228,152 1,306,057 1,346,498 1,442,624
Real estate held for investment and
sale, net.............................. 27,997 22,561 16,288 17,514 36,398 43,854
Deposits................................ 1,352,715 1,371,243 1,473,318 1,384,218 1,388,818 1,606,643
Securities sold under agreements to
repurchase............................. 210,650 192,433 -- -- 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)........ 47,538 46,218 52,640 78,737 76,951 71,603
Stockholder's equity(2)................. 75,789 76,610 67,449 17,348 67,740 76,114
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------- --------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest, fees and dividend
income....................... $ 30,700 $ 29,649 $ 122,896 $ 122,926 $ 116,261 $ 134,923 $ 164,746
Interest expense.............. 22,064 21,630 89,631 94,994 88,238 100,899 127,106
------------- --------- ---------- ---------- ---------- ---------- ----------
Net interest income........... 8,636 8,019 33,265 27,932 28,023 34,024 37,640
Provision for losses.......... 205 1,182 2,884 8,823 24,443 13,059 14,032
------------- --------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for losses......... 8,431 6,837 30,381 19,109 3,580 20,965 23,608
Gain on mortgage-backed
securities sales, net........ 40 3,209 3,638 641 485 901 1,705
Gain (loss)on loan and servicing
sales, net................... 3,391 (14) (53) (166) 2,712 2,537 2,380
Income (loss) from other real
estate operations, net....... 5 75 1,946 (2,067) (5,398) (180) 2,056
Other noninterest income...... 685 635 2,593 2,095 2,328 6,272 3,070
Operating expenses............ 7,154 6,334 27,923 30,906 40,878 41,202 36,666
Goodwill write-off............ -- -- -- -- -- -- 53,105
Earnings (loss) before income
tax provision (benefit)...... 5,398 4,408 10,582 (11,294) (37,171) (10,707) (56,952)
Income tax provision
(benefit).................... -- -- (3,016) (2,646) 11,356 (1,200) --
Cumulative effect (benefit) of
change in accounting
principle.................... -- -- -- -- -- -- (12,570)
------------- --------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss)........... $ 5,398 $ 4,408 $ 13,598 $ (8,648) $ (48,527) $ (9,507) $ (44,382)
------------- --------- ---------- ---------- ---------- ---------- ----------
------------- --------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS
ENDED MARCH 31, 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.................................... 1.20% 1.06% 0.78% (0.49)% (2.54)% (0.48)% (2.06)%
Return on equity.................................... 27.75 24.86 20.20 (16.73) (89.49) (12.76) (55.20)
Interest-earning assets to interest-bearing
liabilities........................................ 101.16 101.93 100.91 100.97 99.69 99.63 99.15
Interest rate spread(4)............................. 1.87 1.81 1.94 1.57 1.54 1.81 1.90
Net interest margin(4).............................. 2.00 1.99 1.99 1.62 1.53 1.80 1.85
Operating expenses to assets........................ 1.59 1.52 1.61 1.75 2.14 2.07 1.70
Asset Quality Ratios:
Non-performing loans as a percent of loans, net..... 1.24 1.58 1.60 2.90 2.06 2.85 1.98
Non-performing assets as a.......................... 2.32 2.63 2.21 2.94 2.21 3.83 3.29
Non-performing assets and troubled debt restructurings as
a percent of total assets(1)....................... 2.75 2.84 2.64 3.33 4.58 4.21 3.50
Allowance for loan losses as a percent of
loans, net......................................... 1.67 2.24 2.04 2.57 2.28 1.52 1.28
Allowance for loan losses as a percent of nonaccrual and
troubled debt restructurings(1).................... 87.48 120.39 90.30 75.67 43.66 44.99 56.18
Net charge-offs to average loans, net............... 1.67 1.95 0.95 0.55 0.95 0.45 0.56
Bank's Regulatory Capital Ratios(5):
Core leverage capital ratio......................... 4.91 4.15 4.57 4.18 1.08 4.21 4.49
Tier 1 capital ratio................................ 9.42 7.92 9.15 7.56 2.01 7.41 8.35
Total risk-based capital ratio...................... 10.68 8.80 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 March 31, 1997 and December 31, 1996 and 1995, stockholder's equity is
net of $12.0 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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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 March 31, 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 12.3%. 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 March 31, 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 4.91%, 9.42% and 10.68%,
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
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<PAGE>
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 March 31,
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.
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS. The Bank has federal
tax net operating loss carryfor-wards of approximately $146.7 million that
can 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. As of June 1, 1995, the Bank had experienced a 47.81% owner
shift due to the Bank's 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. 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
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<PAGE>
1999 at the assessment rate schedule in effect as of June 30, 1995.
Therefore, as of March 31, 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.
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:
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<PAGE>
NUMBER OF
NAME SHARES
----------------------- ------------
Sandler O'Neill & Partners,
L.P.
----------
1,240,000
----------
----------
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
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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 filed an application 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.
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 auditing
and accounting.
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
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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 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.
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<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 (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, (iii) advise the Company with
respect to the acquisition, management, financing and disposition of the
Company's Mortgage Assets and Other Authorized Investments and (iv) maintain
custody of the documents related to the Company's Mortgage Loans and Other
Authorized Investments.
"Applicable Premium" shall have the meaning set forth in "Description of
Series A Preferred Shares--Redemption."
"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
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<PAGE>
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.
"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
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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.
119
<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.
120
<PAGE>
"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.
"OTS" means the Office of Thrift Supervision, Department of the Treasury.
"Pension-Held REIT" means a REIT which (i) qualifies as a REIT by reason
of the modification of the Five or Fewer Test under Section 856(h)(3) and
(ii) either (a) at least one qualified trust (as defined in Section
856(h)(3)(E)) holds more than 25% (by value) of the interests in the REIT, or
(b) one or more qualified trusts (as defined in Section 856(h)(3)(E)) (each
of whom own more than 10% (by value) of the interests in the REIT) hold in
the aggregate more than 50% (by value) of the interests in such REIT.
"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 number 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.
"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.
121
<PAGE>
"REIT taxable income" shall have the meaning set forth in "Federal Income
Tax Considerations-- Taxation of the Company--Annual Distribution
Requirements."
"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.
"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
Bank with respect to the Residential Mortgage Loans and the Commercial
Mortgage Loans.
"SOCAL" means Southern California 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) 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
122
<PAGE>
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.
"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.
123
<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.
/s/ 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.
ANNEX I
PRELIMINARY OFFERING CIRCULAR
SUBJECT TO COMPLETION, DATED JULY 10, 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
- ------------------------
(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.
<PAGE>
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 prices per share set
forth herein, 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.
SEE "RISK FACTORS" COMMENCING ON PAGE OF THIS OFFERING CIRCULAR FOR
A DISCUSSION OF CERTAIN RISKS RELATING TO THE BANK PREFERRED SHARES.
<PAGE>
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.
As a result of the Offering, the Bank will be subject to the
informational requirements of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). 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.
4
<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 March 31, 1997, the
Bank had total assets of $1.7 billion, total deposits of $1.4 billion and
total stockholder's equity of $75.8 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 March 31, 1997, SOCAL had total assets of $1.7 billion and total
stockholders' equity of $63.7 million. 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.
5
<PAGE>
The following chart sets forth in simplified form the ownership of the
common equity of SOCAL, the Bank and the Company.
The Bishop BIL Arbur
Estate Securities
60% 30% 10%
SOCAL Holdings, Inc.
100%
People's Bank of
California
100%
People's Preferred
Capital Corporation
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 is 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 March
31, 1997, Brierley Investments Limited had approximately $6.62 billion in
total assets, $3.24 billion in total liabilities and $3.38 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 $297.2 million of supervisory goodwill, which resulted
from the acquisition and to amortize such goodwill on a straight-line basis
over a 25-year period. Under generally accepted accounting principles, the
Bank recorded $79.7 million of goodwill in connection with such acquisition.
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
6
<PAGE>
its minimum regulatory capital requirements during 1990 and 1991. 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
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 in 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. 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 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 & Loan Association to People's Bank of California,
reflecting a new emphasis on providing full banking services to its
customers. Managements has also undertaken a
7
<PAGE>
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 assets and troubled debt restructurings have declined
from $78.7 million or 4.6% of total assets at December 31, 1994 to $47.5
million or 2.8% of total assets at March 31, 1997. Of the Bank's $47.5
million of problem assets at March 31, 1997, $26.1 million consisted of real
estate owned. 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. Decreases in the Bank's
non-performing assets have resulted in reductions in net loan charge-offs and
reduced provisions for losses, which have contributed to improved operating
results. During the three months ended March 31, 1997 and the year ended
December 31, 1996, the Bank recognized net earnings of $5.4 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 March 31, 1997, the Bank
experienced a net reduction of 53 employees. In addition, 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. 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 1.59% during the year ended December 31, 1996 and the three
months ended March 31, 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
8
<PAGE>
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 $287.0 million or 21.2% of total deposits at March 31, 1997. Over such
period, non-retail jumbo certificates of deposit declined from $122.2 million
to $4.6 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 March
31, 1997, the Bank held $468.6 million of mortgage-backed securities, $214.7
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 substantially increased its commercial business
and consumer loan originations. During the three months ended March 31, 1997
and the year ended December 31, 1996, the Bank originated in the aggregate
$3.5 million and $9.8 million of commercial business and consumer loans,
which amounted to 21.3%, 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
9
<PAGE>
mortgage-backed securities 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.
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:
10
<PAGE>
(i) the Offering will strengthen the Bank's regulatory capital position as
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.
<TABLE>
<CAPTION>
THE OFFERING
<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.
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
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 prices per share set forth herein, 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
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 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 from the exchange
of Series A Preferred hares 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.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(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 three months ended March 31, 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 three months ended March 31, 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,
MARCH 31, ------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets........................... $ 1,727,629 $ 1,747,871 $ 1,579,751 $ 1,720,293 $ 1,829,228 2,046,644
Cash and cash equivalents.............. 13,590 14,673 7,249 10,960 18,481 13,022
Federal funds sold..................... 8,132 7,200 11,800 -- -- --
Securities purchased underagreements to
resell............................... -- -- 35,000 -- -- --
Securities available for sale.......... 495,873 492,301 241,645 7,677 55,477 35,253
Loans held for sale.................... -- -- -- 28,946 5,500 1,396
Mortgage-backed securities held to
maturity............................. 10,728 20,971 -- 304,620 306,530 --
Loans receivable, net.................. 1,121,385 1,141,707 1,228,152 1,306,057 1,346,498 1,442,624
Real estate held for investment and
sale, net............................ 27,997 22,561 16,288 17,514 36,398 43,854
Deposits............................... 1,352,715 1,371,243 1,473,318 1,384,218 1,388,818 1,606,643
Securities sold under agreements to
repurchase........................... 210,650 192,433 -- -- 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).. 47,538 46,218 52,640 78,737 76,951 71,603
Stockholder's equity(2)................ 75,789 76,610 67,449 17,348 67,740 76,114
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 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....... $ 30,700 $ 29,649 $ 122,896 $ 122,926 $ 116,261 $ 134,923 $ 164,746
Interest expense......................... 22,064 21,630 89,631 94,994 88,238 100,899 127,106
--------- --------- ---------- ---------- ---------- ---------- ----------
Net interest income...................... 8,636 8,019 33,265 27,932 28,023 34,024 37,640
Provision for losses..................... 205 1,182 2,884 8,823 24,443 13,059 14,032
--------- --------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision for
losses................................. 8,431 6,837 30,381 19,109 3,580 20,965 23,608
Gain on mortgage-backed securities sales,
net.................................... 40 3,209 3,638 641 485 901 1,705
Gain (loss)on loan and servicing sales,
net.................................... 3,391 (14) (53) (166) 2,712 2,537 2,380
Income (loss) from other real estate
operations, net........................ 5 75 1,946 (2,067) (5,398) (180) 2,056
Other noninterest income................. 685 635 2,593 2,095 2,328 6,272 3,070
Operating expenses....................... 7,154 6,334 27,923 30,906 40,878 41,202 36,666
Goodwill write-off....................... -- -- -- -- -- -- 53,105
Earnings (loss) before income tax
provision (benefit).................... 5,398 4,408 10,582 (11,294) (37,171) (10,707) (56,952)
Income tax provision (benefit)........... -- -- (3,016) (2,646) 11,356 (1,200) --
Cumulative effect (benefit) of change in
accounting principle................... -- -- -- -- -- -- (12,570)
--------- --------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss)...................... $ 5,398 $ 4,408 $ 13,598 $ (8,648) $ (48,527) $ (9,507) $ (44,382)
--------- --------- ---------- ---------- ---------- ---------- ----------
--------- --------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR
THE THREE
MONTHS
ENDED MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- -------
Key Operating Ratios:
Performance Ratios:(3)
Return on assets..................................... 1.20% 1.06% 0.78% (0.49%) (2.54%) (0.48)% (2.06)%
Return on equity..................................... 27.75 24.86 20.20 (16.73) (89.49) (12.76) (55.20)
Interest-earning assets to interest-bearing
liabilities......................................... 101.16 101.93 101.91 101.97 99.69 99.63 99.15
Interest rate spread(4).............................. 1.87 1.81 1.94 1.57 1.54 1.81 1.90
Net interest margin(4)............................... 2.00 1.99 1.99 1.62 1.53 1.80 1.85
Operating expenses to assets......................... 1.59 1.52 1.61 1.75 2.14 2.07 1.70
Asset Quality Ratios:
Non-performing loans as a percent of loans, net...... 1.24 1.58 1.60 2.90 2.06 2.85 1.98
Non-performing assets as a percent of total
assets(1)........................................... 2.32 2.63 2.21 2.94 2.21 3.83 3.29
Non-performing assets and troubled debt
restructurings as a percent of total assets(1)..... 2.75 2.84 2.64 3.33 4.58 4.21 3.50
Allowance for loan losses as a percent of loans, net. 1.67 2.24 2.04 2.57 2.28 1.52 1.28
Allowance for loan losses as a percent of nonaccrual
and troubled debt restructurings(1)................ 87.48 120.39 90.30 75.67 43.66 44.99 56.18
Net charge-offs to average loans, net................ 1.67 1.95 0.95 0.55 0.95 0.45 0.56
Bank's Regulatory Capital Ratios(5):
Core leverage capital ratio.......................... 4.91 4.15 4.57 4.18 1.08 4.21 4.49
Tier 1 capital ratio................................. 9.42 7.92 9.15 7.56 2.01 7.41 8.35
Total risk-based capital ratio....................... 10.68 8.80 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 March 31, 1997 and December 31, 1996 and 1995, stockholder's equity is
net of $12.0 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 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.
<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
15
<PAGE>
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 dividend will be invalid. Further the OTS may prohibit any capital
distribution that it determines would constitute an unsafe or unsound practice.
As of March 31, 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 applied to have the Series A Preferred Shares
listed 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
16
<PAGE>
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 Risk and Credit Risk
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 March
31, 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."
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
17
<PAGE>
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
The Bank has 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. As of June 1 ,1995, the Bank had experienced a 47.81%
owner shift due to the Bank's 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. 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, the 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
18
<PAGE>
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
assets. Non-performing assets and troubled debt restructurings have since
declined and totalled $47.5 million or 2.8% of total assets at March 31,
1997. In addition, performing loans delinquent 120 days or less have declined
from $12.3 million at March 31, 1996 to $7.2 million at March 31, 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 $47.5 million or 2.8%
of total assets at March 31, 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 March 31, 1997, the Bank's multi-family residential and commercial real
estate loans amounted to $557.0 million in the aggregate or approximately 49% of
the Bank's total loans receivable. In addition, although commercial business and
consumer loans amounted to only $8.8 million in the aggregate at March 31, 1997
(which represented less than 1% of the Bank's total loans receivable), such
loans represented 21.3% and 15.8% of the Bank's total loan originations for the
three months ended March 31, 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. Although originated under prior management, at March 31, 1997, an
aggregate of $7.1 million and $21.8 million of the Bank's multi-family
residential and commercial real estate loans were classified non-accrual or
included in real estate owned, respectively. 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.
19
<PAGE>
Leverage
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. Management's leverage
strategy is premised on the 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 from the exchange of the Series A
Preferred Shares for Bank Preferred Shares.
20
<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of the
Bank at March 31, 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.......................................................... $ 1,352,715 $ 1,352,715
------------ ------------
------------ ------------
Borrowings:
Securities sold under agreements to repurchase.................. $ 210,650 $ 210,650
Other borrowings (primarily FHLB advances)...................... 80,000 80,000
------------ ------------
Total......................................................... $ 290,650 $ 290,650
------------ ------------
------------ ------------
Minority interest--Series A Preferred Shares...................... $ -- $ 31,000
------------ ------------
------------ ------------
Stockholder's equity:
Preferred Stock (par value, $0.01 per share; 1,000,000 shares
authorized, no shares issued and outstanding)(1).............. -- --
Common Stock (par value, $0.01 per share; 1,000,000 shares
authorized, 100,000 shares issued and outstanding)(1)......... 1 1
Additional paid-in capital...................................... 142,538 142,538
Net unrealized gain (loss) on securities available for sale....... (12,010) (12,010)
Accumulated deficit............................................... (54,740) (54,740)
------------ ------------
Total stockholder's equity.................................... 75,789 75,789
------------ ------------
Total capitalization.............................................. $ 1,719,154 $ 1,750,154
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Effective as of June 23, 1997, the Bank amended its Federal charter in order
to increase the authorized preferred stock and common stock to 5,000,000 and
10,000,000 shares, respectively.
21
<PAGE>
PRO FORMA REGULATORY CAPITAL
After giving effect to the issuance of the Series A Preferred Shares, at
March 31, 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 March 31, 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............................... $ 75,789 $ 75,789 $ 75,789
Minority interest--Series A Preferred Shares(1)................ 28,407 28,407 31,000
Unrealized losses on securities available for sale............. 12,010 12,010 12,010
Non-allowable capital:
Direct real estate investments............................... (1,908) (1,908) (1,908)
Intangible assets............................................ (668) (668) (668)
Supplemental capital:
Allowance for loan losses.................................... -- -- 11,340
--------------- ------------ --------
Regulatory capital of the Bank................................. $ 113,630 $ 113,630 $ 127,563
--------------- ------------ --------
--------------- ------------ --------
</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, $28.4 million of the proceeds of the Offering will
constitute tangible and core capital of the Bank, while an additional
$2.6 million of the proceeds of the Offering (for a total of $31.0
million) will constitute supplemental capital of the Bank.
<TABLE>
<CAPTION>
Risk-Based
----------------------------------
Core Capital Ratio Tier 1 Ratio Total Capital Ratio
--------------------- ------------- -------------------
<S> <C> <C> <C>
Regulatory capital of the Bank............................... 6.55% 12.56% 14.10%
Well-capitalized ratio....................................... 5.00 8.00 10.00
---- ----- -----
Excess above well-capitalized ratio.......................... 1.55% 4.56% 4.10%
---- ----- -----
---- ----- -----
</TABLE>
The amount of adjusted total assets used for the tangible and core
capital ratios was approximately $1.7 billion. Risk-weighted assets used for
the risk-based capital ratios amounted to approximately $900 million.
22
<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 decreased by $20.2 million or 1.2% during the three
months ended March 31, 1997 and increased by $168.1 million or 10.6% during
the year ended December 31, 1996. The small decrease in total assets during
the first quarter of 1997 primarily reflected a net reduction in loans
receivable. The increase in total assets during 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
23
<PAGE>
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 $21.7 million, $21.9 million
and $54.0 million at March 31, 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 March
31, 1997, the Bank's regulatory liquidity amounted to 5.39% (which exceeded
the minimum OTS requirement of 5.0% by $6.6 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 sponsored enterprises. At March 31,
1997, the Bank's securities portfolio (both held to maturity and available
for sale) amounted to $506.6 million or 29.3% 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 March 31, 1997, $468.6 million or 92.5%
of the Bank's securities portfolio consisted of mortgage-backed securities
and $38.0 million or 7.5% 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
March 31, 1997, $10.7 million of the Bank's securities portfolio was
classified as held to maturity and reported at historical cost and $495.9
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 March
31, 1997, the Bank's securities classified as available for sale had in the
aggregate $12.0 million of unrealized losses. See "Business of the
Bank--Investment Activities."
LOANS RECEIVABLE. Net loans receivable decreased by $20.3 million or 1.8%
during the three months ended March 31, 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
24
<PAGE>
residential and commercial loans to indexes that adjust more rapidly to
changes in market rates of interest (as compared to the 11th FHLB 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. 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 $21.4 million
or 1.2% of total assets at March 31, 1997, as compared to $25.8 million or
1.5% and $41.7 million or 2.6% at December 31, 1996 and 1995, respectively.
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
monitoring procedures in an effort to reduce the level of non-performing
assets. 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 $26.1 million at March 31, 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
25
<PAGE>
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. 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 March 31, 1997, as compared to $2.1
million and $5.4 million at December 31, 1996 and 1995, respectively. At
March 31, 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 slightly by $18.5 million or 1.4%
during the three months ended March 31, 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, 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 $287.0 million or 21.2% of total deposits at March 31,
1997 and certificates of deposit declined from $1.2 billion or 81.3% of total
deposits to $981.8 million or 72.6% of total deposits as of such respective
dates. Over such period, non-retail jumbo certificates of deposit declined
from $103.4 million to $4.6 million. 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 FHLB of San Francisco. At March 31, 1997, reverse
repurchase agreements amounted to $210.7 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."
26
<PAGE>
Advances from the FHLB of San Francisco amounted to $80.0 million, $80.0
million and $31.7 million at March 31, 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 March 31, 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 March 31, 1997, as compared
to 5.91% and 5.93% at December 31, 1996 and 1995, respectively. See
"Business--Sources of Funds--Borrowings." At March 31, 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 subsequently
decreased to $75.8 million at March 31, 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 $821,000 or 1.1% decrease in
stockholder's equity during the three months ended March 31, 1997 reflected a
$5.9 million increase in unrealized losses on securities classified as
available for sale, which was partially offset by the $5.4 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 $5.4 million, $4.4 million,
$13.6 million, $(8.6) million and $(48.5) million during the three months
ended March 31, 1997 and 1996 and the years ended December 31, 1996, 1995 and
1994, respectively. Net earnings
27
<PAGE>
increased by $990,000 or 22.5% during the three months ended March 31, 1997,
as compared to the same period in the prior year, due to a $977,000 decrease
in the provision for losses on loans, a $617,000 increase in net interest
income and a $216,000 increase in total other income (primarily reflecting
the sale of servicing rights), which was partially offset by a $820,000
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.
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 $8.6 million, $8.0 million, $33.3 million,
$27.9 million and $28.0 million during the three months ended March 31, 1997
and 1996 and the years ended December 31, 1996, 1995 and 1994, respectively.
Net interest income increased by $617,000 or 7.7% during the three months
ended March 31, 1997, as compared to the same period in the prior year, due
to a $116.5 million increase in interest-earning assets (consisting primarily
of a $185.3 million increase in the average balance of mortgage-backed
securities, which was partially offset by an $80.4 million decrease in loans
receivable) together with an increase 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.
28
<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>
Three Months Ended
March 31,
-----------------------------------------------------------------
1997 1996
------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)...... $1,130,109 $ 20,967 7.42% $1,210,529 $23,165 7.65%
Mortgage-backed
securities(2)............. 474,305 7,845 6.62 289,012 4,794 6.64
Other earning assets(3)..... 126,181 1,888 5.99 114,603 1,690 5.90
---------- --------- ---------- -------
Total interest-earning
assets.................. 1,730,595 30,700 7.10% 1,614,144 29,649 7.35%
--------- ---- ------ ----
---- ----
Noninterest-earning assets.... 69,666 54,491
---------- ----------
Total assets.............. $1,800,261 $1,668,635
---------- ----------
---------- ----------
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)... 366,950 3,382 3.74% 297,335 2,696 3.68%
Term certificates of
deposit................. 991,062 13,654 5.59 1,167,979 17,196 5.97
---------- ------- ---------- -------
Total deposits.......... 1,358,012 17,036 1,465,314 19,892
Total borrowings............ 352,755 4,948 5.69 118,268 1,626 5.58
Hedging costs............... -- 80 -- 112
---------- ------- ---------- -------
Total interest-bearing
liabilities........... 1,710,767 22,064 5.23 1,583,582 21,630 5.54%
------- ---- ------- ----
---- ----
Noninterest bearing
liabilities................. 11,697 14,138
---------- ----------
Total liabilities....... 1,722,464 1,597,720
Stockholder's equity.......... 77,797 70,914
---------- ----------
Total liabilities and
stockholder's
equity.............. $1,800,261 $1,668,634
---------- ----------
---------- ----------
Net interest-earning assets... $ 19,828 $ 30,562
Net interest income/interest
rate spread................. $ 8,636 1.87% $ 8,019 1.81%
------- ---- ------- -----
------- ---- ------- -----
Net interest margin........... 2.00% 1.99%
---- -----
---- -----
Ratio of average interest-
earning assets to average
interest-bearing
liabilities................. 101.16% 101.93%
------ -------
------ -------
<CAPTION>
---------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------ --------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)...... $1,176,944 $ 89,020 7.56% $1,284,090 $ 94,473 7.36% $1,370,528 $ 89,293 6.52%
Mortgage-backed
securities(2)............. 387,603 26,136 6.74 328,446 21,836 6.65 356,260 22,621 6.35
Other earning assets(3)..... 105,583 7,740 7.33 108,114 6,617 6.12 110,526 4,347 3.93
---------- -------- ---- ---------- --------- ---- ---------- -------- ----
Total interest-earning
assets.................. 1,670,130 122,896 7.36% 1,720,650 122,926 7.14% 1,837,314 116,261 6.33%
-------- ---- -------- ---- -------- ----
---- ---- ----
Noninterest-earning assets.... 65,179 48,945 76,042
---------- ---------- ----------
Total assets.............. $1,735,309 $1,769,595 $1,913,356
---------- ---------- ----------
---------- ---------- ----------
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)... $ 352,853 13,484 3.80% $ 197,441 5,287 2.68% $ 205,684 $ 3,995 1.94%
Term certificates of
deposit................. 1,069,484 61,652 5.76 1,212,989 69,579 5.74 1,186,191 54,010 4.55
---------- -------- ---------- -------- ---------- --------
Total deposits.......... 1,422,337 75,136 1,410,430 74,866 1,391,875 58,005
Total borrowings............ 232,668 14,108 6.06 293,606 18,443 6.28 451,205 21,623 4.79
Hedging costs............... -- 387 -- 1,685 -- 8,610
---------- -------- ---------- ------- ---------- -------
Total interest-bearing
liabilities........... 1,655,005 89,631 5.42% 1,704,036 94,994 5.57% 1,843,080 88,238 4.79%
-------- ---- ------- ---- ------- ----
---- ---- ----
Noninterest bearing
liabilities................. 12,998 13,854 16,048
---------- ---------- ----------
Total liabilities....... 1,668,003 1,717,890 1,859,128
Stockholder's equity.......... 67,306 51,705 54,228
---------- ---------- ----------
Total liabilities and
stockholder's
equity.............. $1,735,309 $1,769,595 $1,913,356
---------- ---------- ----------
---------- ---------- ----------
Net interest-earning assets... $ 15,125 $ 16,614 $ (5,766)
---------- ---------- ----------
---------- ---------- ----------
Net interest income/interest
rate spread................. $ 33,265 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.
29
<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>
THREE MONTHS ENDED MARCH 31, 1997
COMPARED TO THREE MONTHS ENDED
MARCH 31, 1996
------------------------------------------------------ ---
INCREASE (DECREASE) DUE TO
-----------------------------------
<CAPTION>
TOTAL NET
RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE)
--------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable......................... $ (706) $ (1,539) $ 47 $ (2,198)
Mortgage-backed securities............... (16) 3,075 (8) 3,051
Other earning assets..................... 27 170 1 198
--------- ----------- ----- -------
Total net change in income on
interest-earning assets................ (695) 1,706 40 1,051
--------- ----------- ----- -------
Interest-bearing liabilities:
Deposits:
Transaction accounts..................... 45 631 10 686
Term certificates of deposit............. (1,105) (2,605) 168 (3,542)
--------- ----------- ----- -------
Total deposits........................... (1,060) (1,974) 178 (2,856)
Borrowings............................... 33 3,224 64 3,321
Hedging costs............................ -- -- (31) (31)
--------- ----------- ----- -------
Total net change in expense on
interest-bearing liabilities........... (1,027) 1,250 211 434
-------- ----------- ----- -------
Change in net interest income............ $ 332 $ 456 $ (171) $ 617
--------- ----------- ----- -------
--------- ----------- ----- -------
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
---------------------------------------------------
INCREASE (DECREASE) DUE TO
-----------------------------------
TOTAL NET
RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE)
--------- ----------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable......................... $ 2,651 $ (7,883) $ (221) $ (5,453)
Mortgage-backed securities............... 311 3,933 56 4,300
Other earning assets..................... 1,310 (155) (32) 1,123
------- --------- --------- --------
Total net change in income on
interest-earning assets................ 4,272 (4,105) (197) (30)
------- --------- --------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts..................... 2,258 4,162 1,777 8,197
345 (8,231) (41) (7,927)
Term certificates of deposit............. --------- ----------- ----------- -------
Total deposits........................... 2,603 (4,069) 1,736 270
Borrowings............................... (640) (3,828) 133 (4,335)
Hedging costs............................ -- -- (1,298) (1,298)
-------- ----------- ----------- -------
Total net change in expense on
interest-bearing liabilities........... 1,963 (7,897) 571 (5,363)
--------- ----------- ----------- -------
Change in net interest income............ $ 2,309 $ 3,792 $ (768) $ 5,333
--------- ----------- ----------- -------
--------- ----------- ----------- -------
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO 1994
--------------------------------------------------------
INCREASE (DECREASE) DUE TO
-----------------------------------
RATE/ TOTAL NET INCREASE
RATE VOLUME VOLUME (DECREASE)
--------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable......................... $ 11,539 $ (5,632) $ (728) $ 5,180
Mortgage-backed securities............... 1,064 (1,766) (83) (785)
Other earning assets..................... 2,418 (95) (53) 2,270
--------- ----------- ----------- ------
Total net change in income on
interest-earning assets................ 15,021 (7,493) (864) 6,665
--------- ----------- ----------- ------
Interest-bearing liabilities:
Deposits:
Transaction accounts..................... 1,513 (160) (61) 1,292
Term certificates of deposit............. 14,032 1,220 317 15,569
-------- ----------- ----------- -------
Total deposits........................... 15,545 1,060 256 16,861
Borrowings............................... 6,720 (7,553) (2,347) (3,180)
Hedging costs............................ -- -- (6,925) (6,925)
-------- ----------- ----------- -------
Total net change in expense on
interest-bearing liabilities........... 22,265 (6,493) (9,016) 6,756
--------- ----------- ----------- ------
Change in net interest income............ $ (7,244) $ (1,000) $ 8,152 $ (91)
--------- ----------- ----------- ------
--------- ----------- ----------- ------
</TABLE>
30
<PAGE>
INTEREST INCOME. Total interest income increased by $1.1 million or 3.5%
during the three months ended March 31, 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 $2.2 million or 9.5%
during the three months ended March 31, 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 $3.1 million
or 63.6% during the three months ended March 31, 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 $198,000 or 11.7% during the three months ended
March 31, 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 three months ended March 31, 1997 was primarily due to a
$11.6 million increase in the average balance of such investments and, to a
lesser extent, an increase in the average yield earned thereon of 10 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 $434,000 or 2.0%
during the three months ended March 31, 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
31
<PAGE>
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 $2.9 million or 14.4% during the three months ended
March 31, 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 $2.6 million or 225.5% during the three months ended March 31,
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 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
$713,000 or 152.0% during the three months ended March 31, 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 three months ended March 31, 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 $80,000, $112,000, $387,000, $1.7 million and $8.6 million during
such respective periods. The Bank has in the past utilized interest rate
swaps, collars, 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 March 31, 1997, the Bank had one remaining
interest rate swap contract with a notional amount of $6.4 million, ten
remaining interest rate corridors with an aggregate notional amount of $64.0
million and one remaining interest rate floor with a notional amount of $20.0
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
32
<PAGE>
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 $205,000, $1.2
million, $2.9 million, $8.8 million and $24.4 million (which included a $2.1
million provision relating to mortgage-backed securities) during the three
months ended March 31, 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 $4.7 million, $5.9 million, $11.2 million,
$7.1 million and $13.0 million (which included $2.1 million of charge-offs
relating to mortgage-backed securities), respectively. The allowance for
losses on loans as a percentage of total non-performing loans and troubled
debt restructurings was 87.48%, 120.39%, 90.30%, 75.67% and 43.66% at March
31, 1997 and 1996 and December 31, 1996, 1995 and 1994, respectively. The
allowance for losses on loans as a percentage of total loans was 1.67%,
2.24%, 2.04%, 2.57%, and 2.28% at March 31, 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 three months ended March 31, 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
a result of such transfer, 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 March 31, 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 $433,000 or 11.0% during
the three months ended March 31, 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,
33
<PAGE>
respectively. Loan service and loan related fees amounted to $313,000,
$376,000, $1.4 million, $1.6 million and $2.0 million during the three months
ended March 31, 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 securities of
$40,000, $3.2 million, $3.6 million, $641,000 and $485,000 during the three
months ended March 31, 1997 and 1996 and the years ended December 31, 1996,
1995 and 1994, respectively. During such respective periods, the Bank sold
$0, $33.0 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, $(14,000), $(53,000), $(166,000) and $2.7 million during the
three months ended March 31, 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 $881.0 million and $230.0 million of loan servicing during
the three months ended March 31, 1997 and the year ended December 31, 1994,
respectively. The sale of loan servicing during the three months ended March
31, 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 $5,000,
$75,000, $1.9 million, $(2.1) million and $(5.4) million during the three
months ended March 31, 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 three months ended March 31, 1997
and 1996 and the years ended December 31, 1996, 1995 and 1994, losses
(income) from real estate operations amounted to $237,000, $(3,000),
$634,000, $448,000 and $845,000, respectively, gains on sales of real estate
owned and real estate held for investment amounted to $486,000, $90,000, $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 $244,000,
$18,000, $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 $372,000, $259,000, $1.2 million, $513,000 and $360,000
during the three months ended March 31, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994, respectively.
34
<PAGE>
OPERATING EXPENSES. Total operating expenses increased by $820,000 or
12.9% during the three months ended March 31, 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. Since the change in the Bank's management in March 1995, the
Bank has aggressively reduced its operating expenses, as described herein.
See also "The Bank." The increase in operating expenses during the March 1997
quarter 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 associated with the Bank's new data processing equipment.
During the three months ended March 31, 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 1.59%, 1.52%, 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 $2.8 million, $2.6 million, $10.8
million, $12.1 million and $19.1 million during the three months ended March
31, 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 288 at
December 31, 1994 to 235 at March 31, 1997. Personnel and benefits expense
increased during the three months ended March 31, 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 $1.7 million, $1.4 million, $6.4 million,
$7.0 million and $8.8 million during the three months ended March 31, 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 three months ended March 31, 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 totalled $1.3 million, $1.1 million, $4.4
million, $4.3 million and $4.1 million during the three months ended March
31, 1997 and 1996 and the
35
<PAGE>
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
recently enacted 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 March 31, 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 $191,000, $(43,000), $771,000,
$2.1 million and $2.0 million during the three months ended March 31, 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 $862,000, $887,000, $4.0 million, $4.0 million and
$4.4 million during the three months ended March 31, 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 $325,000, $346,000,
$1.6 million, $1.5 million and $2.4 million during the three months ended
March 31, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994,
respectively.
INCOME TAX PROVISION (BENEFIT). During the three months ended March 31,
1997 and 1996 and the years ended December 31, 1996, 1995 and 1994, the Bank
recognized $0, $0, $(3.0) million, $(2.6) million and $11.4 million in income
tax provisions (benefits). At March 31, 1997, 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. 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.
36
<PAGE>
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, collars, 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). The Bank has also significantly increased aggregate
purchases of both short-term or adjustable rate securities in recent periods,
as purchases
37
<PAGE>
were $9.0 million, $216.8 million and $49.7 million during the three months
ended March 1997 and the years ended December 31, 1996 and 1995.
At March 31, 1997, $214.7 million or 45.8% of the Bank's mortgage-backed
securities were secured by adjustable rate loans. In addition, during the
three months ended March 31, 1997 and the years ended December 31, 1996 and
1995, the Bank originated in the aggregate $3.5 million, $9.8 million and
$4.5 million of commercial business and consumer loans, respectively, which
amounted to 21.3%, 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 $122.1 million at December 31, 1994 to $4.6
million at March 31, 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 March 31, 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 $6.4 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 March
31, 1997. At March 31, 1997, one-month LIBOR was 5.44%. The net expense
(income) relating to the Bank's interest rate swap agreements was $(3,600),
$35,000, $1.2 million and $8.4 million during the three months ended March
31, 1997 and the years ended December 31, 1996, 1995 and 1994, respectively.
At March 31, 1997, the Bank was also a party to ten interest rate corridor
agreements and one interest rate floor agreement, which agreements expire from
1997 through 2001 and cover an aggregate notional amount of approximately $84
million. An interest rate floor consists of a guarantee given by one party,
referred to as the issuer (i.e., a broker), to another party, referred to as the
purchaser (i.e., the Bank), in exchange for the payment of
38
<PAGE>
a premium, that if interest rates fall below a specified rate on a specified
interest rate index, the issuer will pay to the purchaser the difference
between the then current market rate and the specified rate on a notional
principal amount for a predetermined period of time. No funds are actually
borrowed or repaid. Similarly, 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 March 31, 1997, the interest rate floor agreement
is triggered whenever the defined floating-rate (which is based on three
month LIBOR) is less than 4.5%. As of March 31, 1997, the interest rate
corridors have an average strike price of 6.6% and an average limit rate of
8.2% (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 $84,000, $352,000, $468,000 and $174,000 during
the three months ended March 31, 1997 and the years ended December 31, 1996,
1995 and 1994, respectively. See Note 14 to the Notes to Consolidated
Financial Statements.
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.
39
<PAGE>
The following table summarizes the anticipated maturities or repricing of
the Bank's interest-earning assets and interest-bearing liabilities as of March
31, 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.................................... $ 6,104 $ 781 $ 1,785 $ 589 $ 125,965 $ 135,224
Adjustable............................... 303,131 90,895 45,544 -- 119 439,689
Multi-family residential:
Fixed.................................... 30 75 224 3,486 19,522 23,337
Adjustable............................... 391,484 20,290 878 337 1,427 414,416
Commercial, industrial and land:
Fixed.................................... 190 1,117 3,257 -- 12,748 17,312
Adjustable............................... 91,862 4,452 -- 432 -- 96,746
Other loans (3)........................... 1,959 1,615 2,736 322 2,168 8,809
Mortgage-backed securities (4)............. 165,933 99,916 84,330 33,941 134,490 518,610
Other interest-earning assets (5).......... 8,282 -- -- -- 15,629 23,911
------------ ---------- ----------- ----------- ---------- ------------
Total.................................... $ 968,975 $ 219,141 $ 138,754 $ 39,107 $ 312,068 $ 1,678,045
------------ ---------- ----------- ----------- ---------- ------------
------------ ---------- ----------- ----------- ---------- ------------
Interest-bearing liabilities:
Deposits:
NOW accounts............................. $ 66,700 $ -- $ -- $ -- $ -- $ 66,700
Passbook accounts........................ 264,936 -- -- -- -- 264,936
Money market accounts.................... 22,573 -- -- -- -- 22,573
Certificates of deposit.................. 261,122 570,315 144,284 3,324 2,792 981,837
Borrowings................................ 20,494 195,156 75,000 -- -- 290,650
------------ ---------- ----------- ----------- ---------- ------------
Total.................................... $ 635,825 $ 765,471 $ 219,284 $ 3,324 $ 2,792 $ 1,626,696
------------ ---------- ----------- ----------- ---------- ------------
------------ ---------- ----------- ----------- ---------- ------------
Excess (deficiency) of interest-earning
basis over interest-bearing.............. $ 333,150 $ (546,330) $ (80,530) $ (35,783) $ 309,276 $ 51,349
------------ ---------- ----------- ----------- ---------- ------------
------------ ---------- ----------- ----------- ---------- ------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities............. $ 333,150 $ (212,568) $ (293,098) $ (257,315) $ 51,961
------------ ---------- ----------- ----------- ----------
------------ ---------- ----------- ----------- ----------
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of
total assets............................. 19.28% (12.30)% (16.96)% (14.89)% 3.01%
------------ ---------- ----------- ----------- ----------
------------ ---------- ----------- ----------- ----------
</TABLE>
- ------------------------
(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 $13.9
million at March 31, 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
$12.0 million.
(5) Comprised of short-term investments, securities purchased under agreements
to resell, investment securities and FHLB stock.
40
<PAGE>
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 March 31, 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
-------------------------------
CHANGE (IN BASIS NET INTEREST INCOME
POINTS) IN INTEREST (NEXT EIGHT
RATES(1) QUARTERS) NPV
- ------------------------ ------------------- ----------
(IN THOUSANDS)
<S> <C> <C>
+400 $ (25,210) $ (41,986)
+300 (17,990) (27,916)
+200 (11,238) (19,175)
+100 (5,347) (8,915)
0 0 0
-100 3,522 3,277
-200 4,791 8,366
-300 8,943 30,066
-400 10,891 59,577
</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 March 31, 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.
41
<PAGE>
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 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 March
31, 1997, the Bank had $330 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 March 31, 1997, the Bank had outstanding commitments (including unused
lines of credit) to originate and/or purchase mortgage and non-mortgage loans of
$8.3 million. Certificates of deposit which are scheduled to mature within one
year totalled $831.4 million at March 31, 1997, and borrowings that are
scheduled to mature within the same period amounted to $215.6 million. The Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments.
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 March 31, 1997.
42
<PAGE>
<TABLE>
<CAPTION>
REQUIRED(4) ACTUAL EXCESS
----------------- ----------------- -----------------
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.... 1.50% $26,036 4.91% $85,223 3.41% $59,187
Core capital(1)..... 3.00 52,072 4.91 85,223 1.91 33,151
Risk-based
capital(2)(3)..... 8.00 72,354 10.68 96,563 2.68 24,209
</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.
(3) Tangible and core capital are computed as a percentage of adjusted total
assets of $1.7 billion. Risk-based capital is computed as a percentage of
adjusted risk-weighted assets of $904 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.
43
<PAGE>
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 securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements. Specifically, the Statement requires all entities to provide
the capital structure disclosures previously required by Opinion 15. Companies
that were exempt from the provisions of Opinion 15 will now need to make those
disclosures.
44
<PAGE>
BUSINESS OF THE BANK
LENDING ACTIVITIES
GENERAL.
At March 31, 1997, the Bank's total loan portfolio amounted to $1.1
billion, which represented 64.9% of the Bank's $1.7 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
March 31, 1997, such loans constituted $582.1 million and $443.5 million, or
51% 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 $113.5 million or 10% of the total loan portfolio at March
31, 1997. Under the Bank's new management, the Bank will be increasing its
focus on the origination of various commercial business and consumer loan
products. First initiated during 1996, at March 31, 1997, commercial business
and consumer loans (including loans secured by deposits) amounted to $4.2
million and $4.6 million, respectively. The Bank's total loan portfolio also
included a small amount of land and other miscellaneous loans, which amounted
to $1.6 million at March 31, 1997. None of these last three loan categories
constituted 1.0% of the total loan portfolio.
As a federally chartered savings institution, 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
believes that substantially all of the loans in the Bank's portfolio are secured
by properties located in California. The Bank's primary market area is Los
Angeles County and, to a lesser extent, Orange and Ventura Counties in Southern
California.
45
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
MARCH 31,
1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential.......... $ 582,149 51% $ 595,915 51% $ 658,412 52% $ 721,801 54%
Multi-family residential........... 443,500 39 453,064 39 479,100 38 480,547 36
Commercial and industrial.......... 113,521 10 110,931 10 120,109 10 129,768 10
Land and other..................... 1,634 -- 1,639 -- 3,176 -- 7,546 --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---
Total mortgage loans............... 1,140,804 100 1,161,549 100 1,260,797 100 1,339,662 100
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---
Other loans:
Commercial......................... 4,211 -- 3,523 -- -- -- -- --
Consumer........................... 2,738 -- 988 -- -- -- -- --
Secured by deposits................ 1,851 -- 2,132 -- 1,976 -- 908 --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---
Total loans receivable............. 1,149,604 100% 1,168,192 100% 1,262,773 100% 1,340,570 100%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---
---------- ---------- ---------- ---
Less: Undistributed loan proceeds.. 1,195 473 28 1,376
Unamortized net loan discounts and
deferred origination fees........ 8,261 2,732 3,021 3,336
Allowance for loan losses.......... 18,763 23,280 31,572 29,801
---------- ---------- ---------- ----------
Loans receivable, net.............. $1,121,385 $1,141,707 $1,228,152 $1,306,057
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<CAPTION>
-----------------------------------------------
1993 1992
---------------------- ----------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential.......... $ 759,157 55% $ 905,981 62%
Multi-family residential........... 457,740 33 403,725 27
Commercial and industrial.......... 142,468 11 144,790 10
Land and other..................... 11,127 1 10,817 1
---------- --- ---------- ---
Total mortgage loans............... 1,370,492 100 1,465,313 100
---------- --- ---------- ---
Other loans:
Commercial......................... -- -- -- --
Consumer........................... -- -- -- --
Secured by deposits................ 724 -- 1,029 --
---------- --- ---------- ---
Total loans receivable............. 1,371,216 100% 1,466,342 100%
---------- --- ---------- ---
--- ---
Less: Undistributed loan proceeds.. 1,087 335
Unamortized net loan discounts and
deferred origination fees........ 3,205 4,874
Allowance for loan losses.......... 20,426 18,509
---------- ---------
Loans receivable, net.............. $1,346,498 $1,442,624
---------- ---------
---------- ---------
</TABLE>
46
<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization or repricing of the Bank's
total loan portfolio at March 31, 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 MARCH 31,
TOTAL AT -------------------------------------------------------------
MARCH 31, 2001- 2003- 2009- THERE-
1997 1998 1999 2000 2002 2008 2014 AFTER
---------- -------- ------- ------ ------ ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family
residential....... $ 582,149 $407,498 $41,025 $6,010 $1,005 $10,226 $12,017 $104,368
Multi-family
residential....... 443,500 417,539 293 181 4,452 2,452 16,299 2,284
Commercial,
industrial and
land.............. 115,155 98,719 2,876 234 578 12,312 436 --
Other loans:
Commercial.......... 4,211 1,108 1,817 538 70 678 -- --
Consumer............ 2,738 731 72 186 249 138 794 568
Secured by
deposits.......... 1,851 1,725 70 29 27 -- -- --
---------- -------- ------- ------ ------ ------- ------- --------
Total (1)........... $1,149,604 $927,320 $46,153 $7,178 $6,381 $25,806 $29,546 $107,220
---------- -------- ------- ------ ------ ------- ------- --------
---------- -------- ------- ------ ------ ------- ------- --------
</TABLE>
- ------------------------
(1) Of the $221 million of loan principal repayments contractually due after
March 31, 1998, $172 million have fixed rates of interest and $49 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
47
<PAGE>
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 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. As discussed below, the lending products currently being
offered by the Bank are more rate sensitive or better match funded, which
management is willing to keep in portfolio.
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
48
<PAGE>
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 quarter 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
$875.2 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 March 31, 1997, the Bank's regulatory limit on
loans-to-one borrower was $15.2 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 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 March 31, 1997.
49
<PAGE>
The following table shows the activity in the Bank's loans during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
Three Months Ended ----------------------------------------
March 31, 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 $ 1,376,716
Originations of loans:
Mortgage loans:
Single-family residential....................... 7,093 37,129 19,593 538,703
Multi-family residential...................... 2,480 7,823 1,120 42,746
Commercial and industrial..................... 3,285 6,945 878 299
Land.......................................... -- -- 746 150
Other loans:
Commercial.................................... 1,162 4,303 -- --
Consumer...................................... 1,813 1,069 -- --
Secured by deposits........................... 505 4,389 4,482 1,778
-------------------- ------------ ------------ ------------
Total originations.......................... 16,338 61,658 26,819 583,676
-------------------- ------------ ------------ ------------
Purchases of loans:
Mortgage loans:
Single-family residential....................... 2,508 -- -- 11,069
Multi-family residential........................ 4,775 -- -- 868
-------------------- ------------ ------------ ------------
Total purchases............................. 7,283 -- -- 11,937
-------------------- ------------ ------------ ------------
Total originations and purchases............ 23,621 61,658 26,819 595,613
-------------------- ------------ ------------ ------------
Loans sold:
Single-family residential....................... -- -- (27,174) (419,845)
-------------------- ------------ ------------ ------------
Total sold.................................. -- -- (27,174) (419,845)
Repayments........................................ (24,745) (113,721) (85,957) (161,690)
Transfers to real estate owned.................... (17,464) (42,518) (20,431) (21,278)
-------------------- ------------ ------------ ------------
Net activity in loans............................. (18,588) (94,581) (106,743) (7,200)
-------------------- ------------ ------------ ------------
Gross loans held at end of period................. $ 1,149,604 $ 1,168,192 $ 1,262,773 $ 1,369,516
-------------------- ------------ ------------ ------------
-------------------- ------------ ------------ ------------
</TABLE>
50
<PAGE>
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 March 31, 1997,
$582.1 million or 51% 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 March 31, 1997, the Bank had $136.2
million or 23% of fixed rate single-family residential loans in its
portfolio. The Bank previously offered a "7/23" loan product, the interest
rate on which is fixed at an initial 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., 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. As of March 31, 1997, the Bank had $ million
of such 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. Approximately 77% of the
single-family residential loans in the Bank's loan portfolio at March 31,
1997 had adjustable interest rates. At March 31, 1997, 79% 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
51
<PAGE>
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 March 31, 1997, the Bank had approximately $283 million of single-family
residential loans with negative amortization features.
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 March 31, 1997, $20.0 million or 3.4% 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 March 31, 1997, the
Bank had an aggregate of $443.5 million and $113.5 million invested in
multi-family and commercial real estate loans, respectively, or 39% and 10%
of the total loan portfolio, respectively. The
52
<PAGE>
Bank's multi-family loans are secured by residential buildings with more than
four units, while the Bank's commercial real estate loans are secured by
light industrial, hotel and retail strip shopping centers. 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
March 31, 1997, an aggregate of $7.1 million and $21.8 million of such loans
were on a non-accrual status and in real estate owned, respectively, which
constituted 72% 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
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
three
53
<PAGE>
months ended March 31, 1997 and the year ended December 31, 1996, the Bank
originated $3.5 million and $9.8 million, respectively, of commercial
business and consumer loans, which amounted to 21.3% and 15.8% of total
originations during such respective periods. In addition, at March 31, 1997,
the Bank had commitments to originate $2.3 million of such loans.
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 March 31, 1997, approximately $454,000 of the Bank's $4.2
million in commercial business loans were comprised of SBA loans, and the
Bank had commitments to lend $2.6 million in SBA loans as of that date.
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 March 31, 1997, home equity loans and lines amounted to $2.0 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).
54
<PAGE>
The Bank also originates new and used loans secured by 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 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 March 31, 1997, the Bank had $527,000 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
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 fifteenth day
after a payment is due, at which time a late payment fee is assessed. In most
cases, deficiencies are cured promptly. If a delinquency extends beyond 15
days, the loan and payment history are reviewed and efforts are made to
collect the loan. Under new management, the Bank initiates the foreclosure
process by sending a notice of intent to foreclose on the 16th day. When the
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 $12.3 million at March 31,
1996 to $7.2 million at March 31, 1997.
Non-Performing Assets. All loans are reviewed on a regular basis and are
placed on non-accrual status when management has substantive doubts about
payment in full of both principal and interest or either principal or interest
is contractually in default for a period of 90 days or more unless management
has documented an analysis that demonstrates that such loan is both well secured
and in the process of collection. The Bank provides an allowance for the loss of
previously accrued but uncollected interest on all non-accrual loans. Loans are
returned to accrual status when the borrower has had a period of sustained
repayment performance. Management considers all loans formerly treated as
troubled debt restructurings, discussed below, to be impaired loans in the year
of restructuring.
55
<PAGE>
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or 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' 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.
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.
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 properties, regardless of performance, are reviewed at least once
each year. Properties that are 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. Properties that are non-performing, real estate owned, subject to
workout or forbearance or classified substandard with three or more
mitigating factors are transferred to a Special Assets Department.
56
<PAGE>
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,
--------------------------------------------------------
AT MARCH 31,
1997 1996 1995 1994 1993 1992
------------ --------- ---------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans, net:
Mortgage loans:
Single-family residential......................... $ 6,770 $ 7,947 $ 10,467 $ 14,780 $ 27,310 $ 26,764
Multi-family residential.......................... 6,044 9,198 16,840(1) -- 4,138 1,159
Commercial and industrial......................... 1,096 1,093 8,173 8,446 2,001 710
Land.............................................. -- -- 112 4,232 5,050 --
---------- --------- ---------- ----------- --------- ---------
Total non-performing loans, net................... 13,910 18,238 35,592 27,458 38,499 28,633
---------- --------- ---------- ----------- --------- ---------
Real estate owned, net:
Single-family residential......................... 4,024 3,268 6,387 5,322 16,568 19,856
Multi-family residential.......................... 14,581 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...................... 26,089 20,436 10,915 10,485 31,550 38,655
---------- --------- ---------- ----------- --------- ---------
Total non-performing assets....................... $ 39,999 $ 38,674 $ 46,507 $ 37,943 $ 70,049 $ 67,288
---------- --------- ---------- ----------- --------- ---------
---------- --------- ---------- ----------- --------- ---------
Troubled debt restructurings...................... $ 7,539 $ 7,544 $ 6,133 $ 40,794(1) $ 6,902 $ 4,315
---------- --------- ---------- ----------- --------- ---------
---------- --------- ---------- ----------- --------- ---------
Total non-performing assets and troubled
debt restructuring.............................. $ 47,538 $ 46,218 $ 52,640 $ 78,737 $ 76,951 $ 71,600
---------- --------- ---------- ----------- --------- ---------
---------- --------- ---------- ----------- --------- ---------
Non-performing loans to total loans, net.......... 1.24% 1.60% 2.90% 2.06% 2.85% 1.98%
Non-performing loans to total assets.............. 0.81 1.04 2.25 1.60 2.11 1.40
Non-performing assets to total assets............. 2.32 2.21 2.94 2.21 3.83 3.29
Total non-performing assets and troubled debt
restructurings to total assets.................. 2.75 2.64 3.33 4.58 4.21 3.50
</TABLE>
- ------------------------
(1) Reflects to a large extent problems associated with 1994 Northridge
earthquake.
The interest income that would have been recorded during the three months
ended March 31, 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 $300,000, $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
57
<PAGE>
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 $47.5
million or 2.8% of total assets at March 31, 1997. Of the Bank's $13.9
million of non-performing loans at March 31, 1997, the largest concentration
consisted of four loans on apartment buildings, with a current balance of
$5.7 million. These loans have been classified as collateral dependent, and
as of March 31, 1997 were carried at fair value. Based on recent appraisals,
the Bank charged against the allowance for loan losses $619,000 during the
June 1997 quarter. The Bank's $26.1 million of real estate owned at March 31,
1997 was comprised of 14 multi-family and commercial properties aggregating
$22.1 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
March 31, 1997 of $6.6 million. The second largest property had a net book
value as of March 31, 1997 of $2.3 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 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
March 31, 1997, an aggregate of $7.1 million and $21.8 million of such loans
were on a non-accrual status and in real estate owned, respectively, which
constituted 72% 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
58
<PAGE>
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."
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Allowance at beginning of period............... $ 23,280 $ 31,572 $ 31,572 $ 29,801 $ 20,426 $ 18,509 $ 19,499
--------- --------- --------- --------- --------- --------- ---------
Provision for loan losses...................... 205 1,182 2,884 8,823 22,330 8,393 8,482
Charge-offs:
Mortgage loans:
Single-family residential.................... (712) (844) (2,213) (3,416) (5,428) (3,507) (2,177)
Multi-family residential..................... (9) (1,699) (5,039) (1,854) (1,787) (817) (377)
Commercial and industrial.................... (4,125) (3,371) (3,371) (860) (5,813) (2,392) (5,214)
Land......................................... -- -- (1,478) (956) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total charge-offs.......................... (4,846) (5,914) (12,101) (7,086) (13,028) (6,716) (7,768)
--------- --------- --------- --------- --------- --------- ---------
Recoveries:
Mortgage loans:
Single-family residential.................... 124 1 16 34 73 235 --
Multi-family residential..................... -- -- 22 -- -- -- --
Commercial and industrial.................... -- 22 2 -- -- 5 --
Land......................................... -- -- 885 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total recoveries........................... 124 23 925 34 73 240 --
Recoveries credited to income.................. -- -- -- -- -- -- (1,704)
Allowance at end of period..................... $ 18,763 $ 26,863 $ 23,280 $ 31,572 $ 29,801 $ 20,426 $ 18,509
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Allowance for loan losses to
total nonperforming loans at
end of period................................ 134.89% 142.28% 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...... 87.48% 120.39% 90.30% 75.67% 43.66% 44.99% 56.18%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Allowance for loan losses to
total loans, net at
end of period............ 1.67% 2.24% 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 $4.7 million, $5.9 million, $11.2 million, $7.1 million and $13.0 million
(which included $2.1 million of charge-offs relating to mortgage-backed
securities), during the three months
59
<PAGE>
ended March 31, 1997 and 1996 and the years ended December 31, 1996, 1995 and
1994, respectively. The net charge-offs recognized by the Bank during the
three months ended March 31, 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. As a result of such transfers, 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 March 31, 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.
60
<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>
MARCH 31, 1997
----------------
PERCENT
TO TOTAL
AMOUNT ALLOWANCE
------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Residential real
estate.............. $ 4,016 21.4%
Multi-family
residential......... 11,319 60.3
Commercial, industrial
and land............ 3,319 17.7
Other loans........... 109 .6
------ --------
Total................. $18,763 100.0%
------ --------
------ --------
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
PERCENT
OF LOANS
IN EACH
PERCENT CATEGORY PERCENT
TO TOTAL TO TOTAL TO TOAL
AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential real
estate.............. $ 4,051 17.4% $ 5,109 16.2% $ 7,809 26.2%
Multi-family
residential......... 15,753 14.4 18,509 58.6 11,396 38.2
Commercial, industrial
and land............ 3,361 67.7 7,954 25.2 10,084 33.9
Other loans........... 115 .5 -- -- 512 1.7
------ -------- ------ -------- ------ --------
Total................. $23,280 100.0% $31,572 100.0% $29,801 100.0%
------ -------- ------ -------- ------ --------
------ -------- ------ -------- ------ --------
</TABLE>
61
<PAGE>
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 March 31, 1997, the Bank's securities portfolio consisted of $468.6
million of mortgage-backed securities, $457.8 million of which were classified
as available for sale and $10.7 million of which were classified as held to
maturity, and $38.0 million of U.S. Government agency obligations. Of the Bank's
total investment in mortgage-backed securities at March 31, 1997, $118.9 million
consisted of Government National Mortgage Association ("GNMA") certificates,
$117.5 million consisted of FNMA certificates and $181.5 million consisted of
FHLMC certificates. Of this $468.6 million of mortgage-backed securities at
March 31, 1997, $261.9 million consisted of fixed rate securities and $216.6
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 $506.6 million at March
31, 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
intermediaries (generally U.S. Government agencies and government sponsored
enterprises) that pool and repackage the participation interests in the form of
62
<PAGE>
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.
63
<PAGE>
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,
----------------------------------------------------------------------
MARCH 31,
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........... $ 38,044 $ 38,044 $ 38,714 $ 38,714 $ 9,944 $ 9,944 $ -- $ --
Mortgage-backed securities..... 457,829 457,829 453,587 453,587 231,651 231,651 7,677 7,677
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 495,873 $ 495,873 $ 492,301 $ 492,301 $ 241,595 $ 241,595 $ 7,677 $ 7,677
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Held to maturity:
Mortgage-backed securities..... $ 10,728 $ 10,426 $ 20,971 $ 20,899 -- -- $ 304,620 $ 289,737
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 10,728 $ 10,426 $ 20,971 $ 20,899 -- -- $ 304,620 $ 289,737
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The following table sets forth the activity in the Bank's aggregate
securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
THREE MONTHS
ENDED MARCH 31, 1997 1996 1995 1994
-------------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities at beginning of period..................... $ 513,272 $ 241,645 $ 312,297 $ 362,007
Purchases............................................. 21,560 487,719 212,155 150,985
Sales................................................. -- (158,448) (222,947) (81,620)
Repayments and prepayments............................ (22,305) (53,207) (58,245) (115,097)
Increase in unrealized losses on
available-for-sale securities(1).................... (5,926) (4,437) (1,615) (1,865)
Charge-offs........................................... -- -- -- (2,113)
-------- ---------- ---------- ----------
Securities at end of period(2)(3)..................... $ 506,601 $ 513,272 $ 241,645 $ 312,297
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) At March 31, 1997, the cumulative unrealized losses on securities classified
as available-for-sale amounted to $12.0 million, which reduces stockholder's
equity.
(2) At March 31, 1997, the book value and market value of the Bank's securities
(including held-to-maturity and available for sale securities) amounted to
$507 million and $507 million, respectively.
(3) At March 31, 1997, $214.7 million or 42.4% 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.
64
<PAGE>
The following table sets forth certain information regarding the maturities
of the Bank's securities (both held to maturity and available for sale) at March
31, 1997.
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
---------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
UNDER 1 AVERAGE 1-5 AVERAGE 6-10 AVERAGE OVER 10 AVERAGE
YEAR YIELD YEARS YIELD YEARS YIELD YEARS YIELD
------------- --------- --------- --------- --------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and agencies......... -- -- $ 9,606 5.65% $19,125 6.37% $ 9,313 6.89%
Mortgage-backed securities........... -- -- 96 2.00 24,568 6.77 443,893 6.55
------------- --------- --------- ---------
-- $ 9,702 $43,693 $453,206
------------- --------- --------- ---------
------------- --------- --------- ---------
</TABLE>
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.
65
<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>
MARCH 31, 1997
---------------------------
AVERAGE AVERAGE
BALANCE RATE PAID
------------ -------------
<S> <C> <C>
Passbook accounts...... $ 273,588 4.48%
NOW accounts........... 70,023 1.21
Money market accounts.. 23,339 2.60
Term certificates...... 991,062 5.59
------------
Total deposits......... $1,358,012 5.09%
------------ -----
------------ -----
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31,
------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- --------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
------------ ------------- ------------ ------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts...... $ 264,677 4.64% $ 95,335 3.67% $ 68,518 2.32%
NOW accounts........... 58,511 0.77 54,837 0.84 59,427 0.90
Money market accounts.. 29,665 2.52 47,269 3.01 77,739 2.41
Term certificates...... 1,069,484 5.76 1,212,989 5.73 1,186,191 4.55
------------ ------------ ------------ -----
Total deposits......... $1,422,337 5.28% $1,410,430 5.31% $1,391,875 4.17%
------------ ----- ------------ ----- ------------ -----
------------ ----- ------------ ----- ------------ -----
</TABLE>
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, 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... (32,203) (160,804) 35,836 12,093
Interest credited......................... 13,675 58,729 53,264 38,307
---------------- ----------- ------------ ------------
Net increase (decrease) in deposits....... (18,528) (102,075) 89,100 50,400
---------------- ----------- ------------ ------------
Ending balance............................ $ 1,352,715 $ 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,
--------------------------------
MARCH 31, 1997 1996 1995 1994
-------------- --------- ---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
0.00% to 2.99%............ $ 5,106 $ 4,299 $ 3,964 $ 1,637
3.00% to 3.99%............ 3,629 3,833 4,900 126,533
4.00% to 4.99%............ 46,408 46,771 49,037 459,920
5.00% to 6.99%............ 918,861 909,895 1,092,316 597,046
7.00% to 8.99%............ 7,771 36,244 47,613 15,898
--------- ---------- ----------- -----------
$981,775 $1,001,042 $1,197,830 $1,201,034
</TABLE>
66
<PAGE>
The following table sets forth the amount and remaining maturities of the
Bank's term certificates at March 31, 1997.
<TABLE>
<CAPTION>
OVER SIX OVER TWO
MONTHS OVER ONE YEARS THROUGH
SIX MONTHS THROUGH ONE YEAR THROUGH YEARS OVER THREE
AND LESS YEAR TWO YEARS THREE YEARS
----------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
0.00% to 1.99% $ 845 $ 4 $ -- $ -- $ --
2.00% to 2.99% 3,327 486 222 164 58
3.00% to 3.99% 3,607 -- 11 6 5
4.00% to 4.99% 40,812 4,893 700 3 --
5.00% to 6.99% 416,717 361,741 118,505 15,851 6,047
7.00% to 8.99% 6,429 793 171 378 --
--------- -------- -------- -------- ------
Total $ 471,737 $367,917 $119,609 $16,402 $6,110
--------- -------- -------- -------- ------
--------- -------- -------- -------- ------
</TABLE>
As of March 31, 1997, the aggregate amount of outstanding time certificates
of deposit in amounts greater than or equal to $100,000, was approximately $221
million. The following table presents the maturity of these time certificates of
deposit at such dates.
<TABLE>
<CAPTION>
MARCH 31, 1997
(IN THOUSANDS)
--------------
<S> <C>
3 months or less.................................................................................. $ 64,095
Over 3 months through 6 months.................................................................... 48,962
Over 6 months through 12 months................................................................... 79,706
Over 12 months.................................................................................... 28,629
--------------
$ 221,392
--------------
--------------
</TABLE>
67
<PAGE>
The following table sets forth certain information regarding the short-term
borrowings of the Bank at or for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------
1997 1996 1996 1995 1994
---------- --------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB of San Francisco advances:
Average balance outstanding............................ $ 80,000 $ 31,746 $ 53,666 $ 195,998 $310,262
Maximum amount outstanding at any
month-end during the period........................... 80,000 31,746 80,000 310,000 310,000
Balance outstanding at end of period................... 80,000 31,746 80,000 31,746
Average interest rate during the period................ 5.91% 5.84% 5.49% 5.92% 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............................ $ 272,238 $ 86,522 $ 179,082 $ 68,993 $140,943
Maximum amount outstanding at any
month-end during the period........................... 229,988 135,437 219,229 271,959 154,210
Balance outstanding at end of period................... 210,650 135,437 192,433 --
Average interest rate during the period................ 5.53% 5.30% 6.09% 5.16% 4.34%
Average interest rate at end of period................. 5.73% 5.31% 5.91% -- --
</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 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 March 31, 1997, the Bank had two fixed rate advances from the
FHLB of San Francisco. At March 31, 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
68
<PAGE>
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 March 31, 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 March 31, 1997, the Bank's investment in its service
corporation subsidiaries amounted to $2.5 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 March 31, 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.
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 three
months ended March 31, 1997 and the years ended December 31, 1996 and 1995, SCS
recognized net earnings of $99,000, $336,000 and $40,000, respectively.
69
<PAGE>
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 initial 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.
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<PAGE>
OFFICE LOCATIONS
The following table set forth certain information with respect to the Bank's
offices at March 31, 1997.
<TABLE>
<CAPTION>
LEASE/OWNED NET BOOK VALUE TOTAL DEPOSITS
LEASE EXPIRATION OF PROPERTY AT AT
OFFICE LOCATION DATE MARCH 31, 1997 MARCH 31, 1997
- ------------------------------------------------- -------------------- --------------- ---------------
<S> <C> <C> <C>
(IN THOUSANDS)
Executive Office (and Branch):
Los Angeles 5900 Wilshire Boulevard Leased
15th Floor 04/2006
Los Angeles, CA 90036 Option: 1--5 years $ 2,280 $ 9,081
Branch Office:
Beverly Hills Leased
9100 Wilshire Boulevard 03/2000
Beverly Hills, CA 90212 Option: 2--10 years 905 136,649
Orange Leased
216 E. Chapman Avenue 01/2001
Orange, CA 92866-1506 Option: 2--5 years 158 56,430
Pacific Palisades Leased
15305 Sunset Boulevard 12/2006
Pacific Palisades, CA 90272 Option: 1--10 years 114 58,075
Montebello Leased
1300 W. Beverly Boulevard 08/2003
Montebello, CA 90640 Option: 1--10 years 124 91,521
Garden Grove
12112 Valley View
Garden Grove, CA 92845-1796 Owned 108 81,186
Simi Valley Leased
1445 Los Angeles Avenue 07/1999
Simi Valley, CA 93065 Option: 2--30 months
followed by 3--5 years 63 95,737
Sylmar Leased
13831 Foothill Boulevard 09/2002
Sylmar, CA 91342 Option: 2--10 years 86 45,216
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
LEASE/OWNED NET BOOK VALUE TOTAL DEPOSITS
LEASE EXPIRATION OF PROPERTY AT AT
OFFICE LOCATION DATE MARCH 31, 1997 MARCH 31, 1997
- ------------------------------------------------- -------------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Buena Park Leased
5470 Beach Boulevard 12/2004
Buena Park, CA 90621 Option: 3--5 years 96 9,364
North Hollywood Leased
12848 Victory Boulevard 05/2000 68 $90,670
North Hollywood, CA 91606
Beverly/Serrano Leased
4500 W. Beverly Boulevard 01/2006
Los Angeles, CA 90004 Option: 2--5 years 128 35,975
Woodland Hills Leased
20259 Ventura Boulevard 11/2009
Woodland Hills 91364 Option: 1--10 years 150 62,300
Burbank Leased
240 North San Fernando Road 06/2000
Burbank, CA 91502 Option: 2--5 years 384 164,793
Santa Clarita
26425 Sierra Highway
Santa Clarita, CA 91321 Owned 181 63,397
Ventura Leased
996 South Seaward Avenue 10/1998
Ventura, CA 93001 Option: 2--3 years 49 67,491
Calabasas
23642 Calabasas Road, Bldg. 2 Leased
Calabasas, CA 91302 03/2007 92 61,598
Irvine
15475 Jeffrey Road Leased
Irvine, CA 92620-4102 10/2005 189 61,662
Fairfax Leased
145 South Fairfax Avenue 01/2003
Los Angeles, CA 90036 Option: 1--5 years 81 70,082
San Pedro
28110 South Western Avenue
San Pedro, CA 80732 Owned 731 91,488
</TABLE>
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<PAGE>
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 THE DIRECTOR TERM
NAME AGE(1) SAVINGS BANK SINCE EXPIRES
- ------------------------------------------------------------------ ----------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Rudolf P. Guenzel 56 President, Chief 1995 1999
Executive Officer
and Director
Henry Peters 56 Chairman of the 1995 1998
Board, Director
Gerard Jervis 48 Director 1995 2000
Robert W. MacDonald 50 Director 1992 2000
</TABLE>
- ------------------------
(1) As of March 31, 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, Chief Executive
Officer and Director of SOCAL and 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
quarter Mr. Guenzel was hired as
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<PAGE>
President and Chief Executive Officer 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 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, 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.
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 SOCAL and 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 Comptroller 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
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<PAGE>
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.
75
<PAGE>
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 compensation exceeded
$100,000 for services rendered in all capacities during the fiscal year ended
December 31, 1996.
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPLE POSITION SALARY(1) BONUS AWARDS (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.
76
<PAGE>
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 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
77
<PAGE>
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 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
78
<PAGE>
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.
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<PAGE>
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.
Five Year
Average 5 Years of 10 Years of Over 10 Years
Compensation Service Service of Service
- ---------------- ----------- ----------- -------------
$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
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.
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.
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<PAGE>
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.
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<PAGE>
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 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
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<PAGE>
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 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 March 31, 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
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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 9.42%, its leverage
capital ratio was 4.91% and its total risk-based capital ratio was 10.68% at
March 31, 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 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.
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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 March 31, 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)
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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, 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.
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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
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.
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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 March 31, 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 alternative,
by qualifying under the Internal Revenue Code as a
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"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 March 31, 1997, under the expanded QTL test,
approximately 88.6% 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 recent legislation, SAIF-assessable deposits held as of March 31,
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.
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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 March 31, 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 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
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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 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
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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,
with the remaining $2.6 million to qualify as supplementary capital of the
Bank (and included as a component of total risk-based capital).
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 $75 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
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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 "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
to be carried back and deducted from taxable income for the three preceding
taxable years and carried forward and deducted from taxable income for the 15
succeeding taxable years. The Bank has federal tax net operating losses of
approximately $146.7 million.
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.
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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 has state tax net operating losses of approximately
$8.7 million.
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
94
<PAGE>
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 March 31, 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 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.
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<PAGE>
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) mostrecent 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
prior 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 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 prices per share as set forth below,
in cash, plus authorized, declared and unpaid dividends to the date of
redemption without interest.
96
<PAGE>
<TABLE>
<CAPTION>
IF REDEEMED DURING THE REDEMPTION PRICE
12-MONTH PERIOD PER SHARE OF THE
BEGINNING _________ BANK PREFERRED SHARES
- ------------------------ ---------------------------
<S> <C>
2002.................... $
2003....................
2004....................
2005....................
2006....................
2007 and thereafter.....
</TABLE>
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
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
97
<PAGE>
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.
98
<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
99
<PAGE>
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.
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.
100
<PAGE>
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.
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
101
<PAGE>
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.
102
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Unaudited Consolidated Financial Statements:
Consolidated Statements of Financial Condition at March 31, 1997 and December 31, 1996................... F-2
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996.......................................................................... F-3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996.......................................................................... F-5
Notes to Unaudited Consolidated Financial Statements..................................................... F-8
Audited Consolidated Financial Statements:
Independent Auditors' Report............................................................................. F-10
Report of Independent Public Accountants................................................................. F-11
Consolidated Statements of Financial Condition at December 31, 1996 and 1995............................. F-12
Consolidated Statements of Operations for each of the three years in the period ended December 31,
1996................................................................................................... F-13
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period
ended December 31, 1996................................................................................ F-15
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
1996................................................................................................... F-16
Notes to Consolidated Financial Statements............................................................... F-19
</TABLE>
F-1
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................ $ 13,590 14,673
Federal funds sold................................................................... 8,132 7,200
Securities available-for-sale, at estimated market values............................ 495,873 492,301
Mortgage-backed securities held-to-maturity, estimated market values of $10,426 at
March 31, 1997..................................................................... 10,728 20,971
Loans receivable, net................................................................ 1,121,385 1,141,707
Real estate held for investment and sale, net........................................ 27,997 22,561
Premises and equipment, net.......................................................... 5,988 6,262
Federal Home Loan Bank stock, at cost................................................ 15,629 15,380
Accrued interest receivable.......................................................... 11,217 11,611
Other assets......................................................................... 17,090 15,205
------------ -------------
Total assets................................................................... $ 1,727,629 1,747,871
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits............................................................................. $ 1,352,715 1,371,243
Securities sold under agreements to repurchase....................................... 210,650 192,433
Advances from the Federal Home Loan Bank............................................. 80,000 80,000
Accrued expenses and other liabilities............................................... 8,475 27,585
------------ -------------
Total liabilities.............................................................. 1,651,840 1,671,261
------------ -------------
------------ -------------
Commitments and contingencies
Shareholders' equity:
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
Additional paid-in capital......................................................... 142,538 142,538
Unrealized losses on securities available-for-sale................................. (12,010) (6,084)
Minimum pension liability, net of tax.............................................. (293) --
Accumulated deficit................................................................ (54,447) (59,845)
------------ -------------
Total shareholders' equity..................................................... 75,789 76,610
------------ -------------
Total liabilities and shareholders' equity..................................... $ 1,727,629 1,747,871
------------ -------------
------------ -------------
</TABLE>
F-2
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
--------------------------------
<S> <C> <C>
MARCH 31, 1997 MARCH 31, 1996
--------------- ---------------
Interest, fees and dividend income:
Short term investments......................................................... $ 267 299
Securities purchased under agreements to resell................................ 748 730
Investment securities.......................................................... 633 477
Mortgage-backed securities..................................................... 7,845 4,796
Loans receivable............................................................... 20,967 23,165
Federal Home Loan Bank stock................................................... 240 182
------ ------
Total interest, fees and dividend income..................................... 30,700 29,649
------ ------
Interest expense:
Deposits....................................................................... 17,036 19,892
Advances from the Federal Home Loan Bank....................................... 1,182 469
Securities sold under agreements to repurchase................................. 3,766 1,157
Hedging costs, net............................................................. 80 112
------ ------
Total interest expense....................................................... 22,064 21,630
------ ------
Net interest income.......................................................... 8,636 8,019
Provision for losses............................................................. 205 1,182
------ ------
Net interest income after provision for losses............................... 8,431 6,837
------ ------
Other income:
Loan service and loan related fees............................................. 313 376
Gain on mortgage-backed securities sales, net.................................. 40 3,209
Gain (loss) on loan and loan servicing sales, net.............................. 3,391 (14)
Income (loss) from real estate operations, net................................. 222 75
Other income................................................................... 372 259
------ ------
Total other income........................................................... 4,121 3,905
------ ------
Operating expenses:
Personnel and benefits......................................................... $ 2,780 2,640
Occupancy...................................................................... 1,740 1,421
FDIC insurance................................................................. 1,256 1,083
Professional services.......................................................... 191 (43)
Office related expenses........................................................ 862 887
Other.......................................................................... 325 346
------ ------
Total operating expenses..................................................... 7,154 6,334
------ ------
Earnings (loss) before income tax provision (benefit)........................ 5,398 4,408
Income tax provision (benefit)................................................... -- --
------ ------
Net earnings (loss).......................................................... $ 5,398 4,408
------ ------
------ ------
</TABLE>
F-3
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD
ENDED
------------------------------
<S> <C> <C>
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Cash flows from operating activities:
Net earnings................................................................... $ 5,398 4,408
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................ 308 498
Provisions for loan and real estate losses................................... 450 1,200
Amortization write-down for discontinued lease operations.................... (29) (32)
Increase in net deferred tax asset........................................... 195 --
Amortization and accretion of premiums, discounts and deferred fees.......... (99) (87)
Amortization of purchase accounting intangible assets, premiums and
discounts, net............................................................. 133 (26)
Gain on sale of investment and mortgage-backed securities.................... (40) (3,209)
(Gain) loss on sale of loans and loan servicing.............................. (3,391) 14
Gain on real estate sales.................................................... (486) (90)
Federal Home Loan Bank stock dividend........................................ (249) (188)
(Increase) decrease in accrued interest receivable........................... 394 (971)
Decrease in accrued interest payable......................................... (2,694) (204)
Decrease in other assets..................................................... (1,604) (2,087)
Decrease in accrued expenses................................................. (16,680) (744)
-------------- --------------
Net cash used in operating activities.................................... (18,394) (1,518)
-------------- --------------
Cash flows from investing activities:
Increase in securities purchased under agreements to resell.................... $ -- 35,000
Proceeds from sales of investment and mortgage-backed securities
available-for-sale........................................................... 40 36,213
Proceeds from loan sales....................................................... 8,594 --
Investment and mortgage-backed security principal repayments and maturities.... 21,742 10,461
Loan originations, net of repayments........................................... 2,325 11,686
Purchases of investments and mortgage-backed securities available-for-sale..... (21,561) (228,699)
Purchases of loans............................................................. (4,775) --
Costs capitalized on real estate............................................... (806) (1,211)
Proceeds from sale of real estate.............................................. 13,075 6,884
Additions to premises and equipment............................................ (80) (262)
-------------- --------------
Net cash (used in) provided by investing activities...................... 18,554 (129,928)
-------------- --------------
</TABLE>
F-4
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD
ENDED
------------------------------
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Net decrease in deposits....................................................... $ (18,528) (17,954)
Net increase in securities sold under agreements to repurchase................. 18,217 135,437
-------------- --------------
Net cash provided by (used in) financing activities...................... (311) 117,483
-------------- --------------
Net increase (decrease) in cash and cash equivalents..................... (151) (13,963)
Cash and cash equivalents at beginning of year................................... 21,873 19,049
-------------- --------------
Cash and cash equivalents at end of year......................................... $ 21,722 5,086
-------------- --------------
-------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest..................................................................... $ 24,675 21,315
-------------- --------------
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate....................................................... $ 17,464 22,185
Loans originated in connection with sale of foreclosed real estate........... 3,176 1,689
Transfer of mortgage-backed securities from held-to-maturity to available for
sale....................................................................... 10,243 --
-------------- --------------
-------------- --------------
</TABLE>
F-5
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997 AND 1996
(1) 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"), formerly known as Southern California Federal
Savings and Loan Association 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 Consolidated Financial Statements included herein have been prepared by
the Bank and are unaudited. In the opinion of management, all adjustments
(which) include only normal recurring adjustments) necessary to present fairly
the results of operations for the periods covered have been made. Certain
information and note disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been
omitted, although the Bank believes that the disclosures are adequate to make
the information presented not misleading.
It is suggested that these Consolidated Financial Statements be read in
conjunction with the audited December 31, 1996 Consolidated Financial Statements
and the notes thereto. The Consolidated Financial Statements ave been prepared
on a basis substantially consistent with that of the audited consolidated
financial statements referred to above. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported balances of certain assets and liabilities as of the balance sheet
dates and the revenues and expenses for the periods then ended. In those cases
where amounts reported in the Consolidated Financial Statements are
significantly influenced by such estimates and assumptions, actual results could
differ from those reported. Certain amounts in the prior periods' financial
statements have been reclassified to conform with the current period
presentation. The results for the periods covered hereby are not necessarily
indicative of the operating results for a full year.
The Consolidated Financial Statements include the accounts of the Bank and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
F-6
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997 AND 1996
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128 "Earnings per Share" (SFAS 128). SFAS 128 supersedes APB Opinion No. 15,
"Earnings per Share" (APB 15) and specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. SFAS will replace the presentation
of primary EPS with a presentation of basic EPS, and fully diluted EPS with
diluted EPS. SFAS 128 will also require dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the of the numerator of the diluted EPS computation.
This statement shall be effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. The Bank has determined that this statement will have no significant
impact on the financial position, or results of operations, or earnings per
share for 1997.
In February 1997, the FASB issued Statement of Financial Standards No. 129,
"Disclosure of Information about Capital Structure" (SFAS 129). This statement
requires disclosures about capital structures that had been included in a number
of previously existing separate statements and opinions. SFAS 129 requires an
entity to explain, in summary form within the financial statements, pertinent
rights and privileges of the various securities outstanding such as; dividend
and liquidation preferences, participation rights, call prices and dates,
conversion or exercise prices or rates and pertinent dates, sinking fund
requirements, unusual voting rights and significant terms of contracts to issue
additional shares. An entity is also to disclose within the financial statements
the number of shares issued upon conversion, exercise, or satisfaction of
required conditions during at least the most recent annual period. In addition,
with respect to preferred stock, an entity is to disclose, within the financial
statements, liquidation preferences of the stock, the aggregate r per share
amounts at which preferred stock may be called or subject to redemption and the
aggregate and per-share amount of arrearages in umulative preferred dividends.
This statement shall be effective for the financial statements for both interim
and Bank has determined that this Statement will have no significant impact on
its financial position or results of operations for 1997.
(3) 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
federally-chartered Savings Bank regulated by the OTS.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and the Board of Directors of
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 shareholders' 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 27, 1997, except as to note 20
to the Consolidated Financial Statements,
which is as of July 1, 1997.
F-8
<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.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 9, 1995
F-9
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Cash and cash equivalents............................................. $ 14,673 7,249
Federal funds sold.................................................... 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)............................................................. 492,301 241,645
Mortgage-backed securities held-to-maturity, estimated market values
of $20,899 at December 31, 1996 (notes 5 and 12).................... 20,971 --
Loans receivable, net (notes 6, 7 and 12)............................. 1,141,707 1,228,152
Real estate held for investment and sale, net (note 8)................ 22,561 16,288
Premises and equipment, net (note 9).................................. 6,262 7,788
Federal Home Loan Bank stock, at cost (note 12)....................... 15,380 14,527
Accrued interest receivable........................................... 11,611 9,438
Other assets.......................................................... 15,205 7,864
--------- ---------
Total assets.................................................. $1,747,871 1,579,751
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (note 10).................................................... $1,371,243 1,473,318
Securities sold under agreements to repurchase (note 11).............. 192,433 --
Advances from the Federal Home Loan Bank (note 12).................... 80,000 31,746
Accrued expenses and other liabilities................................ 27,585 7,238
--------- ---------
--------- ---------
Total liabilities............................................. 1,671,261 1,512,302
--------- ---------
Commitments and contingencies (notes 9 and 16)
Shareholders' 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
Additional paid-in capital.......................................... 142,538 142,538
Unrealized losses on securities available-for-sale.................. (6,084) (1,647)
Accumulated deficit................................................. (59,845) (73,443)
--------- ---------
Total shareholders' equity.................................... 76,610 67,449
--------- ---------
Total liabilities and shareholders' equity.................... $1,747,871 1,579,751
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest, fees and dividend income:
Short term investments......................................................... $ 1,195 2,498 2,327
Securities purchased under agreements to resell................................ 3,257 3,157 1,196
Investment securities.......................................................... 2,374 180 --
Mortgage-backed securities..................................................... 26,136 21,836 22,621
Loans receivable............................................................... 89,020 94,473 89,293
Federal Home Loan Bank stock................................................... 914 782 824
--------- --------- ---------
Total interest, fees and dividend income................................... 122,896 122,926 116,261
--------- --------- ---------
Interest expense:
Deposits (note 10)............................................................. 75,136 74,866 58,005
Advances from the Federal Home Loan Bank....................................... 3,207 11,376 15,511
Securities sold under agreements to repurchase................................. 10,901 7,067 6,112
Hedging costs, net (note 14)................................................... 387 1,685 8,610
--------- --------- ---------
Total interest expense..................................................... 89,631 94,994 88,238
--------- --------- ---------
Net interest income........................................................ 33,265 27,932 28,023
Provision for losses (note 7).................................................... 2,884 8,823 24,443
--------- --------- ---------
Net interest income after provision for losses............................. 30,381 19,109 3,580
--------- --------- ---------
Other income:
Loan service and loan related fees............................................. 1,378 1,582 1,968
Gain on mortgage-backed securities sales, net.................................. 3,638 641 485
(Loss) gain on loan and loan servicing sales, net (note 4)..................... (53) (166) 2,712
Income (loss) from real estate operations, net (note 8)........................ 1,946 (2,067) (5,398)
Other income................................................................... 1,215 513 360
--------- --------- ---------
Total other income......................................................... 8,124 503 127
--------- --------- ---------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating expenses:
Personnel and benefits......................................................... $ 10,763 12,108 19,059
Occupancy...................................................................... 6,389 7,022 8,807
FDIC insurance................................................................. 4,415 4,290 4,121
Professional services.......................................................... 771 2,050 2,007
Office related expenses........................................................ 3,992 3,958 4,441
Other.......................................................................... 1,593 1,478 2,443
--------- --------- ---------
Total operating expenses................................................... 27,923 30,906 40,878
--------- --------- ---------
Earnings (loss) before income tax provision (benefit)...................... 10,582 (11,294) (37,171)
Income tax provision (benefit) (note 13)......................................... (3,016) (2,646) 11,356
--------- --------- ---------
Net earnings (loss)........................................................ $ 13,598 (8,648) (48,527)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
SERIES B (LOSSES) ON
SENIOR SERIES A ADDITIONAL SECURITIES
PREFERRED PREFERRED COMMON PAID-IN AVAILABLE- ACCUMULATED
STOCK STOCK STOCK CAPITAL FOR-SALE DEFICIT
------------- --------------- ------------- ----------- ------------- -------------
<S> <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 (note 1).................. (4) (1) -- 60,369 -- --
Change in unrealized gains (losses) on
securities available-for-sale........... -- -- -- (1,615) -- (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)
-- -- --
-- -- --
----------- ------ -------------
----------- ------ -------------
<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 (note 1).................. 60,364
Change in unrealized gains (losses) on
securities available-for-sale...........
---------
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
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................................... $ 13,598 (8,648) (48,527)
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization......................................... 1,837 1,770 1,772
Provisions for loan and real estate losses............................ 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........... (150) (309) 1,229
(Decrease) increase in net deferred tax asset......................... (7,770) 7,880 13,071
Amortization and accretion of premiums, discounts and deferred fees... 515 158 1,354
Amortization of purchase accounting intangible assets, premiums and
discounts, net...................................................... (185) (234) (214)
Gain on sale of investment and mortgage-backed securities............. (3,638) (641) (470)
Loss (gain) on sale of loans and loan servicing....................... 53 166 (2,712)
Gain on real estate sales............................................. (2,710) (391) (196)
Federal Home Loan Bank stock dividend................................. (853) (803) (1,305)
(Increase) decrease in accrued interest receivable.................... (2,173) (176) 815
Increase (decrease) in accrued interest payable....................... 5,543 (771) (4,025)
(Decrease) increase in other assets................................... (10,317) (1,796) 24,355
Increase (decrease) in accrued expenses............................... 14,954 (409) (162)
---------- ------------- -------------
Net cash provided by (used in) operating activities................. 23,161 1,400 (10,217)
---------- ------------- -------------
Cash flows from investing activities:
Increase (decrease) in securities purchased under agreements to
resell.............................................................. $ 35,000 (35,000) --
Proceeds from sales of investment and mortgage-backed securities
available-for-sale.................................................. 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................... -- 27,541 394,565
Investment and mortgage-backed security principal repayments and
maturities.......................................................... 52,380 58,020 115,156
Loan originations, net of repayments.................................. 41,610 50,391 (439,091)
Purchases of investments and mortgage-backed securities
available-for-sale.................................................. (466,748) (212,155) (19,641)
Purchase of mortgage-backed securities held-to-maturity............... (20,971) -- (99,395)
Purchases of loans.................................................... -- -- (11,937)
Costs capitalized on real estate...................................... (2,228) (262) (1,026)
Proceeds from sale of real estate..................................... 40,217 20,299 36,637
Additions to premises and equipment................................... (1,081) (886) (1,671)
Sales of premises and equipment....................................... 785 1,027 15
Redemption of FHLB stock.............................................. -- 2,914 2,899
---------- ------------- -------------
Net cash (used in) provided by investing activities................. (158,949) 135,479 58,601
---------- ------------- -------------
</TABLE>
F-14
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------- -------------
<S> <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................................... (102,075) 89,100 (4,920)
Net increase (decrease) in securities sold under agreements to
repurchase.......................................................... 192,433 -- (46,985)
Issuance of FHLB advances............................................. 113,900 12,188,746 2,451,000
Repayment of FHLB advances............................................ (65,646) (12,467,000) (2,455,000)
---------- ------------- -------------
Net cash provided by (used in) financing activities................. 138,612 (128,790) (55,905)
---------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................ 2,824 8,089 (7,521)
Cash and cash equivalents at beginning of year.......................... 19,049 10,960 18,481
---------- ------------- -------------
Cash and cash equivalents at end of year................................ $ 21,873 19,049 10,960
---------- ------------- -------------
---------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................................ $ 83,691 95,698 83,653
Income taxes........................................................ 246 4 39
---------- ------------- -------------
---------- ------------- -------------
Supplemental schedule of non cash investing and financing activities:
Securitization of mortgage loans...................................... $ -- -- 31,997
Foreclosed real estate................................................ 42,518 20,431 21,278
Loans originated in connection with sale of foreclosed real estate.... 12,608 6,412 7,360
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(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.
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-16
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(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
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 shareholders' 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-17
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(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-18
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(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-19
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(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.
RECLASSIFICATION
Certain amounts in prior years' financial statements have been reclassified
to conform to the current financial statement presentation.
(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 $58,919,000,
$51,847,000 and $27,521,000 during each of the years ended December 31, 1996,
1995 and 1994, 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
F-20
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(2) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (CONTINUED)
during 1994. The weighted average interest rate on such agreements was
approximately 5.53%, 6.17% and 4.41% during 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 December 31, 1996 and 1995 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
UNREALIZED UNREALIZED FAIR
AMORTIZED COST GAINS LOSSES VALUE
-------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
1996:
Debt securities issued by government agency-- due after
one year through five years........................... $ 40,023 -- (1,309) 38,714
Mortgage-backed securities.............................. 458,362 170 (4,945) 453,587
-------------- --- ----------- -------------
Total securities available-for-sale................... $ 498,385 170 (6,254) 492,301
-------------- --- ----------- -------------
-------------- --- ----------- -------------
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.
Proceeds from sales of mortgage-backed securities available-for-sale, were
approximately $162,087,000, $184,877,000 and $49,837,000 in each of the years
ended December 31, 1996, 1995 and 1994, respectively, and resulted in gross
realized gains of approximately $3,860,000, $551,000 and $898,000, respectively,
and gross realized losses of approximately $222,000 and $18,000 in the years
ended December 31, 1996 and 1995, respectively. There were no gross realized
losses in the year ended December 31, 1994.
F-21
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(3) SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
At 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>
1996 1995
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
ESTIMATED ESTIMATED
FAIR FAIR
AMORTIZED COST VALUE AMORTIZED COST VALUE
-------------- ------------- --------------- -------------
Pledged against:
Securities sold under agreements to repurchase... $ 209,328 206,264 -- --
Advances from Federal Home Loan Bank............. 94,824 93,795 37,503 37,150
Swap and corridor agreements..................... 8,442 8,259 6,141 5,987
Treasury tax and loan Account.................... 5,056 4,874 -- --
Loan servicing custodial deposit accounts........ 4,614 4,554 5,826 5,812
-------------- ------------- ------ ------
$ 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 December 31, 1996 and 1995.
There were no loans sold in 1996. Proceeds from sales of loans held-for-sale
were approximately $27,541,000 and $394,565,000 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 $170,000 and
$1,270,000 and gross realized losses of approximately $296,000 and $1,175,000 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,
was approximately $2,951,000 for the year ended December 31, 1994. There were no
sales of servicing during the years ended December 31, 1996 and 1995.
In the years ended December 31, 1996, 1995 and 1994, write-offs of excess
servicing fees receivable totaled approximately $18,000, $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 December 31, 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
UNREALIZED UNREALIZED FAIR
AMORTIZED COST GAINS LOSSES VALUE
-------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1996...................................................... $ 20,971 -- (72) 20,899
--
--
------- ----- ------
------- ----- ------
</TABLE>
Substantially all mortgage-backed securities are collateralized by
single-family residence secured loans.
F-22
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(5) MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY (CONTINUED)
There were no sales of mortgage-backed securities in 1996. 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.
(6) LOANS RECEIVABLE:
A summary of loans receivable at December 31, 1996 and 1995 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Real estate loans
Single-family residential:
Fixed rate......................................................................... $ 134,971 122,149
Variable rate...................................................................... 460,944 536,263
Multifamily, primarily variable rate................................................. 453,064 479,100
Commercial and industrial, primary variable rate..................................... 110,931 120,109
Land, primarily fixed rate........................................................... 1,639 3,176
------------ ----------
Real estate loans................................................................ 1,161,549 1,260,797
Commercial loans....................................................................... 3,523 --
Consumer loans......................................................................... 988 --
Secured by deposits.................................................................... 2,132 1,976
------------ ----------
All loans........................................................................ 1,168,192 1,262,773
Less:
Undistributed loan proceeds.......................................................... 473 28
Unamortized net loan discounts and deferred origination fees......................... 2,732 3,021
Allowance for losses................................................................. 23,280 31,572
------------ ----------
$ 1,141,707 1,228,152
------------ ----------
------------ ----------
</TABLE>
Nonaccrual loans were $18,238,000, $35,592,000 and $27,458,000 at December
31, 1996, 1995 and 1994, respectively. If loans which were on nonaccrual at
December 31, 1996, 1995 and 1994 had performed in accordance with their terms
for the year or since origination, if shorter, interest income from these loans
would have been $1,405,000, $3,154,000 and $2,257,000, respectively. Interest
collected on these loans for these years was $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.
F-23
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(6) LOANS RECEIVABLE: (CONTINUED)
At December 31, 1996, the Bank had loan applications pending to originate
loans of approximately $5,562,000. Other than pending loan applications at
year-end, the Bank had no outstanding commitments to originate or purchase
loans.
(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 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
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The Bank's gross impaired loans were $31,149,000 and $44,915,000 as of
December 31, 1996 and 1995, respectively. The average impaired loans for the
years then ended were $36,897,000 and $32,386,000. Gross impaired loans with a
valuation allowance totaled $23,779,000 and gross impaired loans without a
valuation allowance totaled $7,370,000 at December 31, 1996. 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 $6,652,000 and
$12,537,000 at December 31, 1996 and 1995, respectively, and is included in the
schedule of the allowance for loan losses described above.
Troubled debt restructurings totaled $11,430,000 and $14,729,000 as of
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 December 31, 1996.
F-24
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(8) REAL ESTATE HELD FOR INVESTMENT AND FOR SALE
Real estate at December 31, 1996 and 1995, consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Acquired for sale or development............................................................. $ 8,641 11,899
Less allowance for losses.................................................................. (6,516) (6,526)
--------- ---------
Acquired for sale or development....................................................... 2,125 5,373
--------- ---------
Acquired in settlement of loans
Single-family residential.................................................................. 3,309 6,415
Multifamily................................................................................ 8,341 1,274
Commercial and industrial.................................................................. 8,614 4,004
Land....................................................................................... 244 682
--------- ---------
20,508 12,375
Less allowance for losses.................................................................. (72) (1,460)
--------- ---------
Acquired in settlement of loans........................................................ 20,436 10,915
--------- ---------
$ 22,561 16,288
--------- ---------
--------- ---------
</TABLE>
A summary of the components of the income from real estate operations in
each of the years ended December 31, 1996, 1995 and 1994 is as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Gross income from real estate operations............................................. $ 4,761 2,536 3,559
Operating expenses................................................................... 5,395 2,984 4,404
--------- --------- ---------
Loss from operations........................................................... (634) (448) (845)
Gain on real estate sales............................................................ 3,346 392 196
--------- --------- ---------
Gain (loss) from real estate operations........................................ 2,712 (56) (649)
Provisions for losses................................................................ (766) (2,011) (4,749)
--------- --------- ---------
Total income (loss) from real estate operations................................ $ 1,946 (2,067) (5,398)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-25
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(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 each of the years ended December
31, 1996, 1995 and 1994, respectively, is as follows (dollars in thousands):
<TABLE>
<CAPTION>
REAL DIRECT 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
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
F-26
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995, consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land..................................................................... $ 521 521
Buildings................................................................ 837 746
Furniture, fixtures and equipment........................................ 11,405 11,594
Leasehold improvements................................................... 4,906 5,240
--------- ---------
--------- ---------
17,669 18,101
Less accumulated depreciation and amortization........................... (11,407) (10,313)
--------- ---------
$ 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
$2,144,000, $3,515,000 and $4,712,000, net of sublease income of approximately
$452,000, $331,000 and $107,000, 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-27
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) DEPOSITS
Deposits at December 31, 1996 and 1995 consisted of the following (dollars
in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts............................................. $ 63,776 0.80% $ 53,866 0.60%
Passbook accounts........................................ 281,907 4.52 185,795 4.49
Money market accounts.................................... 24,518 2.62 35,827 2.32
------------ --- ------------ ---
------------ --- ------------ ---
Transaction accounts..................................... 370,201 3.75 275,488 3.45
------------ --- ------------ ---
------------ --- ------------ ---
Term certificates:
3-month.................................................. 5,428 4.05 4,741 4.00
6-month.................................................. 75,479 5.02 90,969 5.16
12-month................................................. 384,211 5.51 226,387 5.78
18-month................................................. 205,659 5.62 364,970 6.19
24-month................................................. 108,359 5.99 217,177 5.78
36-month................................................. 11,409 5.93 15,381 5.44
48-month................................................. 1,924 5.54 3,265 5.65
60-month................................................. 44,183 6.23 53,893 6.45
Public funds............................................. 5,704 6.07 1,671 6.28
$100,000 and over........................................ 158,686 5.70 219,376 6.12
Term certificates........................................ 1,001,042 5.61 1,197,830 5.94
------------ --- ------------ ---
$ 1,371,243 5.11% $ 1,473,318 5.47%
------------ --- ------------ ---
------------ --- ------------ ---
</TABLE>
Term certificates of deposit outstanding by scheduled maturity date at
December 31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
------------ ---------------
<S> <C> <C>
Due within 3 months................................................................... $ 225,614 5.60%
Due within 3 to 6 months.............................................................. 262,321 5.44
Due within 6 to 9 months.............................................................. 170,454 5.63
Due within 9 to 12 months............................................................. 232,362 5.80
Due within 12 to 24 months............................................................ 78,377 5.69
Due within 24 to 36 months............................................................ 26,705 5.16
Due after 36 months................................................................... 5,209 6.02
------------ ---
Total................................................................................. $ 1,001,042 5.61%
------------ ---
------------ ---
</TABLE>
F-28
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) DEPOSITS (CONTINUED)
The components of deposit interest expense in each of the years ended
December 31, 1996, 1995 and 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
NOW accounts..................................................................... $ 449 461 534
Passbook and money market accounts............................................... 12,288 4,826 3,461
Term certificates--under $100,000................................................ 52,556 57,657 43,469
Term certificates--$100,000 and over............................................. 10,030 12,156 10,759
--------- --------- ---------
75,323 75,100 58,223
Interest forfeitures on early withdrawals........................................ (187) (234) (218)
--------- --------- ---------
$ 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 no outstanding
reverse repurchase agreements at December 31, 1995.
The maximum repurchase liability balances outstanding at any month-end
during the years ended December 31, 1996 and 1995 were approximately
$192,433,000 and $151,626,000, respectively. The average balances outstanding
during each of the years ended December 31, 1996 and 1995 were approximately
$253,712,000 and $103,699,000, 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 December 31,
1996 and 1995 are collateralized by mortgage-backed agency securities and
mortgage loans with a current principal balance of approximately $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 at December 31, 1996 and
1995 of approximately $15,380,000 and $14,527,000, respectively.
At December 31, 1996, the Bank had a collateralized available line of credit
of approximately $352,000,000 with the Federal Home Loan Bank of San Francisco.
F-29
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) ADVANCES FROM THE FEDERAL HOME LOAN BANK (CONTINUED)
The scheduled maturities and weighted average interest rates of advances at
December 31, 1996 and 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
YEAR OF MATURITY AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
- --------------------------------------------------------------- --------- --------------- --------- ---------------
1996........................................................... $ -- -- % $ 31,746 5.85%
1997........................................................... 31,000 5.76 -- --
1998........................................................... 49,000 6.01 -- --
--------- --- --------- ---
$ 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 years ended December 31, 1996,
1995, and 1994 consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........................................................................... $ 16 -- --
State............................................................................. 5 4 --
--------- --------- ---------
--------- --------- ---------
Total current................................................................... 21 4 --
--------- --------- ---------
Deferred:
Federal........................................................................... $ (3,037) (2,650) 10,204
State............................................................................. -- -- 1,152
--------- --------- ---------
Total deferred.................................................................. (3,037) (2,650) 11,356
--------- --------- ---------
Total tax provision............................................................. $ (3,016) (2,646) 11,356
--------- --------- ---------
--------- --------- ---------
</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.
F-30
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES (CONTINUED)
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 December 31, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
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>
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>
F-31
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES (CONTINUED)
The major components of deferred deductible and taxable temporary
differences at the Federal statutory tax rate of 34% and the California
Franchise Tax rate of 10.8%, before valuation allowances, as of December 31,
1996 and 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deductible temporary differences:
Provision for losses on loans and real estate.............................................. $ 18,744 52,548
Tax gains on sales of loans, net of deferred gains......................................... 1,882 2,506
Recognition of interest on nonperforming loans for tax in excess of book................... 3,122 2,518
Accrued interest on deposits recognized for book but deferred for tax...................... 1,614 1,845
Miscellaneous temporary deductible differences............................................. 7,464 3,471
--------- ---------
Total deductible temporary differences................................................... 32,826 62,888
--------- ---------
Taxable temporary differences:
Stock dividends from FHLB.................................................................. (2,557) (2,169)
Real estate partnership tax losses......................................................... (253) (256)
Miscellaneous temporary taxable differences................................................ (892) (181)
Federal tax effect of state temporary differences, net..................................... (3,658) (4,059)
--------- ---------
Total taxable temporary differences...................................................... (7,360) (6,665)
--------- ---------
Total net deductible temporary differences............................................... $ 25,466 56,223
--------- ---------
--------- ---------
</TABLE>
The Federal and state tax net operating loss carryforwards expire as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR FEDERAL STATE TOTAL
- ---------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
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
F-32
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES (CONTINUED)
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.
(14) DERIVATIVES AND HEDGING ACTIVITIES
Hedging costs, net, for each of the years ended December 31, 1996, 1995 and
1994 consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest paid on swaps, net of interest received......................................... $ 35 1,217 8,436
Amortization of cost of swaps, caps, floors and corridors,
net of interest received............................................................. 352 468 174
--------- --------- ---------
$ 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 5.56%, 5.50% 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 December 31, 1996 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR OF NOTIONAL AVERAGE RATE AVERAGE
MATURITY AMOUNT PAID RATE RECEIVED
----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Pay floating and receive fixed................................... 1999 $ 7,026 5.56% 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 5.50% 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 relating to the swap. Excluding this transaction, the Bank does not
have any other positions in complex derivative transactions.
F-33
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
Mortgage-backed securities with book values of approximately $8,442,000 and
$6,141,000 and market values of approximately $8,259,000 and $5,987,000 at
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>
CONTRACT AVERAGE STRIKE AVERAGE LIMIT
YEAR OF 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>
The Bank's floor contract provides for 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 falls
below a present level (the floor rate). The index on the Bank's floor is
three-month LIBOR. The contract amount is $20,000,000 with a floor rate of 4.50%
and receive rate of 5.54%. The contract matures in 1997.
F-34
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
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
F-35
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) BENEFIT PLANS (CONTINUED)
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 $155,000, $159,000 and $245,000 of expense related to the
401(k) plan, including a discretionary contribution of approximately $0, $0 and
$0, 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-36
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)
The carrying amounts and fair values of the Bank's financial instruments
consisted of the following at 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.......................... 492,301 492,301 241,645 241,645
Mortgage-backed securities held-to-maturity............ 20,971 20,899 -- --
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.
- - Federal Home Loan Bank Stock--The carrying amount of Federal Home Loan Bank
Stock approximates its fair value.
F-37
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)
- - 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 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
F-38
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
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 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 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.
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.
F-39
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
At 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
------------------------------------------------------
TANGIBLE TIER 1 TIER 1 TOTAL RISK-
WITHOUT ADDITIONAL ASSISTANCE AGREEMENT CAPITAL CAPITAL LEVERAGE RISK-BASED BASED CAPITAL
- --------------------------------------------------------- ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Shareholders' 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>
Refer to note 1 for discussion of the recapitalization of the Company.
(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-40
<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...........................
Certain Information Regarding the Bank..........
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 .......................................... 75,000
Legal fees and expenses .................................... 225,000
Accounting fees and expenses ............................... 150,000
Investment banking legal fees and expenses ................. 200,000
Miscellaneous expenses ..................................... 39,200
---------
Total .................................................... $ 700,000
---------
---------
</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
II-1
<PAGE>
(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 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
II-2
<PAGE>
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-3
<PAGE>
(b) Exhibits
<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
23(a) Consent of KPMG Peat Marwick LLP.
23(b) Consent of Elias, Matz, Tiernan & Herrick, L.L.P. (included in
Exhibit 5)
24 Power of Attorney (included in Registration Statement signature page)
</TABLE>
- --------------------
* To be filed by amendment
II-4
<PAGE>
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 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-5
<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 30th day of June, 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. 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.
Name Title Date
---- ----- ----
/s/ Rudolf P. Guenzel President, Chief Executive June 30, 1997
- ------------------------- Officer and Director
Rudolf P. Guenzel (Principal Executive Officer)
/s/ J. Michael Holmes Executive Vice President, June 30, 1997
- ------------------------- Chief Financial Officer and
J. Michael Holmes Secretary (Prncipal
Accounting Officer)
/s/ Henry Peters Chairman of the Board of June 30, 1997
- ------------------------- Directors
Henry Peters
/s/ Gerard Jervis Director June 30, 1997
- -------------------------
Gerard Jervis
/s/ Robert W. MacDonald Director June 30, 1997
- -----------------------
Robert W. MacDonald
II-6
<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
23(a) Consent of KPMG Peat Marwick LLP.
23(b) Consent of Elias, Matz, Tiernan & Herrick, L.L.P. (included in Exhibit 5)
24 Power of Attorney (included in Registration Statement signature page)
</TABLE>
- ------------------
* To be filed by amendment
II-7
<PAGE>
ARTICLES OF INCORPORATION
OF
PEOPLE'S PREFERRED CAPITAL CORPORATION
FIRST: The undersigned, Billie Swaboda, whose address is 32 South
Street, Baltimore, Maryland 21202, being at least eighteen years of age, does
hereby form a corporation under the general laws of the State of Maryland.
SECOND: The name of the corporation is:
People's Preferred Capital Corporation (the "Corporation").
THIRD: The purposes for which the Corporation is formed are to conduct
any business for which corporations may be organized under the laws of the
State of Maryland including, but not limited to, the following: (i) to
acquire, hold, own, develop, construct, improve, maintain, operate, sell,
lease, transfer, encumber, convey, exchange and otherwise dispose of or deal
with real and personal property, (ii) to enter into any partnership, joint
venture or other similar arrangement to engage in any of the foregoing and
(iii) in general, to possess and exercise all the purposes, powers, rights
and privileges granted to or conferred upon corporations by the Laws of the
State of Maryland now or hereafter in force, and to exercise any powers
suitable, convenient or proper for the accomplishment of any of the purposes
herein enumerated, implied or incidental to the powers or purposes herein
specified or which at any time may appear conducive to or expedient for the
accomplishment of any of such purposes.
The foregoing shall, except where otherwise expressed, be in no way
limited or restricted by reference to or inference from the terms of any
other clause of this or any other article of these Articles of Incorporation
or of any amendment thereto, and shall each be regarded as independent, and
construed as powers as well as purposes.
FOURTH: 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 the Corporation is The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202. The resident agent
is a corporation in the State of Maryland.
FIFTH: The total number of shares of stock which the Corporation shall
have authority to issue is 10,000 shares, $0.01 par value per share, all of
one class. The aggregate par value of all authorized shares having a par
value is $100.
SIXTH: The number of initial directors of the Corporation shall be
four (4), which number may be increased or decreased pursuant to the Bylaws
of the Corporation, but shall never be less than the minimum number required
by the Maryland General
1
<PAGE>
Corporation Law. The names of the initial directors who shall act until the
first annual meeting and until their successors are duly elected and qualify
are:
Henry Peters
Rudolf P. Guenzel
Gerard Jervis
Robert W. MacDonald
SEVENTH: The following provisions are hereby adopted for the purpose of
defining, limiting and regulating the powers of the Corporation and of the
directors and stockholders:
(a) The Corporation reserves the right to make any amendment of the
Articles of Incorporation, now or hereafter authorized by law, including
any amendment which alters the contract rights, as expressly set forth in
the Articles of Incorporation, with respect to shares of outstanding stock.
(b) The Board of Directors of the Corporation may authorize the
issuance from time to time of shares of its stock of any class, whether now
or hereafter authorized, or securities convertible into shares of its stock
of any class, whether now or hereafter authorized, for such consideration
as the Board of Directors may deem advisable, subject to such restrictions
or limitations, if any, as may be set forth in the Bylaws of the
Corporation.
(c) The Board of Directors of the Corporation may, by articles
supplementary, classify or reclassify any unissued stock from time to time
by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms
or conditions of redemption of the stock.
EIGHTH: No holder of shares of stock of any class shall have any
preemptive right to subscribe to or purchase any additional shares of any
class, or any bonds or convertible securities of any nature; provided,
however, that the Board of Directors may, in authorizing the issuance of
shares of stock of any class, confer any preemptive rights that the Board of
Directors may deem advisable in connection with such issuance.
NINTH: The duration of the Corporation shall be perpetual.
TENTH: To the maximum extent that Maryland law in effect from time to
time permits limitation of the liability of directors and officers, 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, nor the adoption or amendment of any other provision of the Articles
of Incorporation or Bylaws inconsistent with this Article, shall
2
<PAGE>
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.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act on this 19th day of June, 1997.
/s/ Billie Swaboda
_______________________________________
Billie Swaboda
Incorporator
3
<PAGE>
PEOPLES PREFERRED CAPITAL CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: Peoples 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 (the "Corporation") is: Peoples 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. 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
Gerald Jervis
Robert W. MacDonald
______________________
______________________
______________________
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
2
<PAGE>
of its stock of any class or series, whether now or hereafter authorized, for
such 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 General Corporation Law of the State of Maryland in
effect from time to time.
Section 5.5.2 Advancement of Expenses. Reasonable expenses incurred
by a director, officer, employee or agent of the Corporation in defending a
civil 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
provided by this Section 5.5 shall not be deemed to exclude any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under the General Corporation Law of the State of Maryland 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
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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 General Corporation
Law of the State of Maryland 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 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
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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, 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.
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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 (collectively, the
"Common Stock") 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 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
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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 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
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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 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.
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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 of the
Corporation, if any, ranking prior to the Series A Preferred Shares 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, the Series A Preferred Shares may be
redeemed 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 prices set forth below in cash, plus authorized, declared and
unpaid dividends to the date fixed for redemption, without interest:
If Redeemed During the 12-Month Reedemption Price Per Share of the
Period Beginning _________, Series A Preferred Stock
2002........................... $
2003...........................
2004...........................
2005...........................
2006...........................
2007 and thereafter............ 25.00
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
Preferred Shares called for redemption, and they shall be deemed to cease
to be outstanding, provided that the redemption price (including any
authorized and
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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.
(c) Change of Control. In addition to the redemption provisions of
subsections (a) and (b) above and not in lieu of or in substitution
therefore, in the event of a Change of Control, 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 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
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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 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.
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"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 New
York or 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 Peoples 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 single 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).
"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")
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or any Person controlled, directly or indirectly, by the
Bishop Estate, BIL Securities or Arbur.
"Person" means any individual, corporation,
partnership, joint venture, association, joint-stock
company, trust, unincorporated organization, government
or agency or political subdivision thereof or any 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.
"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'
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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 therein or in the mailing
thereof, to any particular holder shall affect the sufficiency of the notice
or the validity of the proceedings for redemption with respect to the other
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 or
before the date fixed for redemption specified in such notice, all funds
necessary for such redemption shall have been set aside by the Corporation
(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
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)
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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").
(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.
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(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 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.
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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 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
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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 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
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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 Peoples Bank of California (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 Residential Mortgage Servicing Agreements between
Temple Inland Mortgage Corporation and the Bank, dated ________, 1997 and
________, 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 Agreement or the Commercial Mortgage
Purchase 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 Corporation 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 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.
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(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.
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.
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ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
Section 7.1 Definitions. For the purpose of this Article VII, the
following terms 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.
Articles of Incorporation. The term "Articles of Incorporation" shall mean
the Articles of Incorporation of the Corporation, under the MGCL.
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.
Business Day. The term "Business Day" shall mean any day, other than a
Saturday or Sunday, that is neither a legal holiday nor a day on which
banking institutions in New York City are authorized or required by law,
regulation or executive order to close.
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
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Ownership Limit is modified by these Articles of Incorporation or by the
Board of Directors pursuant to Section 7.2.7.
Initial Date. The term "Initial Date" shall mean the date upon which the
Articles of Amendment and Restatement 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.
MGCL. The term "MGCL" shall mean the Maryland General Corporation Law, as
amended from time to time.
Person. The term "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.
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.
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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 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
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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) 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
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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 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
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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 noly 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 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 the lesser of 4.5% of the value
of the issued and outstanding shares of Capital Stock of the
Corporation or 9.0% of the number of issued and outstanding shares
of Preferred Stock of the Corporation; 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.
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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.
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
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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 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.
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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
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
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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.
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 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: PEOPLES PREFERRED CAPITAL
CORPORATION
__________________________ By: _________________________(SEAL)
Secretary President
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PEOPLE'S PREFERRED CAPITAL CORPORATION
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Corporation
shall be located at such place or places as the Board of Directors may
designate.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional
offices at such places as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders for
the election of directors and the transaction of any business within the
powers of the Corporation shall be held on a date and at the time set by the
Board of Directors during the month of April in each year.
Section 3. SPECIAL MEETINGS. The president, chief executive officer or
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to
cast not less than a majority of all the votes entitled to be cast at such
meeting. Such request shall state the purpose of such meeting and the matters
proposed to be acted on at such meeting. The secretary shall inform such
stockholders of the reasonably estimated cost of preparing and mailing notice
of the meeting and, upon payment to the Corporation by such stockholders of
such costs, the secretary shall give notice to each stockholder entitled to
notice of the meeting. Unless requested by the stockholders entitled to cast
a majority of all the votes entitled to be cast at such meeting, a special
meeting need not be called to consider any matter which is substantially the
same as a matter voted on at any special meeting of the stockholders held
during the preceding twelve months.
Section 4. NOTICE. Not less than ten nor more than 90 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time and
place of the meeting and, in the case of a special meeting or as otherwise may
be required by any statute, the purpose for which the meeting
<PAGE>
is called, either by mail or by presenting it to such stockholder personally
or by leaving it at his residence or usual place of business. If mailed, such
notice shall be deemed to be given when deposited in the United States mail
addressed to the stockholder at his post office address as it appears on the
records of the Corporation, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute
to be stated in such notice. No business shall be transacted at a special
meeting of stockholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of stockholders, the chairman
of the board, if there be one, shall conduct the meeting or, in the case of
vacancy in office or absence of the chairman of the board, one of the
following officers present shall conduct the meeting in the order stated: the
vice chairman of the board, if there be one, the president, the vice
presidents in their order of rank and seniority, or a chairman chosen by the
stockholders entitled to cast a majority of the votes which all stockholders
present in person or by proxy are entitled to cast, shall act as chairman,
and the secretary, or, in his absence, an assistant secretary, or in the
absence of both the secretary and assistant secretaries, a person appointed
by the chairman shall act as secretary.
Section 7. QUORUM. At any meeting of stockholders, the presence in
person or by proxy of stockholders entitled to cast a majority of all the
votes entitled to be cast at such meeting shall constitute a quorum; but this
section shall not affect any requirement under any statute or the Articles of
Incorporation of the Corporation for the vote necessary for the adoption of
any measure. If, however, such quorum shall not be present at any meeting of
the stockholders, the stockholders entitled to vote at such meeting, present
in person or by proxy, shall have the power to adjourn the meeting from time
to time to a date not more than 120 days after the original record date
without notice other than announcement at the meeting. At such adjourned
meeting at which a quorum shall be present, any business may be transacted
which might have been transacted at the meeting as originally notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient
to elect a director. Each share may be voted for as many individuals as there
are directors to be elected and for whose election the share is entitled to
be voted. A majority of the votes cast at a meeting of stockholders duly
called and at which a quorum is present shall be sufficient to approve any
other matter which may properly come before the meeting, unless more than a
majority of the votes cast is required by statute or by the Articles of
Incorporation of the Corporation. Unless otherwise provided in the Articles
of Incorporation, each outstanding share, regardless of class, shall be
entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.
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Section 9. PROXIES. A stockholder may cast the votes entitled to be
cast by the shares of the stock owned of record by him either in person or by
proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Such proxy shall be filed with the secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid
after eleven months from the date of its execution, unless otherwise provided
in the proxy.
Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the
Corporation registered in the name of a corporation, partnership, trust or
other entity, if entitled to be voted, may be voted by the president or a
vice president, a general partner or trustee thereof, as the case may be, or
a proxy appointed by any of the foregoing individuals, unless some other
person who has been appointed to vote such stock pursuant to a bylaw or a
resolution of the governing body of such corporation or other entity or
agreement of the partners of a partnership presents a certified copy of such
bylaw, resolution or agreement, in which case such person may vote such
stock. Any director or other fiduciary may vote stock registered in his name
as such fiduciary, either in person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it
shall not be voted at any meeting and shall not be counted in determining the
total number of outstanding shares entitled to be voted at any given time,
unless they are held by it in a fiduciary capacity, in which case they may be
voted and shall be counted in determining the total number of outstanding
shares at any given time.
Section 11. INSPECTORS. At any meeting of stockholders, the chairman of
the meeting may appoint one or more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares represented
at the meeting based upon their determination of the validity and effect of
proxies, count all votes, report the results and perform such other acts as
are proper to conduct the election and voting with impartiality and fairness
to all the stockholders.
Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting
shall be prima facie evidence thereof.
Section 12. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS.
(a) Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board of Directors and
the proposal of business to be considered by the stockholders may be made
at an annual meeting of stockholders (i) pursuant to the Corporation's
notice of meeting, (ii) by or
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at the direction of the Board of Directors or (iii) by any stockholder of
the Corporation who was a stockholder of record both at the time of giving
of notice provided for in this Section 12(a) and at the time of the annual
meeting, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 12(a).
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph
(a)(1) of this Section 12, the stockholder must have given timely notice
thereof in writing to the secretary of the Corporation and such other
business must otherwise be a proper matter for action by stockholders. To
be timely, a stockholder's notice shall be delivered to the secretary at
the principal executive offices of the Corporation not later than the close
of business on the 60th day nor earlier than the close of business on the
90th day prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date or if the Corporation has not previously held an
annual meeting, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 90th day prior to such annual
meeting and not later than the close of business on the later of the 60th
day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of such meeting is first made by the
Corporation. In no event shall the public announcement of a postponement or
adjournment of an annual meeting to a later date or time commence a new
time period for the giving of a stockholder's notice as described above.
Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a director
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (including
such person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (ii) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material
interest in such business of such stockholder and of the beneficial owner,
if any, on whose behalf the proposal is made; and (iii) as to the
stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (x) the name and address of such
stockholder, as they appear on the Corporation's books, and of such
beneficial owner and (y) the number of shares of each class of stock of the
Corporation which are owned beneficially and of record by such stockholder
and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 12 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there
is no public announcement by the
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Corporation naming all of the nominees for director or specifying the
size of the increased Board of Directors at least 70 days prior to the
first anniversary of the preceding year's annual meeting, a stockholder's
notice required by this Section 12(a) shall also be considered timely, but
only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal
executive offices of the Corporation not later than the close of business
on the tenth day following the day on which such public announcement is
first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting. Nominations of persons
for election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record both at the time of giving of notice
provided for in this Section 12(b) and at the time of the special meeting, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 12(b). In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate a person or persons (as
the case may be) for election to such position as specified in the Corporation's
notice of meeting, if the stockholder's notice containing the information
required by paragraph (a)(2) of this Section 12 shall be delivered to the
secretary at the principal executive offices of the Corporation not earlier than
the close of business on the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting. In no event shall the
public announcement of a postponement or adjournment of a special meeting to a
later date or time commence a new time period for the giving of a stockholder's
notice as described above.
(c) General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 12 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance
with the procedures set forth in this Section 12. The chairman of the
meeting shall have the power and duty to determine whether a nomination or
any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth
in this Section 12 and, if any proposed nomination or business is not in
compliance with this Section 12, to declare that such nomination or
proposal shall be disregarded.
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(2) For purposes of this Section 12, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed
by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a
stockholder shall also comply with all applicable requirements of state law
and of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this Section 12. Nothing in this
Section 12 shall be deemed to affect any rights of stockholders to request
inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
Section 13. VOTING BY BALLOT. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or
at any special meeting called for that purpose, a majority of the entire
Board of Directors may establish, increase or decrease the number of
directors, provided that the number thereof shall never be less than the
minimum number required by the Maryland General Corporation Law, nor more
than 15, and further provided that the tenure of office of a director shall
not be affected by any decrease in the number of directors.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board
of Directors shall be held immediately after and at the same place as the
annual meeting of stockholders, no notice other than this Bylaw being
necessary. The Board of Directors may provide, by resolution, the time and
place, either within or without the State of Maryland, for the holding of
regular meetings of the Board of Directors without other notice than such
resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the chairman of the board, president or
by a majority of the directors then in office. The person or persons
authorized to call special meetings of the Board of Directors may fix any
place, either within or without the State of Maryland, as the place for
holding any special meeting of the Board of Directors called by them.
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Section 5. NOTICE. Notice of any special meeting of the Board of
Directors shall be delivered personally or by telephone, facsimile
transmission, United States mail or courier to each director at his business
or residence address. Notice by personal delivery, by telephone or a
facsimile transmission shall be given at least two days prior to the meeting.
Notice by mail shall be given at least five days prior to the meeting and
shall be deemed to be given when deposited in the United States mail properly
addressed, with postage thereon prepaid. Telephone notice shall be deemed to
be given when the director is personally given such notice in a telephone
call to which he is a party. Facsimile transmission notice shall be deemed to
be given upon completion of the transmission of the message to the number
given to the Corporation by the director and receipt of a completed
answer-back indicating receipt. Neither the business to be transacted at, nor
the purpose of, any annual, regular or special meeting of the Board of
Directors need be stated in the notice, unless specifically required by
statute or these Bylaws.
Section 6. QUORUM. A majority of the directors shall constitute a
quorum for transaction of business at any meeting of the Board of Directors,
provided that, if less than a majority of such directors are present at said
meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice, and provided further that if, pursuant
to the Articles of Incorporation of the Corporation or these Bylaws, the vote
of a majority of a particular group of directors is required for action, a
quorum must also include a majority of such group.
The directors present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough directors to leave less than a quorum.
Section 7. VOTING. The action of the majority of the directors present
at a meeting at which a quorum is present shall be the action of the Board of
Directors, unless the concurrence of a greater proportion is required for
such action by applicable statute.
Section 8. TELEPHONE MEETINGS. Directors may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person
at the meeting.
Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
director and such written consent is filed with the minutes of proceedings of
the Board of Directors.
Section 10. VACANCIES. If for any reason any or all the directors cease
to be directors, such event shall not terminate the Corporation or affect
these Bylaws or the powers of the remaining directors hereunder (even if
fewer than three directors remain). Any vacancy on the Board of Directors for
any cause other than an increase in the number
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of directors shall be filled by a majority of the remaining directors,
although such majority is less than a quorum. Any vacancy in the number of
directors created by an increase in the number of directors may be filled by
a majority vote of the entire Board of Directors. Any individual so elected
as director shall hold office until the next annual meeting of stockholders
and until his successor is elected and qualifies.
Section 11. COMPENSATION. Directors shall not receive any stated salary
for their services as directors but, by resolution of the Board of Directors,
may receive fixed sums per year and/or per meeting and/or per visit to real
property or other facilities owned or leased by the Corporation and for any
service or activity they performed or engaged in as directors. Directors may
be reimbursed for expenses of attendance, if any, at each annual, regular or
special meeting of the Board of Directors or of any committee thereof and for
their expenses, if any, in connection with each property visit and any other
service or activity they performed or engaged in as directors; but nothing
herein contained shall be construed to preclude any directors from serving
the Corporation in any other capacity and receiving compensation therefor.
Section 12. LOSS OF DEPOSITS. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings
and loan association, or other institution with whom moneys or stock have
been deposited.
Section 13. SURETY BONDS. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 14. RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or
failure to act in reliance in good faith upon the books of account or other
records of the Corporation, upon an opinion of counsel or upon reports made
to the Corporation by any of its officers or employees or by the adviser,
accountants, appraisers or other experts or consultants selected by the Board
of Directors or officers of the Corporation, regardless of whether such
counsel or expert may also be a director.
Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
The directors shall have no responsibility to devote their full time to the
affairs of the Corporation. Any director or officer, employee or agent of the
Corporation, in his personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or
in competition with those of or relating to the Corporation.
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ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may
appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee and other committees, composed of one or more
directors, to serve at the pleasure of the Board of Directors.
Section 2. POWERS. The Board of Directors may delegate to committees
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except as prohibited by law.
Section 3. MEETINGS. Notice of committee meetings shall be given in the
same manner as notice for special meetings of the Board of Directors. A
majority of the members of the committee shall constitute a quorum for the
transaction of business at any meeting of the committee. The act of a
majority of the committee members present at a meeting shall be the act of
such committee. The Board of Directors may designate a chairman of any
committee, and such chairman or any two members of any committee may fix the
time and place of its meeting unless the Board shall otherwise provide. In
the absence of any member of any such committee, the members thereof present
at any meeting, whether or not they constitute a quorum, may appoint another
director to act in the place of such absent member. Each committee shall keep
minutes of its proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting
can hear each other at the same time. Participation in a meeting by these
means shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is
signed by each member of the committee and such written consent is filed with
the minutes of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace
any absent or disqualified member or to dissolve any such committee.
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ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall
include a chief executive officer, a president, a secretary and a treasurer
and may include a chairman of the board, a vice chairman of the board, one or
more vice presidents, a chief operating officer, a chief financial officer,
one or more assistant secretaries and one or more assistant treasurers. In
addition, the Board of Directors may from time to time appoint such other
officers with such powers and duties as they shall deem necessary or
desirable. The officers of the Corporation shall be elected annually by the
Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of stockholders, except that the chief executive officer
may appoint one or more vice presidents, assistant secretaries and assistant
treasurers. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as may be convenient. Each
officer shall hold office until his successor is elected and qualifies or
until his death, resignation or removal in the manner hereinafter provided.
Any two or more offices except president and vice president may be held by
the same person. In its discretion, the Board of Directors may leave unfilled
any office except that of president, treasurer and secretary. Election of an
officer or agent shall not of itself create contract rights between the
Corporation and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the
best interests of the Corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Any officer of the Corporation may resign at any time by giving
written notice of his resignation to the Board of Directors, the chairman of
the board, the president or the secretary. Any resignation shall take effect
at any time subsequent to the time specified therein or, if the time when it
shall become effective is not specified therein, immediately upon its
receipt. The acceptance of a resignation shall not be necessary to make it
effective unless otherwise stated in the resignation. Such resignation shall
be without prejudice to the contract rights, if any, of the Corporation.
Section 3. VACANCIES. A vacancy in any office may be filled by the
Board of Directors for the balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate
a chief executive officer. In the absence of such designation, the chairman
of the board shall be the chief executive officer of the Corporation. The
chief executive officer shall have general responsibility for implementation
of the policies of the Corporation, as determined by the Board of Directors,
and for the management of the business and affairs of the Corporation.
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Section 5. CHIEF OPERATING OFFICER. The Board of Directors may
designate a chief operating officer. The chief operating officer shall have
the responsibilities and duties as set forth by the Board of Directors or the
chief executive officer.
Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may
designate a chief financial officer. The chief financial officer shall have
the responsibilities and duties as set forth by the Board of Directors or the
chief executive officer.
Section 7. CHAIRMAN OF THE BOARD. The Board of Directors shall
designate a chairman of the board. The chairman of the board shall preside
over the meetings of the Board of Directors and of the stockholders at which
he shall be present. The chairman of the board shall perform such other
duties as may be assigned to him or them by the Board of Directors.
Section 8. PRESIDENT. The president or chief executive officer, as the
case may be, shall in general supervise and control all of the business and
affairs of the Corporation. In the absence of a designation of a chief
operating officer by the Board of Directors, the president shall be the chief
operating officer. He may execute any deed, mortgage, bond, contract or other
instrument, except in cases where the execution thereof shall be expressly
delegated by the Board of Directors or by these Bylaws to some other officer
or agent of the Corporation or shall be required by law to be otherwise
executed; and in general shall perform all duties incident to the office of
president and such other duties as may be prescribed by the Board of
Directors from time to time.
Section 9. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there
be more than one vice president, the vice presidents in the order designated
at the time of their election or, in the absence of any designation, then in
the order of their election) shall perform the duties of the president and
when so acting shall have all the powers of and be subject to all the
restrictions upon the president; and shall perform such other duties as from
time to time may be assigned to him by the president or by the Board of
Directors. The Board of Directors may designate one or more vice presidents
as executive vice president or as vice president for particular areas of
responsibility.
Section 10. SECRETARY. The secretary shall (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see
that all notices are duly given in accordance with the provisions of these
Bylaws or as required by law; (c) be custodian of the corporate records and
of the seal of the Corporation; (d) keep a register of the post office
address of each stockholder which shall be furnished to the secretary by such
stockholder; (e) have general charge of the share transfer books of the
Corporation; and (f) in general perform such other duties as from time to
time may be assigned to him by the chief executive officer, the president or
by the Board of Directors.
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Section 11. TREASURER. The treasurer shall have the custody of the
funds and securities of the Corporation and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation
and shall deposit all moneys and other valuable effects in the name and to
the credit of the Corporation in such depositories as may be designated by
the Board of Directors. In the absence of a designation of a chief financial
officer by the Board of Directors, the treasurer shall be the chief financial
officer of the Corporation.
The treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and Board of Directors, at
the regular meetings of the Board of Directors or whenever it may so require,
an account of all his transactions as treasurer and of the financial
condition of the Corporation.
If required by the Board of Directors, the treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, moneys and other property of whatever kind in his
possession or under his control belonging to the Corporation.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries and assistant treasurers, in general, shall perform
such duties as shall be assigned to them by the secretary or treasurer,
respectively, or by the president or the Board of Directors. The assistant
treasurers shall, if required by the Board of Directors, give bonds for the
faithful performance of their duties in such sums and with such surety or
sureties as shall be satisfactory to the Board of Directors.
Section 13. SALARIES. The salaries and other compensation of the
officers shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving such salary or other compensation
by reason of the fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument
in the name of and on behalf of the Corporation and such authority may be
general or confined to specific instances. Any agreement, deed, mortgage,
lease or other document executed by one or more of the directors or by an
authorized person shall be valid and binding upon the Board of Directors and
upon the Corporation when authorized or ratified by action of the Board of
Directors.
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Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name
of the Corporation shall be signed by such officer or agent of the
Corporation in such manner as shall from time to time be determined by the
Board of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. Each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each
certificate shall be signed by the chief executive officer, the president or
a vice president and countersigned by the secretary or an assistant secretary
or the treasurer or an assistant treasurer and may be sealed with the seal,
if any, of the Corporation. The signatures may be either manual or facsimile.
Certificates shall be consecutively numbered; and if the Corporation shall,
from time to time, issue several classes of stock, each class may have its
own number series. A certificate is valid and may be issued whether or not an
officer who signed it is still an officer when it is issued. Each certificate
representing shares which are restricted as to their transferability or
voting powers, which are preferred or limited as to their dividends or as to
their allocable portion of the assets upon liquidation or which are
redeemable at the option of the Corporation, shall have a statement of such
restriction, limitation, preference or redemption provision, or a summary
thereof, plainly stated on the certificate. If the Corporation has authority
to issue stock of more than one class, the certificate shall contain on the
face or back a full statement or summary of the designations and any
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications and terms
and conditions of redemption of each class of stock and, if the Corporation
is authorized to issue any preferred or special class in series, the
differences in the relative rights and preferences between the shares of each
series to the extent they have been set and the authority of the Board of
Directors to set the relative rights and preferences of subsequent series. In
lieu of such statement or summary, the certificate may state that the
Corporation will furnish a full statement of such information to any
stockholder upon request and without charge. If any class of stock is
restricted by the Corporation as to transferability, the certificate shall
contain a full statement of the restriction or state that the Corporation
will furnish information about the restrictions to the stockholder on request
and without charge.
Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer
agent of the Corporation of a stock certificate duly endorsed or accompanied
by proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate
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to the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share
or on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the State
of Maryland.
Notwithstanding the foregoing, transfers of shares of any class of stock
will be subject in all respects to the Articles of Incorporation of the
Corporation and all of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board
of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the
person claiming the certificate to be lost, stolen or destroyed. When
authorizing the issuance of a new certificate, an officer designated by the
Board of Directors may, in his discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or the owner's legal representative to give bond, with sufficient
surety, to the Corporation to indemnify it against any loss or claim which
may arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board
of Directors may set, in advance, a record date for the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or determining stockholders entitled to receive payment of any
dividend or the allotment of any other rights, or in order to make a
determination of stockholders for any other proper purpose. Such date, in
any case, shall not be prior to the close of business on the day the record
date is fixed and shall be not more than 90 days and, in the case of a
meeting of stockholders, not less than ten days, before the date on which the
meeting or particular action requiring such determination of stockholders of
record is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide that
the stock transfer books shall be closed for a stated period but not longer
than 20 days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten days before the
date of such meeting.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, except when (i) the determination has
been made through the closing of the transfer books and the stated period of
closing has expired or (ii) the meeting is
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adjourned to a date more than 120 days after the record date fixed for the
original meeting, in either of which case a new record date shall be
determined as set forth herein.
Section 5. STOCK LEDGER. The Corporation shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors
may issue fractional stock or provide for the issuance of scrip, all on such
terms and under such conditions as they may determine. Notwithstanding any
other provision of the Articles of Incorporation or these Bylaws, the Board
of Directors may issue units consisting of different securities of the
Corporation. Any security issued in a unit shall have the same
characteristics as any identical securities issued by the Corporation, except
that the Board of Directors may provide that for a specified period
securities of the Corporation issued in such unit may be transferred on the
books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix
the fiscal year of the Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
stock of the Corporation may be authorized and declared by the Board of
Directors, subject to the provisions of law and the Articles of Incorporation
of the Corporation. Dividends and other distributions may be paid in cash,
property or stock of the Corporation, subject to the provisions of law and
the Articles of Incorporation.
Section 2. CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board
of Directors may from time to time, in its absolute discretion, think proper
as a reserve fund for contingencies, for equalizing dividends or other
distributions, for repairing or maintaining any property of the Corporation
or for such other purpose as the Board of Directors shall determine to be in
the best interest of the Corporation, and the Board of Directors may modify
or abolish any such reserve in the manner in which it was created.
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ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the Articles of Incorporation of the
Corporation, the Board of Directors may from time to time adopt, amend,
revise or terminate any policy or policies with respect to investments by the
Corporation as it shall deem appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption of a
seal by the Corporation. The seal shall contain the name of the Corporation
and the year of its incorporation and the words "Incorporated Maryland." The
Board of Directors may authorize one or more duplicate seals and provide for
the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the
word "(SEAL)" adjacent to the signature of the person authorized to execute
the document on behalf of the Corporation.
ARTICLE XII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Articles of
Incorporation of the Corporation or these Bylaws or pursuant to applicable
law, a waiver thereof in writing, signed by the person or persons entitled to
such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be
transacted at nor the purpose of any meeting need be set forth in the waiver
of notice, unless specifically required by statute. The attendance of any
person at any meeting shall constitute a waiver of notice of such meeting,
except where such person attends a meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting
is not lawfully called or convened.
ARTICLE XIII
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter or
repeal any provision of these Bylaws and to make new Bylaws.
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<PAGE>
Number *0* Shares *0*
SEE REVERSE FOR
IMPORTANT NOTICE
ON TRANSFER RESTRICTIONS
AND OTHER INFORMATION
CUSIP ________
PEOPLE'S PREFERRED CAPITAL CORPORATION
a Corporation Formed Under the Laws of the State of Maryland
THIS CERTIFIES THAT **Specimen**
is the owner of **Zero (0)**
fully paid and nonassessable shares of __% Noncumulative Preferred Stock, Series
A, $.01 par value per share, of
People's Preferred Capital Corporation
(the "Corporation") transferable on the books of the Corporation by the holder
hereof in person or by its duly authorized attorney, upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be held subject to all of the provisions of the
Articles of Incorporation of the Corporation (the "Articles of Incorporation")
and the Bylaws of the Corporation and any amendments thereto. This Certificate
is not valid unless countersigned and registered by the Transfer Agent and
Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed on its behalf by its duly authorized officers.
DATED ______________________
Countersigned and Registered:
Transfer Agent
and Registrar ______________________ (SEAL)
President
By:_________________________ ____________________________
Authorized Signature Secretary
<PAGE>
IMPORTANT NOTICE
The Corporation will furnish to any stockholder, on request and without
charge, a full statement of the information required by Section 2-211(b) of the
Corporations and Associations Article of the Annotated Code of Maryland with
respect to the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends and other
distributions, qualifications, and terms and conditions of redemption of the
stock of each class which the Corporation has authority to issue and, if the
Corporation is authorized to issue any preferred or special class in series, (i)
the differences in the relative rights and preferences between the shares of
each series to the extent set, and (ii) the authority of the Board of Directors
to set such rights and preferences of subsequent series. The foregoing summary
does not purport to be complete and is subject to and qualified in its entirety
by reference to the Articles of Incorporation of the Corporation (the "Articles
of Incorporation"), a copy of which will be sent without charge to each
stockholder who so requests. Such request must be made to the Secretary of the
Corporation at its principal office or to the Transfer Agent.
The shares represented by this certificate are subject to restrictions on
Constructive Ownership and Transfer for the 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) the term "Ownership Limit" shall mean no more than 7.5% of
the aggregate initial liquidation preference of the value of the issued and
outstanding shares of Preferred Stock of the Corporation, including the Series A
Preferred Stock unless such Person is an Excepted Holder (in which no ownership
limit shall be applicable to such Excepted Holder); and (ii) no Person may
Transfer shares of Preferred Stock if such Transfer would result in the
Preferred Stock of the Corporation being owned (directly or beneficially) by
fewer than 100 Persons. Any Person who attempts to Constructively Own shares of
Preferred Stock which causes or will cause a Person to Constructively Own shares
of Preferred Stock in excess or in violation of the above limitations must
immediately notify the Corporation. If any of the restrictions on the transfer
or ownership are violated, the shares of Preferred Stock represented hereby will
be automatically transferred to a Trustee or 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 Preferred Stock of
the Corporation on request and without charge.
---------------------
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN
OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A
CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
---------------------
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right
of survivorship and not as tenants
in common
UNIF GIFT MIN ACT ___________ Custodian ___________
(Custodian) (Minor)
under Uniform Gifts to Minors Act of
______________________________________
(State)
Additional abbreviations by also be used though not in the above list.
FOR VALUE RECEIVED, ___________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______
_____________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, or Assignee)
______________________ (_____________) shares of Preferred Stock of the
Corporation represented by this Certificate and do hereby irrevocably constitute
and appoint _______________________ Attorney to transfer the said shares of
Common Stock on the books of the Corporation, with full power of substitution in
the premises.
Dated ____________________ ________________________________________
NOTICE: The Signature to this Assignment
Must Correspond With The Name As Written
Upon The Face Of The Certificate In
Every Particular, Without Alteration Or
Enlargement Or Any Change Whatever.
<PAGE>
ADVISORY AGREEMENT
THIS AGREEMENT is made this ___ day of __________, 1997 between PEOPLE'S
PREFERRED CAPITAL CORPORATION, a Maryland corporation (the "Company"), and
PEOPLE'S BANK OF CALIFORNIA, a federally chartered savings bank (the "Advisor").
Capitalized terms used herein shall have the meanings set forth in Section 1 of
this Agreement.
WHEREAS, the Company intends to qualify as a "real estate investment trust"
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company desires to avail itself of the experience and
assistance of the Advisor and to have the Advisor undertake, on the Company's
behalf, the duties and responsibilities hereinafter set forth, subject to the
control and supervision of the Board of Directors of the Company (the "Board of
Directors") as provided for herein; and
WHEREAS, the Advisor desires to render such services for the Company
subject to the control and supervision of the Board of Directors, on the terms
and conditions hereinafter set forth.
NOW THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
respective meanings set forth below:
"Advisor" has the meaning set forth in the forepart of this Agreement.
"Advisor Termination Date" means the date on which this Agreement
terminates.
"Agreement" means this Advisory Agreement, as amended, modified and
supplemented from time to time.
"Board of Directors" has the meaning set forth in the forepart of this
Agreement.
"Code" has the meaning set forth in the forepart of this Agreement.
"Company" has the meaning set forth in the forepart of this Agreement.
"Gross Mortgage Assets" means for any month the weighted average book value
of the real estate mortgage assets held by the Company, before reserves for
depreciation or bad debts or other similar noncash reserves, computed at the end
of such month.
<PAGE>
"Independent Directors" means the members of the Board of Directors of the
Company who are either not current directors, officers or employees of the
Company or current directors, officers or employees of the Advisor or any
affiliate of the Advisor.
"Operating Expenses" for any period means all of the operating expenses of
the Company (with the exception of those expenses to be borne by the Advisor in
accordance with Section 4 hereof), including without limitation the following:
(a) interest, taxes and other expenses incurred in connection with the
mortgage assets of the Company;
(b) expenses related to the officers, directors and employees of the
Company, including without limitation any fees or expenses of the
directors;
(c) fees and expenses payable to accountants, appraisers, auditors,
consultants, attorneys, collection and paying agents and all other
Persons who contract with or are retained by the Company or by the
Advisor on behalf of the Company;
(d) legal and other expenses incurred in connection with advice
concerning, obtaining or maintaining the Company's status as a REIT,
the determination of the Company's taxable income, any formal or
informal administrative action or legal proceedings which involve a
challenge to the REIT status of the Company or any claim that the
activities of the Company, any member of the Board of Directors or any
officer were improper;
(e) expenses relating to communications and reports to stockholders of the
Company, including without limitation the costs of preparing,
printing, duplicating and mailing the certificates for the stock of
the Company, proxy solicitation materials and reports to stockholders,
and the costs of arranging meetings of stockholders;
(f) the costs of insurance described in Section 2 hereof, including
directors and officers liability insurance covering the directors and
officers of the Company;
(g) expenses relating to the acquisition, disposition and ownership of
mortgage assets, including without limitation and to the extent not
paid by others, legal fees and other expenses for professional
services and fees;
(h) expenses connected with the payments of dividends or interest or
distributions in cash or any other form made or caused to be made by
the Board of Directors to the stockholders of the Company;
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(i) expenses connected with any office or office facilities maintained by
the Company separate from the office of the Advisor, including without
limitation rent, telephone, utilities, office furniture and equipment
and machinery; and
(j) other miscellaneous expenses of the Company which are not expenses of
the Advisor under Section 4.
"Person" means and includes individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
limited liability companies, joint ventures, associations, consortia, companies,
trusts, banks, savings institutions, trust companies, land trusts, common law
trusts, business trusts or other entities, governments and agencies and
political subdivisions thereof.
"REIT" has the meaning set forth in the forepart of this Agreement.
SECTION 2. Duties of Advisor. The Advisor shall consult with the Board of
Directors and the officers of the Company and shall, at the request of the Board
of Directors or the officers of the Company, furnish advice and recommendations
with respect to all aspects of the business and affairs of the Company. Subject
to the control and discretion and at the request of the Board of Directors, the
Advisor shall:
(a) administer the day-to-day operations and affairs of the Company,
including without limitation the performance or supervision of the
functions described in this Section 2;
(b) monitor the credit quality of the mortgage loans and other real estate
mortgage and other assets held by the Company;
(c) advise the Company with respect to the acquisition, management,
financing and disposition of the Company's mortgage loans and other
real estate and other mortgage assets;
(d) represent the Company in its day-to-day dealings with Persons with
whom the Company interacts, including without limitation stockholders
of the Company, the transfer agent, consultants, accountants,
attorneys, servicers of the Company's mortgage loans, custodians,
insurers and banks;
(e) establish and provide necessary services for the Company, including
executive, administrative, accounting, stockholder relations,
secretarial, recordkeeping, copying, telephone, mailing and
distribution facilities;
(f) provide the Company with office space, conference room facilities,
office equipment and personnel necessary for the services to be
performed by the Advisor hereunder;
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(g) arrange, schedule and coordinate the regular and special matters of
the Board of Directors required for the conduct of the affairs of the
Company or for timely action on any matters the Company is required to
act upon and implement all decisions of the Board of Directors, unless
otherwise instructed, with regard to the Company and its assets;
(h) maintain communications and relations with the stockholders of the
Company, including, but not limited to, responding to inquiries, proxy
solicitations, providing reports to stockholders and arranging and
coordinating all meetings of stockholders;
(i) arrange for the investment and management of any short-term
investments of the Company;
(j) arrange for the services of third parties to collect and distribute
funds of the Company and to perform such functions as the Board of
Directors shall from time to time require;
(k) monitor and supervise the performance of all parties who have
contracts to perform services for the Company, provided that the
Advisor shall have no duty to assume the obligations or guarantee the
performance of such parties under such contracts;
(l) establish and maintain such bank accounts in the name of the Company
as may be required by the Company and approved by the Board of
Directors and ensure that all funds collected by the Advisor in the
name or on behalf of the Company shall be held in trust and shall not
be commingled with the Advisor's own funds or accounts;
(m) make payment on behalf of the Company of all Operating Expenses;
(n) arrange for the execution and delivery of such documents and
instruments by the officers of the Company as may be required in order
to perform the functions herein described and to take any other
required action;
(o) arrange for insurance for the Company including liability insurance,
errors and omissions policies and officers and directors policies,
which shall cover and insure the Company, members of the Board of
Directors and the officers of the Company in amounts and with
deductibles and insurers approved by the Board of Directors;
(p) maintain proper books and records of the Company's affairs and furnish
or cause to be furnished to the Board of Directors such periodic
reports and accounting information as may be required from time to
time by the Board
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of Directors, including, but not limited to quarterly reports of all
income and expenses of and distributions of the Company;
(q) consult and work with legal counsel for the Company in implementing
Company decisions and undertaking measures consistent with all
pertinent Federal, state and local laws and rules or regulations of
governmental or quasi-governmental agencies, including, but not
limited to, Federal and state securities laws, the Code, as it relates
to the Company's qualification as a REIT, and the regulations
promulgated under each of the foregoing;
(r) consult and work with accountants for the Company in connection with
the preparation of financial statements, annual reports and tax
returns;
(s) arrange for an annual audit of the books and records of the Company by
the accounting firm designated for such purposes by the Board of
Directors;
(t) prepare and distribute in consultation with the accountants for the
Company, annual reports to stockholders which will contain audited
financial statements;
(u) furnish reports to the Board of Directors and provide research,
economical and statistical data in connection with the Company's
investments; and
(v) as reasonably requested by the Company, make reports to the Company of
its performance of the foregoing services and furnish advice and
recommendations with respect to other aspects of the business of the
Company.
SECTION 3. Compensation. The Company shall pay to the Advisor, for
services rendered by the Advisor hereunder, a management fee equal to
___________________________ Dollars ($_________), payable in equal _____
installments.
SECTION 4. Expenses of the Advisor.
(a) Without regard to the compensation received pursuant to Section 3, the
Advisor will bear the following expenses:
(i) employment expenses of the personnel employed by the Advisor,
including without limitation salaries, wages, payroll taxes and
the cost of employee benefit plans; and
(ii) rent, telephone equipment, utilities, office furniture and
equipment and machinery and other office expenses of the Advisor
incurred in connection with the maintenance of any office
facility of the Advisor.
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(b) The Company shall reimburse the Advisor within 30 days of a written
request by the Advisor, for any Operating Expenses paid or incurred by
the Advisor on behalf of the Company.
SECTION 5. Records. The Advisor shall maintain appropriate books of
account and records relating to services performed hereunder, and such books of
account an records shall be accessible for inspection by the Board of Directors
or representatives of the Company at all times.
SECTION 6. REIT Qualification and Compliance. The Advisor shall consult
and work with the Company's legal and tax counsel in maintaining the Company's
qualification as a REIT. Notwithstanding any other provisions of this Agreement
to the contrary, the Advisor shall refrain from any action which, in its
reasonable judgment or in the judgment of the Board of Directors (of which the
Advisor has received written notice), would adversely affect the qualification
of the Company as a REIT or which would violate any law, rule or regulation of
any governmental body or agency having jurisdiction over the Company or its
securities, or which would otherwise not be permitted by the Articles of
Incorporation or Bylaws of the Company. Furthermore, the Advisor shall take any
action which, in its judgment or the judgment of the Board of Directors (of
which the Advisor has received written notice), may be necessary to maintain the
qualification of the Company as a REIT or prevent the violation of any law or
regulation of any governmental body or agency having jurisdiction over the
Company or its securities.
SECTION 7. Term; Termination. This Agreement shall be in full force and
effect for a term beginning on the date hereof with an initial term of five
years, and will be renewed automatically for additional five year periods unless
the Company delivers a notice of nonrenewal to the Advisor not less than 90 days
prior to the expiration of the initial term of this Agreement or 90 days prior
to the expiration of any renewal term. Notwithstanding the foregoing, at any
time after the initial term, the Company may terminate this Agreement at any
time upon 90 days' prior notice.
SECTION 8. Other Activities of the Advisor.
(a) Nothing herein contained shall prevent the Advisor, an affiliate of
the Advisor or an officer, a director, employee or stockholder of the
Advisor from engaging in any activity, including without limitation
originating, purchasing and managing mortgage loans and other real
estate assets, rendering of services and investment advice with
respect to real estate investment opportunities to any other Person
(including other REITs) and managing other investments (including the
investments of the Advisor and its affiliates).
(b) Directors, officers, stockholders, employees and agents of the Advisor
or of the affiliates of the Advisor may serve as directors, officers,
employees or
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agents of the Company but shall receive no compensation (other than
reimbursement for expenses) from the Company for such service.
SECTION 9. Binding Effect; Assignment. This Agreement shall inure to the
benefit of and shall be binding upon the parties hereto and their respective
successors and assigns. Neither party may assign this Agreement or any of its
respective rights hereunder (other than an assignment to a successor
organization which acquires substantially all of the property of such party or,
in the case of the Advisor, to an affiliate of the Advisor) without the prior
written consent of the other party to this Agreement.
SECTION 10. Subcontracting. The Advisor may at any time subcontract all or
a portion of its obligations under this Agreement to any affiliate of the
Advisor without the consent of the Company or if no affiliate of the Advisor is
engaged in the business of managing mortgage assets to an unaffiliated third
party with the approval of a majority of the Board of Directors as well as a
majority of the Independent Directors. Notwithstanding the foregoing, the
Advisor will not, in connection with subcontracting any of its obligations under
this Agreement, be relieved or discharged in any respect from its obligations
under this Agreement.
SECTION 11. Liability and Indemnity of the Advisor. The Advisor assumes no
responsibilities under this Agreement other than to perform the services called
for hereunder in good faith. Neither the Advisor nor any of its affiliates,
stockholders, directors, officers or employees will have any liability to the
Company, or stockholders of the Company, or others except by reason of acts or
omissions constituting gross negligence or willful breach of any of its material
obligations under this agreement. The Company shall indemnify and reimburse (if
necessary) the Advisor, its stockholders, directors, officers, employees and
agents for any and all expenses (including without limitation attorneys' fees
and expenses), losses, damages, liabilities, demands and charges of any nature
whatsoever in respect of or arising from any acts or omissions by the Advisor
pursuant to this Agreement, provided that the conduct against which the claim is
made was determined by such person, in good faith, to be in the best interest of
the Company and was not the result of gross negligence by such person or willful
breach of any of such person's material obligations by such person. The Advisor
agrees that any such indemnification is recoverable only from the assets of the
Company and not from the stockholders.
SECTION 12. Action Upon Notice of Non-Renewal or Termination. Forthwith
upon giving of notice of non-renewal of this Agreement by the Company or of
termination of this Agreement by the Company, the Advisor shall not be entitled
to compensation after the Advisor Termination Date for further services under
this Agreement, but shall be paid all compensation accruing to the Advisor
Termination Date and shall be reimbursed for all expenses of the Company paid or
incurred by the Advisor as of the Advisor Termination Date which are
reimbursable by the Company under this Agreement. The Advisor shall promptly
after the Advisor Termination Date:
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(i) deliver to the Company all assets and documents of the Company then in
the custody of the Advisor; and
(ii) cooperate with the Company and take all reasonable steps requested to
assist the Board of Directors in making an orderly transfer of the
administrative functions of the Company.
SECTION 13. No Joint Venture or Partnership. Nothing in this Agreement
shall be deemed to create a partnership or joint venture between the parties,
whether for purposes of taxation or otherwise.
SECTION 14. Notices. Unless expressly provided otherwise herein, all
notices, request, demands and other communications required or permitted under
this Agreement shall be in writing and shall be made by hand delivery, certified
mail, overnight courier service, telex or telecopier. Any notice shall be duly
addressed to the parties as follows:
If to the Company:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Corporate Secretary
If to the Advisor:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Corporate Secretary
Either party may alter the address to which communications or copies are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section 14 for the giving of notice.
SECTION 15. Severability. If any term or provision of this Agreement or
the application thereof with respect to any Person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement, or the
application of that term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Agreement shall be valid and be
enforced to the fullest extent permitted by law.
SECTION 16. Governing Law. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the State
of Maryland.
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SECTION 17. Amendments. This Agreement shall not be amended changed,
modified, terminated or discharged in whole or in part except by an instrument
in writing signed by both parties hereto or their respective successors or
assigns, or otherwise as provided herein.
SECTION 18. Headings. The section headings herein have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction or effect of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the day and year
first above written.
PEOPLE'S PREFERRED CAPITAL CORPORATION
By: ___________________________________
Name:
Title:
PEOPLE'S BANK OF CALIFORNIA
By: __________________________________
Name:
Title:
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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.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
July 10, 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, shareholders' equity, and cash flows
for the years then ended, which report appears in Annex 1 of the Preliminary
Offering Circular of the Form S-11 of People's Preferred Capital Corporation
dated July 10, 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
July 10, 1997
